Published on 13/08/2019 11:58:44 AM | Source: Motilal Oswal Services Ltd

Neutral Havells India Ltd For Target Rs.700 - Motilal Oswal

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Lloyd facing stiff competition

Strategy in place but proving time consuming

* Another quarter of revenue pressure: Revenues continued disappointing for the second consecutive quarter, with growth of meager 4.5% YoY to INR27.1b (10% miss). EBITDA too declined 11.7% YoY to INR2.8b (24% miss), with the margin contracting 180bp YoY to 10.2%. Other income came in higher than our estimate at INR397m. However, the tax rate stood at 34% v/s 30.8% in 1QFY19. Thus, net profit was down 17% YoY to INR1.7b (29% miss) in the quarter.

* Lloyd hit by intensifying competition: In a seasonally strong quarter backed by a robust summer season, Lloyd reported an 8% decline in revenues. While Lloyd revenue was impacted by a sharp decline in LED TV sales, we believe that even in the AC business, the company has lost market share. Lloyd reported an EBITDA margin of just 1.4% v/s 8.1% in 1QFY19 due to (a) weak top line and (b) higher ad spends at 10.2% of sales v/s 7.1% in 1QFY19 (likely against the backdrop of the Cricket World Cup). Management admitted to fierce competition in terms of pricing in the segment as competitors were more focused on volume rather than profitability, especially given weak sales last summer and the high inventory level into the summer season this year. Thus, despite of input cost pressure on account of INR depreciation and higher import duty, price hikes eluded the segment. Lloyd’s performance was also impacted by the ongoing distribution network revamp, as management is focusing on increasing penetration through multi-brand retail rather than the traditional low-price model distribution network. We note that Lloyd is carrying higher-than-usual inventory at the end of the season.

* Real estate slowdown impacts core growth: Ex-Lloyd business, HAVL reported revenue growth of 9% YoY. Management attributed flat growth in the Switchgears business to the slowdown in the real estate market. The industry has been registering negative growth since Nov’18; however, HAVL has gained market share in the segment. Going forward, the recovery may be stretched out in the segment. Cables & Wires segment reported revenue growth of 4%, but is expected to recover in the second half on account of likely higher infrastructure spending. Lighting business continues witnessing price erosion. However, the key silver lining was the ability of the company to improve margins (+140bp) on account of a better product mix. ECD segment delivered strong growth of 24% YoY, led by high-teen growth in fans segment, market share gain in water heaters and strong growth in other appliances, given the low base. The company continues gaining market share in the ECD segment and expects the trend to continue. On the margin front, HAVL (ex-Lloyd) EBITDA margin stood at 12.9% (-60bp YoY) – the weakest in the past two years


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