Institutional Equities

Capital Goods & Consumer Durables

07 July 2021

Favorable base effect; Rising input costs to affect margins QoQ NBIE Values your patronage- Vote for

The Team in the Asia Money poll 2021. Revenue growth for Capital Goods and Consumer Durables sector in 1QFY22 is Click here expected to be robust due to a favourable base (1QFY21 was affected by a relatively more severe lockdown than in 1QFY22). In Consumer Durables, demand was strong till mid-April’21 while June’21 also saw a decent off-take. Our channel checks suggest that Mayank Bhandari demand in June’21 was affected by poor business sentiments amid expectations of a Research Analyst third COVID wave and reduction in stocking by channel partners/dealers. Seasonal [email protected] +91-99457 58662 products like Room ACs have seen two consecutive seasons getting washed out due to lockdown. Overall, we factor in de-growth over 1QFY20. In Capital Goods, we believe that the execution would be affected but it would be higher YoY as projects sites/construction sites were operational. However, both the sectors are facing challenges such as steep rise in commodity prices, higher transportation costs (both overseas ocean freight and domestic transport) and shortage of imported components due to global shipping challenges. While companies have taken prices hikes during 4QFY21-1QFY22, there will be pressure on operating margins, especially on QoQ basis. Consumer Durables/Electrical companies may not pass on the full extent of cost inflation due to resistance from the trade channel, heightened competition and the compulsion to ensure demand does not taper off. Recovery in the capex cycle, order inflows and adverse impact on working capital will be keenly monitored for the Capital Goods sector.

(Rsmn) Rating TP Revenues EBITDA EBITDA margin (%) PAT

Companies (Rs) 1QFY22E YoY (%) QoQ (%) 1QFY22E YoY (%) QoQ (%) 1QFY21 4QFY21 1QFY22E 1QFY22E YoY (%) QoQ (%) Result Result Preview

Capital Goods

2 Apar Industries Acc 520 16,220 25.4 (14.6) 1,059 178.0 5.1 2.9 5.3 6.5 399 NA (16.2) BHEL Sell 48 38,912 95.4 (45.7) (1,556) (85.3) (87.7) (53.2) (17.6) (4.0) (2,060) (77.0) (80.1) KEC International Acc 425 25,195 14.2 (42.2) 2,016 3.4 (43.1) 8.8 8.1 8.0 789 11.4 (59.4) Power Mech Projects Buy 830 7,158 160.3 (5.2) 646 NA (13.3) (5.1) 9.9 9.0 311 NA (13.6)

QFY2 Solar Industries Buy 1,625 5,894 20.0 (25.5) 1,267 37.9 (23.0) 18.7 20.8 21.5 701 66.5 (23.0)

1 Thermax Sell 1,200 11,145 67.6 (29.2) 973 NA (30.4) (1.7) 8.9 8.7 649 NA (39.6) Triveni Turbine Acc 128 1,899 15.0 6.4 342 (11.6) 38.5 23.4 13.8 18.0 252 (12.2) 31.9 Consumer Durables Blue Star Acc 850 11,018 76.0 (31.6) 703 4,921.4 (30.9) 0.2 6.3 6.4 308 NA (54.1) Acc 3,850 18,921 266.0 (10.3) 718 324.9 (10.0) 3.3 3.8 3.8 408 2,450.0 (7.9) IFB Industries Buy 1,300 4,811 72.2 (39.8) 424 NA (18.3) (11.6) 6.5 8.8 113 NA 79.4 Johnson Hitachi AC Acc 2,500 6,047 124.3 4.4 582 NA (24.8) (8.2) 13.4 9.6 284 NA (36.0) Acc 1,100 19,113 47.4 (27.9) 2,104 215.0 (36.4) 5.2 12.5 11.0 1,902 103.4 (27.1) Whirlpool of India Buy 2,725 14,429 40.5 (18.9) 1,443 209.7 (23.9) 4.5 10.7 10.0 1,031 524.8 (16.7) Consumer Electricals Bajaj Electricals Acc 1,130 8,903 46.5 (29.0) 616 NA (14.0) (3.4) 5.7 6.9 394 NA (29.6) Crompton Consumer Buy 475 10,565 46.7 (30.6) 1,461 44.4 (35.9) 14.1 15.0 13.8 1,102 47.3 (55.8) India Acc 1,029 22,548 52.4 (32.3) 2,927 123.6 (42.1) 8.8 15.2 13.0 1,850 196.5 (39.0) Orient Electric Buy 325 3,688 106.3 (54.0) 427 NA (55.9) (10.8) 12.1 11.6 212 NA (66.2) Polycab India Acc 1,700 19,297 97.6 (36.5) 2,372 312.5 (43.7) 5.9 13.9 12.3 1,496 26.0 (47.0) V-Guard Industries Acc 285 5,406 33.2 (36.3) 621 582.4 (43.5) 2.2 12.9 11.5 399 1,008.3 (41.6) Coverage universe 2,51,170 62.3 (32.2) 19,145 NA 3 (2.5) 5.0 7.6 10,540 NA 2.2 Source: Respective companies, Nirmal Bang Institutional Equities Research

