Havells India's Q2FY18 results (Neutral) - Weak demand offset against strong margin expansion
Q2FY18 standalone result highlights
- Adj PAT +17% yoy to Rs1.7bn: led by consolidation of Lloyd business as also strong margin expansion.
- Revenues +22% yoy to Rs17.8bn; ex-Lloyd growth muted: at 3.8% yoy to Rs15.1bn led by 21% yoy growth in lighting (38% yoy growth in LED). Revenue growth in ECD (+4% yoy; slow re-stocking), Cables (+2% yoy; volume decline), and Switchgears (–5% yoy; weakness in housing) was muted. We note that revenues adjusted for excise has grown by 7% yoy. Lloyd revenues were at Rs2.7bn (+11% yoy) due to lean season.
- Sharp margin expansion: with ex-Lloyd OPM at 15.8% (+180 bps yoy) and Lloyd OPM at 7% (+220bps qoq). Margin improvement was led by higher cables margins (+570bps yoy; benefit of low cost inventory, higher share of domestic cables) and lower ad spend (-29% yoy ex-Lloyd, 2.3% of revenues, typically 3-3.5% of revenues) as also improved revenue mix towards LEDs and domestic wires. Hence, EBITDA +26% yoy to Rs2.57bn.
Conf call highlights: (1) GST re-stocking slower than expected; it is likely that channel may run leaner going forward (2) Festive demand has been weaker than anticipated; GST transition issues constrained recovery (3) Prices increases in cables to offset higher commodity prices, cable margins to normalise to ~14% levels (4) Cutback on ad spend in July/early Aug due to weak demand on GST transition, has been normalized since (5) Rs2bn annual capex in FY18/FY19
Key positives: Strong growth in lighting; margin improvement in cables
Key negatives: Muted demand impacting revenues (ex-Lloyd)
Impact on financials: FY18/FY19 EPS upgraded by 5.5/2.7% to Rs10.4/12.8
Valuations & view
Havells has continued its focus on enhancing brand value, new product launches and deep channel engagement. The Lloyd acquisition is further catapulting Havells into a strong growth segment. However, near term headwinds remain on weak demand led by GST implementation. We believe valuations of 42x FY19E earnings adequately capture the positives (16% earnings CAGR over FY17-19E) and further re-rating will be driven by Havells’ ability to improve Lloyd’s performance. Neutral.
Havells India is a Fast Moving Electrical Goods (FMEG) company based in India. Co. is active across a variety of market segments with a wide spectrum of products, including Industrial & Domestic Circuit Protection Devices, Cables & Wires, Motors, Pumps, Fans, Modular Switches, Home Appliances, Electric Water Heaters, Power Capacitors, CFL Lamps, Luminaires for Domestic, Commercial and industrial Applications. Co.'s global brand names include Havells, Crabtree, Sylvania, Concord, Luminance and Standard. Co. maintains a global network consisting of 91 branches & representative offices in over 50 countries. Co.'s manufacturing plants are loacted in India, Europe, Latin America, Africa & China.
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