IGI Logo

In-line revenue; higher staff costs and ad-spend dent margin

Havells India’s (HAVL) sales grew 17% YoY to Rs45.3bn, broadly in-line with our estimate, led by improvement in consumer demand. Key segments driving growth were cables (+23% YoY), ECD (+17% YoY) and Lloyd (+19% YoY). Gross margin rose 50bps YoY to 33.8%. Adspend jumped 54% YoY to Rs1.3bn (at 2.9% of sales, up 70bps YoY) due to festive season starting early in Q2. EBITDA was broadly flat YoY at Rs3.8bn due to higher ad-spend, staff cost (+21% YoY) and other expenses (+23% YoY). EBITDA margin fell 120bps YoY to 8.4%, much below our/consensus estimate of 10.8%/10.4%. Aided by higher other income, PAT grew 9% YoY to Rs2.7bn, but was below our/consensus estimate of Rs3.4bn/Rs3.3bn due to operating margin miss. As per management, consumer spending is showing signs of improvement due to ongoing festive season coupled with rural pickup. Margin will likely normalize in upcoming quarters as HAVL has taken most of the price hikes across categories (except C&W). We cut our FY25E/26E EPS by 14%/11% to factor margin miss. We roll over our valuation to Sept’26 with unchanged target price of Rs1,875 based on 50x H1FY27E EPS

Electricals – Cables and ECD post healthy growth; lighting and switchgears stays soft

Sales of FMEG ex-Lloyd grew 16% YoY to Rs39.5bn with EBIT margin of 9.9%, down 340bps YoY. Cables grew by 23% YoY at Rs18.1bn (35-40% share of cables, rest house wires) led by volume uptick (+15% YoY) and partially aided by spillover from Q1 destocking. Though margin was lower at 8.6% (down 300bps YoY) due to high cost inventory absorption, HAVL expects it to normalize by Q4FY25. ECD sales grew 17% YoY to Rs8.6bn due to festive-led broad based growth in fans, air coolers, water heaters and SDA while enhanced spend in alternate/ emerging channels caused 390bps fall in EBIT margin to 7.5%. Switchgears sales grew only 4% YoY to Rs5.5bn due to high base of industrial switchgears, with EBIT margin at 20.9% (down 530bps YoY). However, high single digit to low double digit growth is likely. Lighting sales were broadly flat YoY at Rs3.9bn. Though volume were healthy (+15% YoY), pricing has started stabilizing. Product mix was Consumer luminaries (60%) and professional luminaires (40%).

Lloyd – Healhty growth in a non-seasonal quarter; Contribution margin improves

Lloyd sales growth was healthy at 19% YoY to Rs5.9bn, largely driven by better growth in nonRAC category (refrigerators and washing machine), outpacing RAC growth (slow offtake in Q2, as it followed strong summer sales in Q1). RAC constitutes 78% of Lloyd sales on annual basis. For non-RAC portfolio, products placement with most of the large retailers has improved, hence, it will likely deliver better growth going ahead. Contribution margin for Lloyd was at 14% in Q2FY25 (vs. 3.9% YoY and 13.2% QoQ) while it saw EBIT loss of Rs224mn in Q2FY25 (negative 3.8% margin vs. negative 15% YoY). Lloyd’s contribution margin is higher for RAC products as non-RAC portfolio has many outsourced products. With structural improvement in cost efficiencies and better brand acceptance, margin should improve in 1-2 years.

Other KTAs: (1) OCF in H1FY25 was Rs7.7bn vs Rs8bn YoY. (2) Ex-cash NWC as on H1FY25 was 6 days (annualized) vs. 20 days YoY. (3) FY25E capex at Rs10bn (Rs3bn spent in H1).

Maintain ADD with an unchanged target price of Rs1,875

We expect HAVL to post 18% revenue CAGR over FY24-27E while earnings CAGR will be 27% due to turnaround in Lloyd. We assign ADD rating with a target of Rs1,875 based on P/E of 50x H1FY27E EPS. Key risk is moderation in demand amid rising commodity costs, as price hikes puts the industry in a conundrum of preserving margin vs. affecting consumer demand.

For More Centrum Broking Disclaimer https://www.centrumbroking.com/disclaimer/

SEBI Registration No.:- INZ000205331