Weakness to persist...
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.
* We downgrade HAVL to Reduce as we believe that near term earnings are likely to be more volatile, while valuation seem to be unsustainable unless until there is a sharp recovery, which is unlikely in the near term.
* Q1 Revenue & PAT declined by 45% & 64% YoY due to lockdown.
* EBITDA margin declined by 130bps YoY to 8.8%, on account of suboptimal sales.
* Given frequent/continuing lockdowns, demand revival is expected to be protracted.
* We lower our EPS estimates by 7% for FY21E, as we factor the impact of Q1FY21E on our estimates.
* Though HAVL‘s long term strategy of expansion of product portfolio, strong brand recall and distribution strength will drive growth.
* However, near term earnings volatility and premium valuation is a concern. We value HAVL at P/E of 37x on FY22E with a target price of Rs.530.
Revenue growth impacted by lockdown...
HAVL Q1FY21 revenue declined by 45% YoY, on account of weak demand scenario due to Covid-19. Decline in revenue was broad based across segments, with Switch gears, cables, Lighting & fixtures and Electric appliances segment declined by 44%, 41% & 45% and 46% YoY, respectively. Though there was marginal pick-up in B2C business. However, B2B continue to be subdued. The weakness in HAVL’s growth trajectory was accentuated by Covid-19, which was already impacted by general weakness in domestic macros, tight liquidity situations and slowdown in infrastructure spending. Switchgear segment was largely impacted by sluggish infrastructure and Government driven procurement. In the cable segment, power cables segment was weighed down by industrial and infrastructure slowdown and fall in commodity prices. Revenue from Lloyd business was declined by 53% YoY. We expect the current demand headwinds to persist for some more time and we may see gradual revival from H2FY21E. We expect revenue to grow by 6% over FY20-22E.
Cost rationalisation cushion margins...
HAVL’s Q1FY21 EBITDA margin declined by 130bps YoY, to 8.8% on account of margin contraction across segments. Segment wise decline in EBIT margins across Switch gear 900bps, Cables 290bps, Lighting 1200bps and consumer appliance 240bps YoY. While Lloyd EBIT margins were flat YoY. Lower than expected sales impacted the operating leverage, however cost rationalisation helped in arresting sharp fall. PAT fell 64% YoY to Rs.63cr. Going ahead, we expect EBITDA margins to be under pressure. We lower our EPS estimates by 7% for FY21E to factor in the impact of Q1. We expect PAT to grow by 10% over FY20-22E.
We expect near term earnings to be volatile due to frequent disruptions and overall weakness in discretionary spending. Further, headwind faced by construction sector and general weakness consumer segment is likely to impact growth trajectory of HAVL. We value HAVL at 37x on FY22E, given likelihood of underperformance in the near term we downgrade to Reduce with a target price of Rs.530.
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