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FY23 AR analysis; Resilience amid volatility

In its FY23 Annual Report, Havells has emphasised on a) augmenting manufacturing, b) maximising value creation, and c) increasing R&D investment. Having 90% of products manufactured in-house ensures quality standards are maintained and customer needs are met. Havells is focused on ensuring its presence across the value chain through a) increased presence in e-commerce, b) deeper penetration into India through the Rural Vistaar programme and Utsav stores, c) increased participation in B2B projects, and d) expanded footprint in international markets. Havells continues to invest in R&D activities (INR 5.5bn over the past 5 years) to remain competitive in an environment where disruption is becoming the new normal. Lloyd has gained market share during the year and is now amongst the top 3 players in the industry. It expects to maintain its position over the medium term. Operationally, Havells posted a resilient performance in FY23 with sales growing by 21% despite subdued consumer sentiment while PAT fell by 17% YoY owing to sub-optimal passon of input cost inflation. Despite expectation of softness in near-term demand owing to unseasonal rains and weak summer intensity, we continue to like Havells’ long-term growth strategy through continuous portfolio and distribution expansion and brand-building initiatives. We maintain BUY with a Mar’24TP of INR 1,420, basis 48x Mar’25 EPS.

* Augmenting manufacturing capability: Manufacturing has been a forte for Havells and the company currently has 15 manufacturing units and 90% of the products sold are being manufactured in-house. Manufacturing infrastructure provides advantages of a) scale; b) quality; c) product differentiation; d) cost efficiency; e) customisation, and f) marketing. A new AC plant in Sri-City was commissioned during the last quarter of FY23, which helped double capacity to 2mn units per year. The company also crossed the unique milestone of achieving 500mn MCB pole production cumulatively till now, a level achieved by only a few companies globally.

* Maximise value creation: Havells has devised a comprehensive strategy to maximise value creation by focussing on a) Brand; b) Omnichannel; c) Innovation; d) Digitisation; and e) Talent. Apart from strengthening its tie-ups with multi-brand outlets, regional retailers, and modern formats, the company has increased its presence on new age digital platforms like the e-commerce marketplace and the company managed O2O portal. Through the Rural Vistaar programme, Havells now has a direct presence in 3k rural towns covering 42k+ retail outlets. Under its rural initiative, Havells has opened 400+ Utsav stores (like Havells Galaxies) in FY23 and targets to increase it to 2,000 by FY24.

* Havells spent INR 5.5bn on R&D over the last 5 years; investments to sustain: Havells has sustained its R&D spend by investing INR 1.6bn in FY23 (c.1% of FY23 revenue; INR 5.5bn invested over the last 5 years). It is making progress in R&D transformation, focusing on consumer centricity, critical technology ownership and innovation leadership. It had earlier said that it would increase R&D spending to c.2% of revenue. Some of the key highlights on the technological front include in-house design and development of electronic controllers/ drivers for ACs and LED lights; introduction of IoT-enabled products in AC, fans, water heaters, switches, air purifiers and lights categories; in-house IoT platform, OTA (Over-The-Air updates) and predictive analysis in products. The share of new products, which contributed 17% of total revenue till last year, is expected to increase as the innovation pipeline remains strong. During the year, Havells launched products such as LED Glamtubes and Havells studio Meditate air purifiers.

* FY23 – Resilient amid volatility: Post 3 years of Covid-led disruption, FY23 was the first normal year. The company continued its demand momentum from the previous year with revenue growing by 21% YoY in FY23 led by broad-based growth across Havells ex-Lloyd (+16% YoY) and the Lloyd portfolio (+49% YoY). However, gross contribution margin compressed 200bps YoY to 18.3% largely on account of partial pass-on of input cost inflation owing to weak consumer sentiment. Lloyd’s margin compressed by 350bps YoY while core business margin shrank by 180bps. Havells’ EBITDA/ Adj.PAT declined by 9%/ 11% respectively.

* Havells (ex-Lloyd) performance: Revenue grew by 16% YoY in FY23 with broad-based growth witnessed across product categories. Switchgears and cables growth (+19% each) was led by good industrial and infrastructural demand. Lighting growth (+17%) was led by good performance in both consumer & professional lighting while ECD (+7%) saw lower growth due to subdued demand in fans (fans contribution is 60-65% in the ECD business) on account of BEE transition. However, contribution margin shrank by 110bps YoY largely on account of partial pass-through of high commodity prices. While cables and lighting category saw margin compression of 170bps and 130bps respectively, switchgear margin shrank by only 20bps YoY and ECD margin was flat.

* Lloyd performance: Post 2 years of impacted summer sales especially for cooling products such as air conditioners and refrigerators, this year witnessed good summer sales, which propelled Lloyd revenue growth to 49% for the full year FY23. Lloyd, along with channel expansion, strengthened its product portfolio during the year, which helped it gain market share and be amongst the top 3 players in the industry. The management believes that Lloyd is now well positioned to leverage the AC performance to spur growth of other products such as washing machines and refrigerators. Gross contribution margin remained under pressure and compressed by 250bps as the hypercompetitive environment restrained adequate pricing action required to compensate the cost inflation. In the near to medium term, the management expects to maintain its market position.

* Financial performance: Havells’ operating cash flow (OCF) declined 68% YoY to INR 5.6bn owing to increased working capital requirement. Net working capital days deteriorated by 8 days YoY in FY23 to 44 days (36 days in FY22), largely on account of lower creditor days (-6 days YoY) while inventory days increased marginally (+2 days YoY) to 80 days. The company incurred c.INR 5.9bn capex in FY23, resulting in outflow in FCF of INR 0.2bn (vs. inflow of INR 14.9bn in FY22). During the year, Havells incurred capex for Lloyd AC plant in Sri City and washing machine plant in Ghiloth. It plans to incur capex of INR 6bn in FY24 through internal accruals. Of this, INR 3bn will be spent on the cables and wires plant in Tumkur.

* Maintain BUY: We continue to like Havells’ long-term strategy of growth by continuous portfolio and distribution expansion and brand-building initiatives. We maintain BUY with a Mar’24TP of INR 1,420, basis 48x Mar’25 EPS. Key risk: Demand softness and heightened competitive intensity, particularly in RAC.

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