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Volume growth and margins key monitorables in H2FY22

* Havells reported a 6% revenue beat in Q2, driven by Lighting and Others segments. On a 2-yr CAGR basis, revenue growth across segments was in the range of 10-38%. Margin delivery in C&W and Lloyd segments was disappointing.

* Volume & price contributed equally to revenue growth across categories, ex-C&W, to which volumes contributed 20%, indicating strong consumer sentiment. A&P spends surprised again, with a 34% decline on a 2-yr CAGR basis, despite robust revenue growth.

* Management remains optimistic about demand in the ensuing quarters and is hopeful of a gradual improvement in margins. Demand is broad-based, unlike last year. Price increases will reflect with a lag and aid margins. Channel inventory is at normalized level.

* Given the solid revenue print in Q2, along with an encouraging demand outlook and copper price inflation, we are raising FY22-24E revenue/EBITDA/PAT by 5-12%. Maintain Hold with a revised Dec’22 TP of Rs.1,250 (PE of 45x implied using a 2-stage DCF model).

EBITDA miss despite revenue beat:

On a 2-year CAGR basis, total revenue saw 20% growth, with the segments growing between 10% and 38%. The revenue beat was mainly contributed by the Lighting segment, with its revenues coming in 22% ahead of estimates. C&W benefited from commodity inflation; growth in the Lighting business was driven by increased penetration and product launches. The ECD segment recorded a 22% revenue CAGR (2-yr basis).

EBITDA missed estimates by 6%, with margins falling 339bps yoy to 13.8%, primarily impacted by weak gross margins. Lag in commodity inflation pass-through impacted gross margins (-142bps qoq and -597bps yoy). Other opex was up mere 7% and ad spends declined 34% on 2-yr CAGR, showcasing strict control. Improved working capital led to healthy cash generation as compared to FY21.

Outlook:

Havells has maintained its outperformance streak with strong revenue delivery across product categories. Demand recovery across product segments is encouraging despite price inflation. The B2B categories, which were impacted more by Covid-led disruptions, have started to see green-shoots, implying continued revenue growth in the coming quarters amid the high base of H2FY21, although at a lower rate. Volume growth in H2FY22 in B2C categories would be key to watch out for.

EBITDA delivery in H2FY22 is expected to be moderate as costs are getting normalized and H2FY21 had benefit of high GM and lower opex. Although valuations remain an area of discomfort for us, we are of the view that if Havells continues to outperform peers, it would be rewarded by investors. Upside risks: sustained market share gains, better than expected revenue recovery. Downside risks: higher-than-expected cost inflation; slower economic growth; and sustained margin pressure.

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