Havells India's Q3FY18 results (Outperformer) - Strong performance, demand outlook improving

Q3FY18 standalone result highlights

• Adj PAT +29% yoy to Rs1.7bn: led by margin expansion. 
• Revenues +31% yoy to Rs19.7bn: with ex-Lloyd growth at 11% yoy to Rs16.7bn led by 21% yoy growth in lighting (strong traction in B2B) and 26% yoy growth in ECD (low base, uptick in water heaters, premium fans, etc). However, revenues were muted for cables (+3% yoy; domestic wires 17% volume growth, industrial cables saw decline) and Switchgears (+4% yoy; driven by switches as housing weakness impacted demand). We note that revenues adjusted for excise has grown by 14% yoy. Lloyd revenues were at Rs2.9bn (+16% yoy).
• Sharp margin expansion: with ex-Lloyd margins +250bps yoy to 15.2% led by higher cables margins (+280bps yoy; higher share of domestic wires, cost efficiencies) and ECD (+510bps; low base, positive op leverage, higher premium products). EBITDA +38% yoy to Rs2.62bn.

Conf call highlights: (1) GST related issues settled; benefits of cut in GST rate in mid-3Q18 yet to be seen, gradual shift likely towards organised mkt (2) Overall demand outlook is improving (3) Lighting seeing strong traction in B2B segment led by Havells focus on the segment (EESL ~5% of segment revs) (4) Industrial cables impacted in post GST era with govt ordering slow and higher tax rate,  GST cut likely to revive volumes (5) Cable margins have structurally improved led by cost efficiencies & higher proportion of domestic wires (6) ECD seeing traction across categories and now emerged as leader in premium fans, no 3 in water heaters. (7) Lloyd margins impacted with transition to new rating (likely old inventory sales); price hikes taken to pass on impact of table rating and higher RM prices. 

Key positives: Strong growth in ECD, lighting; cable margin expansion

Key negatives: Muted margins in Lloyd

Impact on financials: FY18/FY19 EPS upgraded by 3%/1% to Rs10.7/13.3

Valuations & view

Havells has continued its focus on enhancing brand value, new product launches & deep channel engagement. Havells is fortifying its competitive position by focusing on technology, strengthening channel & addressing untapped mkts. Lloyd acquisition is further catapulting Havells into a strong growth segment. A culmination of these factors & shift to organised players will accelerate earnings (20% earnings CAGR over FY17-20E). Hence, valuations are likely to remain rich (33x FY20E). Outperformer.