Institutional Equities

Capital Goods sector: (1) Apar Industries is likely to post 25.4% YoY growth in revenue to Rs16.2bn. We expect EBITDA margin to more than double YoY at 6.5%. Lower interest cost (down 28% YoY) will likely aid in achieving PAT of Rs399mn (vs. loss of Rs231mn YoY). (2) BHEL is likely to report 95.4% YoY growth in revenue at Rs38.9bn on a low base (1QFY21 revenue was down by 56% YoY). We are expecting negative EBITDA of Rs1.5bn (sixth successive quarter of EBITDA loss), leading to negative operating margin of 4%. We expect net loss to decline to Rs2.06bn (vs. loss of Rs8.9bn YoY). (3) KEC International is likely to post revenue of Rs25.1bn, up 14.2% YoY, led by execution of strong order book. EBITDA margin is likely to fall by 80bps YoY to 8% on account of rising commodity costs, which would affect margin in the fixed-price international contracts. We expect 11.4% YoY growth in PAT at Rs789mn. (4) Power Mech Projects’ revenue is likely to grow by 160% YoY to Rs7.1bn as execution returns to normalcy. EBITDA margin, which remained under pressure for most part of last year, is likely to increase by 1410bps YoY to 9%. Consequently, PAT is expected to increase to Rs311mn (vs. loss of Rs327mn YoY). (5) Solar Industries’ revenue is likely to grow by 20% YoY to Rs5.8bn on a low base (sales in 1QFY21 had declined by 20.8% YoY). Growth will be aided by overseas markets, domestic infrastructure sector and defence segment. EBITDA is likely to increase by 37.9% YoY to Rs1.2bn with EBITDA margin expected at 21.5% (up 280bps YoY). PAT is likely to grow by 66.5% YoY to Rs701mn. (6) We expect Thermax’ revenue to grow by 67.6% YoY to Rs11.1bn on a low base. We expect EBITDA margin of 8.7% (up 1040bps YoY on a low base). Consequently, PAT is likely to rise to Rs649mn (vs. a net loss of Rs153mn YoY). (7) Triveni Turbine’s revenue is likely to grow by 15% YoY to Rs1.8bn due to a low base (sales in 1QFY21 had declined by 22% YoY). EBITDA margin is likely to be ~18% (down 540bps YoY but up 520bps QoQ). PAT will likely decline by 12.2% YoY to Rs252mn.

