MOSL: HAVELLS INDIA (Neutral)-Results above estimates-margins hit by demonetization

​Havells India: Results above estimates; margins hit by demonetization

(HAVL IN, Mkt Cap USD4.7b, CMP INR514, TP INR480, 7% Downside, Neutral)

• 4QFY17 operating performance meaningfully above expectations: Revenues grew 17.2% YoY to INR17.1b in 4QFY17, exceeding our estimate of INR15.9b. Operating profit of INR2.3b (+4% YoY) too was meaningfully above our estimate of INR1.8b. Similarly, adj. PAT of INR1.7b (+5% YoY) came in higher than our estimate of INR1.3b. FY17 sales grew 15% YoY to INR61.4b, EBITDA margin at 13.4%(-60bps YoY) and PAT at INR6b(+17% YoY)
  
• Sales growth driven by demand revival across segments: The revenue beat was primarily driven by demand revival across product categories. Cables & Wires revenue grew 12% YoY to INR7.6b, driven by higher commodity prices. Electrical Consumer Durables revenue rose 28% YoY to INR4.0b, led by strong growth in Water Heaters and Fans. Switchgear revenue rose 15% YoY, driven by growth in Switches. Domestic lighting ex CFL grew 29% YoY. Domestic business registered 19% growth, while exports declined 9% YoY due to lower exports to Sylvania.
  
• Margins impacted by support schemes for dealers and higher raw material prices: Gross margin contracted 200bp YoY to 39% on account of (1) schemes launched for dealers (albeit are gradually being withdrawn) to counter the demonetization impact and (2) deferred price hikes over the quarter to factor in higher raw material costs. EBITDA margin shrunk 177bp YoY to 13.5%, exceeding our estimate of 11.4%, driven by lower other expenses. Adspend stood at 2.3% of sales (2.6% in 4QFY16).