Strategy: Mid-caps- Healthy PAT growth of 35% y-y in Q2

Price hikes could cushion OPM in third quarter; SI, CROMPTON, AMBER and DIXON are the top picks

EMS players AMBER, DIXON saw robust sales growth led by indigenisation tailwind & PLI upside.
EMS players AMBER, DIXON saw robust sales growth led by indigenisation tailwind & PLI upside.

JEF SMID coverage posted healthy sales/PAT growth at +31%/35% y-o-y in Q2FY22. Strong demand from housing upcycle (SI, ASTRA, KJC), traction in Appliances, Electricals (HAVL, CROMPTON, VGRD) and Ebitda turnaround in GRIL, HEG aided growth. Many players have resorted to price hikes to pass-on escalating input costs, which could cushion OPM in Q3. EMS players AMBER, DIXON saw robust sales growth led by indigenisation tailwind & PLI upside.

Building Materials: Pipes and Tiles fared better than most SMID sectors in Q2, as sales/PAT grew by +50%/+53% resp. However, avg OPM declined by -60bps, on a higher y-o-y base and rising discretionary costs. PVC pipe prices (mainly FNXP, SI) were hiked by 30%+ y-o-y, due to rising resin prices. In CPVC Pipes, ASTRA took two price hikes in Oct’21, cumulative at +12%; full benefit to be seen in Q3. Demand scenario is healthy, driven by Housing (ASTRA, SI). However, higher stocking of RM led to a rise in inventory days in Pipes. With a view to pass on rising input costs, KJC has taken three rounds of price hikes in Tiles, latest of +4% in Oct’21 (YTD +10%). Morbi players have not routed excess supply in the domestic market, entailing pricing stability.

Electricals, Appliances: Sales growth in Q2 (ex-WHIRL) was strong at +31% y-o-y, driven by healthy demand (B2B reviving), housing upcycle, deeper penetration and market share gains from unorganised. Cables & Wires saw +35-40% y-o-y price hike due to pass-through of RM volatility. Appliances witnessed calibrated price hikes, total at +15-20% YTD. Due to elevated prices, traction in higher-priced Durables seem to have lagged that in lower-priced Appliances & Electricals. WHIRL’s Q2 revenue was flattish y-o-y vs +16-46% y-o-y growth in VGRD, HAVL & CROMPTON. Average OPM dipped by -200bps, impacted by lag in raising prices given steep input cost escalation, rising ad-spends and a higher base.

EMS: Sales growth was notable at +66% y-o-y in Q2, driven by PLI upside in Mobile sales in DIXON and customer adds and rising component sales in AMBER (AC import ban in Oct’20). While AMBER improved OPM by +50bps, DIXON’s OPM dipped by -150bps impacted by changing product mix (higher OEM %). In Nov’21, AMBER has received two PLI approvals for AC components, while DIXON has received for AC and LED components (one each).

Graphite Electrodes: GRIL, HEG continued to showcase sharp y-o-y turnaround in Ebitda. Capacity utilisation rose q-o-q, now at 80-90%, led by improving demand. Electrode prices rose +20% q-o-q in Q2, and HEG mgmt foresees sequential price hikes in H2FY22 as well. However, prices for needle coke and few other inputs (eg: freight, pitch) are also rising q-o-q.

Top Picks: We prefer market leaders such as CROMPTON and SI in view of their strong brand franchise (ease of taking price hikes), cost control, premium launches (value-added mix), and entrenched distribution. We also like EMS players AMBER and DIXON, in view of strong indigenisation opportunity and potential PLI upside.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express Telegram Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.