Consumer Durables sector: (1) We expect Blue Star to register 76% YoY growth in revenue at Rs11bn, led by summer season demand for ACs and Commercial Refrigeration products and price hikes. EBITDA margin is expected at 6.4%, up 620bps YoY on a low base. PAT is expected at Rs308mn (vs. a net loss of Rs200mn YoY). (2) Dixon Technologies is likely to post strong revenue growth of 266% YoY to Rs18.9bn, driven by a strong order book across categories and revenue booking in new verticals such as mobile phones (under PLI scheme) and top load fully automatic washing machines. EBITDA margin is likely to marginally increase by 50bps YoY to 3.5%. However, in absolute terms, EBITDA is likely to grow by 325% YoY to Rs718mn and PAT is likely to grow by 2450% YoY to Rs408mn on a low base. (3) IFB Industries is likely to report 72.2% YoY growth in revenue at Rs4.8bn, led by continuation of strong demand for washing machines and start of revenue booking of ACs for OEM clients. EBITDA margin is likely to be healthy at 8.8% due to higher scale, up 2040bps YoY. PAT is expected at Rs113mn vs. net loss of Rs430mn YoY. (4) We expect Johnson Controls- Hitachi Air Conditioning India to report 124% YoY growth in revenue at Rs6bn (on a low base as 1QFY21 sales were down 71% YoY), led by summer season demand for ACs. EBITDA margin is likely to be healthy at 9.6%, albeit down 380bps QoQ due to input costs pressure. PAT is expected at Rs284mn (vs. net loss of Rs231mn YoY). (5) Voltas is likely to post 47.4% YoY growth in revenue at Rs19.1bn, led by summer season demand for ACs and Commercial Refrigeration products and price hikes. EBITDA margin is likely to rise by 580bps YoY to 11% on a low base. PAT is likely to rise by 103% YoY to Rs1.9bn. (6) Whirlpool of India is likely to post 40.5% YoY growth in revenue at Rs14.4bn due to a low base and summer season demand for refrigerators and ACs. EBITDA margin is likely to increase by 550bps YoY to 10% on a low base. Consequently, PAT is expected to grow by 524.8%YoY to Rs1bn on a low base of Rs165mn profit in 1QFY21.

Consumer Electricals sector: (1) Bajaj Electricals is likely to post revenue growth of 46.5% YoY at Rs8.9bn. Consumer Products segment is likely to grow by 50% YoY whereas the EPC segment is expected to grow by 40% YoY on a low base. We expect EBITDA margin at 6.7% (up by 1030bps YoY on a low base). We expect EBITDA of Rs616mn and PAT of Rs394mn. (2) Crompton Greaves Consumer Electricals is expected to post 46.5% YoY growth in revenue at Rs10.5bn due to a low base and summer season demand of fans. EBITDA margin is expected to decrease marginally by 30bps YoY to 13.8% due to rising input costs. We expect EBITDA to grow by 44.4% YoY to Rs1.4bn and PAT to grow by 47.3% YoY to Rs1.1bn. (3) Havells India is likely to post 52.4% YoY revenue growth at Rs22.5bn due to a low base (1QFY21 sales had declined 45.5% YoY). Growth is also likely to be aided by price hikes and summer season demand for ACs & fans. EBITDA margin is likely to rise by 420bps YoY to 13% (but down 220bps QoQ due to input cost pressure). We expect EBITDA to grow by 123% YoY to Rs2.9bn and PAT by 196% YoY to Rs1.8bn. (4) Orient Electric is likely to post 106% YoY revenue growth at Rs3.6bn due to a low base, price hikes and summer season demand for fans. EBITDA margin is likely to rise by 2240bps to 11.6% (but will fall 50bps QoQ due to input price pressure). We expect EBITDA to grow to Rs582mn (vs. negative EBITDA of Rs221mn in 1QFY21) and PAT to come in at Rs284mn (vs. net loss of Rs231mn in 1QF21).

2 Capital Goods & Consumer Durables Sectors

Institutional Equities

(5) Polycab India is expected to post 97.6% YoY growth in revenue at Rs19.2bn due to a low base and improved demand. EBITDA margin is expected to jump by 640bps YoY to 12.3% but fall 160bps QoQ due to rising input costs. We expect EBITDA to grow by 312% YoY to Rs2.3bn and PAT to grow by 26% YoY to Rs1.4bn. (6) V-Guard Industries is likely to post 33% YoY jump in revenue to Rs5.4bn on a low base (1QFY21 revenue was down 42% YoY), price hikes and summer season demand for voltage stabilisers and fans. We expect EBITDA margin of 11.5%, up 930bps YoY on a low base but down 140bps QoQ due to input cost pressures. We expect 582% YoY rise in EBITDA to Rs621mn and 1008% YoY jump in PAT to Rs399mn on a low base.

3 Capital Goods & Consumer Durables Sectors

Institutional Equities

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4 Capital Goods & Consumer Durables Sectors

Institutional Equities

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5 Capital Goods & Consumer Durables Sectors