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Profit falters as Lloyd loss widens & cable margin dips

Havells India’s (HAVL) topline of Rs42.3bn (Q1FY20-23 CAGR at 16%) was 14%/8% above our/consensus estimates. However, its margin profile continues to slide downwards. Gross margin declined 670bps YoY and 30bps QoQ to 29%, partly due to unfavorable sales mix (Lloyd formed 25.6% of total sales vs. 19%/21.7% YoY/QoQ). EBITDA stood at Rs3.6bn (Q1FY20-23 CAGR at 9%), leading to operating margin of 8.5%, much below our/consensus estimate of 12% each due to larger than expected loss in Lloyd and weaker margin in cables. PAT stood at Rs2.4bn (Q1FY20-23 CAGR at 11.4%, PBT CAGR at 7%), 20%/23% below our/consensus estimates. The demand outlook is stable in consumer and residential segments but deferment is visible in industrial and infra segment. The benefits of the recent decline in commodity prices is likely to accrue in a couple of quarters. Factoring in the higher than expected loss in Lloyd, we cut our earnings estimates for FY23E/24E by 9%/6%, as priority remains market share expansion over profitability. With an unchanged P/E of 50x FY24E earnings, we revise target price to Rs1,220 (Rs1,305 earlier). However, the rating stands downgraded to REDUCE (from ADD) due to stretched valuations.

Electricals – Revenue growth healthy; Cables margin dip due to inventory loss

Switchgears (Rs5.2bn), lighting (Rs3.7bn), cables (Rs11.9bn) and ECD (Rs8.4bn) posted Q1FY20-23 CAGR in 14-15% range with high single digit volume CAGR. EBIT margin of switchgear (26.2%, up 30bps QOQ) and lighting (16.5%, up 110bps QoQ) expanded sequentially. ECD margin at 13.1% was down 420bps QoQ, due to higher ad-spend. Cable EBIT margin was much lower at 7.3% (down 430bps QoQ) due to sharp decline in copper & aluminum prices, which HAVL passed on to the trade channel while holding high cost inventory. In cables, channel inventory is low due to de-stocking while margin is likely to normalize in Q3. In fans, demand moderated in June and could revive once prices reduce. Volume growth was healthy in lighting (due to industrial and professional demand) and switchgears (led by property/construction upcycle).

Lloyd – EBIT loss rising despite higher scale

Lloyd sales remained strong for second quarter in a row at Rs10.8bn, up 13% QoQ and a CAGR of 18.5% over Q1FY20-23. Lloyd’s EBIT loss expanded to Rs559mn (fourth consecutive quarterly loss) with a negative EBIT margin of 5.2% as it did not pass on the entire cost increase to the market. Lloyd still has high cost inventory, which will be cleared out over the next two quarters. Lloyd’s core priority is to gain market share by focusing on brand, manufacturing, technology and distribution. In H1CY22, Lloyd regained market share and is likely to be amongst top three players. Lloyd will explore exports opportunities through own brand as well as white label. In washing machines, Lloyd now has complete portfolio while in refrigerator, a much larger range will be ready by end-FY23.

Key concall takeaways: (1) FY23E capex outlay is Rs7bn-Rs8bn, mainly for new AC plant. (2) Rural region forms 5% of total consumer sales. (3) Ad-spend target at 2.5-3% of annual sales.

Downgrade to REDUCE with a revised target price of Rs1,220

We expect HAVL to post 12%/13% revenue/EPS CAGR over FY22-24E. We downgrade the rating to REDUCE, as valuations are stretched while losses in Lloyd will suppress earnings

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