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Margins have bottomed out; reiterate BUY

Result Synopsis

Havells delivered inline revenue growth; while disappointed on the margin front. Most of the growth was aided by higher volumes across the product categories. Margins were impacted owing to full absorption of high costs inventory against falling raw material and selling prices. Management fells margins have bottomed out and expects margins to improve from Q3 as commodity prices have corrected and are trending lower. High priced inventory for Lloyds would be cleared off by Q4 where management expects to see high single digit contribution margins. Management’s focus would be growth and market share gains in the near term with an eye on improving profitability.

Given the thrust on revenue growth and market share gains, we are factoring FY22?24E growth trajectory of 16% CAGR from earlier 14% CAGR. We have trimmed our margin estimates considering higher investments in brand building and normalization on A&P spends. We estimate EBITDA and PAT CAGR of 16% and 19% respectively. We marginally reduce our target price to Rs 1,480 from earlier Rs1,506 on lower margins. We see strong revenue growth momentum and gradual margin improvement in next 2 years on falling commodity prices. We continue to maintain our positive stance on the stock and current correction in the stock price should be used to accumulate the stock. We reiterate our BUY rating continuing to value the stock on 55x FY24E earnings.

Result Highlights

* Inline revenue growth across the segments? Havells delivered better than expected revenue growth on back of strong performance across product categories; Switchgears/Cables and wires/Lighting & Fixtures/ECD/Others growing at 10.2%/18.8%/12.3%/6.2%/12.3% yoy respectively. Lloyd surprised positively with higher growth of 21.3% yoy growth.

* Margins – Operating margin contracted 505bps to 7.8%. Margin in Q2 impacted owing to full absorption of high?cost inventory against falling RM /sales prices. Lloyd and Cables & wires segment saw higher impact of high costs inventory.   

* Inventory and product portfolio – There have been inventory de?stocking by the channel in Fans segment as dealers want to clear existing inventory before migrating to the new BEE rating norms.

* Price increases – Company is expected to take price increase in Fans as well as Lloyd from Q4 onwards as there will be costs increase on account of change in BEE ratings which will be passed on to the market. Quantum of price increase will be known closer to Q4.

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