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Strong operating performance led by B2B businesses

Margin normalization to offset strong demand, limiting EPS growth

* Havells India (HAVL)’s 1QFY22 earnings were a strong beat, led by surprisingly robust revenues (+76% YoY; two-year CAGR of -2%) and strong operating leverage. The key takeaway for us is the diversified product portfolio strength and strong brand positioning, which is resilient to commodity inflation risks.

* Segmental insights suggest that while Cables and Wires as well as Switchgears benefitted from commodity price inflation, ECD and Lighting saw margin compression. Lloyd, on the other hand, was a laggard in terms of demand as well as margins. These insights are in line with our thesis on the impact of commodity price inflation across various product categories (read here, here, and here).

* While the earnings beat is largely attributable to better-than-expected revenues during the quarter, this also means the pent-up component may be absent for the remainder of the year. Overall, the demand environment looks good at a double-digit structural growth rate, while margin normalization may limit earnings growth. We raise our FY22–24E EPS estimate by 9% each, factoring in 1QFY22 performance. Maintain Neutral, with TP of INR1,120 (unchanged target multiple of 50x Mar’23E EPS).

Cables and Wires, Switchgears drive profitability

* 1QFY22 snapshot : Revenue grew 75% YoY to INR26b and was 27% ahead of our expectation. Notably, the two-year CAGR stood at -2% (Havells’ core at +1%, Lloyd’s at -13%), which is remarkable given the second COVID wave disruption. EBITDA grew 170% YoY to INR3.5b and was 71% ahead of our expectation. The EBITDA margin came in at 13.6% v/s our expectation of 10.1%. The surprisingly strong margins (v/s our expectation) may be attributable to better operating leverage on the revenue beat. Ad spends stood at 1.7% of sales, similar to the previous quarter, but above 1QFY21 levels of 0.4%. Adj. PAT came in at INR2.3b and was 97% ahead of our expectation, a follow-through of the revenue and margin beats.

* 1QFY22 segmental highlights: (a) Havells (ex-Lloyd) – Revenue grew 79% YoY (two-year CAGR at +1%), with strong performance from Cables and Wires as well as Switchgears. Cables and Wires: Revenue was up 75% YoY, with the PBIT margin expanding to 15.6%. Switchgears: Revenue increased 96% YoY, with the PBIT margin expanding to 27.3%. Lighting: Revenue rose 52%, with the PBIT margin at 15.1% (down QoQ). ECD (incl. others): Revenue grew 86% YoY, with margins at 10.2% (down QoQ). (b) Lloyd – Revenue was up 62% YoY (two-year CAGR at -13%). Due to the seasonality factor, the AC business has been the clear laggard v/s other categories. Also, the PBIT margin at 2.1% (down QoQ and similar YoY) suggests higher margin pressure v/s other categories due to commodity price inflation.

Key highlights from management commentary

* Price hikes taken to pass on commodity price inflation: Commodity prices have stabilized now, and major price hikes have already been taken to negate the input price inflation. Cables and Wires has seen a 35% price hike, while other segments have witnessed 10–15% price hikes.

* Margin normalization likely: Ad spends would increase in due course, albeit at a lower level than in the past. The Cables segment has benefitted in a rising copper price environment, but would return to historical levels.

* Lloyd update – AC inventory levels were high in the system at the end of the quarter – largely at the company level, but not at the trade level. Hence, secondary sales are currently faring better than primary sales. North India saw a good pickup in sales when the lockdown was lifted, but with the monsoons setting in, sales have now returned to normal levels.

Valuation and view

* We increase our FY22–24E EPS estimate by 9% each, factoring in a better-thanexpected revenue trend. However, we note that a large portion of the robust revenues is attributable to an inflationary environment, while margins are driven by (a) the Cables and Wires segment and (b) yet to be normalized cost overheads, such as ad spends. Havells’ diversified product portfolio is resilient to input cost pressures. In fact, its strong brand positioning enables the company to take price hikes and, thereby, positively impact earnings growth.

* We expect margins to normalize towards trend margins and bake in an EBITDA margin of 13.2% in FY24E (from 15% in FY21), still higher than 11–12% range in FY19/FY20, as some cost rationalization elements would continue for a longer time. Thus, we forecast a revenue / EBITDA / adj. PAT CAGR of 17%/12%/15% over FY21– 24E. Post the 1QFY22 growth induced by a low base, earnings growth may be subdued over the next few quarters. We maintain a Neutralrating, with TP of INR1,120 (prior: INR1,030), on an unchanged target multiple of 50x Mar’23E EPS.

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