Buy Havells India Ltd For Target Rs.1,740 by Motilal Oswal Financial Services Ltd
Healthy revenue growth; margin a bit lower
C&W margin improves QoQ, Switchgear profitability disappoint
* Havells India (HAVL)’s 3QFY25 revenue grew 11% YoY to INR49b (in line) as better-than-expected growth in the ECD/Switchgear segments was offset by lower revenue from the C&W segment. Lower margin in switchgear and higher-than-expected loss in Lloyd resulted in ~1% YoY decline in EBITDA (7% miss). OPM stood at 8.7% vs. an estimated 9.3% for the quarter. PAT declined ~3% YoY to INR2.8b (13% miss) in 3QFY25.
* The Switchgear segment’s margin was lower on account of a change in channel mix (higher sales in the project business) and factory underabsorption due to plant relocation. However, management expects the margins to improve in the Switchgear, ECD, and Lloyd segments in the coming quarters. Further, after destocking in the wires due to lower copper prices, restocking is anticipated in 4QFY25.
* We trim our margin estimates by 100-200bp in the Switchgear/Lloyd segments and by 20-50bp in the Lighting/ECD segments. Consequently, we cut our EPS estimates by 5-8% for FY25-27. HAVL’s valuations at 59x/48x FY26/ FY27E EPS remain expensive. Hence, we reiterate our Neutral rating with a revised TP of INR1,740 (premised on 55x Dec’26 EPS).
Switchgear/ECD’s EBIT margins dip 5.7/2.4pp YoY to ~18%/9%
* HAVL’s consolidated revenue/EBITDA/PAT stood at INR48.9b/INR4.3b/INR2.8b (+11%/-1%/-3% YoY and -1%/-7%/-13% vs. our estimates). Gross margin stood at ~34% (+1.2pp YoY). OPM dipped 1.1pp YoY to 8.7%. Ad spending was at 3.7% of revenue vs. 4.0%/2.9% in 3QFY24/2QFY25.
* Segmental highlights: 1) HAVL revenue (excl. Lloyd) increased ~10% YoY to INR41.5b. The C&W revenue grew ~7% YoY to INR16.9b, and EBIT margin improved 75bp YoY to ~11%. The Switchgear revenue rose ~11% YoY to INR5.8b, while EBIT margin contracted 5.7pp YoY to ~18%. The Lighting revenue grew 3% YoY to INR4.5b, and EBIT margin expanded 60bp to ~15%. The ECD revenue rose 15% YoY to INR11.0b, while EBIT margin dipped 2.4pp YoY to 8.6%. 2) Lloyd’s revenue grew ~13% YoY to INR7.4b. It reported a loss of INR361m vs. INR654m in 3QFY24 (our estimated loss was INR259m).
* In 9MFY25, HAVL’s revenue/EBITDA/PAT grew 16%/14%/16% YoY. OPM margin contracted 20bp YoY to ~9%. Among segments, Lloyd/ECD/C&W’s revenue rose 32%/17%/11% YoY, while Switchgear/Lighting’s revenue grew 7%/2%. The company’s 4QFY25 revenue is estimated to rise ~9%, while its EBITDA and PAT are anticipated to decline ~2% and 4%, respectively. We estimate OPM at 10.4% (down 1.2pp YoY).
Key highlights from the management commentary
* The consumer sentiment is a bit weak but has started improving by 3Q-end. The company has gained market share in all consumer-facing categories. Management targets an EBIT margin (ex-Lloyd) of 12-13% in FY26.
* The company remains focused on channel and product category expansion. The additional investments in other segments are in the emerging channels for sustainable growth in the business. Incremental investments will continue, but there should not be any additional cash burn.
* In the Lighting segment, volume growth was 13-14% YoY, but price erosion adversely impacted growth. Currently, price erosion is bottoming out, and growth should start improving
Valuation and view
* HAVL posted healthy revenue growth in 3Q, led by an improvement in consumer demand at the end of the quarter. However, the lower margin in Switchgear and higher losses in Lloyd resulted in a miss on EBITDA. We cut our FY25-27E EPS by ~5-8%, mainly assuming lower margins in Switchgear, ECD, and Lloyd.
* We expect HAVL to report a revenue/EBITDA/PAT CAGR of 14%/21%/23% over FY25-27. We estimate OPM to reach 10.6% in FY27 vs. 9.4% in FY25E. RoIC of the company is expected to improve to 29% by FY27 from 22% in FY25E, and RoE is likely to be 19% in FY27 vs. 17% in FY25.
* The stock trades at rich valuations of 59x/48x FY26/27E EPS, and hence, we reiterate our Neutral rating with a revised TP of INR1,740 (premised on 55x Dec’26 EPS). Key monitorables will be the performance of Lloyd in the upcoming summer season and the margin trajectory of the Switchgear segment.
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