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B2C demand remains muted; higher ad-spends impact margins

Havells India’s (HAVL) sales grew modestly at 7% YoY to Rs44bn, 5%/3% below our/ consensus estimate, amid subdued consumer demand. Cables grew 11% YoY to Rs15.7bn aided by infra-led B2B demand while Lloyd grew 7% YoY to Rs6.5bn. Switchgears/ECD/ Lighting segment sales grew in the range of only 1-3% YoY due to muted consumer demand. Gross margin rose 30bps YoY to 33.3%, but higher ad-spends (+90bps YoY forming 4% of sales vs. usual run-rate of 2-3%) led to 50bps YoY fall in EBITDA margin to 9.8%, below our/ consensus estimate of 10.2%/10.6%. PAT was flat YoY at Rs2.9bn, 12% below our/ consensus estimates of Rs3.3bn each due to both top-line and margin miss. B2B demand remains robust with uptrend in govt. capex. B2C demand is healthy for premium products in urban areas, while non-urban areas will pick up once inflationary impact moderates, which would benefit mass/economy range products. With focus on cost levers, FMEG margin can improve despite high competition. Factoring in Q3 results, we cut FY24E EPS estimate by 7% while FY25E/26E gets trimmed by 4%/2%. Retain REDUCE rating with revised target of Rs1,160 (Rs1,195 earlier) based on unchanged P/E of 42x H1FY26E EPS.

Electricals – B2C demand remains tepid; B2B growth aided by infra capex

Cables sales (Rs15.7bn, +11% YoY) was led by infra-led demand however unfavorable product mix caused EBIT margin to fall 110bps YoY to 10.4%, lowest in past 5 quarters. Cables-wires sales mix is 65-35 with wires having better margins. Rs3bn greenfield plant of underground cables will expand capacity by 25%. In switchgears (Rs5.2bn sales, +1% YoY), healthy growth from projects and retail was offset by lower sales from telecom OEMs and exports. EBIT margin fell 60bps YoY to 24.1%. Softer ECD sales (Rs9.6bn, +3% YoY) was due to subdued B2C demand and de-growth in fans on a high base (pre-BEE channel filling in Q3FY23). Fans growth is likely to be healthy in upcoming summer amidst lower channel inventory and normalcy in pricing with trade carrying only BEE rated fans. Small domestic appliances benefited from festive demand. EBIT margin fell 190bps YoY at 11.2%. In lighting (Rs4.3bn sales, +2% YoY), healthy growth in professional lighting was offset by LED price erosion in consumer lighting. EBIT margin rose 150bps YoY to 14.2% and has sustained 14-14.5% range in past 3 quarters. 

Lloyd – Decent growth; EBIT loss continues as core priority is brand building

Lloyd sales grew 7% YoY to Rs6.5bn while EBIT losses continued at Rs652mn. RAC channel filling is lower YoY as trade is cautious. HAVL expects good summer season due to pent-up demand as last year’s summer was truncated due to unseasonal rains. Lloyd’s capacity utilization is at 50-60% across both plants. Lloyd believes that capacity addition by RAC brands wouldn’t trigger price war in the industry as popular brands have vision for long term growth. In the Middle East market, Lloyd would position itself as a mass premium brand and will target NRI population. Lloyd’s market share and margins are similar across offline and online channels. Channel finance accounted for 30-35% of total sales.  

Other key takeaways: (1) OCF in 9MFY24 at Rs14.3bn vs. Rs5.7bn in FY23. (2) NWC at 37 days (TTM sales) as on Q3 vs. 42 days YoY. (3) Capex in 9M at Rs5bn vs. FY24E guidance of Rs6bn.

Maintain REDUCE with a revised target price of Rs1,160

We expect HAVL to post 14% revenue CAGR over FY23-26E while earnings CAGR will be 21% on a low base. We maintain REDUCE as (1) consumer demand remains soft and competitive intensity is elevated in FMEG, (2) losses in Lloyd will continue for foreseeable future while its share in total sales mix will rise with addition of new products and (3) stretched valuations.