IGI Logo

Gross margin pressure comes to the fore

Havells India (HAVL) revenue grew 15% YoY to Rs36.5bn, 3%/2% above our/consensus estimates. Festive demand was encouraging initially but it tapered in second half of 3QFY22 due to inflation in product prices and Omicron surge. This led to flat volume growth for the quarter. Gross margin continued the downward trend as it fell 200bps QoQ to 32.3%, lowest in the past 10 years (since Q4FY11). Gross margin was impacted by higher input costs and delay in passing complete price hikes to consumers. EBITDA margin fell 400bps YoY and 170bps QoQ to 12.1%, lower than our/consensus estimates of 14% each. PAT was down 12% YoY to Rs3.1bn, 10%/11% below our/consensus estimates. HAVL does not expect the demand to slow down structurally and is hopeful of a strong summer season. It aims to take gradual price hikes starting from Feb & March 2022. In fans & ACs cost pressure is higher and a 5%-10% price hike is needed for margin profile to normalize in FY23. We have cut our earnings estimates by 4%-6% for FY22E-FY24E. We maintain ADD rating on the stock, with a revised target price of Rs1,390 (Rs1,465 earlier) based on 55x 1HFY24E EPS.

Cable segment leads revenue growth; Switchgears & Lighting post healthy margin

Cable sales rose 33% YoY to Rs12.1bn led by higher commodity prices (volume growth was flat). Lighting grew 16% YoY to Rs4.1bn led by both volume and value growth. ECD and switchgears sales grew 14% YoY each to Rs8.9bn/Rs5bn. Lloyd sales fell 9% YoY to Rs4.7bn. EBIT margin for switchgears (29.3%, up 210bps QoQ) and lighting (21.3%, down 60bps QoQ) were healthy compared to its past 10 quarters avg. of 25.6%/16%. Cables margin were decent at 10.4%, up 30bps QoQ. However, ECD margin fell sharply by 520bps YoY and 460bps QoQ to 12.7% (past 10 quarters’ avg. margin is at 15.2%). Lloyd continued to post loss at Rs418mn (negative 9% margin due to deferment of price hikes amid higher competitive intensity). In the next 2 to 3 years, real estate and infra capex is likely to be healthy and hence construction related categories like cables & wires and switches & switchgears are likely to do well.

Growth a bigger priority for Lloyd; Higher margin profile to take time

For entire product portfolio of Lloyd, growth will be the main priority. HAVL will be investing in new products and focus will be on portfolio expansion, brand building and attaining growth. With ad-spend at 5-6% of sales, it will be a long journey to have a 7-8% margin in Lloyd. For AC, Lloyd is expected to report healthy growth in upcoming summer season as their product portfolio is now complete while they also have omni-channel presence. Now, Lloyd is present in major multi brand outlets which was not the case earlier. They are now also present in online channel with e-commerce forming 6-7% of total sales. In washing machine and refrigerator, it will take 2 to 3 years to establish a complete portfolio and distribution network.

Key concall takeaways: (1) FY22E capex outlay is likely at Rs2.5bn-Rs2.75bn. (2) Inventory position with trade channel as on January is lower than normal for summer products. (3) ‘Standard’ brand caters to contractor segment and has attained turnover of Rs6bn-Rs7bn. ‘Crabtree’ brand caters to architectural segment and has attained turnover of Rs3bn.

Maintain ADD rating with a revised target price of Rs1,390

We expect HAVL to register 18% revenue/earnings CAGR each over FY21-24E. We maintain ADD rating on the stock, with a target price of Rs1,390 based on 55x 1HFY24E EPS.