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Spark Capital : Consumer Durables - Analysis of Tamil Nadu freebie orders




Spark Capital Advisors(India) Private Limited


07 Jan 2013





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Freebie orders, a near term boon but a long term concern The distribution of free mixer grinder, table top grinder and table fans by the current Tamil Nadu (TN) government as a part of its election manifesto is a sizeable order of ~Rs. 80bn and is expected to have significant impact on market dynamics for these consumer durable products in the South Indian market. First two rounds of ordering for a total of 6mn pieces of the three appliances each has been placed already and order for >12mn pieces of each appliance is expected to be placed over the next two years. We expect these orders to have both positive and negative outcomes for the market participants in the region. Opportunity for large players to dominate – The TN election manifesto entailed distribution of free appliances to 18.4mn households across TN and orders for 6mn appliances (~Rs. 25bn) have already been placed in the first two rounds (Aug’11 &’12). Manufacturers across the spectrum including large branded players (CRG, BJE and BGAL – Not Rated) and medium sized players have participated and secured orders with many players scaling up their production capacity many folds to cater to this order. Given the tight delivery schedule, some marginal players are already struggling to supply orders in time. This could result in organized players winning a larger share in the next 2 phases. Realization are significantly lower than base market products – While volumes and size of orders have been large, realization per product has been significantly lower than that of comparable products in the market. This is owing to the fact that the capacity, features, offerings and quality requirements are below the base market products. Absence of dealer margin, distribution costs and advertisement expenses are margin accretive in these orders but overall margins for manufacturers are expected to remain subdued given the competition, large size of orders and low bid prices. Retail market demand to get adversely impacted over the next few years – While these orders are expected to boost revenue growth for successful bidders and expand markets (especially table top grinder) rapidly, the distribution across all households is expected to saturate demand for these products and we expect further sales to be relatively subdued (compared to other markets) for 2-3 years post distribution. This, we believe, would in turn lead to under utilization of the capacity which was increased solely for this one time order. While manufacturers expect replacement demand to keep sales momentum upbeat, we expect this to be a gradual process and benefits to be felt only in the long term. We also believe that excesses in the distribution of these products in Tamil Nadu could spill over to the neighboring states which would have an adverse effect on growth of these products in the entire southern region. Impact on coverage companies – Given BJE’s product offering and exposure to southern market (25-30%), the company could win further orders in the next two phases but at the same time would be at risk in the long run on being exposed to the subdued southern market post the ordering. CRG and HAVL are predominantly present only in the fans space in the southern market and have a low contribution of lower realisation products. Hence the negative impact in the long run on HAVL and CRG is expected to be relatively lower than BJE. We maintain our ‘SELL’ rating on both BJE and CRG and our ‘ADD’ rating on HAVL.

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