Published on 26/11/2020 10:16:06 AM | Source: Emkay Global Financial Services Ltd

Hold Havells India Ltd For Target Rs.701 - Emkay Global

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Pace of demand recovery exceeds expectations

* Revenue beat estimates on faster demand recovery and strong growth in consumer and residential portfolios, while the EBITDA margin beat was far ahead of expectations. Lloyd recorded the highest revenue growth of 56% yoy, driven by RAC.

* Large part of margin surprise was led by 1) inventory adjustment of Rs1.7bn, 2) reduction in A&P spends and 3) optimization in other cost heads. Gross margins and A&P spends are likely to reverse in H2FY21 and hence, sustaining Q2 EBITDA margin is unlikely.

* Distribution expansion, market share gains in key categories, demand recovery and a favorable base should augur well for revenue growth in H2FY21. Lloyd is expected to see margin improvement on the back of higher indigenization and revenue recovery.

* With a strong operating performance in Q2, we have upgraded FY21-23E EPS by 7-23%. Better-than-expected demand recovery and strong execution lead to a reversal in our target multiple, while we retain Hold and a revised TP of Rs701 (40x FY23E EPS).


Strong margin performance with demand recovery: Standalone revenue grew 9.9% yoy to Rs24.5bn. All segments, except cables and wires, registered growth yoy: Switchgears (+1.8%), Lighting and Fixtures (+4.3%), Electrical Consumer Durables (+18.3%), Lloyd (+55.8%) and Others (+41.3%). EBITDA grew 79% yoy to Rs4.2bn, while EBITDA margins expanded by 662bps to 17.2%, led by cost reduction initiatives, gross margin expansion and lower A&P spends. Employee and other expenses have declined 10.5% and 12.8%, respectively, with A&P spends down 74%. PAT stood at Rs3.2bn ─ growth of 80% yoy.


Outlook: Q2FY21 results were significantly better than expected on strong demand recovery from consumer and residential portfolios, while 56% growth in Lloyd was major positive. Although margins surprised positively, we believe that it is not sustainable as inventory adjustments are non-recurring in nature and A&P spends will bounce back with the revenue recovery. A&P spends for FY21 is expected to decline 41% and we bake in reversal in FY22 with a 60% increase (2.9% of Sales). Benefits of low rentals and other cost optimization will be visible on a sustainable basis. Lower channel inventory, demand recovery during the festive season, recovery in Real Estate and benefits of market share gains will augur well for sustained revenue growth. Our estimates factor in strong revenue recovery from H2FY21. Havells’ strong balance sheet, distribution network strength of its core business and revival in market share for Lloyds in RAC can help deliver better-than-industry growth with a macro recovery. Key risks: Sustained weakness in the macro environment, higher-than-expected cost inflation and market share loss.


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