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Healthy growth in cables and Lloyd; ECD and lighting subdued

Strong B2B demand; normalcy expected in B2C segment

* HAVL reported a miss of 3%/6% on EBITDA/PAT on our 3QFY24 estimates, primarily due to higher-than-estimated AD spends (4% of revenues vs. 3.1%/2.2% in 3QFY23/2QFY24). An adverse product mix in the Cables and Wires segment led to a QoQ decline in margin.

* The management expects a positive impact on the summer season, aided by low base. It foresees the realization of deferred purchases, due to the inflationary environment over the past year in the B2C category going forward. It does not anticipate any price increases in both AC and fan product categories. Instead, the focus is on leveraging cost-saving initiatives and capitalizing on improved economies of scale in 1HCY24 to boost margin.

* We cut our EPS estimates by 8%/6%/4% for FY24/FY25/FY26 as we factor in lower margins in the ECD/Lighting segments due to pricing pressure. We remain structurally positive on HAVL, given its diversified product portfolio, premiumization strategy, and continued focus on brand building. We value HAVL at 50x FY26E EPS to arrive at our TP of INR1,510.

Higher ad spending results in lower-than-estimated margins

* Consolidated revenue/EBITDA/PAT stood at INR44.1b/INR4.3b/INR2.9b (up 7%/2%/1% YoY and in line/down 3%/6% vs. our estimates). Gross margin was up 30bp YoY (flat QoQ) to 33.3%. OPM declined 50bp YoY to 9.8%.

* Ad spends stood at 4% of the revenue vs. 3.1%/2.2% in 3QFY23/2QFY24. Depreciation/interest costs rose 18%/40% YoY, whereas ‘Other income’ grew 40% YoY. The board has approved an interim dividend of INR3/share (~23% payout).

* Segmental highlights: (a) Havells (ex-Lloyd): revenue up 7% YoY to INR37.6b. C&W: revenue up 11% YoY to INR15.7b and EBIT margin contracted 1.1pp to 10.4%. Switchgear: revenue up 1% YoY to INR5.2b and EBIT margin declined 60bp to 24%. Lighting: revenue was up 3% YoY to INR4b and EBIT margin improved 1.5pp to 14%. ECD: revenue was up 3% YoY to INR9.6b and EBIT margin declined 2pp to 11%. (b) Lloyd’s revenue grew 8% YoY to INR6.6b. The company reported a loss of INR646m at the EBIT level in 3Q vs. a loss of INR596m YoY (estimated EBIT loss of INR577m).

* In 9MFY24, revenue increased 9% YoY, led by 17%/14%/5% growth in revenue of Lloyd/C&W/Switchgear segments. EBITDA increased 12.7% YoY to INR12.1b with OPM improvement of 30bp YoY to 9.2%. Adj. Profit was up 15% YoY to INR8.2b.

Key highlights from the management commentary

* Sustained infrastructure growth led to demand growth in the B2B segment. There is good traction in the residential segment, especially on the premium side in urban areas. It foresees the realization of deferred purchases in the B2C category going forward.

* It participated in several projects in professional lighting, which led to a strong volume growth. However, price deflation remained a significant drag, impacting the value growth.

* It gained market share in Lloyd in 9MFY24 and delivered strong CAGR of ~30% in the last two years. Further, the company positioned itself as a mass premium brand in the Middle East region owing to increased competition from China.

Valuation and view

* We estimate HAVL’s revenue/EBITDA/PAT CAGR of 12%/19%/21% over FY23-26. We expect EBITDA margin to improve gradually to 11.4% in FY26 vs. 9.5% in FY23, led by benefits from commodity cost stabilization and lower losses for Lloyds.

* HAVL has been generating positive free cash flows most of the years despite higher capex (due to focus on in-house manufacturing). We expect cumulative OCF to be at INR50b over FY24-26 and cumulative capex at INR16.5b over this period. RoE and RoCE are likely to be at 20% and 19% in FY26 vs. an average level of 18% and 17%, respectively, over FY15-23.

* Our target price of INR1,510 is based on 50x FY26E EPS. We reiterate our BUY rating on the stock.

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SEBI Registration number is INH000000412