Consumer cos’ gross margin improves but all is not well at Ebitda

The white goods and durables sector is one of the main beneficiaries of falling prices for commodities such as steel, aluminum and copper.

Profit margins of companies such as Havells India Ltd and Voltas Ltd have been under pressure in the past few quarters. For example, in the June quarter (Q1FY23), Havells gross margin fell 670 basis points year-on-year to 29%. A basis point is one hundredth of a percentage point.

But this metric will likely expand from Q3 onwards to cover all companies in the industry. However, the full increase in gross margin is not expected to reflect in Ebitda margin (earnings before interest, taxes, depreciation and amortization).

One reason for this is the possibility that advertising and promotion (A&P) costs increase as a percentage of sales. Analysts at ICICI Securities point out that due to disrupted operations, lower sales and uncertain environment in fiscal year 21 due to the covid-19 pandemic, companies have slashed marketing budgets theirs during the financial year. But in FY22, when rates returned to normal, most durables increased their A&P costs, they added.

“Companies want to invest more in branding, channels and new product development. As a result, we believe spending on marketing and branding is likely to continue to grow to 19 in FY23 through FY24, hurting profitability,” the analysts said. ICICI Securities analyst said in a report on September 22.

Consumer durables companies will also focus on gaining market share, which will be driven by higher costs, but added to the woes are rising fuel costs.

This, of course, helps companies that have raised prices significantly over the past few quarters. But it remains to be seen whether such price increases will be enough.

As a result, ICICI expects Ebitda margins to expand in fiscal year 23-24E but their estimates remain conservative relative to consensus.

The improvement in margin performance will be the main driver for shares of Havells, Voltas and Crompton Greaves Consumer Electricals Ltd. Shares of these companies are 13-34% below their 52-week high.

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