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Strong performance...near term concerns pop-out

Havells India Ltd (HAVL) is a leading player in electrical consumer goods in India. Its key verticals include switchgears, cables & wires, lighting fixtures and consumer appliances.

* Q4FY21 Revenue & PAT grew by 50% & 71% YoY, led by broad based growth across the segments on account strong demand recovery in consumer and B2B business.

* EBITDA margin improved by 410bps YoY to 15.2% led by scale benefits, product mix, price hikes and cost rationalisation.

* We continue to like HAVL as a complete player in electrical & consumer durables products with strong brand recall, distribution strength and leadership position in almost all the products.

* However, given near term risk on demand as well as margins pressure, we downgrade our EPS estimates by 3% & 1.6% for FY22E & FY23E.

* Given limited upside on account of premium valuation, we lower our valuation multiple to P/E of 42x on FY23E and maintain Reduce with a target price of Rs.937.

Revenue growth shoots-up...

HAVL Q4FY21 revenue grew by ~50% YoY, led by strong revival in demand across product segments. Revenue from Consumer durable, Switch gears, Cables and lighting fixtures was up by 71%, 53%, 51% & 40% YoY, respectively. Revenue growth was supported by pent-up demand and market share gains from both organised & unorganised players. The demand recovery was more broad based, as both B2B as well B2C business saw strong pick-up. Lloyd revenue grew by 29% YoY, was lower than expected on account of higher inventory in channel.

During, April the demand witnessed fall due to Covid second wave, while in May the sales witnessed accelerated dip given lockdown across the states. We may expect demand recovery in Q2FY22 led by fall in Covid cases and recovery in demand. While Q1FY22 is expected to weak. Further, due to sharp jump in commodity prices, we expect price hikes in the near future leading to marginal dip in growth momentum. We expect revenue to grow by 13% over FY22E-23E.

Margins expands…

HAVL’s Q4FY21 EBITDA grew by 106% YoY, while margin improved by 410bps YoY to 15.2%. EBIT margins across the expanded, including Switch gear 450bps, Cables 510bps, Lighting 660bps and consumer appliance 190bps YoY. Lloyd EBIT margins improved by 350bps YoY. Improvement in EBITDA margins was largely supported by price hikes, scale benefits and cost rationalisation. Consequently, PAT grew by 71% YoY to Rs.302cr.

Going ahead, we expect demand situation to be impacted by lockdown on account of second wave of Covid, while pass through of higher raw material prices will take some more time. However, we expect recovery in demand starting from Q2FY22. We marginally bring down our EBITDA margin estimates by 10bps & 20bps for FY22E & FY23E. We expect PAT to grow by 24% over FY20-23E.

Valuations

Currently, HAVL is trading at 1Year forward P/E of 44x. We are convinced by HAVL’s strong brand recall, market share gain and high quality earnings. However, demand headwinds due to lockdown and higher raw material cost is a concern in the near term, while given its premium valuation the risk reward ratio is not favourable. We value HAVL at a P/E of 42x on FY23E, with a target price of Rs.937 and maintain Reduce rating.

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