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Strong volume led revenue growth

Havells reported healthy revenue growth of 31.7% YoY. However, the gross margin was down 605bps YoY due to (1) revenue mix deterioration, (2) steep commodity inflation and (3) lag effect of price hikes. The company benefitted from revival in economy and higher infrastructure spending. Profitability of Lloyd segment remained under stress even in Q2FY22 due to higher input prices and negative operating leverage. We model Havells to report PAT CAGR of 22.5% over FY21-FY24E with: (1) strong volume growth, (2) high single digit price hike and (3) benefits of cost saving initiatives and recovery in Lloyd. We remain structurally positive on the company due to its competitive advantages and growth opportunity in consumer durables. Maintain BUY with a DCF-based revised target price of Rs1,650 (54x FY24E; Earlier TP-Rs1,350).

* Q2FY22 performance: Havells reported revenue and EBITDA growth of 31.7% and 5.5%, respectively, YoY. Considering the price hike, we believe volume growth at the company level was ~20%. PAT declined 7.3% YoY. We believe (1) strong consumer off-take, (2) recovery in real-estate sector, (3) high single digit price hike across products and (4) market share gains from smaller/ unorganized players helped to report strong revenue growth. While Gross margin declined 605bps YoY, lower staff cost and other expenditure arrested EBITDA margin impact to 341bps.

* Strong growth across segments: Segment-wise YoY revenue growth rates were as follows: Switchgears 21%, Cables 45.8%, Lighting & fixtures 31.9%, Electrical consumer durables 25.8% and Lloyd Consumer 23.5%. Revival in economy resulted in steady growth of industrial products too.

* Revenue mix deterioration and higher material cost: Cables and wires segment which has lowest EBIT margin (after Lloyd) reported 45.8% YoY revenue growth leading to revenue mix deterioration. Steep inflation, higher freight costs and delayed/ limited price hikes impacted margins.

* Impact on profitability of Lloyd: While Lloyd reported strong 23.5% revenue growth, its profitability was impacted to higher input prices. We also believe higher capex and negative operating leverage impacted the profitability. However, we model steady recovery in revenues/ profitability of Lloyd in coming quarters.

* Maintain BUY: We model Havells to report PAT CAGR of 22.5% over FY21-FY24E and RoE to be upwards of 20% over FY22-24. We remain positive on the company’s business model due to strong moats and growth opportunities. We maintain BUY rating with a revised DCF-based target price of Rs1,650 (implied P/E 54x FY24E).

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