Dismal outlook for Havells in the near future

Havells Q3 revenue up 13% year-on-year (yoy) amid softening consumer demand 4,120 crore, ahead of analyst estimates. Excluding the Lloyd consumer business, Havells’ revenue growth stood at 10 per cent year-on-year. Here, the cable division registered the fastest revenue growth of 17% among all business segments.

The company said the revenue growth was primarily driven by volume. In the earnings call, the management of Havells said that excluding Lloyd’s business, the B2B segment witnessed strong traction due to demand in industrial and infrastructure. However, the B2C segment, which contributes heavily to revenue (75%, non-Lloyd), remained muted. According to the management, demand in the B2C segment has slowed down in recent months amid rising retail inflation.

Weak consumer sentiment is likely to continue, at least in the near term. Given that raw material prices started rising again at the end of the third quarter, it will be harder to cut product prices, which could perhaps help demand. Havells’ EBITDA margin rose sequentially to 10.3% in Q3, aided by reduction in raw material costs and liquidation of most of its high-cost inventory in the fans, cables and wires segments. The management said in the earnings call that Havells has increased the prices of fans and air conditioners from the fourth quarter keeping in view the rising cost due to change in rating norms.

Advertising spending has increased and staff costs have come down. Ad spend grew 27% year over year in Q3. As a result, EBITDA margin was down year-over-year in the third quarter. The management said, ad-spends are at optimum level and it does not expect any material growth from here. However, the trend is unlikely to reverse given the company’s focus on research and development, brand building and attracting/retaining talent, according to analysts at Investec Capital Services (India). “We raise our employee/opex estimates, more than offset by the benefit of RM cost moderation,” said Investec analysts.

Meanwhile, Lloyd’s remains a pain point and continues to post losses on its earnings before interest and taxes (Ebit) level. Lloyd’s still has some high-cost inventory and is seeing intense competition in the air conditioner space. However, the margin revival at Lloyd may not happen in a hurry.

As a result, several brokerage firms have cut Earnings Per Share (EPS) estimates for Havells. Investec cut its FY23-25 ​​EPS estimate by 2-5%. Kotak Institutional Equities cuts FY2023-24 EPS by 5-8%. The revised fair value of Kotak’s stock is 1,075 each and it sees a risk of a downgrade in consensus EPS amid softening demand and only a gradual improvement in Lloyd margins.

Shares of Havells on Friday 1,153.60 on the NSE. In recent months, the stock has seen a sharp decline from its 52-week high 1,405.55 in September.

Naveen Trivedi, Institutional Research Analyst, HDFC Securities Ltd. said, “There has been downgrade in consumer durable stocks including Havells in the last one year. The company enjoys long-term positives in terms of scale and market position, but concerns remain over sluggish demand in the B2C business. “This could prevent the stock from seeing a rapid recovery,” he added.