Havells India's Q4FY19 results (Outperformer) - Muted quarter, gradual revival likely

Q4FY19 standalone result highlights

• Revenue growth muted at 9% yoy to Rs27.5bn: led by sluggishness in demand on extended winters (impacting fans, ACs), NBFC liquidity issues and elections. ECD +9% yoy: was muted due to weak fan revenues (~70% of segment); switchgears +11% yoy: led by infra & electrification; cables +17% yoy: led by sustained industrial and infra led demand; lighting +18% yoy: on EESL (+216% to Rs504mn) while ex-EESL was muted (9% yoy; weak B2B sales); Lloyd fell 9% yoy to Rs5.3bn: led by extended winter and liquidation of inventory.
• Negative operating leverage dents margins: with ex-Lloyd margins falling 160bps yoy to 13.7% on erosion in lighting (-340bps yoy; lower growth in higher margin B2B segment); Switchgears fell 67bps yoy on high base; ECD margins fell 100bps yoy on adverse revenue mix; Cable margins +40bps yoy as commodity prices stabilized and benefit of positive operating leverage. Lloyd EBITDA margins fell 900bps yoy to 3.4% on rupee depreciation, higher custom duty and negative operating leverage. Hence, overall EBITDA declined 14.2% yoy to Rs3.1bn.
• FY19 PAT +13% yoy to Rs7.9bn: Revenues +24% yoy to Rs100.6bn led by strong growth in ECD and cables & full consolidation of Lloyd. However, OPM fell 100bps to 11.9% on higher RM & rupee depn driving 14% EBITDA growth. Ex–Lloyd: Revenues +22%, OPM -50bps to 13.4%, EBITDA +17%.
• Conf call highlights: (1) 1Q20 trends - strong summer is driving robust growth in products like ACs and fans. However, other segments have not yet seen revival and expect a gradual uptick through the year (2) FY20 margin expansion to be led by both operating leverage and price hikes are gradually undertaken (Lloyd not yet taken hikes); (3) RAC plant on track to be commissioned 1Q20 and aim to increase in-house manufacturing in FY20; (4) Working capital increased on higher inventory for upcoming AC season in Lloyd and prepayment of foreign suppliers. (5) FY20 capex to be ~Rs6bn towards capacity for fans, switchgears, cables etc. and Lloyd plant.
• Impact on financials: FY20/FY21 EPS cut by 3.6%/2.3% to Rs15.3/18.3

Valuations & view

FY19 margins and PAT have been largely hit by weak demand and higher input costs in Lloyd, while core earnings have seen strong momentum and 4Q weakness likely to see revival. However, Havells’ sustained focus on enhancing brand value, new product launches & deep channel engagement has driven market share gains across products (20%+ revenue growth). Havells is fortifying its competitive position by focusing on technology, strengthening channel and addressing untapped mkts. On the other hand, commissioning of Lloyd’s factory will aid its margins over FY20-21E. A culmination of these factors will likely drive earnings (21% earnings CAGR over FY19-21E). Hence, we believe valuations are likely to remain rich (40x FY21E). Outperformer.