Havells has corrected ~30% year-to-date. While near-term demand could be impacted by lockdown due to the coronavirus pandemic and challenging macro, the medium-term catalysts remain robust.
We view Havells as a structural growth story, aided by a varied product array, strong brand equity and market share, new launches, multi-channel distribution (150,000 retailers), net cash B/S (~Rs 16 billion in FY20e) and sturdy return ratios (RoCE ~25%, RoE ~20%). Lloyd is amidst a revamp as well, with many corrective steps. Buy.
India’s Covid lockdown could impact discretionary spending, construction & projects.
We pencil a subdued FY21e (on a weak FY20e base), with max impact in Q1FY21 (20-25% of annual sales). Refer Exh 20 for earnings sensitivity. Electricals value-chain is mainly domestic (copper is key RM).
Industry participants are alluding to an existing inventory stock, which could clear once demand resumes (strong summer in India). A near-term catalyst could be festive season (Q3).
Havells’ key moat is a diversified product mix with market leadership across most categories (Exh 2,3). B2C mix is 70-75% now (Exh 10-13). Key medium-term drivers would be strong industry opportunity (Exh 5-9), impetus to housing, infrastructure, rural electrification, low organised penetration across many categories (Exh 4), market share gains, new launches and entrenched distribution.
Havells has consistently launched a slew of products (Exh 14,15) – Water heaters (2012), small appliances (2013), pumps (2013), air coolers (2016), water purifiers (2017) and personal grooming (2018).
Research and development spend is at Rs 790 million in FY19 (+35% y-o-y) was ~1% of sales. Havells expects R&D spend to grow to 3% of net sales.