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Strong correlation of earnings and stock price with copper prices

While consensus appears concerned about higher copper prices hurting earnings and stock price movement of Havells, we note there is strong positive correlation (0.8) between copper prices and revenues and EBITDA of Havells. The stock price has also moved in line with higher copper prices. While the inflation in copper prices may impact earnings in near term, we note Havells has historically been able to initiate pricing action to pass on the additional costs and maintain/ improve margins. With steady earnings growth, the stock price has also improved in-spite of volatility in copper prices. Hence, we believe while the fear of higher copper prices is not necessary, there is no reason to cheer the correction in copper prices. However, we note the bond yields have inverse correlation (-0.61) with P/E multiples. With higher interest rates, the P/E multiples contract. We model Havells to report revenue and PAT CAGRs of 21.9% and 22.9% over FY22-FY24E, respectively. Maintain BUY with DCF-based TP of Rs1,621 (56x FY24E EPS).

* Copper prices and Havells’ revenue have strong correlation: Copper prices and revenue of Havells have had strong correlation of 0.84 over FY09-22. While copper prices increased at a CAGR of 8.5%, company’s revenue grew at 15.3% CAGR over the same timeframe. We believe inflation has helped Havells to report strong revenue as it is able to take price hikes.

* Strong correlation between copper prices and EBITDA: Copper prices and Havells’ EBITDA have correlation of 0.84. While copper prices have been volatile, the company has been able to maintain margins via pricing actions. It has been able to grow its EBITDA at CAGR of 18.1% over FY09-22.

* Stock prices and copper prices have positive correlation: While the consensus in concerned about higher copper prices impacting earnings and stock price of Havells, we note Havells has been able to pass on the inflation via pricing actions. With strong earnings growth over past decade, Havells’ stock price has compounded at CAGR of 40.1% over FY09-22 in-spite of increase in copper price over past decade.

* PE multiples have inverse correlation with bond yields: There is correlation coefficient of -0.61 between Havells’ 1-year forward P/E and India 10-year bond yields over FY09-22. Higher yields directly translate into increase in cost of capital pulling valuation multiples down. We believe any further rise in bond yields might hurt the nearterm stock price performance of the company.

* Maintain BUY: We model Havells to report PAT CAGR of 22.9% over FY22-FY24E and RoE to be upwards of 20% over FY22-24. We remain positive on the company’s business model due to strong moats and growth opportunities. We maintain BUY rating on the stock with DCF-based target price of Rs1,621 (implied P/E 56x FY24E).

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