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Pricing-led beat; consistent demand key

Havells’s Q2FY22 double-digit revenue beat reflects sector-wide pricing scenario as markets open up with double-digit volume growth across segments (ex-cables). This reflects healthy demand for electricals/B2B and small appliances. Management remains optimistic on H2 demand.

Lag in input-cost pass-through is throwing up challenges in managing OPMs even as leaders continue to benefit from consolidation. For Havells, while competitive position, especially in electricals (wires, switches, small appliances), remains strong, a re-rating would hinge on how Lloyd’s returns fare over the medium term, apart from ongoing penetration in stronger electrical segments. Retain ‘HOLD’

Volumes decent, in line; beat largely price-led; Lighting/ECD shines

Cutting through noise, Havells Q2 numbers have a few interesting aspects. Cable and wire value growth is 80% led by pricing, even as volumes growth fared weaker; for all other categories, value growth is half led by pricing and half by volume. Switches, lighting and ECD growth in healthy double digits reflects better demand on ground for real estate, industrial and B2B. In our view, the divergence in cables versus other segments shows Havells’s market strategy and focus on cash flows. To us, Lloyd’s EBIT loss is a negative surprise resonating with our market feedback of high competition from MNC players and share gains for Voltas, particularly in south.

What should investors focus on Havells over 12–24 months

Premium-electrical positioning for Havells has been consistent reflecting in its industry-leading margins/cash flows. Tier II penetration with compatible products (Standard, Rio, etc) should continue to aid better electrical growth, and remains a key earnings trigger. More importantly, the consistent gap in Lloyd’s returns versus leaders remains a key area for the leadership at Havells to focus on. Given RAC is 70%-plus of revenue, the category remains key; other categories (refrigerators, LED TV) are unlikely to have any material impact on FY22–24E numbers in our view.

Outlook and valuation:

Consistency in growth key; retain ‘HOLD’ We see B2B and electrical segments for Havells faring better than many peers given revenue mix even as Lloyd-related challenges go higher. All in all, we are raising FY22/23E earnings by ~5/9% given better growth, This along with a rollover to FY23E earnings yields a revised TP of INR1,250; retain ‘HOLD/SN’.

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