After three good years of healthy double-digit growth, the past 2–3 quarters have been one of deceleration led by slowing infra and weakening disposable income profiles in the consumer durable sector.
The COVID-19-led disruption will add to sector woes since: i) channel appetite is already low; ii) infra spend outlook for FY21 remains subdued; and iii) weaker retail off-take implies consensus estimates are at risk, Edelweiss Securities said in a report.
The report also suggests that large players are trading at rich valuations. For FY21, it expects lower growth across segment vis-à-vis their respective long-term growth rates).
The brokerage firm slashed earnings by 9–18 percent for stocks in their coverage. It remains positive on Amber Enterprises which was recently added to the model portfolio along with KEI Industries, and Voltas.
Growth across players has come off over the past few quarters barring cooling products, reflecting the impact of weak infra, lower retail demand and deteriorating distribution channel health.
Top-line growth, particularly in electrical segments (excluding large appliances) has tapered to 6 percent (Q3FY20) which is lower than the five-year CAGR of 12 percent, said the report.
The recent stock correction to some extent factor near term earnings disruption from COVID-19 and valuation correction has been in line with broader indices.
But, the current scenario, in contrast, poses multiple challenges, implying a more enduring effect on demand potentially extending to medium term (12-18 months).
“It is possible that rich valuations do pose challenges as most stocks in the coverage are still trading at mid-cycle/lower end of the peak cycle. Only a few possess levers to outperform in a tough demand outlook,” said the report.
Out of the coverage universe, Edelweiss Securities reiterated their conviction for: a) Voltas - sustained leadership in RACs and potential to scale up the refrigerator business (JV), b) KEI - earnings growth resilience and balance sheet discipline.
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