Electrifying Presence In Your Homes

Company Name: Havells

CMP: Rs 1,099

Market cap: Rs 68,909 crore

Havells India, which was incorporated in 1983, is one of India’s largest and fastest growing manufacturers of electrical components and systems. Its product line includes domestic and industrial switchgears, cables and wires, and consumer durables such as fans, LED lightings and fixtures. Havells entered the large appliances business (ACs and LED TVs) after acquiring Lloyd in February 2017. This gave it direct access to about 10,000 AC dealers and a market share of 12-14 per cent in the highly competitive room AC business.

Over the last decade, Havells has transformed its business profile from being an industrial product-driven business to a consumer-focused business. The latter, which includes home appliances, has recorded a strong revenue CAGR of 21 per cent over FY12-22 led by new product launches and dealer expansions. After the Lloyd acquisition, contribution of consumer business in the topline has increased from 31 per cent in FY12 to 54 per cent by FY22. The industrial product segment, which includes wire, cables and switchgear categories, and contributes about 46 per cent to the overall topline, grew at 10 per cent over FY12-22.

Havells has a strong presence in the organised product category with market share in the range of 6-20 per cent. Though fans and switchgear are highly penetrated categories, Havells has the first-mover advantage in the premium fans and branded switches category. It is also focussing on new launches and increasing penetration in Tier II and Tier III cities. It plans to increase its touch points by 56 per cent to 2.6 lakh over the next five years to increase its presence in the rural markets. Havells spends 4-5 per cent on promotions to gain market share into new categories, such as refrigerators and washing machines. It has also laid down a capital expenditure plan of Rs 700-800 crore in FY23 to expand manufacturing capacities of ACs, washing machines, wire and cables.

Havells has reported strong revenue, earning a CAGR of 14-15 per cent over FY12-22, with double-digit Ebitda margin of 11-13 per cent. However, its recent performance in Q2FY23, was negatively impacted by high-cost inventory, leading to a fall in gross margin. In addition, advertisement expenses climbed back to pre-Covid levels that led to Ebitda margin falling to a multi-year low at 7.8 per cent.

The company is expected to see gradual recovery in gross margins from Q3FY23 onwards supported by softening raw material prices and improved product mix. The margin headwinds seem to be temporary concerns, while the structural growth remains intact.

Havells is likely to report strong revenue CAGR of 16 per cent over FY22-24 led by new product launches (in both small and large appliance segments) and dealer expansions. Softening of raw material prices and launch of premium products will result in strong Ebitda margin recovery from H2FY23 onwards (from its lowest Q2FY23 Ebitda margin of 7.8 per cent). As a result, profit after tax (PAT) will register a strong CAGR of 19 per cent over FY22-24. Strong brand, robust debt-free balance sheet (return on capital employed and return on equity at 24 per cent and 20 per cent, respectively) and focus on improving profitability of the Lloyd business makes Havells an attractive stock in the fast-moving electrical goods (FMEG) space.

That said, there are some important key risks. One, Lloyd is a loss-making business on the Ebit level mainly due to focus on market share gains. The delay in the turnaround of Lloyd may hit the overall profitability of Havells. Two, reversal of commodity prices from the current level and delay in price hikes due to rising competition may restrict Ebitda margin expansion going forward. Three, higher inflationary pressure, adverse monsoon condition may hit rural offtake of consumer durables.