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FY20E margin rebound not enough to support valuations; downgrade to Sell
* After surprising positively with strong revenue growth over the last couple of quarters, Havells missed on revenue growth estimates in Q4 due to extended winters and macro headwinds. Lloyd disappointed with 9% revenue decline and also faced margin pressure.
* A weak demand scenario and extended winters impacted Fan and AC sales. Heightened competition, weak demand restricted price increases, along with adverse revenue mix led to a margin contraction. Demand headwinds are expected to continue in Q1FY20E as well.
* A recovery in revenue and moderation in the competitive intensity are key for margin expansion. Growth strategy with a focus on distribution expansion, new product launches, and strong execution should drive outperformance once macro headwinds recede.
* The weak 4Q performance led to an EPS cut of 9%/7% for FY20/21E. We already factor in a healthy 23% EBITDA CAGR over FY19-21. Estimate reduction and expensive valuations lead us to downgrade the name to Sell, with a revised TP of Rs669 (35x FY21E EPS).
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