Polycab And Astral To Kajaria: Jefferies View On How Raw Material Prices Could Impact Mid Caps

As input costs decrease, raw material-heavy small- and medium-sized companies across sectors could see their margins improve, according to Jefferies.

Electricals, plastics, ceramics, and adhesives firms are set to benefit from falling prices as average raw material costs stand at 65% of the sales for these sectors, according to an April 18 note.

Here's how Jefferies expects falling prices of copper to crude to impact these sectors:

Raw materials are the key cost at 65–70% of the sales for diversified electricals, Jefferies said. While the average LME copper price declined 10% year-on-year in the quarter ended March, it's up 11% sequentially. According to the brokerage, that could entail inventory gains—cheaper stock sold at a higher price.

A 1-2% dip in total raw material costs could lead to a 60- to 80-basis-point rise in gross margins, Jefferies said.

Average prices rose 5-8% for fans, 5% for air conditioners, and 2-3% for cables and wires in January 2023.

That could aid margins of Polycab India Ltd., Havells India Ltd., and Finolex Cables Ltd., Jefferies said.

Raw material costs are about 65% of the sales for makers of plastic pipes. After having tumbled 45% from January to November 2022, PVC prices rose from December 2022 to March 2023. Jefferies expects that to aid margins for pipemakers in the fourth quarter of FY23.

A 1-2% reduction in raw material costs could lead to a 60- to 80-basis-point rise in gross margins, it said.

Key players in the sector include Supreme Industries Ltd. and Finolex Cables in PVC; and Astral Ltd. in both CPVC and PVC.

Power and fuel costs are 20–25% of the sales for tilemakers. Kajaria Ceramics Ltd. has been moving to alternative fuels like LPG (5%) and biofuel (30%)—the proportion of these likely rose from 11% in December to 24% in January and about 35% by February.

Brent has declined about 25% in the last month and domestic gas prices, especially in Morbi, have fallen 16% since October.

This could aid tile margins over the coming quarters, Jefferies said, as a 5% dip in power and fuel costs could entail about 90 to 100 basis points of gross margin expansion.

Jefferies estimates Kajaria's operating margin to trough at 13–14% in FY23 and increase to 16–17% by FY25.

Raw material costs range from 45–50% of the sales for Pidilite Industries Ltd., with a major contribution from vinyl acetate monomer, or VAM.

While its operating margin has stayed "strong" around 22% over FY17–21, it fell to around 19% in FY22 and the first half of FY23 as VAM prices spiked. Since then, the commodity has fallen by about 50%.

While Pidilite's margin is likely to stay at about 17% in FY23, it is estimated to revive to 20-22% by FY25-26, said Jefferies.

Jefferies has a 'buy' call on Polycab, Finolex, Supreme Industries, Amber Enterprises, and Kajaria, while it recommends 'hold' on Havels, Astral and Pidilite.

Here's the street view: