Weak performance continues...H2FY20E to be better
Havells India Ltd (HAVL) is a leading player in electrical consumer goods in India. Its key verticals include switchgears, cables & wires, lighting fixtures and consumer appliances.
* Revenue grew by modest 2% YoY, which was below expectation.
* EBITDA margins declined by 150bps on account of weak product mix, margin erosion in Lloyd business and higher cost. But supported by tax cut PAT growth was flat YoY.
* Demand situation continues to be weak on account of tight liquidity scenario and slowdown in real estate business.
* The slowdown is likely to persist in the near term, but H2FY20E would be better on account of festive season and low base.
* However, a revival in construction sector would be the key for any change in HAVL’s fortunes.
* We lower our earning estimates by 3% & 5% for FY20E & FY21E to factor in the near term impact on earnings. We expect PAT to grow by 14% CAGR over FY19-21E.
* HAVL is trading at average 1 year forward P/E of 46x, which is 18% premium to its 5 year historical average of 39x. Given the near term impact on margin and premium valuation, we value HAVL at 38x on FY21E and reiterate to Reduce with a target price of Rs625.
Revenue growth muted...
HAVL Q2FY20 revenue grew by modest 2% YoY, led by consumer durables segment & Cable which grew by 20% & 7% YoY. Lighting & fixtures and Switch gears de-grew by 2% & 6% YoY. Weak construction sector demand on account of tighter liquidity situation in the sector and slowdown in industrial segment impacted these segments. Revenue from Lloyd business declined by 30% YoY on account of weak demand in Air conditioner and decline in LED TV sales on account of higher competition. While management reiterated their strategy of penetration into existing product categories through retail expansion and re-positioning of Lloyd brand. However, we believe that near term demand headwinds is likely to persist as construction sector continue to face slowdown, while HAVL 48% of business being largely related construction activities. We lower our revenue estimates 3.4% & 6.6.% and we factor revenue to grow by 10% CAGR over FY19- FY21E.
EBITDA margin declines...
HAVL’s Q2FY20 EBITDA declined by 11% YoY and margins declined by 150bps YoY to 10.5%. This was largely on account of lower revenue growth, higher cost and weak product mix. Margin compression was seen in Lighting & fixtures, which saw dip in 200bps and ECD witnessed 220bps decline in margin. But on account of reduction in corporate tax, the reported PAT was flat YoY. We lower our EBITDA margins estimates by 60bps for FY20E & FY21E. Consequently, our EPS estimates stand reduced by 3% & 5% for FY20E & FY21E.
HAVL is trading at average 1 year forward P/E of 46x, which is 18% premium to its 5 year historical average. Given the near term demand headwinds and premium valuation, we value HAVL at 38x on FY21E and reiterate to Reduce with a target price of Rs625.
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