Indian Mid Caps’ Margin Likely To Normalise From FY24, Says Jefferies

Jefferies indicated that volatility in PVC costs may drag margins for pipemakers.

<div class="paragraphs"><p>A trader uses laptops to monitor stocks. (Photo:&nbsp;Adam Nowakowski/Unsplash)</p></div>
A trader uses laptops to monitor stocks. (Photo: Adam Nowakowski/Unsplash)

Indian mid caps’ operating profit margin is likely to start “normalising” from the fiscal ending March 2024, led by premiumisation, volume traction and softening of commodity prices, Jefferies said.

“Over April-August 2022, key input commodities (copper, aluminum, steel, etc.) have corrected by 20-30%. This could bring respite to operating profit margins in H2 FY23, given that most sectors have taken average 10-15% total price hikes in FY22,” the financial services provider said in an Aug. 25 report. “Also, better volume traction in housing (pipes, tiles), infra, capex (electricals) could entail operating leverage, aiding margins.”

According to Jefferies, about 55% of its coverage companies reported Ebitda margin expansion year-on-year in Q1 FY23. The key ones being: HEG Ltd. on strong price hikes and 100% domestic manufacturing; followed by Polycab India Ltd., Crompton Greaves Consumer Electricals Ltd., Kajaria Ceramics Ltd. and Dixon Technologies Ltd.

The financial services provider, however, expects operating margins of the companies in its coverage to drop 100 basis points in FY23 owing to a weaker first half. But margins could commence expansion from FY24, up 70 basis points year-on-year, it said.

PVC Price Volatility

Jefferies indicated that volatility in PVC costs may drag margins for pipemakers.

Supreme Industries Ltd., Astral Ltd., Finolex Industries Ltd., while reporting strong volume growth in April-June, faced weaker operating margins due to sharp PVC volatility, it said.

PVC prices, however, continue to soften in the second quarter. That prompted Jefferies to forecast a 300-basis-point year-on-year dip in average operating margin in FY23, but a 110-basis-point improvement with PVC prices stabilising.

Jefferies’ Small And Mid Cap Picks

  • Crompton Greaves Consumer Electricals Ltd.: Maintains ‘buy’ on improving margin outlook, with premiumisation and synergies from Butterfly integration.

  • Supreme Industries Ltd.: Reiterates ‘buy’. Margin uptick may happen from FY24 with PVC prices stabilising and about a 40% value-added mix.

  • Kajaria Ceramics Ltd.: Says ‘buy’. Expects solid volume traction to entail operating leverage, Morbi exports to aid domestic pricing stability.

  • Dixon Technologies (India) Ltd.: Maintains ‘buy’. Expects production-linked incentive upside to support strong sales growth, while value addition may gradually aid margin.

  • Polycab India Ltd.: Rates ‘buy’. Sees revival in FMEG margin and sustaining market leadership in cables and wires.

Key risks: Further spike in input costs and supply-chain issues.