Havells: Strong growth in B2B biz

Electrical appliance maker Havells reported revenue growth of 12.6% y-o-y in Q3FY23. However, Ebitda and PAT were down 3.8% and 7.3% y-o-y. While gross margin improved 75bps y-o-y, higher staff cost and other expenses as percentage of sales pulled the Ebitda margin down by 175bps y-o-y. PAT margin also contracted to 6.9%.

While B2C sales were relatively muted, strong B2B revenues helped Havells report revenue growth of 12.6% y-o-y. The revenue growth was largely volume led. While softening of raw material prices led to higher gross margins y-o-y, we note the company has increased ad-spend and staff cost as percentage of sales, which impacted Ebitda margin. Lloyd continues to be a loss making venture. While we expect air conditioner business losses to shrink, we model losses of washing machines and refrigerators to increase. Price hikes of 3-4% in fans and air conditioners in Q4FY23 and correction in input prices will likely improve margins in H1FY24.

We remain structurally positive on Havells due to its competitive advantages and growth opportunity in durables. We model Havells to report revenue and PAT CAGR of 17.5% and 17.9% over FY22-FY25E. However, we cut earnings estimates to factor in muted consumer demand and subdued 9MFY23 performance. Maintain BUY with DCF-based TP of Rs 1,550.

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Havells managed the transition to BEE norms in fans as there were no hiccups in sales and trade inventory. While there is some excess inventory in trade for low priced fans, the trade inventory is lower for premium fans. Havells has raised prices of fans by 3-4%.

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While the segment reported revenue growth of 29.9% in the non-seasonal quarter, Ebit margin was -9.8% Havells moderated adspends to 5-6% of sales during Q3FY23 vs. earlier 9-10% of sales. The company will likely take a price hike of 3-4% in the segment in Q4FY23. We remain positive on the company’s business model due to strong moats and growth opportunities.