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Inspiring performance...valuation a concern

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.

* Q3 Revenue & PAT grew by 40% & 74% YoY, led by festive & pentup demand, restriction in imports and market share gains.

* EBITDA margin improved by 430bps YoY to 16% led by scale benefits, product mix, price hikes and cost rationalisation.

* We upgrade our EPS estimates by 27% & 18% for FY21E & FY22E, given sharp turnaround in earnings.

* A complete player in electrical & consumer durables products with strong brand recall, distribution strength and leadership position in almost all the products, stand to benefit as consumer sentiments improves.

* We value HAVL at P/E of 43x on FY23E, as we upgrade our earnings estimates. However, considering premium valuation and sharp runup in stock price, we downgrade HAVL to Reduce with a target price of Rs.974.

Revenue growth shoots-up...

Q3FY21 revenue grew by ~40% YoY, led by strong revival in demand across all the segments as lockdown restrictions ease out. Revenue from Consumer durable, Switch gears, Cables, lighting fixtures was up by 46%, 32%, 28% YoY, respectively. Revenue growth was supported by pent-up demand & festive season, market share gains from both organised & unorganised players and pre-buying on account of rise in commodity prices. Further, supply chain disruption due to restriction of imports also played out. Lloyd’s revenue grew by 70% YoY due to pre-buying, import restrictions and improvement in retail penetration. Going forward the key focus in Lloyd business would be in AC, refrigerator and washing machines. With relaxations in restrictions and improvement in consumer sentiments, we expect overall revenue growth to normalise. Considering sharp jump in commodity prices, we expect price hikes in the near future leading to marginal dip in growth momentum. We upgrade our revenue estimates by 10% & 7% for FY21E & FY22E, as we factor improvement in the growth outlook. We expect revenue to grow by 12% over FY21E-23E.

Cost rationalisation supports margins expansion..

Q3FY21 EBITDA grew by 90% YoY, while margin improved by 430bps YoY to 16.0%. EBIT margins across the segments expanded, including Switch gear 500bps, Cables 60bps, Lighting 550bps and consumer appliance 360bps YoY. Lloyd EBIT margins improved by 1030bps YoY. The improvement in EBITDA margins was largely supported by price hikes, scale benefits and cost rationalisation. S&D expenses declined by 33% YoY while other income increased by 63% YoY. Consequently PAT grew by 74% YoY. Going ahead, we expect EBITDA margin to stable led by higher utilisation and price hikes. We upgrade our EBITDA margin estimates by 160bps & 90bps for FY21E & FY22E, given price hikes and likelihood of scale benefits. Consequently, our EPS estimates stands increased by 27% & 18% for FY21E & FY22E. We expect PAT to grow by 25% over FY20-23E.

Valuations

Currently, HAVL is trading at 1Year forward P/E of 50x. Though we are convinced by its strong brand recall, market share gain and high quality earnings, we believe given premium valuation the risk reward ratio is not favourable. We value HAVL at P/E multiple of 43x on FY23E, with a target price of Rs.974 and recommend to Reduce.

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