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Consumer Durables

Sector Update

April 26, 2021 PLI to foster component ecosystem

Government has approved the Production Linked Incentive (PLI) Scheme for Air Conditioners and LED Lights to be implemented over FY22 to FY29 with a PL Universe budgetary outlay of Rs62.4bn (4-6% incentive on incremental sales over base year FY20). Given the contours of the scheme, we believe this shall promote Companies Rating CMP (Rs) TP (Rs) onshore of critical components like Compressors, Motors, PCBs, LED chips amongst others. We remain unsure on the participation of Bajaj Electricals BUY 1,135 1,033 CG Cons. Elec. BUY 354 447 local brands like , etc. given the capital intensive nature and Havells Hold 1,006 1,128 need of large economies of scale for these components. Nevertheless, Polycab India BUY 1,485 1,480 creation of a robust component ecosystem by ancillary entities remains a Voltas Hold 939 1,000 positive for brands as it shall help 1) accelerate import substitution and 2) Source: PL shrink lead times thereby reducing working capital requirements.

We continue to maintain our positive stance on consumer durables space given huge penetration scope and market consolidation. Amongst our coverage universe, Voltas/ Lloyd (Havells) stand to benefit from AC PLI while

Crompton, Havels, Bajaj and Polycab to benefit from the LED Lights PLI.

Key Highlights of the Scheme:

. To incentivize manufacturing of components of Air Conditioners and LED

Lights over FY22-FY29 with a budgetary outlay of Rs62.4bn.

. Categories within Air Conditioner:

. AC Components: High Value Intermediates or Low Value Intermediates or Sub-assemblies or a Combination thereof

. High Value Intermediates of AC: Aluminum Foil, Cu Tube, Compressor

. Lower Value Intermediates of AC: PCB Assembly for Controllers, BLDC Motors, Service Valves for AC, Cross Flow Fans and other components

. Categories within LED Lights:

. LED Lighting Products: Core Components like LED Chip Packaging, Resisters, ICs, Fuses and Large scale investments in other components

. Components of LED Lights: LED chips, LED drivers, LED engines, Mechanicals, Packaging, Modules, Wire Wound Inductors and other components

. The scheme shall extend an incentive of 4-6% on incremental sales over the

base year (FY20) of goods manufactured in India over a period of 5 years subsequent to the base year and one year of gestation period (subject to ceilings) Amnish Aggarwal [email protected] | 91-22-66322233 . Applicant will have to fulfill both criteria of cumulative incremental investment Paarth Gala in plant and machinery as well as incremental sales over the base year in that [email protected] | 91-22-66322242 respective year to be eligible for PLI.

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. Incentives open for companies making brown field or green field investments for manufacturing in target segments in India.

. Mere assembly of finished goods shall not be incentivized.

. Companies investing in basic/ core components shall be given a higher priority. Large investments shall have a higher priority over Normal Investment

. The Government is targeting production worth Rs1.68 lakh crore and exports worth Rs644bn in 5 years.

. The scheme is in line with the Government’s Atmanirbhar Bharat movement. Within Air Conditioners they first introduced Phased Manufacturing Program flowed by Import Ban on refrigerant filled AC

. By incentivizing manufacturing of critical components or sub-assemblies, the scheme places emphasis on creating a robust component ecosystem in India.

. This shall enable higher value addition in Air Conditioners/ LED Lights going ahead (currently at 25-30%/35-40% respectively).

Break-up of major components Component % of RM Cost Compressor 20-25 PCB Controller 20 Copper Tube 10-15 Aluminum Foil 5-10 BLDC Motors 6-8 Cross Flow Fans 5-7 Service Valves 4-5 Source: PL

April 26, 2021 2 Consumer Durables

Air Conditioners: Thrust on creating component ecosystem and increase value addition from current 25-30% Large Investment (Rs mn) Normal Investment (Rs mn) PLI Segment Year Min Incremental Min Incremental % Min Investment/ year Min PLI Min Investment/ year Min PLI Sales Sales FY22 1,500 500 FY23 6.0 1,500 7,500 500 2,500 FY24 6.0 1,000 15,000 450 500 5,000 150 AC FY25 5.0 1,000 20,000 900 750 7,500 300 Components FY26 5.0 1,000 25,000 1,000 750 11,250 375 FY27 4.0 30,000 1,250 15,000 563 FY28 1,200 600 Total 6,000 97,500 4,800 3,000 41,250 1,988

FY22 500 500 FY23 6.0 750 2,500 500 2,500 FY24 6.0 750 6,250 150 500 5,000 150 High Value FY25 5.0 1,000 10,000 375 500 7,500 300 Intermediates of AC FY26 5.0 1,000 15,000 500 500 10,000 375 FY27 4.0 20,000 750 12,500 500 FY28 800 500 Total 4,000 53,750 2,575 2,500 37,500 1,825

