A deadly second covid wave and reintroduction of curbs have come as bad news for the highflying consumer discretionary basket. Makers of white goods, apparels, paints and jewellery, among others, face renewed concerns over demand and supply constraints. But this is also a window for investors to grab select names at bargain prices, say experts.Amid the initial coronavirus outbreak last year, consumer discretionary businesses saw a sharp contraction in demand in the April-June quarter. But as curbs were slowly lifted and economic activity resumed, sales witnessed a smart rebound, riding on pent-up demand. The momentum in sales continued beyond the end of the festive season. Continuance of work from home supported off-take of goods that enhance convenience at home such as refrigerators, cooking appliances, washing machines and air conditioners. Summer setting in strongly led to the robust offtake of secondary sales of most summer products— fans, air coolers and air conditioners. Owing to this, March quarter results are expected to be a blockbuster show for much of the discretionary basket.82230017 However, the return of lockdowns threatens to peg back discretionary consumption again. “The rising fear of further restrictions can potentially impact demand for appliances, particularly cooling products (considering lockdowns could impact peak season),” observes HDFC Securities in a note. Analysts also expect a deferral of spends on other discretionary items. “Retailers and quick service restaurant (QSR) players are likely to be impacted due to curtailed working hours even with less strict measures like night curfew, weekend lockdowns and higher social distancing norms. This could delay the recovery path for some of the discretionary companies,” points out a report by ICICI Securities. CARE Ratings states that the growth momentum recorded in the third quarter is expected to continue in the fourth quarter as well. However, it cautioned that the recent spike in covid cases could be a dampener in some regions. Jewellery sales that have so far exceeded expectations may particularly take a hit as weddings get postponed and because jewellery retailers not part of the essential services category. Further, lockdowns will limit manufacturers’ ability to take price hikes like in the recent past. Commodity inflation has continued into the first quarter of this year, with copper, aluminium and steel seeing uptick in prices. While most appliance makers passed on higher input costs to consumers with price hikes in January this year, not many will be in a position to do so now. This may eat into the gross margins of some companies.Yet, analysts are quite upbeat about the prospects of this basket. Most say if demand trends from last year’s comeback are anything to go by, the sector should bounce back fast. Pent-up demand tends to play out very quickly, particularly in consumer electricals and appliances. “Considering the stronger pace of recovery in the consumer space post the full lockdown of April 2020 and the increased pace of vaccination, we believe that the impact of this lockdown should be short-lived and companies should bounce back faster,” suggest analysts at Emkay. Besides, most manufacturers have enough inventory on hands to cover short-term disruptions. Pre-buying toward the end of the March quarter has led to higher-than-normal inventory levels for summer products such as fans and air conditioners. “As per the channel feedback, eight to 15-day lockdowns do not pose a high risk for summer products as sales can be recouped in May based on the ongoing strong summer demand,” contend analysts at Motilal Oswal. Further, companies have managed to maintain strong control over costs aided by cut in ad spends. This should partly offset any impact on profitability. Companies have also focused on new product launches and improving distribution reach.Analysts maintain that dip in stock price could give a brief window for investors to buy select names from this universe. “We believe stock price volatility may increase given the near-term uncertainties; however, this may present a good opportunity to increase exposure to strong structural stories with superior business models,” feel analysts at Motilal Oswal. Whirlpool is the brokerage’s top pick in the underpenetrated white goods space as it currently offers the best risk-reward matrix. Orient Electric is its top pick in consumer electricals owing to superior return on equity (RoE) vis-a-vis peers. HDFC Securities reiterates that since leading players gained market share across categories in 2020-21, companies in its coverage universe have the potential to bounce back quickly even after a strict lockdown. “Despite overhang on near-term performance, we remain positive on the multi-year growth potential for the sector,” the brokerage adds. It has a Buy rating on Crompton, and Add rating on Havells, Voltas, TTK Prestige, V-Guard and Symphony. Valuations for certain stocks like Jubilant Foodworks, Blue Star, Titan Company, Dixon Technologies, Amber Enterprises, among others, are quite expensive. But analysts maintain that any sharp correction in these names may provide a good entry point from the medium-to-long term perspective.
from Economic Times https://ift.tt/3tUvnyJ
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