Cables & wires and switchgears posted low single-digit value growth, which adjusted for commodity price rise, seems to have de-grown in Q2FY18, purely attributed to deferred re-stocking by channel partners.
Havells India (Havells) posted better PAT, despite the top-line miss, led by improved OPM across businesses. Key highlights: (a) 12-13% price hike in cables and wires, reversal of promotional schemes post GST/DeMon and better profitability in Lloyd led to 8-9% EBITDA beat; (b) Re-stocking was poor as dealers deferred buying leading to 12-14% top-line miss; and (c) While management expects low double-digit revenue growth in FY18, they were more confident about profitability, especially in Lloyd business. While we trim our FY18/19E top-line by 8.5/4% to reflect channel deferments, impact on PAT is contained at 6/0.5%. Despite near-term growth challenges, we believe Havells is the best play on rising penetration/premiumisation in durables/electrical space and estimate 33% earnings CAGR over next 2 years. We maintain ‘Buy’ with TP of Rs 564.
Cables & wires and switchgears posted low single-digit value growth, which adjusted for commodity price rise, seems to have de-grown in Q2FY18, purely attributed to deferred re-stocking by channel partners. However, in consumer durables and Lloyd segment growth was slightly lower at 11% y-o-y despite the festival quarter this year. Amid weak volumes, Havells posted strong EBITDA margin at 14.5%, which implies benefits from price hike (in cables business), and reversal of trade schemes. EBIT margin of Lloyd, which jumped by 480bps q-o-q and far exceeded street’s/our estimates, was driven by consolidation/efficiency benefits.
Given strong core demand outlook for Havells’ traditional segment, we expect HAVL to post 15-20 % top-line growth over FY17-19E. However, scope for improvement in Lloyd’s profitability remains a key trigger in near to medium term as Havells fully derives benefits of change in business model versus Lloyd’s push model. We believe Havells with its best coverage of the consumer durables/electricals market is well geared to reap the benefits of rising penetration/premiumisation over next 3-5 years. Moreover, with rising focus on tier-III/IV cities, we expect Havells to post better-than industry growth going ahead. At CMP, the stock trades at 37x FY19 PE.
