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Opportunities in consumer durables sector

Our consumer durables coverage universe has jumped 34% YoY over the past 12 months (64% outperformance to the Sensex) and we reiterate our rising consolidation and accelerating cash flows/returns thesis — 33% CAGR over FY18-20/25% by FY20.

Aggressive competition from MNCs is a risk to our call/estimates.

Our consumer durables coverage universe has jumped 34% YoY over the past 12 months (64% outperformance to the Sensex) and we reiterate our rising consolidation and accelerating cash flows/returns thesis — 33% CAGR over FY18-20/25% by FY20. That said, with soaring/capped valuations, higher-than-anticipated seasonality impact and a few earnings disappointments, it’s time to get more discerning. We see the business and valuation needle shifting in favour of players armed with wider products and stronger brands.

Hence, we prune our top picks basket to Voltas (BUY) and KEI (BUY), reaffirm faith in Havells (BUY) and downgrade Finolex, Crompton &Symphony (to HOLD). This, we believe, is a durable story and valuations will remain expensive (100% premium to market). Moreover, with +/-45% valuation range to the sector mean, it’s time to cash in on the differential stock opportunities coming your way.

Our core thesis of rising premiumisation and penetration across consumer durables/light electrical segments (highlighted in our report — Home Run) is on track from a medium- to long-term perspective. However, the past 12-15 months has seen several disruptions like impact of unseasonal rains/weak summer, GST volatility, among others, raising investors’ concerns on near- term growth, particularly for companies with single/limited product basket.

Aggressive competition from MNCs is a risk to our call/estimates. Also, with rising M&A in the sector, over aggressive acquisitions will be one of the key risks which need monitoring. Moreover, rising e-commerce share is another area which could pose risk to current distribution-based franchises of consumer durables companies. Lastly, with valuations at peak levels (33x FY20E), we believe players will largely play around +/-45% valuation range to sector mean.

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