Takeaways from call recently hosted by HDFC Securities Institutional team
Current state of business:
* Business has normalised currently, post washout in April and sub-normal business in May. Demand at consumer level is being witnessed across categories.
* Management is not witnessing any down-trading in different product categories; hence, don’t foresee major risk to realizations.
* Recovery has been swifter in rural India. Tier 1 and 2 cities are still not doing well in terms of demand as key distribution centres in metros are not fully functional due to local regulations. Havells is at marginal disadvantage due to comparatively lower presence in rural markets.
* Industrial demand has not picked up yet. However, some green shoots are visible in the form of government orders
* Capacity utilisation of plants has reached normalised levels. Company has sorted out labour issues.
Channel inventory and current status:
* Company could not stock up inventory at channel level during March due to COVID-19, so channel inventory is at normalized level. However, this helped company to cater to pent-up demand post lockdown relaxation. Currently, channel itself is only stocking products where primary demand at consumer level is being witnessed.
* As of now, there is no pressure from channel for improved trade terms.
Impact on A.C.:
* Summer-2020 was fairly strong. But COVID-19 impacted RAC sales. However, 1QFY20 was a lean quarter forRACs, therefore, YOY impact will not be significant.
* Company is planning to launch refrigerator. The launch has got delayed due to COVID-19.
* Managementhas launched O2O platform (Online to Offline) in midst of COVID-19 outbreak during May to compete better with online channel. In the past, Havells had strategically taken a call not to push Lloyd RACs on online platform due to higher discounting practices. Management believes current O2O platform is a win-win situation for customers (getting similar service like online/modern format) and management can reduce the extent of price erosion.
COVID-19 fallout and cost cutting measures:
* Bigger players are expected to gain market share as smaller/unorganized players are struggling due to supply chain disruptions.
* Management is evaluating to tilt marketing spend more towards digital medium rather than TV and newspaper advertisements in order to reduce A&P spend
Our analyst Naveen Trivedi believes, once normalcy resumes Havells will bounce back quickly due to superior execution skills, large portfolio and strong balance sheet. Maintain ADD rating.
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