In their latest report on India’s Midcap stocks, Jefferies unveils a positive outlook for Q3FY24, anticipating healthy sales and profit after tax (PAT) growth of +16% and +24% YoY, respectively, for their coverage (excluding UPL).
Jefferies predicts that the topline growth in Q3FY24 will be predominantly volume-driven, with a particular emphasis on companies in the Cables & Wires sector, including POLYCAB and Finolex Cables.
The report notes that there have been no significant pricing actions observed in most product segments. This stability is attributed to the softening of input costs year-on-year, indicating a cautious approach by companies in adjusting their pricing strategies.
Companies in the Electronic Manufacturing Services (EMS) sector, such as AMBER and DIXON, are expected to benefit from Production-Linked Incentives (PLIs) and new customer additions. Companies like KJC, PIDI, SI, and ASTRA, operating in the housing and capital expenditure segments, are poised for solid growth.
The report highlights a potential weak quarter for UPLL, attributing it to the ongoing global supply glut affecting the company’s performance.
Jefferies expects the sales and PAT of their SMID coverage (excluding UPL) to grow at +16% and +24% YoY in Q3FY24, supported by a +60 basis points expansion in operating profit margins. The report emphasizes the pivotal role of housing and capital expenditure in driving the anticipated volume growth during the quarter.
Company Specific Key Drivers in Q3FY24e
Polycab
Jefferies estimates a +15% YoY sales growth for POLYCAB, attributing it to a +2% YoY rise in average copper prices. The pass-through impact, coupled with operational leverage from Cables & Wires (C&W) volumes and softening commodities in Fast Moving Electrical Goods (FMEG), is expected to contribute to this growth. The report anticipates a +40bps YoY expansion in OPM, reflecting positive market dynamics and operational efficiencies.
SI
Sales growth for SI is estimated at +13% YoY, with robust volume growth in Pipes partially offset by a -4% YoY fall in PVC prices (pass-through). Jefferies predicts a +90bps YoY margin expansion, driving a substantial +20% YoY earnings growth for SI.
Amber Enterprises
High temperatures in October 2023 are expected to boost AC sales for AMBER in a seasonally weak quarter. The fast-growing Components segment is likely to drive operational leverage. Jefferies estimates a remarkable +32% YoY growth in EBITDA and +73% YoY growth in PAT on a low base. However, attention is warranted due to high interest and depreciation, associated with front-ended capital expenditure.
KJC
Jefferies foresees a significant expansion in OPM to 15% (+280bps YoY), driven by a -50% YoY decline in average gas prices (spot LNG) and a strategic focus on lower-cost alternative fuels. Recent natural gas price hikes could impact margins QoQ, with spot LNG prices increasing +25% QoQ in Q3.
Havells India
HAVL is expected to witness moderate sales and PAT growth of +10% and +13% YoY, respectively. Robust volumes in C&W are expected to offset a broader discretionary slowdown affecting ECD/Lighting segments.
Pidilite Industries
Lower average VAM prices (-19% YoY in Q3, +3% QoQ) are expected to revive OPM by +500bps YoY to 21-22%. Volatility in VAM prices, which are crude-linked, remains a key factor to monitor.
Dixon Technologies
Jefferies estimates robust +55% YoY sales growth and +63% YoY PAT growth for DIXON. Mobile Production-Linked Incentive (PLI) benefits and new customer additions, such as Xiaomi, are identified as significant contributors to Dixon’s growth.