Maintain ADD on Havells - Sharp margin recovery; Lloyd back on track - HDFC Securities

Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

Havells reported a stellar 2QFY21 with a massive jump in operating margin. Core business posted revenue/EBIT growth of 6/45% YoY. Lloyd clocked 56% YoY revenue growth with 2% EBIT margin vs. 25% loss YoY. We were also expecting quicker recovery in margin than revenue; however, the magnitude of margin recovery beat ours as wells as the street's expectation. We believe some of the cost will restore in 2HFY21 (A&P, Employee, etc.). Hence, margin expansion will be healthy, but unlike 2Q's. Havells has once again proved its execution superiority by gaining share for core business and turnaround in Lloyd. We increase EPS estimates owing to (1) quicker recovery in B-C business, (2) expected healthy pick-up of B-B in 2HFY21, (3) turnaround in Lloyd, (4) cost savings initiatives (the company is reversing several high overhead cost built over the past 2 years) and (5) operating leverage on margin. We increase EPS by 32/11/11% for FY21/22/23. We value Havells at 40x P/E on Sep-22E EPS to derive a target price of Rs 715. Maintain ADD.

B-C supports revenues: Revenue grew by 10% YoY (+2% in 2QFY20 and - 46% in 1QFY21), vs expectation of 4% growth. Switchgears/Lighting/ ECD/Lloyd saw revenue grow by 2/4/18/56% YoY. RAC drove Lloyd recovery, and B-C Lighting registered 15% YoY growth. Cables declined by 5% YoY due to sluggish B-B. Domestic wires grew by 18% YoY.

All-time high EBITDA margin: Gross margin expanded by 89bps YoY (+103bps in 2QFY20 and -281bps in 1QFY21) vs an expectation of +39bps YoY. Employee/ASP declined by 11/74% YoY while other expenses increased by 1% YoY. EBITDA margin expanded by 662bps YoY (-144bps in 2QFY20 and -140bps in 1QFY21) to 17.2% (all-time high). EBITDA grew by 79% YoY to Rs 4.2bn (HSIE Rs 2.7bn). EBIT margins for Switchgears/Cables/ Lighting/ECD expanded by 700/160/760/560bps YoY. PBT grew by 106% YoY while APAT grew by 80% YoY (lower tax rate in the base quarter).

Concall takeaways: (1) Residential real estate demand improved; (2) rural revenue grew 140% YoY (~4% revenue mix now); (3) in-house production stands at 75%; (3) 1,100 distributors on its online to offline platform so far; (4) FY21 Capex at Rs 3.3bn; (5) healthy margin is sustainable.

Shares of HAVELLS INDIA LTD. was last trading in BSE at Rs.729 as compared to the previous close of Rs. 725.05. The total number of shares traded during the day was 102699 in over 3200 trades.

The stock hit an intraday high of Rs. 740.65 and intraday low of 712. The net turnover during the day was Rs. 74542292.

Source : Equity Bulls

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