Havells India missed Q1FY18 sales/ebitda by a huge margin— 22%/35% — due to multiple factors which, in our view, are non-recurring. Key highlights: a) Rs 2bn-plus sales attributable to Lloyds wherein HAVL reported only 50 days of sales, missing the crucial AC season, apart from impact of GST affecting primary off take; and b) weak switchgears/consumer durables sales, sharp rise in low margin cables & wires’ sales and one-time expenses impacted ebitda margin—down 440bps YoY. While we revise down FY18/19E EPS ~2.5% each building in Q1 impact, we expect HAVL to do much better in coming quarters given strong underlying demand outlook and gradual transition of Lloyds’ business. Maintain ‘buy’ with revised TP of `564 (`575 earlier).
HAVL’s (excluding Lloyds) Q1FY18 top line grew 9% YoY, way below >20% estimate as dealers resorted to inventory de-stocking, especially in switchgears/consumer durables. Cables grew a healthy 19% YoY as channel partners advanced purchases fearing price rise. Weak top line, Rs 30million one-time expense related to Lloyds and poor sales mix impacted ebitda margin —tumbled 400bps plus YoY. We expect most of the firm’s segments to pick up going ahead given healthy underlying demand drivers. Hence, we estimate 11% and 20% YoY top line and ebitda growth, respectively, in 9MFY18 led by operating leverage and favourable revenue mix.
We are bullish on HAVL from the medium- to long-term perspective given potent demand drivers and its strong competitive positioning in existing businesses. However incremental value driver will be repositioning of the Lloyds business with focus on product positioning and cost structure. This will improve latter’s inherent OPM to atleast industry average of ~8-10% from current level. HAVL now has a huge target market in place with more than 95% reach in the consumer durable/light electrical industry. Management has potential to drive business growth/profitability as the firm expands its distribution and product portfolio catering to tier III/IV/V cities.