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Q3 let down...but positive outlook prevails

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 7% YoY and was marginally below expectations, primarily due to weak consumer sentiments.

• EBITDA was flat, and margins were lower by 50bps YoY at 9.8% on account of higher ad spends and other expenses.

• HAVL's core portfolio has done well, led by healthy demand in real estate and construction, a trend likely to continue. However, the ECD segment saw weak consumer sentiments.

• Despite these challenges, optimism prevails, as seasonal factors and an improved product mix are poised to boost profitability. With inflation easing and input prices stabilizing, an overall improvement in consumer sentiment is anticipated for FY25.

• In spite of a 7% & 11% reduction in our EPS estimates, aligning with decreased EBITDA margin projections and indicative of margins in Q3 falling below anticipated levels, the overall outlook for earnings remains strong.

• We value HAVL at a P/E of 46x as we roll forward to FY26E and maintain BUY rating with a target price of Rs.1,496.

Weak consumer sentiments impacted…Q4 to see revival.

In Q3FY24, revenue grew by 6.8% YoY, missed our estimates by 5.4% due to weak consumer sentiments. B2B volumes remained robust, driven by infra and real estate demand. Despite the festive season, the ECD segment saw modest growth of 3% YoY, attributed to subdued fan demand. The lighting segment faced price erosion but achieved double-digit volume growth. Switchgear growth was flat due to a decline in sales to the telecom OEM segment. Cables reported double-digit growth, though underground cable capacity constraints impacted overall cable growth. Off-season impacts led to modest growth in Lloyd. Management indicated a weakness in consumer sentiments, especially in rural areas. However, green shoots are visible, and we expect a gradual revival going ahead. In the near-term, Q4 is expected to be strong, led by summer-related products. We cut our revenue estimates by 2% for FY24-FY25E and expect revenue to grow by 14% CAGR

Margins expansion will be gradual…

In Q3 FY24, EBITDA grew only modestly by 2% due to higher ad spends and other expenses. While margins declined by 50bps YoY to 9.8%. Consequently, the reported net profit was flat. Normalizing the EBITDA margin to historical levels (13.3%) may take time due to higher spending at Lloyd. We've adjusted our FY24E EBITDA margin estimates down by 50bps to 9.7% and 80bps for FY25E to 11.2%, on account for the Q3 margin EBITDA margin miss. Nevertheless, we still project a robust 28% CAGR growth in net profit over FY24-26E.

Valuations

Consumer sentiments remain weak in the near term; however, there are green shoots, and we expect a gradual revival in growth going into FY25. The near-term earnings outlook remains robust on account of seasonal factors and a better product mix. Further, input prices have stabilised, which is expected to keep margins stable. However, we don’t have meaningful EBITDA margins in the very short term, given that HAVL is in an ininvestment mode. Despite earnings downgrades, the earnings outlook remains robust. We value HAVL at a P/E of 46x as we roll forward to FY26E and maintain a Buy rating, with a target price of Rs. 1,496

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