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Margin pressure to ease gradually….

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.

• Revenue grew by 13% YoY, exceeding our expectation, aided by higher growth in cables & Lloyd.

• Due to higher costs, EBITDA margins fell by 180 bps YoY to 10.3%. But, on a sequential basis, margins improved by 250 bps, indicating gradual improvement going ahead.

• Cost pressure is likely to persist in the very short term due to volatility in RM prices and growing competition.

• We expect strong earnings recovery in FY24 as RM prices begin to normalise and revenue growth is likely to be supported by volume growth.

• We believe that the worst impact on margins is behind us. We value HAVL at a P/E of 43x (14% discount to 5-year avg.) as we roll forward to FY25E and upgrade our rating to BUY from SELL with a target price of Rs.1,311.

FY24 growth outlook healthy….

 Q3FY23 revenue grew by 13% YoY, largely led by cables & Lloyd. Revenue from other segments, such as switch gears, Lighting & fixtures and consumer durables, grew by modest 3-5%, largely on account of weak B2C demand on account of high inflation. Furthermore, transition to new Bureau of Energy Efficient (BEE) standards impacted the consumer durables volumes. Higher rating fans observed destocking because the price increase in higher rated fans was not significant, while lower rated fans saw restocking. B2B volume remained healthy on account of infra and real estate demand. In the near term, we expect the overall demand scenario for the sector to remain subdued due to higher inflation. However, we expect HAVL to benefit from a strong presence in Tier-2 towns, rural penetration and gradual normalisation in RM prices. We expect revenue to grow by 16% over FY22-25E.

Margins to improve…

Q3FY23 EBITDA declined by 4% YoY. Margins dropped by 180bps YoY to 10.3% on account of normalisation costs in-line with pre-covid levels. Ad-spends has normalised to pre-covid levels, was at 3.1% of net sales. Consequently, PAT declined by 7% YoY. However, on a sequential basis, EBITDA margins have improved by 250bps, an indication of likely improvement in margins going ahead. However, we marginally decrease our EBITDA margin estimates by 50bps for FY23 to 9.3%, to factor in higher brand spending going ahead. We expect PAT to grow by 17% over FY22-25E.

Valuations 

We expect HAVL’s improved retail presence, market share gains across segments and normalisation of RM prices, will drive earnings. Though inflation remains elevated, we believe that the worst is over and margins are expected to normalise gradually going ahead. We value HAVL at a P/E of 43x (14% discount to 5-year historical average) as we roll forward to FY25E and upgrade our rating to Buy from Sell with a target price of Rs.1,311

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