Summer stocks to buy: As mercury rises, Jefferies sees Havells, 5 other midcap cos doing well in Q4

With the mercury rising and India Meteorological Department (IMD) forecasting a strong summer, Jefferies expects select midcap companies engaged in manufacturing of fans, ACs, refrigerators, agri pipes, air coolers and pumps to emerge as key beneficiaries of rising in demand. Jefferies sees a 14 per cent sales growth and 110 basis points sequential rise in operating profit margin for six companies namely Crompton Greaves Consumer Electricals, Havells India, V-Guard Industries, Amber Enterprises, Finolex Industries and Supreme Industries in the March quarter.

"We foresee Crompton Consumer, Havells India, V-Guard, Amber, Finolex Industries, and Supreme Industries as key beneficiaries of a good summer. Supreme Industries is among our top picks. But, in view of stretched valuations and continued margin weakness, we retain ‘Hold’ on Havells and Whirlphool of India. Astral's (Hold) 9MFY23 volume growth at 20 per cent lags that of Supreme Industries at 35 per cent," it said.

 

To recall, IMD on February 28 forecasted a hot summer (March-May), with above-normal temperature in most parts of North East, East, Central India, and some parts of North West India. Below normal rainfall is most likely over most areas of North West, West, Central and some parts of East & North East India.

"In our coverage, key sectors which could benefit from a good summer are fans, ACs, refrigerators, pipes (mainly Agri), air coolers and pumps. Q4 (Jan-Mar) sales are usually 30-35 per cent of their annual mix. Also, construction activity (pipes, tiles) usually peaks pre-monsoons. Margins tend to expand QoQ, given better op-leverage (volumes," it said.

Jefferies said ACs, refrigerators and fans are key summer-centric products. It noted that Crompton Greaves Consumer is the market leader in fans with 28 per cent share and residential pumps with 25 per cent-plus share.

Havells India, it said, has been posting good sales in Lloyd, with nearly 18 per cent of its mix over last 4-5 quarters, alluding to volume market share gains.

V-Guard's stabilisers (20 per cent of sales), fans and pumps could benefit from a hotter summer, it said. Whirlpool of India has a stronger franchise in refrigerators and washing machines (60-65 per cent of its mix) than in ACs, it noted.

Jefferies noted that Crompton, Havells India and V-Guard also sell air-coolers. "In Q4FY23, we expect average sales growth of 10 per cent YoY for these cos, with 70 bps QoQ expansion in OPM. Historical analysis indicates good seasonality for sales/margins during summers (Q4-Q1)," it said.

For Amber, it said the company has 70 per cent market share in contract manufacturing of ACs in India,

and can be viewed as a demand aggregator for the under-penetrated AC industry in India. Jefferies sees 15 per cent YoY Q4 sales growth for Amber, with 70 bps QoQ Ebitda margin expansion.

"Offtake in agri-pipes and pumps is usually directly correlated with summers. Finolex Industries is the market leader in agri-pipes with 70 per cent of its pipes mix. Supreme Industries has a diversified product mix, with pipes at 65 per cent of its sales (25 per cent of pipes is agri-pipes). Whereas, Astral is predominantly present in plumbing and has negligible presence in Agri. On margins, PVC resin seems to be stabilising now. Thus, in Q4 we expect 15 per cent YoY Q4 sales growth, with 210 bps QoQ Ebitda margin expansion," it said.

 

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