White goods and durable companies to see better margins in April-June despite weak sales: ICICI Securities

ICICI Securities highlights that the cables and wires category is performing better compared to other durable goods.

White goods and durables are expected to witness improvement in operating margin even when revenue growth might be muted in Q1 of FY24, highlighted ICICI Securities in a note.

Revenue growth is still muted in April-May 2023, the domestic brokerage firm highlighted in its note post an interaction with companies and channel partners.

According to ICICI Securities, the reason for subdued growth in sales is unseasonal rains in North India in April that have impacted the off-take of summer products, while competitive pressure has resulted in trade schemes and consumer offers being higher than earlier quarters. Additionally, the advertising spend has also increased post-decline during FY21-23.

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This has led the brokerage firm to believe that volume off-take is also likely to be muted on a YoY basis.

“However, correction in input prices on YoY as well as QoQ basis is likely to result in higher gross and EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) margins,” said ICICI Securities.

Profitability could improve because all major raw materials are in the deflation zone now. The prices of aluminum, copper, Steel and HDPE (high-density polyethylene) have corrected 16 percent, 5 percent, 11 percent and 13 percent, respectively YoY. The commodity prices have also fallen on a QoQ basis, the brokerage firm pointed out.

ICICI Securities has baked in gross and EBITDA margins to inch upwards on both, YoY and QoQ basis, in April-June with a correction in input prices. Freight prices have also corrected with the reduction in fuel prices, it added.

“We believe there is a strong scope to see EBITDA margin expansion of 100-300bps YoY in Q1 FY24,” the domestic brokerage firm said.

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ICICI Securities highlights that the cables and wires category is performing better compared to other durable goods. Although there may be a decrease in commodity prices that could negatively affect cables and wires, they are still outperforming most other segments. While there is a relatively higher demand for white goods, the market competition is intense, which could impact profit margins. Additionally, the kitchen appliances sector is still facing challenges due to the resurgence of small and unorganised players.

Yet, strong return ratios, promising growth prospects, and scope for expansion due to low market penetration has prompted the brokerage firm to maintain a positive outlook on the white goods and durables sector. Additionally, it sees customers preferring companies in the organised sector as compared with the ones in the unorganised space.

Havells India is the brokerage firm's top pick in the sector.

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