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Core margin disappoints; loss of Lloyd narrows

High volatility in RM costs hurts C&W margin

* Havells India (HAVL) reported weak 2Q results with 3-5pp margin miss across segments as segmental margins contracted 2-6pp YoY (excluding Lloyd where loss narrowed YoY). EBITDA at INR3.8b was 25% below our estimate, and OPM stood at 8.3% (vs. estimated 11.7%). Ad spending was 2.9% of revenue (vs. 2.2% in 2QFY24), while higher impairments had an impact of 65bp on OPM. Profit stood at INR2.7b in 2QFY25, 25% below our estimate.

* Management has been cautiously optimistic on festive demand improvement and believes that there has been an improvement in rural demand too. Volatilities in RM costs had a higher impact on the margin of the cables & wires (C&W) segment and are likely to normalize in 2HFY25. Lower industrial segment demand has hurt growth of switchgear segment.

* We cut our EPS estimates by 4-8% for FY25-27 as we reduce our segmental margin assumption by 50-80bp across segments. Valuations at 62x/50x FY26/27E EPS appear expensive, and hence, we reiterate our Neutral rating with a revised TP of INR1,830 (premised on 55x Sep’26 EPS). Sustainability/ improvement in Lloyd’s margin is a key monitorable, in our opinion

OPM contracts 1.3pp YoY to ~8% (est. ~12%)

* Consolidated revenue/EBITDA/PAT stood at INR45.4b/INR3.8b/INR2.7b (up 16%/flat/ up 8% YoY and up 5%/down 25%/25% vs. our estimates). Gross margin improved 50bp YoY to ~34%. OPM dipped 1.3pp YoY to ~8%.

* Segmental highlights: 1) Havells (ex-Lloyd)’s revenue grew 16% YoY to INR39.5b. C&W’s revenue rose 23% YoY to INR18.1b, while EBIT margin dipped 3.0pp YoY to ~9%. Switchgear’s revenue was up 3% YoY to INR5.5b, while EBIT margin contracted 5.6pp to ~21%. Lighting’s revenue declined 1% YoY to INR4.0b and EBIT margin contracted 1.6pp to ~13%. ECD revenue rose 17% YoY to INR8.6b and EBIT margin contracted 4.0pp to ~8%. 2) Lloyd’s revenue grew 19% YoY to INR5.9b. Lloyd reported a loss of INR243m vs. a loss of INR745m in 2QFY24 (estimated EBIT of INR29m).

* In 1HFY25, Revenue/EBITDA/PAT grew ~18%/22%/26% YoY. OPM was up 30bp YoY to ~9%. Based on our estimates, the implied revenue/EBITDA/PAT growth for 2HFY25 is ~11%/9%/18%. We estimate EBITDA margin to remain flat YoY at ~11% in 2HFY25. The company’s OCF stood at INR7.6b vs. INR7.9b in 1HFY24. Net cash balance stood at INR31.2b vs. INR30.2b as of Mar’24

Key highlights from the management commentary

* Wire demand was hit in 1Q due to destocking, while restocking led to higher demand during the quarter. Margin should be better in 3Q if there is not much volatility in RM prices, and 4Q should experience normal margins.

* In the ECD segment, margin will normalize in FY26 as investments in manpower are being made at present. Margin should bottom out in the lighting segment this year and should start improving from next year. There has been increased investment in fortifying retail channels, which is leading to higher employee expenses.

* It increased investment in newer channels, especially in modern formats, retail, and rural areas, which is leading to higher employee expenses.

Valuation and view

* HAVL reported healthy revenue growth in 2QFY25, led by a pickup in consumer demand. However, excessive volatility in the RM costs and intensified competition hurt margin. We estimate margin to improve in 2HFY25 with stability in RM cost, price hike, capacity expansion, and recovery in B2B demand. ECD and Lloyd is estimated to maintain growth momentum led by the festive season and a pickup in consumer demand.

* We expect HAVL to report a revenue/EBITDA/PAT CAGR of 15%/20%/22% over FY24-27. RoIC of the company is expected to improve to 32% by FY27 from 24% in FY24, and RoE is likely to be 21% in FY27 vs. 17% in FY24.

* Investments in Lloyd have helped the company to improve its price positioning, and there has been an improvement in its performance in the last few quarters. The stock trades at expensive valuations of 62x/50x FY26/27E EPS, and hence, we reiterate our Neutral rating with a TP of INR1,830 (premised on 55x Sep’26 EPS). Key monitorables would be sustainability/improvement in Lloyd’s margin and the margin trajectory of the switchgear segment.

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