Havells India's Q3FY20 results (Outperformer) - Weak revenues impacts earnings

Q3FY20 standalone result highlights

• PAT muted at Rs2bn (+2.4% yoy): The miss in estimates was led by 10% yoy decline in revenues to Rs22.7bn. Margins were flat yoy (+10bp) to 11.8% leading to 9.2% yoy drop in EBITDA to Rs2.7bn. Lower other income (-27% yoy), higher depreciation (+56%) and finance cost (+48%) further impacted earnings, which was partially offset by lower tax rate.
• Revenue weakness across segments: led to a 9% yoy decline in core-Havells revenues at Rs19.7bn. ECD growth was muted at 1% yoy on muted consumer sentiment, delayed winters (impacted geyser revenues) and de-stocking by dealers. Further, liquidity challenges and slowdown in industrial and infrastructure segment impacted demand for industrial cables, professional lighting (street lighting) and industrial switchgear, impacting cables (-13% yoy; ~5% lower RM impact), lighting (-18% yoy;  -8% ex-EESL) and switchgear (-5.5% yoy) revenues. Lloyd revenues fell 16% yoy due to industry wide disruption in LED TV panels, while AC saw traction in revenues with c.10-12% growth.
• EBITDA margins were stable at 11.8%: (+8bps yoy) as core Havells contribution margins expanded 88bps yoy to 26% on favourable product mix, cost efficiencies (lower employee & ad spend). However, Lloyd contribution margins fell 703bps to 7.8% on negative operating leverage, new AC plant costs and decline in TV margins.
• Conf call highlights: (1) B2B business (30% of revs) impacted severely on delay in project execution, lack of liquidity, etc; (2) B2C sales were relatively stable with growth being restricted on de-stocking by dealers; Further, delay in inventory build-up for fans for upcoming season also impacted revenues; (3) independent reports reflect no mkt share loss for Havells in 9M20 across categories; (4) Havells has not resorted to discounts or easy credit to push sales (5) Low inventory levels with dealers and improved off take trends over the past 2-3 weeks is expected to drive improved growth in B2C (5) Lloyd’ new RAC plant has resulted in cost control (75% in-house mfg vs imports earlier), which will drive competitive pricing vs peers. Further product portfolio being expanded in washing machines and refrigerators being launched in 1QFY21 (outsourced mfg).

Impact on financials: FY20/FY21 earnings cut by 5/7% to Rs12.7/14.7

Valuations & view

FY20 is a weak year for Havells due to decline in B2B revenues and muted consumer sentiment restricting growth in B2C segment. On the other hand, Lloyd has seen a disappointing performance on disruption in non-AC segments (~30% of revenues) and AC mkt share loss. Havells has focussed on cost efficiencies, deepening channel engagement, apart from new products. Concurrently, the new RAC plant and product expansion with revamped distribution would enable Lloyd to compete more effectively. Accordingly, while near term earnings are likely to be muted, we believe Havells is well positioned over the medium term to gain mkt share. We believe valuations are likely to remain rich (41x FY21E). Outperformer.