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Margins softness to hurt premium valuations...

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.

• Revenue grew by 63% YoY on account of healthy demand and higher realisation.

• EBITDA growth was flat and margin eroded by 500bps YoY due to sharp volatility in commodity prices.

• Sharp fall in commodity prices, including copper, will support margin expansion and also improve demand.

• In the near term, we may see margin erosion and destocking in channels to hurt demand.

• We lower our EPS estimates by 9% & 7%, as we factor the likely impact on margins.

• Considering earnings moderation and premium valuation, we value HAVL at a P/E of 42x (~10 yr avg.) on FY24E and downgrade to SELL with target price of Rs.1,104.

Broad based growth….

Q1FY23 revenue grew by 63% YoY, supported by healthy demand and higher realisation, albeit at lower base. Revenue growth was broad based across product categories; Cables & wires, Switch gears, Lighting & Consumer durables & other products which grew by 48%, 38%, 78%, 46% & 66% YoY, respectively. Overall demand was stable in consumer and residential segments. While Industrial and infra segments demand remained soft. Going ahead, with falling copper and other key base metals, we may see some moderation in demand especially in cables & wires on account of de-stocking. Management expects revenue growth to remain healthy on account of strong discretionary demand and a moderation in commodity prices. We expect revenue to grow by 15% over FY22-24E.

Margins pressure to continue...

Despite strong revenue growth, Q1FY23 EBITDA grew by just 2%, and margins declined by 500bps to 8.5%. This was largely due to margin contraction in cable & wires and Lloyd business. Both segments were impacted by volatility in raw material prices. While ad spends also remained higher at 2.7% of overall sales. Supported by higher other income, PAT grew by 3.5% YoY. Over medium term to long term, the reduction in raw materials is positive. However, we lower our EBITDA estimates by 8.5% & 5.3%, and margin estimates by 80bps & 40bps for FY23E & FY24E, considering the impact on margins in near term. Consequently, our EPS estimates for FY23 & 24E stands reduced by 9% & 7%, respectively. We expect PAT to grow by 17% over FY22-24E.

Valuations

HAVL’s revenue growth remained healthy supported by pick-up in construction activities, revival in consumer sentiments, and market share gains. Though the sharp fall in raw materials is positive in the long term, but we may see some moderation in demand as well as decline in margins. Considering the likely impact on margins and premium valuation, We value HAVL at a P/E of 42x (10 year avg.) on FY24E and downgrade to SELL from BUY with a target price of Rs.1,104.

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