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Havells India - Strong demand across regions; profitability likely to be muted in H2FY22 - ICICI Securities

Posted On: 2021-10-24 15:30:45 (Time Zone: IST)

Havells is expected to maintain strong revenue growth momentum due to (1) strong demand across urban and rural regions, (2) effect of delayed price hikes and selective price hikes in H2FY22 will be able to pass on inflation in input prices in H2FY22 and (3) market share gains across segments likely to continue even in H2FY22. The company benefitted from revival in economy and higher infrastructure spending. Havells has applied for PLI scheme for Air conditioner segment. We model Havells to report PAT CAGR of 22.5% over FY21-FY24E with: (1) strong volume growth, (2) high single digit price hike and (3) benefits of cost savings and recovery in Lloyd. We remain structurally positive on the company due to its competitive advantages and growth opportunity in consumer durables. Maintain BUY with a DCF-based target price of Rs1,650 (54x FY24E EPS).

  • Volume growth accounted for 50% of revenue growth (ex-Cables & Wires): The volume growth was 50% of total revenue growth in all the segments. However, it was ~20% of total revenues of Cables and Wires. Due to steep input inflation, the company has aggressively hiked prices of Cables & Wires.
  • Healthy demand across regions: There is healthy demand across regions. There was higher growth in rural markets in FY21. However, there is higher growth in rural as well as urban markets in FY22. There is higher growth from real estate sector too. Due to higher infrastructure spending, Havells is witnessing good traction in both B2B and B2G segments.
  • Delayed price hikes: In order to pass on inflation in commodities, price hikes across segments were initiated. However, there has been a lag in price hikes which impacted profitability during the quarter.
  • Revival in profitability of Lloyd: Lloyd was impacted by covid led lockdown in its two seasons. Higher input prices, delayed price hikes and higher competitive pressures have impacted the profitability. However, the company plans to invest in brand building, higher volume growth, distribution expansion. It expects the profitability to improve with higher business scale.
  • Marketing investments to increase: The management indicated that brand building activities and advertisement spends are largely back-on-track and will stay at normalized levels from festive season.
  • Growth drivers of lighting segment: Havells is expected to gain market shares due to (1) wide range of offerings due to continuous innovation, (2) rigorous focus on increasing retail touch points and (3) deeper penetration in rural markets.
  • Organized sector is beneficiary of inflation: Most organized players have been able to gain market shares from smaller / unorganized players. While there is impact on profitability, the market share expansion in DCF accretive in medium-long term.
  • Normal inventory levels in trade: Inventory in trade channels is at normalized levels. Dealers are focusing on improving their RoCE and hence, there are negligible cases of over stocking. The primary and secondary sales are in symphony.
  • Market leadership in fans: The company has maintained its leadership in premium fans segment. We believe it would have gained market shares in other consumer durable products too.
  • PLI scheme: Havells has applied for PLI scheme only for the air conditioner segment. Currently, it is awaiting regulatory approvals.
  • Standard and Rio brands: These brands are benefitting due to their differentiated positioning of affordability. There has been good traction in these segments especially in rural markets.
  • Capex guidance: The management guided for capex of Rs3-3.5bn in FY22.
  • Maintain BUY: We model Havells to report PAT CAGR of 22.5% over FY21-FY24E and RoE to be upwards of 20% over FY22-24. We remain positive on the company's business model due to strong moats and growth opportunities. We maintain BUY rating with a DCF-based target price of Rs1,650 (implied P/E 54x FY24E).

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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