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Strong beat led by supply-side disruption

Market share gains across categories; ad spends yet to normalize

* Havells (HAVL)’s revenue came in 18% above our estimates, supported by (a) strong pre-buying prior to price hikes across categories, (b) market share gains (at the cost of the unorganized sector), (c) a strong performance from Lloyd – owing to the shift to own manufacturing, which provides the ability to supply to the market v/s outsourcing brands (Voltas is an exception to this as the company had INR10b worth of inventory at Sep’20-end). With costs such as ad spends yet to normalize, adj. PAT grew 75% YoY, 29% ahead of our expectation.

* The B2C and Residential portfolio did exceedingly well with 40% growth, while B2B (Industrial and Infra) saw growth in the mid-teens. Adj. for the low base of last year, the two-year revenue CAGR is back in the double digits at ~12%. While retail sales trailed primary sales in 3Q, we expect it to catch up subsequently. Also, with price hikes in place now, we expect revenues to sustain double-digit growth hereafter – although, we may see a marginal dip in volume offtake for around a month or some normalization of supply-side disruption for the unorganized sector.

* With likely improvement in the demand outlook (as economic growth picks up), we increase our earnings assumption by 16–20% over FY21–23E. While the near-term outlook remains strong on the demand front, our FY21–23E EPS CAGR stands at 15% (v/s a revenue CAGR of 17%). This is because FY21 is turning out to be a high-base year v/s the earlier expectation of a fairly low base. We maintain our Neutral rating, with TP of INR1,100 (earlier: INR850), based on a higher target PE multiple of 50x v/s 45x earlier.

Beat across parameters; ad spends remain muted

* Revenue grew 40% to INR31.7b, 18% ahead of our expectation. EBITDA grew 89% to INR5.1b and was 26% ahead of our expectation. The EBITDA margin expanded 420bps YoY to 16%. Ad spends stood at 1.6% of sales (v/s 3.4%). Adj. PAT grew 75% YoY to INR3.5b, coming in 29% ahead of our expectation. Notably, 9MFY21 revenue is now almost flat at INR71b, while adj. PAT is up 25% to ~INR7b.

* Segmental highlights: (a) HAVL’s core portfolio (ex-Lloyd) was up 35% YoY to INR26.5b. Cables and Wires grew 27% YoY, Switchgear +32%, Consumer Durables +46%, and Lighting +28%. (b) Lloyd demonstrated a robust performance with revenue growth of 70%. Lloyd’s PBIT margins turned positive at 6% – a remarkable achievement in a lean season.

Key highlights from management commentary

* Input cost pressure has led to price hikes across categories – Domestic Cables: 15%, Domestic Switchgear: 5–7%, Consumer Durables: 5–12%. The Domestic Wires, Switchgear, and Consumer Durables categories are expected to witness further price hikes

* Across categories, pre-buying is observed before the likely price hikes. Market share gains are also seen from the unorganized sector, which is facing supply chain issues. Historical evidence suggests a large portion of the market share gains may turn out to be sticky.

* While secondary sales have rebounded handsomely following the easing of the lockdown, they are yet to pick up steam to match primary sales figures. Hence, it is difficult to comment on the sustainable growth rate at present.

* In the ECD segment, domestic appliances performed well in the rural markets; Water Heaters grew on a high base of last year, and growth in Fans was aided by pre-buying toward the end of Dec’20.

* Markets share gains have continued to accrue in 3QFY21 as well. Havells is a top 3 player across products and No.1 in heating products.

* Lloyd – The strong performance is attributable to a) the perceived change in industry dynamics, consequent to import prohibitions, b) better availability from own production, c) wider network coverage through regional retailers, and d) select pre-buying. While the management cautioned toward extrapolating Lloyd’s performance from a lean season, it believes that structurally Lloyd is emerging as a key growth driver for the company, and in-house manufacturing has given strong impetus to growth. The PLI Scheme in the AC industry (details not out yet) should augur well for the company. Havells is also open to the concept of contract manufacturing to capture the export market – which could prove a game-changer.

Valuation and view

With likely improvement in the demand outlook as economic growth picks up, we increase our earnings assumption by 16–20% over FY21-23E. While the near-term outlook remains strong on the demand front, our FY21–23E EPS CAGR stands at 15% (v/s a revenue CAGR of 17%). This is because FY21 is turning out to be a high-base year v/s the earlier expectation of a fairly low base. We maintain our Neutral rating, with TP of INR1,100 (earlier: INR850), based on a higher target PE multiple of 50x v/s 45x earlier.

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