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Aims to sustain profitability amid market challenges

Targets profitability in the premium segment

We met with Havells’ (HAVL) management to gain insights into industry trends and the outlook for key business segments. The management remains optimistic about growth prospects across core categories, supported by margin improvement initiatives. The company continues to invest in manufacturing, brand building, distribution, talent development, premiumization, and R&D, positioning itself for long-term success. The summer season has begun on a positive note, which should drive growth for Lloyd, with profitability sustained through operating leverage and cost controls. Demand for cables & wires remains strong, with a stable long-term growth outlook. In the switches and switchgear segment, domestic switchgear demand has improved; however, industrial switchgear recovery is still awaited. The lighting segment remains impacted by pricing pressure, though volume growth remains strong. The company is focused on expanding its presence in professional lighting to drive profitability. We expect HAVL's EPS to grow at a 23% CAGR over FY25-27, supported by margin expansion in Lloyd and other key segments. We maintain a Neutral rating with a TP of INR1,650 (50x FY27E EPS).

RAC segment: Focus on in-house manufacturing and premiumization

* HAVL, through its Lloyd brand, is strengthening its position in the Residential Air Conditioner (RAC) market, focusing on split ACs and operational efficiency. Lloyd has gained market share in RACs over the last few years and is now ranked among the top three players in the industry.

* Over the years, the company has strengthened its product portfolio with the introduction of washing machines, refrigerators, and televisions, establishing itself as a full-stack consumer durable player. Currently, ~75% of Lloyd’s revenue comes from RACs (80% Split and 20% Windows), while the remaining comes from washing machines (mostly semi-automatic), refrigerators, and televisions.

* The company faces no supply-side issues for compressors during the ongoing summer season. RAC volumes are expected to grow in line with the industry growth rate for the summer season of CY25, with a focus on margin improvement through internal cost efficiencies rather than price hikes.

* Lloyd has been focused on strengthening its brand through channel expansion, innovative product offerings, and investments in manufacturing and customer outreach. In recent years, it has set up manufacturing plants for RACs (current capacity: 2m units) and washing machines (current capacity: 0.7m units).

* Over FY20-24, capex for Lloyd stood at INR7.7b, accounting for ~36% of the company’s total capex during this period. The company aims to further expand RAC’s manufacturing capacity to 3m units by 4QFY25 with a capex of INR500-600m. Additionally, it is setting up a refrigerator manufacturing capacity of 1.4m units in Ghiloth, Rajasthan. The project is expected to be completed by Sep’26, with a total capex of INR4.8b.

* Cost optimization remains a priority for HAVL, driven by value engineering, higher volumes, and in-house production of components like heat exchangers, cross fans, and PCBs. However, compressors and motors continue to be outsourced, mirroring industry norms.

* HVL continues to strengthen its distribution network by expanding into modern trade channels like Croma, Reliance Digital, and Vijay Sales (a plausible new entry based on its modern trade focus), along with regional chains. E-commerce sales via platforms like Amazon, Flipkart, Tata Cliq, and its D2C website further enhance its urban market penetration. The company is also investing in modern format retail and quick commerce channels, with e-commerce and MFR collectively contributing ~40% to Lloyd’s revenues.

* The management views Lloyd as a long-term opportunity for the group, with continued investments expected in brand building (~5% of revenues in A&P), distribution network, and product premiumization. In the summer season of CY24, it launched the industry-first designer Lloyd Stellar & Stylus air conditioner range and more recently introduced the Stunnair range, India’s first AI-powered designer ACs. Its designer ACs, launched under the Luxuria brand, are priced ~50% higher than standard ACs.

* HAVL has deployed 4,500 in-store demonstrators to strengthen brand presence and customer engagement.

* Lloyd turned profitable in 4QFY24, benefiting from operating leverage, the stabilization of the Sri City plant, and cost-saving strategies. We expect it to remain profitable in FY25 (EBIT margin of 0.7% vs loss of INR1.7b; -4.4% of revenues in FY24). Going forward, we factor in a 20% revenue CAGR over FY25- 27E, with EBIT margin of 1.5%/2.5% in FY26/27E.

Cables & wires segment: New capacities to aid growth

* The cables & wires segment faced headwinds in 1HFY25 due to volatile copper prices, which surged 21% over Apr’24-May’24, before declining 12% by June, disrupting trade sentiment and squeezing profitability. The industry struggled to pass on costs, further compounded by general elections and a housing slowdown, leading to a decline in the segment’s EBIT margin to ~8.6% in Q2FY25 from ~12% in Q4FY24. However, the recent stabilization of copper prices and a recovery in the housing market have spurred wire demand, while cables have sustained strong growth through 9MFY25, driven by rising government capex.

* The company has accelerated investments in the cables & wires segment, announcing two brownfield expansion plans in FY25. In Jul’24, it announced a capex of INR3.75b for a brownfield capacity expansion at its Alwar, Rajasthan plant, which is scheduled for completion by Mar’26 in a phased manner. In Sep’24, HAVL commenced commercial production at its greenfield plant in Tumkur, Karnataka, and subsequently announced another brownfield expansion at the same location, with a capex of INR4.5b. The brownfield expansion is expected to be completed by Sep’26.

* Its investments in the cables & wires segment remained low over the past few years, which impacted growth as the company faced a shortage of cable production capacity. During FY12-23, the total capex for this segment stood at INR4.7b, compared to INR11.8b planned for FY24-27. The segment’s contribution from cables improved to ~40% from ~30% a few years ago and is expected to remain at similar levels in the near future. Going forward, we estimate revenue CAGR of 14% over FY25-27, with EBIT margin of 11.5%/12% in FY26/27 vs 10.7% for this segment.

