Covid-19 lockdown to hit consumer durable firms; FY21 earnings estimate cut

Brokerages believe the extension of lockdown can potentially wipe off a major portion of seasonal sales for RAC.

The nationwide lockdown to stem the spread of Coronavirus (Covid-19) pandemic is expected to significantly hit the consumer durable companies such as Havells India, Voltas, and Crompton Greaves CE as the demand for the summer season products like room air conditioners (RAC), coolers and fans will be severely impacted. 

That apart, lower infra spending since the government's top-most priority, at present, is to battle the pandemic, may also impact the mechanical, engineering and plumbing (MEP) business of the companies. Further, a prolonged slowdown in the real estate sector, muted spending from the private sector and tight liquidity will also add to the companies' woes, say analysts. 

The current situation, analysts say, is unlike the past disruptions such as Global Financial Crisis (GFC) and demonetisation, with the present set of challenges being multi-fold and enduring.

Analysts at Edelweiss Securities, for instance, say the past two events had hit the industry when the fundamentals (discretionary demand, infra momentum) were sound, and hence, the recovery was swift. “However, Covid-19 challenges are different as the economy is struggling with a much deeper and broad-based discretionary demand slowdown, supply-chain consolidation, and weaker new construction cycle,” the brokerage observed.

Given this backdrop, most brokerages have slashed the earnings estimates of these companies by 8 per cent to 39 per cent for the financial year 2020-21 and 2021-22 (FY21 and FY22).

“We don’t rule out demand pressures in the near-term given that Micro, Small and Medium Enterprises (MSME) sector can result in job losses with consequent impairment of purchasing power. With near term visibility remaining hazy given uncertainty due to Covid-19, we believe the expected demand recovery can materialise from the onset of festival season in 2HFY21,” wrote Amnish Aggarwal, Head of Research at Prabhudas Lilladher, in a co-authored report with Paarth Gala, an analyst at the brokerage firm.

They believe the extension of lockdown can potentially wipe off a major portion of seasonal sales for RAC.

Emkay Global Financial Services, too, believes it is difficult to assess when the demand will fully recover. That said, Emkay believes companies with dependence on seasonal products and business-to-business (B2B) segments will take longer to recover.

“There is still a lack of clarity resumption of economic activity. However, we assume that production will slowly start from May with a gradual uptick in utilisation. The demand is expected to remain grim in the first half of FY21 (H1FY21) for both B2B and B2C segments, while replacement demand, which constitutes nearly 30 per cent of sales, should continue to see traction,” it said.

Investment strategy

Given how things stand, brokerages are placing their bets on companies that have lesser dependence on seasonal products and lower B2B exposure. However, they caution that the investment should be made only from a 12 – 24 months perspective.

Prabhudas Lilladher has a ‘buy’ rating on Crompton Greaves with the target price of Rs 291. It expects the company's sales (revenue) to come in at Rs 4,874 crore in FY21 and Rs 5,540.3 crore in FY22. Earnings before interest, taxes, depreciation, and amortisation (EBITDA) is projected at Rs 660.4 crore for FY21 and Rs 786.7 crore for FY22 – down 12.9 per cent and 8.3 per cent, respectively from previous estimates. Earnings per share (EPS) has been revised down to Rs 7.9 and Rs 9.7 for FY21 and FY22, respectively.

Among other stocks, it has upgraded Voltas to "Accumulate" despite near term growth challenges given beaten down valuations, strong balance sheet and leadership in RAC business. It has a ‘reduce’ rating on Havells.

Emkay Global, too, has a ‘buy’ rating on Crompton Greaves CE and Dixon Technologies; ‘hold’ rating on Blue Star, V-Guard and Voltas. It has downgraded Havells, Whirlpool, and Amber to ‘hold’. Voltas, KEI Industries, and Amber Enterprises are the top picks of Edelweiss Securities in this sector.