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MOSL: HAVELLS INDIA (Neutral)-Revenues disappoint-cost rationalization supports margins

(HAVL IN, Mkt Cap USD5.3b, CMP INR600, TP INR660, 10% Upside, Neutral)

Weak demand outlook to weigh on revenue growth
** Havells' weak operating performance in 3QFY20, led by 10% overall revenue decline, has led to the third consecutive quarter of cut in earnings estimates.

** While the base is favorable, Havells' should regain double-digit growth in FY21, if improvement in the liquidity scenario for overall consumption revival is supportive. Moreover, Lloyd's performance is a key monitorable.

Havells core portfolio revenue declines 9%; AC business sees growth
** Overall, revenues declined 9.9% YoY to INR22.7b (v/s 14% below est.). Revenue miss was largely due to weakness in Havells' core portfolio (i.e. ex-Lloyd business), which declined 9% on account of decline in core portfolio. This can be attributable to (a) weak consumer sentiment, (b) economic slowdown, (c) weak industrial demand due to muted capex, (d) dealer de-stocking on liquidity crunch, and (e) high base of last year (3QFY19 revenue growth was 29% in core portfolio).

** Lloyd's revenue was down 15.9% YoY to INR3b. However, we note that the decline is attributable to price erosion in the TV segment. In the AC business, the company has witnessed low double-digit growth, a key positive after dull performance in the last summer season.

Cost-cutting arrests margin decline; lower tax rates lead to in-line PAT
** Gross margins improved 190bp to 39.4% during the quarter.

** On account of demand slowdown, Havells resorted to cost rationalization. Thus, employee cost declined 8.4% QoQ to INR2.2b. Overall, employee expense grew 4% YoY, the slowest growth rate in many quarters.

** Ad-spends declined 15% YoY to INR773m on cut-down in discretionary-related ad-spends.

** Overall, EBITDA margin came in at 11.8% (+10bp YoY) v/s expected 11%.

** PBT declined 20% YoY to INR2.3b and was 12% below our expectation. On account of deferred tax re-assessment (spread over last 3 quarters of FY20), effective tax rate came in at just 13.2%. As a result, adj. PAT grew 2.4% YoY to INR2b and was in line with our estimate.