Prospects of Havells India seen improving; but positives priced in

Havells has established two US subsidiaries in order to develop exports. The company is also eyeing the Middle East

In the October-December quarter of the financial year (Q3FY24), Havells India recorded weak revenue growth due to continuing weakness in consumer demand. The company clocked 7 per cent revenue growth year-on-year (Y-o-Y), on the back of good performance in the cables and domestic appliances business driven by festival-season discounts. In Q3FY24, the Ebitda margin improved quarter-on-quarter (Q-o-Q), but declined on a Y-o-Y basis with higher ad-spends and HR investments.

The company has started making efforts to develop exports and the management guided that the demand for air conditioners (ACs) and fans should improve in Q4FY24 and Q1FY25, as summer arrives. Margins should also improve and normalise.
 

In Q3FY24, the switchgear, lighting, and electrical consumer durable (ECD) segments saw weak revenues and operating margin decline. Switchgear and ECD reduced on account of weak demand from the telecom segment, and a higher base quarter Q3FY23, respectively. The reduced revenues in lighting was an outcome of continued price erosion despite volume growth.
 

Havells has established two US subsidiaries in order to develop exports. The company is also eyeing West Asia. The strategy involves building its brand and establishing distribution in overseas markets. In addition, Havells is also open to white labelling assuming a decent margin.
 

Management guidance was that demand in the B2B business was better than B2C business. This was due to subdued consumer sentiment, which is expected to improve as inflation reduces. Exports are expected to be a crucial growth driver. Havells and Lloyd have been able to pass on cost increases on account of the energy transition both in AC as well as fans. The strategy is to go for capacity expansion in any category where capacity utilisation reaches 70-75 per cent.
 

Wires contribute 60-65 per cent to the total cables and wires (C&W) segment. This is a brand-oriented business where the company enjoys better margins compared to cables. But in Q3FY24, cables contributed more than wires, which led to margin decline. The company anticipates strong demand.
 

AC contributes 65-70 per cent to total Lloyd sales, which are mainly sold in Q4 and Q1 due to the seasonal nature. The company has gained market share in 9MFY24 and expects Q4FY24 and Q1FY25 to be better than last year. Current capacity utilisation stands at 60 per cent. The AC industry is seeing consolidation, with the top 5 players controlling maximum market share. Lloyd is in the top 4 and believes there is a huge room for growth given low penetration. Profitability is a function of raw material-procurement efficiency, operating leverage, product mix. All components are manufactured in-house.
 

The ECD segment’s weak performance was due to the BEE transition, price erosion in lighting, lost summer season on account of unseasonal rains, etc. However, management is seeing green shoots as inflation eases. Switch­gears’ growth was low due to a base effect, since Q3FY23 saw very strong demand from the telecom sector. Its market share is steady.
 

An Ebitda margin improvement is expected and revenues should also grow faster. The export boost may be sustained in FY25.

Most analysts are positive on the stock. According to Bloomberg, 9 out of 13 analysts polled since February have a ‘buy’, ‘outperform’, or ‘accumulate’ rating, three are ‘neutral’ and ‘hold’ and one has ‘reduce’ rating. Their average one-year target price is Rs 1,497 compared to the current price of Rs 1,552.30.