Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Markets / Mark To Market/  Consumer durable cos’ gross margin to improve but all isn’t well at Ebitda level
BackBack

Consumer durable cos’ gross margin to improve but all isn’t well at Ebitda level

Consumer durable companies would focus on gaining market share, which would be driven by higher expenses, but adding to the woes is the elevated fuel expenses

Improvement in margin performance would be a key trigger for shares of Havells, Voltas and Crompton Greaves Consumer Electricals. (Photo by Priyanka Parashar)Premium
Improvement in margin performance would be a key trigger for shares of Havells, Voltas and Crompton Greaves Consumer Electricals. (Photo by Priyanka Parashar)

The white goods and durables sector is one of the key beneficiaries of the fall in prices of commodities such as steel, aluminium and copper.

Margins of companies such as Havells India Ltd and Voltas Ltd were under pressure in the past few quarters. For instance, in the June quarter (Q1FY23), Havells’ gross margin dropped by 670 basis points year-on-year to 29%. One basis point is one hundredth of a percentage point.

But this metric is likely to expand from Q3 onwards for all companies in the sector. However, the full increase in gross margin is not expected to reflect at the Ebitda (earnings before interest, tax, depreciation and amortization) margin level.

One reason for this would be a potential increase in advertisement and promotion (A&P) expenses as a percentage of revenues. Owing to disruption in operations, lower sales and an uncertain environment in FY21 on account of the covid-19 pandemic, companies had cut their marketing budget in the fiscal year, point out analysts at ICICI Securities. But in FY22, as normalcy returned, most of the durable companies increased their A&P expenses, they added.

“The companies would like to invest further in branding, channel schemes and new product developments. Hence, we believe marketing and brand spend will likely further increase to FY19 levels over FY23E-FY24E, hurting profitability," said ICICI Securities analysts in a report on 22 September.

Consumer durable companies would also focus on gaining market share, which would be driven by higher expenses, but adding to the woes is the elevated fuel expenses.

Of course, it helps that companies have taken significant price hikes over the last few quarters. But it remains to be seen if such price hikes would suffice.

As such, ICICI expects Ebitda margin to expand over FY23-24E but their estimates remain conservative versus consensus.

Improvement in margin performance would be a key trigger for shares of Havells, Voltas and Crompton Greaves Consumer Electricals Ltd. The stocks of these companies are 13-34% below their 52-week high.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

ABOUT THE AUTHOR
Vineetha Sampath
Vineetha is a part of the Mark to Market team, which specializes in offering cutting edge commentary on stocks and financial reports of companies. Vineetha looks at varied number of sectors, including automobile, aviation, FMCG, internet companies and metals. If you want to know -- why entry-level auto sales are not picking up; or which FMCG companies would be more adversely impacted due to weak rural demand; or why IndiGo’s landing is about to get tougher? You will find these answers and more in her stories. Vineetha is a chartered accountant.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 22 Sep 2022, 12:00 PM IST
Next Story footLogo
Recommended For You
GENIE RECOMMENDS

Get the best recommendations on Stocks, Mutual Funds and more based on your Risk profile!

Let’s get started
Switch to the Mint app for fast and personalized news - Get App