Leading brokerage firm in its report on White goods and durables said the likely increase in GST for LED bulbs from 12% to 18% in a highly competitive business such as lighting will hurt the company's profitability. Amid such a landscape, smaller and unorganised players shall gain traction or market share. Notably in the past 18 months only, companies have raised prices by over 20% and any further increase shall impact volumes or result in down trading.
Lighting business is viewed as low HHI segment:
The Herfindahl Hirschman Index (HHI) is less than 0.1 in lighting which suggests of a very high competition in the segment. As per the brokerage, any increase in taxes and consequently costs will impact the sector's profitability negatively and even those of players within the space.
Sector view and top picks:
The brokerage continues to be structurally positive on the white goods and durables sector given the robust return ratios, good growth potential and low penetration. Also, at the same time, the brokerage expects the migration from unorganised to organised sector to steadily generate value.
Durable companies such as Crompton, Orient and Bajaj Electricals generate more than 20% revenues from lighting segment whereas Havells generates 10% revenue from lighting. Any increase in taxes will have 2-5% impact on earnings adds the brokerage. Nevertheless, being positive on the sector, ICICI has given 'Buy' recommendation for Havells and Crompton Greaves.
|White goods and durables stock||CMP||Target price||Potential upside|
Valuation and risks
The brokerage entity value stocks in white goods and durables market on DCF methodology (WACC
and TG ranging from 10-13% and 3-6%, respectively). Key upside risk: Better-than- expected gross margins due to correction in input prices. Key downside risks: (1) Unexpected irrational competition due to deceleration in general consumption demand, and (2) steep inflation in input prices.