All-round disappointment; economic slowdown taking toll
* A miss on revenue: Havells (HAVL) disappointed on revenue growth for the third consecutive quarter in 2QFY20. Revenue growth was muted at 1.8% YoY (6% miss). While the gross margin expanded by 80bp YoY, the EBITDA margin shrank 150bp YoY to 10.5% on account of lower absorption of overheads. PBT was down 19% YoY to INR2.1b (22% miss). On account of a lower tax rate of 11.6%, PAT came in at INR1.8b (+1.5% YoY). 1H performance: Revenue grew 3.2% YoY, while EBITDA fell 11.3% YoY to INR5.1b. PAT was down 8.7% YoY, despite the benefits from lower tax rates.
* Economic slowdown impacts core portfolio: Ex-Lloyd business, HAVL reported revenue growth of 6% YoY. Management attributed flat growth in the Switchgears business to the slowdown in the real estate market. Cables & Wires revenue growth was at 7% YoY. Lighting business continues witnessing price erosion and revenue was down 2% YoY. ECD delivered strong growth of 15% YoY, led by market share gains.
* Lloyd revenue impacted by sharp fall in LED TV sales: 2Q is a seasonally weak quarter for Lloyd and has a higher proportion of LED TV sales. Prices of LED TVs declined 25% YoY, and thus, Lloyd revenue was down 30% YoY to INR1.8b. Lloyd reported a loss at contribution level with the PBIT margin at - 2.3% v/s 18.5% in 2QFY19. AC sales were flattish YoY. The company is looking to launch refrigerators in 1QFY21.
* Near-term outlook challenging, but we build recovery from 4QFY20: Although festive demand has started kicking in recently, the overall demand outlook remains weak, especially in the industrial and real estate related segments like cables and switchgears. Although HAVL’s core portfolio growth of 7.6% in 1HFY20 was disappointing, it was off a high base of 23% growth last year. We have built in a recovery in growth trajectory from 4Q as the base will also become favorable thereon. For the Lloyd business, although the near term appears challenging, we believe the next summer season could be a real test as (a) current market share loss is also a function of conscious decision by management to let go big dealers and foray into MBOs and (b) with the new plant being operational, the benefits on margins and working capital would be key to watch out for. Overall, we have built in revenue growth of 7%/16% for FY20/21.
* Focus on margin expansion: EBITDA margin was impacted by high employee costs and higher ad spends, leading to a 230bp contraction in the blended EBITDA margin. HAVL will focus on cost rationalization and expects an improvement in margins from 4QFY20.
* Cutting EPS estimates for FY20/21: We cut our FY20/21 EPS estimates by 12%/10% to factor in lower revenue growth and margin assumption. Our FY19-21 EPS CAGR estimate now stands at 14.3% on the back of the revenue CAGR of 11.5% and the benefits from lower tax rates.
* Lowering TP; maintaining Neutral stance: On the back of our EPS cut, our TP is reduced to INR730 with an unchanged target Sep’21E P/E multiple of 40x. Maintain Neutral as we await a better entry point in the stock.
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