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Sector Report: Consumer Electricals - Tweaking strategy to penetrate deeper

The Rs1trn+ consumer electrical industry registered 10-12% CAGR over FY13-17. We expect the growth trend to sustain and in fact, accelerate for organised players (benefit from GST). Most companies are looking to tap into the slated growth by focusing on brand equity, new product categories as also wider distribution. We believe companies that are able to build a strong management team, rationalise distribution to improve counter share, digitise to track secondary sales, innovate and premiumise products will be better placed to capture a meaningful market share and improve profitability. Within sub-segments, we prefer room air conditioners (RAC), as the segment will reap benefits from structural demand drivers (low penetration, high cooling requirements, etc). Consistent market share gains (focus on brand, reach), cost efficiencies and free cash flow (FCF) generation make us upbeat on Voltas. We initiate coverage on CGCEL and Amber with Outperformer (OP) and Blue Star with a Neutral rating. We reiterate OP rating on Havells and Dixon.

Favourable demand drivers: Rising penetration levels and disposable incomes, government thrust on housing, easy finance, etc, will continue to drive growth in consumer electricals. Concurrently, improved power availability (government schemes) and higher energy-efficiency products (inverter ACs, LEDs, etc) will further support the growth. As the real estate segment is showing signs of bottoming out, any uptick would drive the demand for consumer electricals.

Brand pull and distribution key for market share: While most companies vie a pie of the growing market, companies that invest towards building strong management teams (better execution skillset), rationalising distribution (higher retail focus with deeper connect), maintaining brand equity (pull factor), product innovation (premiumisation) and digitisation (tracking of end sales), will be able to capture a higher market share.

Preferred pick - Voltas: While we expect all segments to report consistent growth, the AC sub segment in particular will see sustained and structural demand momentum, backed by low penetration, higher cooling requirement and improved power availability in India. Voltas a leader with deeper reach, cost efficiencies and scale benefits is poised to benefit from the demand. Concurrently, prudent order selection in the company’s EMP business has driven margin improvement. At 23.7x FY20E earnings, Voltas looks attractive as a structural story at 14% earnings CAGR over FY18-21E, FCF generation and superior return ratios. We initiate coverage on Crompton Consumer (OP; management focus on innovation, distribution and superior return ratios), Blue Star (Neutral; beneficiary of AC demand uptick, with 10%+ market share, new product categories, albeit priced in) and Amber (OP; leading player in the RAC EMS market with strong growth momentum) and reiterate our OP rating on Voltas, Dixon and Havells.