The recent fall in the prices of commodities like steel, aluminum and copper should give some margin relief to many companies. Havells India Limited is an example. The company has increased the prices and that should also improve margins.
“The benefit of softening of raw materials may be visible in the coming quarters. For Havells, we expect year-on-year EBITDA margin recovery to be 13.0-13.5% in H2FY23,” wrote Sonali Salgaonkar of Jefferies India in a report dated July 13.
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However, short-term margin pressure is expected. Commodity costs remained high in the June quarter (Q1FY23). According to Jefferies, EBITDA margin for Q1FY23 may remain low at 12% (-160bps year-on-year).
A potential margin improvement will be a major trigger for the stock, which is down 17.5% from the 52-week high seen in October. “Revenue growth is not a challenge for Havells, given its broad-based white goods portfolio. Though input costs are declining, inflation concerns remain and the company would do well to implement cost control measures to aid margin growth,” said Harshit Kapadia, analyst at Elara Securities (India).
The Lloyd consumer segment, which is important to Havells, is low-margin given the stiff competition. The recent announcement by Havells to set up 1.1 million units per annum air conditioner (AC) facility will be a good thing amidst such high competition. The current capacity is 0.9 million units with a capacity utilization of 90%.
In Q4, AC accounted for 80-85% of Lloyd’s revenue. As demand for ACs eases after the summer, the performance of other products will be a major monitorable for Lloyd’s. The same is true in the case of fans. Accelerating demand for new launches is crucial for the growth of the electric consumer durables segment. Moreover, the lighting business will see growth with the improvement in electrification, especially in rural areas.
Meanwhile, in Q1, Havells’ revenue growth will be partially aided by last year’s lower base. Industry checks at Jefferies suggested good uptake for strong heat-powered durables and appliances at the start of the first quarter. However, demand has moderated from the second half of May with the onset of monsoon and inflationary pressures in specific regions.
Shares of Havells trade at high valuations. According to Bloomberg, the stock trades at 45 times FY24 estimated earnings. Given the inflationary environment and the low margin profile of the Lloyd consumer segment, large near-term upsides may be limited.
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