FY22 200 100 FY23 6.0 200 1,000 100 500 FY24 6.0 200 2,000 60 100 1,000 30 Lower Value FY25 5.0 200 3,000 120 100 1,500 60 Intermediates of AC FY26 5.0 200 4,000 150 100 2,000 75 FY27 4.0 5,000 200 2,500 100 FY28 200 100 Total 1,000 15,000 730 500 7,500 365 Source: Ministry of Commerce and Industry, PL

LED Lights: Thrust on creating component ecosystem and increase value addition from current 35-40% Large Investment (Rs mn) Normal Investment (Rs mn) PLI Segment Year Min Incremental Min Incremental % Min Investment/ year Min PLI Min Investment/ year Min PLI Sales Sales FY22 1,000 200 FY23 6.0 500 6,000 200 1,200 FY24 6.0 500 9,000 360 200 2,400 72 LED Lights FY25 5.0 500 12,000 540 200 3,600 144 (Core Components) FY26 5.0 500 15,000 600 200 4,800 180 FY27 4.0 18,000 750 6,000 240 FY28 720 240 Total 3,000 60,000 2,970 1,000 18,000 876

FY22 50 20 FY23 6.0 50 300 20 120 FY24 6.0 50 600 18 20 240 7 Components FY25 5.0 50 900 36 20 360 14 of LED Lights FY26 5.0 50 1,200 45 20 480 18 FY27 4.0 1,500 60 600 24 FY28 60 24 Total 250 4,500 219 100 1,800 88 Source: Ministry of Commerce and Industry, PL

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Consumer Durables

Valuation Summary

S/C CMP TP MCap Sales (Rs bn) EBITDA (Rs bn) PAT (Rs bn) EPS (Rs) RoE (%) PE (x) Company Names Rating (Rs) (Rs) (Rs bn) FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E Bajaj Electricals S BUY 1,135 1,033 129.1 49.8 46.9 55.1 62.0 2.1 3.4 4.4 5.2 -0.0 1.6 2.6 3.4 -0.0 13.9 23.3 29.7 -0.0 10.7 15.7 17.5 NA 81.5 48.8 38.2 Crompton Greaves Consumer S BUY 354 447 222.2 45.1 46.2 54.7 62.2 6.0 6.7 7.9 9.2 4.4 5.0 6.0 7.0 7.0 8.0 9.6 11.2 34.1 30.8 30.3 29.6 50.8 44.4 37.0 31.7 Electricals Havells India S Hold 1,006 1,128 629.2 94.3 103.0 123.5 140.7 10.3 15.1 17.5 20.3 7.3 10.0 12.2 14.4 11.7 15.9 19.4 23.0 17.3 21.1 21.5 21.7 85.8 63.2 51.8 43.8 Polycab India C BUY 1,485 1,480 221.1 88.3 88.8 105.7 120.7 11.4 11.4 13.6 15.9 7.6 7.6 9.1 10.8 51.0 51.3 61.3 72.3 22.7 17.9 18.0 18.2 29.1 29.0 24.2 20.5 Voltas C Hold 939 1,000 310.6 76.6 77.1 91.1 102.1 6.9 6.0 9.5 11.2 5.7 5.2 8.0 9.4 17.2 15.7 24.1 28.5 13.5 11.6 16.1 16.7 54.6 59.9 39.0 33.0 Source: Company, PL S=Standalone / C=Consolidated

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Consumer Durables

Analyst Coverage Universe Sr. No. Company Name Rating TP (Rs) Share Price (Rs) 1 Hold 2,829 2,622 2 Avenue Supermarts BUY 3,195 2,880 3 Bajaj Electricals BUY 1,033 991 4 BUY 4,189 3,795 5 Burger King India BUY 221 145 6 Colgate Palmolive Hold 1,685 1,551 7 Crompton Greaves Consumer Electricals BUY 447 374 8 India Accumulate 550 552 9 BUY 568 507 10 GlaxoSmithKline Consumer Healthcare Hold 9,377 9,247 11 Havells India Hold 1,128 1,026 12 BUY 2,509 2,400 13 ITC BUY 248 214 14 Jubilant FoodWorks Accumulate 3,279 2,862 15 Kansai Nerolac Paints BUY 653 596 16 Accumulate 441 407 17 Nestle India Accumulate 18,450 17,096 18 Hold 1,739 1,886 19 Polycab India BUY 1,480 1,376 20 Accumulate 1,663 1,518 21 Titan Company Accumulate 1,663 1,518 22 Voltas Hold 1,000 977 23 Westlife Development BUY 618 496

PL’s Recommendation Nomenclature Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

April 26, 2021 5 Consumer Durables

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