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Positivity priced in, valuation remains stretched; downgrade to Reduce

Result Synopsis

Havells strong revenue growth has been driven by strong summer season and continued industrial and infrastructure led B2B segment, demand outlook remains positive with some uptick in consumer trends. Summer dependent categories like Lloyd and ECD has registered growth of 47% and 20% respectively, led by strong performance of RAC, Fans and Air-coolers which has grown higher albeit on low base. Gross margins have expanded on yoy basis, while flowthrough of higher gross margin has resulted in EBITDA margin improvement. However, on sequential basis margins are lower. Lloyds for the second quarter in a row has registered positive EBIT. EBIT margins stood at 3.5% expanding 73bps on sequential basis. Management is committed to drive volume growth as well as improving profitability for Lloyd. Management is cautiously optimistic of improvement in consumer demand going forward.

We are factoring FY24-26E Revenue/EBITDA/PAT CAGR of 17%/26%/27%. Our EPS estimates are marginally revised upwards resulting from higher revenue growth on back of strong summer season. Expected improvement in B2C consumer demand on back of real estate uptick and continued industrial and infrastructure led demand has already factored in the stock price. we continue to value the company at 55x on FY26 EPS and arrive at PT of Rs1,792. We however downgrade the rating to REDUCE as recent rally in the stock price has priced in all the positives and we would wait for better entry point as recent commodity price surge could pose margin challenges going forward.

Result Highlights

* Revenue beats estimates- Havells delivered better than expected revenue growth on back of strong summer demand.

* Margins -Gross margins has seen improvement of ~151bps on yoy basis as commodity prices have stabilized. EBITDA margin at 9.9% has expanded on yoy basis, while it has contracted sequential basis on increased brand investments.

* Price revisions – The company has increased prices across the product category. Price increase has been sufficient to cover the increase in commodity prices. Further price increase will not be required if commodity prices remains at current level

* Lloyd – Lloyds has seen strong revenue growth for quarter with revenue growing 47% yoy. Lloyd for the second quarter in the row has registered positive EBIT with EBIT margins at 3.5% with contribution margin seeing further improvement from Q4 levels. Lloyd progressing on its journey of growth and profitability.

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