Havells India's Q3FY19 results (Outperformer) - Strong market share gains

Q3FY19 standalone result highlights

• Revenues +28% yoy to Rs25.2bn: led by growth across segments largely reflecting volume growth. ECD +34% yoy: strong festive season, sustained mkt share gains especially in water heaters, premiumisation; switchgears +21% yoy: demand growth led by govt. initiatives in electrification & infra, apart from low base; cables +31% yoy: led by industrial demand and infra (~25% volume growth); lighting +29% yoy: led by strong festive season (ex-EESL growth 18% yoy) and revival in EESL & B2G revenues (+196% to Rs506mn); Lloyd +22% yoy: led by growth in non-AC segments as AC revenues were broadly flattish.
• Higher input costs, volatility dent margins: with ex-Lloyd margins falling 167bps yoy to 13.2% on sharp erosion in ECD margins (-410bps on lag in pass through of higher input costs). The mgmt. expects the same to be passed on and see a positive traction on margins in 4Q19. Cables margins fell 130bps yoy on high base & volatility in copper prices; Switchgears fell 90bps yoy largely on high base Lighting margins expanded 100bps yoy on improved revenue mix. Lloyd EBITDA margins fell 120bps yoy to 1.7% on rupee depreciation, growth in low margin non-AC segments and negative operating leverage. Hence, overall EBITDA growth moderated to 10.6% yoy to Rs2.84bn.

Conf call highlights: (1) Havells witnessed contraction in demand post the festive season led by NBFC liquidity issues, (2) ECD seeing traction across categories including domestic appliances, water heaters and water purifiers. Fans too saw a high teen growth in the quarter (3) Havells will pass on higher input costs, which will drive margin expansion in 4Q19 (4) RAC inventory remains high & likely to be normalised in next season (5) RAC plant on track to be commissioned in Apr-19 and aim to increase in-house manufacturing in FY20; (6) Working capital increased on higher inventory for forthcoming AC season in Lloyd and prepayment of foreign suppliers. (7) Capex in the quarter was at Rs1.4bn largely towards AC plant

Impact on financials: FY19/FY20/FY21 EPS maintained at Rs13/15.9/18.7

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 and 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 will likely accelerate earnings (19% earnings CAGR over FY18-20E). Hence, we believe valuations are likely to remain rich (45/38x FY20/21E). Outperformer.