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Maintain ADD on Havells India - Outperformance continues; miss on margin - HDFC Securities

Posted On: 2021-10-23 09:31:55 (Time Zone: IST)


Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities and Mr. Saras Singh, Institutional Research Analyst, HDFC Securities

Havells delivered a strong Q2FY22 revenue performance; however, margin was a miss. Revenue grew by 31% YoY (20% two-year CAGR, HSIE 21%), driven by broad-based performance across segments. Given that Havells has a large product range, healthy mix of B-C and B-B, and pan-India presence, it has managed to capitalise on the improving demand scenario. We believe that, in this kind of inflation, leading players will continue to tap the share gain opportunity. The miss in margin does not reflect any weakness in the business; we believe it is more temporary in nature. Gross/EBITDA margins contracted by 597/339bps YoY to 34.3/13.8%. We expect margin recovery in H2FY22. Havells is one of the best plays on the improving underlying demand (driven by housing and home improvement), share gain, and B-B revival. Trade inventory is normal; thereby, festive season and seasonal products can drive the upcoming quarters. We continue to value the stock at 55x P/E on FY24E EPS to derive a target price of INR 1,550. We believe Havells will continue to command a rich valuation (as it is one of the best plays among richly valued discretionary names). Maintain ADD.

Continued all-round performance: Revenue was up 31% YoY (10% in Q2FY22 and 76% in Q1FY21; HSIE 21%), driven by growth across segments. Switchgears/cables/lighting/ECD/others delivered YoY revenue growth of 20/46/34/26/34% while delivering two-year CAGRs of +10/+18/+18/+22/+32%. Lloyd grew at 22% YoY. We expect the revenue growth momentum to sustain with inspiring industry recovery, housing activities, and share gain. The omnichannel strategy (online, rural, modern trade, and enterprise business) of penetration is playing out well for the company, leading to addition of new customers and broad basing of demand channels.

Miss in margin; expect recovery in H2FY22: GPM was down by 597bps YoY (up 89bps in Q2FY21 and up 99bps in Q1FY22), lower than our expectations of a 323bps YoY contraction. Employee/A&P/other expenses grew by 16/68/14% YoY on a low Q2FY21 base. EBIT margin for switchgears/cables/lighting/ECD expanded by -386/-418/219/-286bps YoY to 27/10/22/17%. Lloyd reported an EBIT loss due to insufficient price hikes and under absorption of overheads. EBITDA margin contracted by 339bps YoY to 13.8% (+420bps in Q2FY21, +474bps in Q1FY22, HSIE 15.7%). EBITDA grew by 5% YoY (37% two-year CAGR; HSIE +11%).

Con call takeaways: (1) The company is seeing traction across B2B, B2G and institutional demand. (2) It saw broad-based growth with about half of it being driven by volume growth across all categories, excluding cables. (3) Lloyd is seeing good acceptance by the trade channel. (4) Given the loss of two peak seasons in AC, the overall system inventory was high, thereby leading to a gradual price hike. (5) Lloyd has gained market share in the past two years. (6) Havells may take further price hikes if the current inflationary pressure continues. (7) Capex guidance for FY22 stands at INR 3.5bn.

Shares of Havells India Limited was last trading in BSE at Rs. 1289.50 as compared to the previous close of Rs. 1285.60. The total number of shares traded during the day was 75074 in over 4915 trades.

The stock hit an intraday high of Rs. 1319.10 and intraday low of 1265.60. The net turnover during the day was Rs. 97087072.00.


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