It’s just the beginning of the festive season. A perfect time to scoop-up consumer durable stocks? Well, macro-trends are conducive for the sector’s growth—high pent up demand, cheaper credit and stabilizing metal prices. But valuations have soared too.
To spot attractive investment opportunities in India’s consumption story at this juncture, you need to invest in companies that have multiple growth triggers.
When we talk about consumer goods, most obvious categories, such as ACs and refrigerators, come to our mind. Can we miss out on fans? If we can’t then it would be interesting to find out how companies such as Orient Electric are doing.
Orient Electric, a C.K. Birla group company, is the second-largest player in India’s fan market and is the largest fan exporter of India. Its market share within the organized sector is around 20%. The company offers products across four categories—fans, household appliances, lighting and switchgears—classified under two segments, electrical consumer durables and lighting & switchgear.
Orient Electric has a manufacturing capacity of 97 lakh fans p.a., 3.41 crore lights and luminaries and 1.43 crore switchgear units p.a. at present. The company has committed Rs 125 crore to Greenfield expansion of its fans capacity.
Now you may wonder how companies operating in such competitive segments can have multiple growth triggers. In that case, you might want to change your spectacles for the time being.
First off, a fan is not a luxury but a necessity in a tropical country like India.
India’s fans market is likely to have tailwinds such as rising electrification of villages, possibility of continuation of the work-from-home culture beyond the pandemic and brightening prospects of the housing sector, amongst others.
Right from real estate developers to lenders, many industry experts are predicting an upswing in the real estate market. If we are talking about thousands of new affordable houses, can we forget about product categories that Orient Electric caters to?
Penetration of ceiling fans in Indian homes is close to 90%. However, only 3% of homes use energy-efficient fans. The biggest deterrent appears to be the high upfront costs of energy efficient fans.
But focusing just on the initial costs and ignoring savings that come by way of lower energy consumption is a myopic view. Manufacturers of energy-efficient fans claim that the additional upfront costs on energy efficient fans can be covered within less than 2 years, through electricity savings.
The energy labeling on ceiling fans is voluntary so far. BEE’s (Bureau of Energy Efficiency’s) new mandatory energy efficiency labeling norms for ceiling fans will kick in from January 01, 2022. The previous deadline was July 2020, which was postponed due to pandemic. This may boost the replacement demand in a big way.
Now that only the star-rated ceiling fans will be sold in India from January 01, 2022 onwards, as things stand today, companies such as Orient Electric are likely to benefit.
Incremental demand for energy-efficient fans is expected to result in the improvement of average selling price. The new norms may also help organized sector players increase their market share. Organized players account for nearly 63% of market share in India’s Rs 12,000 crore fan market at present. The industry experts expect the organized market to grow at a compounded annualized rate of 15% for the next few years.
Orient Electric has been cautiously expanding its ‘i-series’ range with ‘i-Float IoT’. Besides, launching the exclusive products for the e-commerce channel, the company is also expanding its hector range by introducing new colours and variants.
Speaking about future growth potential of other businesses, such as domestic appliances, the company is hopeful that its partnership with strong global brands such as De’Longhi, Kenwood and Braun will help it grow its presence in the premium segments. The company is focusing on lighting products as well.
Copper, steel and aluminium prices have shot up substantially over the last 8-10 months. Moreover, the company has faced shortages of some critical components. Its financial statements have been reflecting the impact with a lag though.
The management of Orient Electric believes that component availability is likely to improve going forward. Moreover, many analysts are now predicting that the run rate of price escalation of commodities (metals, especially) may substantially moderate in future.
In that case, it remains to be seen whether these potential positives translate into better margins for Orient Electric.
To achieve cost-competitiveness and process efficiencies in the manufacturing of fans and lighting products, Orient Electric undertook various initiatives in FY21. The company has been redesigning its infrastructure layout and working on shop-floor automation.
The implementation is already underway and may start yielding results over the next 2 years. The company is aiming to increase its exports with new capacities—a major stepping stone for the company’s future growth.
Orient Electric is a net-debt free company.
Bulk of Orient Electric’s revenue comes from highly seasonal products such as fans and coolers. The performance of household appliances and lighting & switchgear may be the key to lowering the risk of seasonality, going forward.
The company’s thrust on premiumization, automation and exports is likely to help it consolidate its position. The potential upturn in the housing market and the implementation of mandatory energy labeling norms starting from January 2022 might bode well for the company.
Does that make Orient Electric sound cool?
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Disclaimer: The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
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