Havells India's Q2FY19 results (Outperformer) - Strong revenue traction, margins disappoint

Q2FY19 standalone result highlights

• Adj PAT +4% yoy to Rs1.78bn: on robust revenue growth
• Revenues +23.3% yoy to Rs21.9bn: with ex-Lloyd growth at 28% yoy to Rs19.3bn led by ECD (+42% yoy; low base, continued market share gains in premium fans, traction in new products), switchgears (+28.3% yoy; demand growth in industrial, exports, residential & govt. led by electrification) and cables (+35% yoy; +20% vol growth). Lighting revenues declined 0.4% yoy due to negligible revenues from EESL (ex-EESL revenues +18% yoy, volumes +30%). Lloyd revenues fell 4% yoy at Rs2.6bn due to adverse season and higher channel inventory.
• Higher input costs, volatility dent margins: with ex-Lloyd margins falling 290bps yoy to 12.9% on sharp erosion in cables margins (-590bps yoy; high base, volatility in copper prices, lag in pass through of higher costs), ECD (-50bps yoy) and switchgears (-280bps yoy) on high base. Lighting margins improved by 260bps yoy on improved revenue mix (lower EESL revenues). Lloyd margins (-370bps yoy to 3.3%) were impacted on rupee depreciation and negative operating leverage. Hence, EBITDA was flat yoy to Rs2.58bn.

Conf call highlights: (1) Cables contributed the most to margin erosion in the quarter and pass through of higher input price will drive margin bounce back to 15-17%, (2) RAC assembly plant is on track to be commissioned in 4QFY19 and aim to increase in-house manufacturing to 60-70% in FY20; (3) ECD seeing traction across categories including appliances, water purifiers, personal grooming (4) Mkt share in fans increased during the quarter including premium fans. (5) Lighting product prices are falling in line with decline in costs.

Impact on financials: FY19/FY20 EPS cut by 6% each to Rs13/15.7

Valuations & view

Havells’ sustained focus on enhancing brand value, new product launches & deep channel engagement is driving market share gains across products. Havells is fortifying its competitive position by focusing on technology, strengthening channel & addressing untapped mkts. While Lloyd is likely to see near term pain on higher input costs, the impact is likely to be transient till its own factory is commissioned.  A culmination of these factors and shift to organised players will accelerate earnings (19% earnings CAGR over FY18-20E). Hence, we believe valuations are likely to remain rich (37x FY20E). Outperformer.