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Cautious near-term demand outlook

Havells’ 3QFY23 print was largely in line with our estimates with another broad-based revenue growth across categories (+22% 3-year CAGR) further backed by sequential improvement in contribution margin. EBITDA grew by 16% ( 3-year CAGR) to INR 4.2bn (3% above JMFe) while Adj. PAT rose by 12% (3-year CAGR) to INR 2.8bn (1% below JMFe). With the RM environment largely stable and most of the high-cost inventory now liquidated (except Lloyd RAC), margins are likely to revert to normalised levels in the medium term. However, Lloyd’s margins are likely to remain muted over the next couple of years as the management continues to focus on RAC market share gains and ramp-up in other categories. Dampened by the inflationary environment, the management expects weak consumer sentiment to have a bearing on near-term demand. We cut our FY23-FY25 EPS estimate by 4%-11% to reflect the 3QFY23 performance and outlook. We roll forward to Mar’24 TP of INR 1,470 (earlier Sep’23 TP of INR 1,400), basis 48x Mar’25 EPS. Maintain BUY.

* Strong revenue growth in 3QFY23: The company’s 3QFY23 revenue grew 13% YoY (+22% 3-year CAGR; +12% QoQ) to INR 41.2bn (4% above JMFe/2% above consensus). Havells’ (ex-Lloyd) revenue grew 10% YoY (+21% 3-year CAGR; +8% QoQ) while Lloyd’s revenue grew by 30% YoY (+26% 3-year CAGR; +47% QoQ). On a 3-year CAGR basis, Electrical Consumer Durables (ECD), Cables & Wires, and Lighting and Switchgears grew 20%, 26%, 15% and 16% respectively. Excluding Lloyd and C&W segments, Havells posted a 3-year CAGR of 19%

* Margins improve sequentially: After being impacted by high-cost inventory and BEE rating change in 2QFY23, contribution margin (Havells ex-Lloyd) improved sequentially, expanding 320bps QoQ to 22.8% (-50bps YoY). Barring Switchgears (flat QoQ), margins expanded across segments with ECD (+150bps QoQ) and Cables (+640bps QoQ) showing the most improvement. Lloyd’s contribution margin came in at 3.7% (+10bps YoY). Overall, gross margin expanded 70bps YoY (+210bps QoQ) while EBITDA margin fell 180bps YoY (+250bps QoQ) to 10.3%. EBITDA fell 4% YoY (+16% 3-year CAGR/ +48% QoQ) to INR 4.2bn (3% above JMFe and consensus). Adj. PAT fell by 5% YoY (+12% 3- year CAGR / +49% QoQ) to INR 2.8bn (1% below JMFe and 1% above consensus).

* Moderation seen in B2C demand; B2B remains strong: Impacted by inflationary environment over the past 12-18 months, consumer sentiment remained weak, leading to moderation in demand for Havells’ (Ex-Lloyd) B2C portfolio (revenue mix of 75%). However, the B2B portfolio continues to witness robust demand. After seeing some stability in the early part of the quarter, RM prices again started to inch up towards the close of the quarter. Although the management expects demand to remain soft in the near term, it continues to be enthused by India’s runway for growth in the medium term led by a) residential and consumer portfolio b) tailwinds from real estate cycle revival aiding switchgear demand, and c) improving capex cycle aiding industrial and infra

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