Havells' valuation factors in gains from buoyant demand, expansion

The consumer durables sector has seen buoyant demand in August after a slowdown in July.

August has seen double-digit growth across the large appliances and electronics segments.

Most brands have avoided price increases as commodity prices are stable.  The average selling prices for large appliances has increased by 14 per cent as demand for premium products have been driven by

no-costs monthly instalments. Independence week has seen double-digit footfalls, reckoned to be the best in three years.

Channel inventory has normalised with large retailers holding 40-45 days of inventory going into the festival season. 

Brands like Voltas-Beko, Lloyd and Whirlpool are doing better apart from LG, which is the market leader in the large appliances category.

Industry revenue has risen above the long-term average, due to the heatwave.

The aggregate Q1FY25 revenue for the consumer durables sector rose about 24 per cent year-on-year (Y-o-Y). The long-term growth rate is 13 per cent, aided by a low base.

The aggregate gross margin improved slightly, with better product mix and stronger operating leverage play, leading to 120 basis points Y-o-Y expansion in aggregate operating profit margins. The aggregate adjusted net profit rose 48 per cent Y-o-Y.

White goods outperformance was driven by room air conditioners (RAC), with mixed trends in electrical consumer durables (ECD) while cable & wires (C&W) growth moderated.

White goods posted 42 per cent Y-o-Y revenue growth, driven by the RAC category and refrigerators also benefited. Washing machines saw modest growth, with high competitive intensity. Small price hikes continued across ECD (2-3 per cent Y-o-Y in Q1FY5), and lighting revenue growth improved to 5 per cent Y-o-Y.

C&W revenue growth moderated to 10 per cent Y-o-Y down from around 15 per cent plus growth in the past four quarters, with destocking in wires and decline in exports that hurt margins. But capex guidance remains robust, implying a strong C&W demand outlook.

Many CD companies have seen sharp positive reratings, with consensus earnings per share upgrades across white goods and ECD players. Sustainability of B2C demand, especially in festival season will be critical. A pick-up in the real-estate led demand and the ongoing capacity expansion in C&W augured well for Havells earnings growth.

The C&W segment is Havell’s largest revenue contributor, with FY24 revenue reaching Rs 6,320 crore, constituting 34 per cent of total revenue.

In Q1FY25, this segment’s revenue was Rs 1,520 crore, about 26 per cent of the topline. Havells has been operating at peak capacity for several quarters and is expanding capacity.

Since 2022, it has committed a total capex of Rs 1,125 crore for cables, increasing capacity from 3.29 million kilometre (mn km) currently to 4.58 mn km (September 2026) translating to 39 per cent addition to volume.

In August 2022, it established a new cable manufacturing facility in Tumakuru, Karnataka. Commercial production began this month. Eventually capacity at this facility will be pushed from 348,000 km per annum to 462,600 km per annum.

This expansion, involving additional investments of Rs 450 crore, will be funded through internal accruals with a focus on producing larger-sized cables.

The expanded capacity will start production by September 2026. Meanwhile, the capacity at the Alwar plant, which is 3.29 mn km currently, will be expanded to 4.12 mn km.

This would add 25 per cent at Alwar plant with the expansion likely to conclude by March 2026, and the capital outlay of Rs 375 crore to be funded by internal accrual.

The company has excellent financials, steady growth, a strong brand and a wide product range. However, it is also highly valued at 75 times the expected FY25 earnings. That’s a reason why investors should exercise caution.