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Margin under pressure amid external headwinds

Margin recovery will be led by localization and premium mix

* LG Electronics India’s (LGEIL) 2QFY26 revenue inched up ~1% YoY to INR61.7b. However, EBITDA declined ~28% YoY to INR5.5b. OPM contracted 3.5pp YoY to 8.9% due to external factors (under absorption of fixed cost, rising commodity prices, and higher recycling costs). PAT declined ~27% YoY to INR3.9b.

* Management highlighted that it is entering its next phase of growth, with a clear strategy anchored in its Make for India, Make in India, Make India Global vision. 1HFY26 was impacted by a cool summer, early monsoons, currency volatility, US tariffs, and the GST rate cut, which temporarily delayed purchases; however, sales recovered quickly once GST changes took effect, supported by the festive and wedding season demand. Looking ahead, it expects growth to be driven by premiumization, deeper penetration through the newly launched LG essential series, expansion of premium appliances and TVs, and a stronger push in B2B segments, such as HVAC, and in information displays.

* We cut our EPS estimates ~13% for FY26E to factor in margin pressure in 2Q and ~7% for FY26-FY27E (each). The stock is trading at 45x/39x FY27/FY28E EPS. We value LGEIL at 45x FY28E EPS to arrive at our TP of INR1,890. Reiterate Buy.

Revenue up ~1% YoY; OPM contracts 3.5pp to ~9%

* LGEIL’s consol. revenue/EBITDA/Adj PAT stood at INR61.7b/INR5.5b/INR3.9b (+1%/-28%/-27% YoY) and OPM contracted 3.5pp YoY to ~9% in 2QFY26.

* Segmental highlights: a) Home appliances & air solutions (H&A) segment – Revenue was flat YoY at INR39.5b, and EBIT declined ~32% YoY to INR3.2b. EBIT margin contracted 3.9pp YoY at 8.2%; b) Home entertainment (HE) – revenue rose ~3% YoY to INR22.3b, while EBIT declined 10% YoY to INR2.8b. EBIT margin contracted 1.8pp YoY to 12.6%.

* In 1HFY26, Revenue/EBITDA/ PAT stood at INR124.4b/INR12.6b/INR9.0b, which was -1%/-26%/-26% YoY. OPM contracted 3.5pp YoY to ~10%. OCF stood at INR10.3b vs INR14.2b in 1HFY25. Capex stood at INR5.9b vs INR1.5b. FCF stood at INR4.4b vs INR12.7b in 1HFY25

Key highlights from the management commentary

* LGEIL expects margin expansion to be driven by higher localization, enhanced operational efficiencies, and a higher premium products mix. The new product categories will boost volumes, enabling fixed-cost absorption.

* The washing machine market share stood at 33.4%, and the refrigerator share rose to 29.9%, up 1% YoY. In the RAC category, share improved by 0.5% to 17.4% vs. YTD Sep’24.

* The market share in TVs rose to ~28%, supported by premiumization and strong traction in large-screen formats. OLED market share reached ~62%, confirming LG’s leadership in premium televisions

Valuation and view

* LGEIL’s 2QFY26 earnings were below our estimates due to margin pressure amid external factors. Management expects margins to improve going forward, with multiple initiatives taken by the company. Additionally, the company is pursuing a two-track strategy of continuing LG Essential while launching a new premium range to target niche demand and unlock growth in underpenetrated markets. This will also widen the price spectrum and help improve the asset turnover of the upcoming Sri City plan.

* We estimate LGEIL’s revenue/EBITDA/PAT CAGR at 8%/8%/9% over FY25-28. We estimate the H&A segment’s margin to be at ~13% (each) in FY27/FY28 vs. ~11% in FY26, while the HE segment’s margin is projected at ~15%/16% in FY27/FY28 vs. ~14% in FY26. We anticipate a recovery in operating profit margin in FY27/28, driven by increased domestic sourcing of components, a focus on B2B and export markets, and growth in AMC revenue. The stock is trading reasonably at 45x/39x FY27/FY28E EPS. We value LGEIL at 45x FY28E EPS to arrive at our TP of INR1,890. Reiterate BUY.

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