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Core portfolio delivers strongly; Lloyd fares below expectations

Revenue outlook strong, but margin normalization to limit EPS growth

* Havells (HAVL)’s 4QFY21 revenue grew a strong 50% YoY (two-year CAGR: 10%), with the recovery seen in 3QFY21 sustaining in 4QFY21 as well. The company continued to accrue market share gains in its core portfolio at the cost of the unorganized sector. The core portfolio reported a two-year CAGR of 11% and Lloyd posted a two-year CAGR of 5%.

* Lloyd performed below our expectations, with sequential growth of just 15% QoQ v/s strong growth by peers such as Voltas and Blue Star going into the summer season. This was despite Lloyd’s full-year performance being fairly strong in terms of market share gains. This suggests a very high level of prebuying in the Lloyd brand in 3QFY21. Overall, the Lloyd business has improved from the lows of FY20, but is still in a transformational phase. Lloyd’s success holds the key to HAVL’s premium valuation and remains a key monitorable.

* We reduce our FY22/FY23E by 5%/6%, factoring in the second COVID wave impact and commodity price inflation. While Havells ended FY21 on a high note – by utilizing all cost control levers – trend margins should normalize to 13% at the aggregate level over the next 2–3 years. Thus, our FY21–24E EPS CAGR stands at 12% (v/s revenue/EBITDA CAGR of 14%/9%). We maintain our Neutral rating, with lower TP of INR1,030 (earlier: INR1,100).

Strong operating performance, in line with expectations

* 4QFY21 snapshot: Revenue was up 50% YoY to INR33.3b, in line with our estimate. On a two-year CAGR basis, the revenue CAGR stood at 10%. EBITDA more than doubled to INR5.1b, in line with our estimate. The EBITDA margin came in at 15.2% v/s our estimate of 14.3%. PBT grew 130% YoY to INR4.5b, in line with our estimate. Adj. PAT grew 89% to INR3.4b and was in line with our estimate.

* FY21 snapshot: Revenue was up 10.6% YoY to INR 104b. EBITDA grew 52% to INR15.7b, with the EBITDA margin at 15% (+410bps YoY). Ad spends stood at 1.3% of sales v/s 3.4% of sales in FY20. Adj. PAT was up 41% YoY to INR10.3b.

* 4QFY21 segmental highlights: (a) Havells (ex-Lloyd): Revenue grew 56% to INR27.4b (two-year CAGR of 11.1%). Cables and Wires: Revenue grew 51% YoY to INR10.3b. The PBIT margin expanded 500bps to 14.8%. Switchgear: Revenue was up 53% to INR4.6b. The PBIT margin expanded 450bps to 26.6%. Lighting: Revenue grew 40% YoY to INR3.3b. The PBIT margin expanded 670bps to 20.7%. ECD: Revenue rose 71% YoY to INR9.2b. The PBIT margin expanded 330bps to 13.4%. (b) Lloyd’s revenue grew 29% YoY to INR5.9b. The PBIT margin expanded 350bps to 5.4%, but came in weak sequentially.

Key highlights from management commentary

* An overall price increase was seen in FY21 across various categories - Copper Wires: 40–45%, Fans: 10%, Switches: ~10%, Appliances: 8–12%, and Industrial Switchgears: 12–15%. Most of the price increases taken have covered for commodity inflation; however, in certain categories, minor price increases may be taken once the lockdown is lifted (post May’21).

* Unlike the last time, the management believes demand recovery post lockdown would be led by Tier 1 towns, while Tier 2/3 towns would be slower to recover.

* Inventory was ramped up in seasonal products such as Fans and ACs owing to an improved demand outlook and the onset of a strong summer season. However, as April and May’21 have almost been a washout, this inventory may take some time to liquidate.

* Lloyd posted market share gains in FY21 despite April and May’20 being washout months.

* Every disruption has resulted in some of the market share gains shifting to organized players. However, once the supply chain is restored, unorganized players tend to take back some of the lost market share.

Valuation and view

While the pace of recovery was swift in 2HFY21, the second wave has impacted offtake since the second week of April’21, which has further decelerated in May’21. Havells rightly utilized all of the cost levers (ad spends, employee costs, travel costs, etc.) in FY21, thereby leading to EBITDA margin expansion to 15% (+410bps YoY) and EPS growth of 40%+. While near-term ad spends may remain low due to the second COVID wave, other levers (such as employee costs) may be difficult to utilize going forward. We expect margins to settle at 13% by FY24, closer to the trend margin, as ad spends return. Thus, our FY21–24E EPS CAGR stands at 12% (v/s revenue/EBITDA CAGR of 14%/9%). We maintain our Neutral rating, with lower TP of INR1,030 (earlier: INR1,100) – on 50x FY23E EPS.

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