Havells India Stock Research Report

Strong B2C growth; Rural off-take and margin revival likely in H2FY25

Havells reported strong performance in B2C segment with 20% revenue growth YoY. Broad-based growth across segments led to strong revenues but higher operational costs weighed on margins. Takeaways: (1) Higher consumer demand led to strong double digit revenue growth in key segments of ECD, cables and Lloyd. Weakness in industrial switchgear business impacted overall segmental growth (+3.3% YoY). (2) Higher ad spends (due to the festive season) and staff cost weighed on EBITDA margin. With normalisation in these costs, EBITDA margin may recover in H2FY25E. (3) Lloyd’s segmental growth (+18.5% YoY) was driven by non-RAC businesses. (4) Capex intensity may continue as the company aims to spend INR 19bn over the next two years. We cut FY25/26E earnings by 5.6%/3.1% to factor in Q2FY25 result. At our DCF-based revised TP of INR 2,120, the stock trades at 68x FY26E EPS and 56x FY27E EPS. We remain positive on Havells led by its diversified business model, established brands and sub segmentation strategy. Maintain BUY.

Q2FY25 result review

Havells reported revenue, EBITDA and PAT growth of 16.4%, 0.5% and 7.7%, respectively, YoY. Gross margin expanded 46bps YoY led by lower input prices, in our view. However, EBITDA margin contracted 131bps YoY as benefit of lower commodity cost was completely offset by higher ad spend and other expenses. Carryover of high-priced inventory of Cables & wires and lower margins in Switchgear impacted overall margins. Ad spend as a % of net sales at 2.9% (2.9% in H1FY25 vs 2.5% in H1FY24) was 60bps higher than its fouryear average. Other income grew 77%/20.1% YoY/QoQ led by claim receivable of INR 170.5mn.

Segment-wise performance

Cables and wires segment posted strong revenue growth of 22.8% YoY. The company registered 15% YoY volume growth in cables and wires segment. Switchgear revenue remained flat (+3.3% YoY). While switches and domestic businesses led the growth, the lag in industrial switchgear segment impacted overall segmental growth. High base of Q2FY24 impacted the revenue growth of industrial switchgear segment. Lloyd registered strong 18.5% YoY revenue growth, with non-RAC segment posting relatively higher revenue/volume growth than core RAC segment. However, it incurred losses at EBIT level of INR 243mn (loss of INR 753mn in Q2FY24). ECD (electrical consumer durables) segment maintained its strong growth traction of past two quarters in Q2FY25 with 16.5% YoY revenue growth. Most sub-segments reported strong growth led by demand pick up ahead of festive season. Lighting revenue marginally declined 1.2% YoY

Capex intensity is likely to continue

Havells plans to invest INR 19bn until FY26. The company had average capital outlay of INR 4.5bn over the past five years, indicating 2x capex spend over the next two years. It has spent INR 3.2bn of INR 10bn proposed for FY25. We reckon strong capex investments may drive growth for the company over FY25 27E.

Lloyd – non-RAC segments are gaining significance

Lloyd’s double digit revenue growth (+18.5% YoY) was largely driven by non-RAC segment in Q2FY25. LED panels, refrigerators and washing machines posted relatively better growth than RAC segment. While RAC segment continues to be the major revenue driver for Lloyd segment, the contribution from other segments is inching up. The segment reported losses at EBIT level following profits in past two quarters. However, the company expects the margins to improve structurally led by (1) costsaving initiatives and (2) operating leverage.

Maintain BUY

We model Havells to report revenue/PAT CAGR of 15.4%/22.7% over FY24–27E and RoCE moving up to 19% in FY27E, from 15.1% in FY24. We remain positive on Havells led by its established competitive advantages and growth opportunity in white goods and durables. Maintain BUY with DCF-based revised TP of INR 2,120 (earlier: INR 2,160; implied P/E of 68x FY26E EPS).