Switchgear segment: Positioning for premium markets

* The revenue mix for this segment includes ~40% domestic switchgear (residential and small commercial), ~40% electrical wiring accessories (switches and automation), and ~20% industrial switchgear. In 3Q, segment margins were impacted by lower demand from the industrial segment, a higher share of project sales, and factory under-absorption following the plant shift from Faridabad to Sahibabad. Recently, demand for domestic switchgears has improved, though industrial demand remains low.

* The repositioning of switches from utility to designer products is a notable shift, with new designs driving demand. Designer switches, now viewed as aesthetic complements to interiors, have shorter replacement cycles as consumers upgrade for style, boosting replacement sales. We estimate ~9% revenue CAGR over FY25-27, with EBIT margins expanding to ~24% in FY26 and ~25% in FY27, up from ~22% in FY25, driven by premiumization and improved profitability.

ECD segment: Targets double-digit growth in Fans

* The Electrical Consumer Durables (ECD) segment, with fans contributing ~60% to its ECD revenue, is driving growth through premiumization and volume-led strategies. The company is expanding its Brushless DC (BLDC) and premium fan offerings, with BLDC models now spanning 40 variants and accounting for 24- 25% of total volumes.

* Alongside fans, HAVL is strengthening its water heater portfolio and aims to be among the top three in kitchen appliances within three years, leveraging branding and distribution. Higher investments in brand building and new channels (modern format retail, quick commerce) have squeezed margins, but recovery is expected as scale improves.

* The company targets double-digit growth in Fans and aims for market share gains. Revenue growth hinges on volumes, supported by a robust presence in modern retail, e-commerce, and quick commerce channels. Demand for water heaters (~15% of segmental revenues) was impacted this year by the short winter season and aggressiveness by competitors.

* Going forward, we estimate a ~15% revenue CAGR over FY25-27, with EBIT margins expanding to ~10% in FY26 and ~11% in FY27, up from ~9.3% in FY25.

Lighting business: Targets to increase sales of value-added products

* The lighting business is divided into Consumer Lighting and Professional Lighting, with a strategic focus on premiumization, innovation, and efficiency to counter LED price erosion, a persistent industry challenge. The company has seen robust volume growth of ~15% despite modest price declines, shifting its portfolio toward value-added products. While the industry mix is ~60% bulbs and batons and ~40% value-added items, HAVL has reduced its bulb reliance to 40%.

* Professional lighting has higher margins, driven by technical expertise and strong demand from infrastructure and industrial projects, including notable contracts like Shri Ram Mandir and National Highway developments.

* Consumer lighting continues to perform well, fueled by premium and decorative solutions and supported by 50+ Home Art Light stores offering experiential retail. HAVL is expanding its premium collections.

* Contribution margins for this segment are expected to remain at 31-32%, with a focus on value-added products and a higher share of professional lighting. Going forward, we estimate a ~6% revenue CAGR over FY25-27, with EBIT margins expanding to ~15.6% in FY26 and ~16.5% in FY27, up from ~15.1% in FY25.

Higher AD and R&D spends help in brand building

* HAVL is focused on enhancing brand affinity, equity, and image through advertising initiatives, including national advertising campaigns, regional brand ambassador associations, celebrity engagements, digital marketing campaigns, establishment of brand shops, in-shop advertising, and participation in trade shows. HAVL’s advertising and promotion spending increased 21% YoY to INR5.3b in FY24 (2.8% of revenues) and we estimate AD spends to remain at 2.8% of revenues over FY25-27. In 9MFY25, its AD spends increased 22% to INR4.8b and stood at 3.2% of revenues, compared to 3% in 9MFY24. On a cumulative basis, the company has spent INR28.8b on AD spends over FY15-24 (2.9% of its revenues).

* HAVL and Lloyd leverage celebrity endorsements to boost regional appeal in Southern and Eastern India. For instance, Vijay Sethupathi targets Tamil Nadu, Tamannaah Bhatia enhances pan-South visibility, Mahesh Babu strengthens brand presence in Andhra Pradesh and Telangana, Nayanthara appeals to Tamil Nadu and Kerala markets, and Sourav Ganguly strengthens brand outreach in Eastern India.

* HAVL strengthens its scalable product portfolio through sustained R&D investment, prioritizing quality, operational efficiency, asset optimization, automation, and backward integration. In FY24, R&D spending jumped ~26% to INR2.1b, or 1.1% of revenues (up from 1% in FY23). The company operates four R&D centers with a dedicated team of 713 members.

Valuation and view

* We expect HAVL to report ~14% revenue CAGR over FY25-27. Revenue CAGR across segments is estimated as follows: Lloyd (20%), ECDs (15%), Cables & Wires (14%), Switchgears (9%), and Lighting & Fixtures (6%).

*We estimate Lloyd’s margin to expand going forward, led by an increase in contribution margin in the RAC segment, positive operating leverage, and an increase in in-house capabilities for the non-AC segment (currently setting up a new refrigerator manufacturing facility in Ghiloth at a capex of INR4.8b).

* We expect HAVL to report an EBITDA/PAT CAGR of 21%/23% over FY25-27. Additionally, we estimate OPM to reach 10.6% in FY27 vs. 9.4% in FY25. RoIC is expected to improve to 29% by FY27 from 22% in FY25, and RoE is likely to be 19% in FY27 vs. 17% in FY25.

* The stock is trading fairly at 54x/44x FY26/27E EPS and, hence, we reiterate our Neutral rating with a TP of INR1,650 (premised on 50x FY27E EPS).

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