Consumer durable cos’ gross margin to improve but all isn’t well at Ebitda level


The white goods and durables sector is one of the key beneficiaries of the fall in prices of commodities such as steel, aluminium and copper.

Margins of companies such as Havells India Ltd and Voltas Ltd were under pressure in the past few quarters. For instance, in the June quarter (Q1FY23), Havells’ gross margin dropped by 670 basis points year-on-year to 29%. One basis point is one hundredth of a percentage point.

But this metric is likely to expand from Q3 onwards for all companies in the sector. However, the full increase in gross margin is not expected to reflect at the Ebitda (earnings before interest, tax, depreciation and amortization) margin level.

One reason for this would be a potential increase in advertisement and promotion (A&P) expenses as a percentage of revenues. Owing to disruption in operations, lower sales and an uncertain environment in FY21 on account of the covid-19 pandemic, companies had cut their marketing budget in the fiscal year, point out analysts at ICICI Securities. But in FY22, as normalcy returned, most of the durable companies increased their A&P expenses, they added.

“The companies would like to invest further in branding, channel schemes and new product developments. Hence, we believe marketing and brand spend will likely further increase to FY19 levels over FY23E-FY24E, hurting profitability,” said ICICI Securities analysts in a report on 22 September.

Consumer durable companies would also focus on gaining market share, which would be driven by higher expenses, but adding to the woes is the elevated fuel expenses.

Of course, it helps that companies have taken significant price hikes over the last few quarters. But it remains to be seen if such price hikes would suffice.

As such, ICICI expects Ebitda margin to expand over FY23-24E but their estimates remain conservative versus consensus.

Improvement in margin performance would be a key trigger for shares of Havells, Voltas and Crompton Greaves Consumer Electricals Ltd. The stocks of these companies are 13-34% below their 52-week high.

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