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Margin pressures dent a strong revenue show

Havells’ 1QFY23 sales surprised positively, growing by 16% on 3-year CAGR to INR 42.3bn (9% above JMFe) with broad-based growth seen across categories. Volume grew 40% YoY (high single/early double digit 3-year CAGR), as per the management. However, contribution margins declined across most categories QoQ by 30-370bps (except Switchgears/ Lighting – up 30bps/220bps) due to input cost volatility. The management expects RM volatility pain to have a bearing on margins in 2Q before they recover in 2HFY23. The company will look to leverage input cost deflation to recover to long-terms margins across categories .EBITDA grew by 9% on 3-year CAGR to INR 3.6bn (20% below JMFe) while Adj. PAT rose by 13% on 3-year CAGR to INR 2.4bn (19% below JMFe). The management remains positive on demand outlook given a) consumer and residential portfolio b) recovery in real estate, c) Lloyd being amongst the top 3 Room AC players having regained lost market share, and d) improving capex cycle, aiding industrial and infra segments. We cut our FY23/FY24 EPS estimate by 9%/3%% respectively to reflect 1QFY23 performance and outlook. We maintain BUY with a Sep’23TP of INR 1,420, basis 48x Sep4EPS (earlier Mar’23TP of INR1330, basis 48xMar24 EPS).

1QFY23 summary:

Havells’ 1QFY23 revenue grew 16% on 3-year CAGR (+63% YoY on low base/-4%% QoQ) to INR 42.3bn (9% above JMFe/8% above consensus). Havells (exLloyd) grew 16% on 3-year CAGR (-9% QoQ) while Lloyd grew by 18% on 3-year CAGR (+13 QoQ). On a 3-year CAGR basis, Electrical Consumer Durables (ECD), Cables & Wires, Lighting and Switchgears grew 14%, 15%, 14% and 15% respectively. Excluding Lloyd and C&W segments (led by copper price inflation), Havells posted 3-year CAGR of 15%. Havells (ex-Lloyd) contribution margin was 21.4% in 1QFY23, -280bps YoY/-70bps QoQ on account of commodity price volatility. Switchgears (+30bps QoQ) and Lighting (+220bpsQoQ) margins improved sequentially while Cables (-370bps QoQ) and ECD (- 30bps QoQ) margins disappointed. Although Lloyd continued to exhibit strong revenue growth, Lloyd’s contribution margin dipped by 750bps YoY due to increased ad spends and insufficient pricing action. Overall, gross margin slumped 670bps YoY while EBITDA margin fell 500bps YoY to 8.5% with employee cost (-180bps YoY) and op ex (-80bps YoY) partially cushioning the impact. EBITDA grew 9% on 3-year CAGR (+2% YoY/-31% QoQ) to INR 3.6bn (20%below JMFe). PAT grew by 13% on 3-year CAGR (+7% 3-year CAGR/-31% QoQ) to INR 2.4bn (19%/ 23% below JMFe/ consensus).

Input price volatility dampens demand in later half of 1QFY23:

Demand uptick seen in Mar’22 sustained for a large part of the quarter led by summer portfolio (Lloyd RAC, fans and air cooler). However, a sharp correction in prices of key commodities (down 6%-11% in May) led to the channel turning cautious, thereby impacting primary sales (particularly in Cables) in the middle of May and deferment of industrial/infra demand. Although volatility in commodity prices is likely to impact 2QFY23, the management remains positive on demand outlook and expects gradual margin improvement led by a) residential and consumer portfolio b) tailwinds from real estate cycle revival aiding switchgear demands, and c) improving capex cycle, aiding industrial and infra portfolios.

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