Havells India's Q1FY20 results (Outperformer) - Lloyd plays spoilsport; core business seeing gradual uptick

Q1FY20 standalone result highlights

• PAT falls 17% yoy to Rs1.74bn: led by sharp drop in Lloyd performance. Revenues +5% yoy to Rs27bn, OPM declined 220bps to 10.2% driving 14% yoy drop in EBITDA to Rs2.76bn. Higher depreciation & tax impacted PAT.
• ECD (+24% yoy) drives core-Havells revenues: with 9% yoy growth to Rs20.6bn as fans (mid teen growth, summers) & other appliances (geysers, coolers, water purifiers, etc) saw strong growth. However, other segments (switchgears +0.5%yoy; cables +4%; lighting +8%) were muted on weak B2B revenues on project execution slowdown (elections) and liquidity crunch. Ex-Lloyd, OPM fell 60bps yoy to 12.9% on negative op. leverage, higher costs (R&D, people, technology, brand, etc) and adverse product mix.
• Lloyd sees sharp deterioration: with 8% yoy revenue drop to Rs6.5bn led by steep decline in TV sales (high competitive intensity by Chinese players). Moreover, AC revenues too saw a marginal drop indicating market share loss. The drop was led by dealer rationalisation as the mgmt. is transitioning the brand from economy to a mass premium brand. The sustained ad spend (10% of sales vs 6-7%), negative op. leverage, higher import duty & rupee depn eroded Lloyd margins by 790bps yoy to 1.4%.

Conf call highlights: (1) Lloyd’s transformation to mass premium brand will drive gradual improvement in revenues (2) Extending Lloyd offering to refrigerators apart from existing TV and Washing machines; pain in TV to sustain (3) Lloyd ad spend to normalise and RAC mfg plant (now operational) will drive 75% in-house mfg (vs nil now) by FY21 driving gradual uptick in profitability. (3) Havells investment towards R&D, brand building, distribution, manufacturing, people, etc. specifically in Lloyd is now peaking and revenue growth would drive positive op leverage benefits (4) Expect demand for core Havells to improve in 2H led by resumption in projects, particularly for govt projects (5) Increased retail reach in rural from 25K to 60K (6) seeing some signs of movement to organised players in areas such as wires (saw growth despite housing slowdown)

Impact on financials: FY20/FY21 EPS cut by 9.8%/9.1% to Rs13.8/16.6

Valuations & view

Lloyd performance in the quarter has been muted led by market share loss. Havells is building the business from a long term perspective (brand repositioning, revamping distribution, expanding product portfolio, mfg plant, etc) and gains would be a key monitorable going ahead. Havells’ core business was weak due to slower B2B traction and would see a gradual revival. The sustained focus on enhancing brand, new product launches, technology, deep channel engagement, addressing untapped mkts, etc should continue to fortify its competitive positioning and drive market share gains. Accordingly, we believe earnings will grow at 15% earnings CAGR over FY19-21E and hence, valuations are likely to remain rich (40x FY21E). Outperformer.