We recently attended Havells India’s (HAVL) analyst meet. Key takeaways are: (i) entrepreneurship culture has empowered management to take bolder organic/inorganic initiatives versus 10 years ago; (ii) aims to nurture 100 Business Leaders over 2-3 years to sustain growth; (iii) independent SBUs with separate P/L, marketing & business heads will not only enhance focus/rigour on each business, but will also help manage expanding operations; (iv) product innovation (SKU ramp-up) & direct reach (2x jump in retailers) key focus areas to garner 2x growth across businesses in 4-5 years; and (v) multi-pronged strategy to ensure Lloyds’ profitability ramp-up over the medium term. HAVL’s organisational/growth framework, in our view, places it favourably to capture upcoming market opportunities and successfully tackle competition. Maintain Buy with revised TP of Rs 640 (Rs 564 earlier) as we roll over to FY20 with a target multiple of 35x FY20 EPS.
Reinforcing growth framework; sharpening focus on retail channel
Management stated that the entrepreneurship culture at HAVL has led to bolder & swifter decisions in the organisation, which has spurred growth. Also, it is planning to nurture 100 Business Leaders in 2-3 years to sustain the momentum. With growing importance of retailers (60% of revenue), HAVL is targeting 2x jump in their retail distribution network to 2.0 lakh over FY18-20.
Lloyd: medium-term ramp-up in profitability
HAVL aims to align Lloyd’s OPMs with industry average of 9-10% over medium term, (implying 20% PAT CAGR) which it envisages to achieve via: (i) upcoming integrated consumer durables manufacturing hub at Gehlot (Neemrama); (ii) reduction in seasonality of AC revenues (50% of Lloyd revenue); and (iii) improved brand perception.
Outlook & valuations: Growth framework in place
Management’s capability to handle growth as each SBU expands riding tailwinds like low penetration, rising income levels/premiumisation etc., remain key monitorables. Short/medium term triggers are profitability ramp-up in Lloyd and pick-up in currently struggling switchgear/cables business. We maintain ‘BUY/SO’ with a TP of Rs 640.
We expect Havells to continue to grow its domestic business on the back of strong product portfolio. The company is currently one of the fastest growing fan brands in the Indian market with market share at ~15%. In the switchgear market, HAVL is the market leader in the low voltage segment with 28% share. In India, the company has a network of 7,000 distributors servicing 100,000 retailers/ touch points. HAVL has been highly successful in bolstering market share of existing products along with launching new products. Recent buyout of Lloyd brand imparts access to a high growth larger white good market.
Key risks: (i) Slowdown in domestic business; increased competition could put pressure on margin; (ii) slowdown in key consumer segments of construction and industrial capex; (iii) slowdown in power T&D could impact the demand for its cables and wires business; (iv) slower than expected revenue growth and profitability turnaround in Lloyd’s consumer business poses risk to estimates and valuations.