Havells’ near-term demand gloomy


Havells India Ltd’s financial results for the quarter ended December (Q3FY23) were encouraging on some counts. However, that failed to enthuse investors in the stock. Shares of the consumer durables maker have fallen by 4% in the past two trading sessions since the results were announced.

Amid moderating consumer demand, Havells’ Q3 revenue increased by 13% year-on-year (y-o-y) to 4,120 crore, ahead of analyst forecasts. Excluding the Lloyd Consumer business, Havells’ revenue growth stood at 10% y-o-y. Here, the cable division clocked the fastest revenue growth of 17% among all business segments.

Revenue growth was primarily volume driven, said the company. In the earnings call, Havells’ management said excluding Lloyd’s business, the B2B segment saw strong traction aided by demand in industrial and infrastructure. However, the B2C segment, which contributes bulk of revenue (75%, non-Lloyd), remained muted. According to the management, demand from the B2C segment has been moderating amid elevated retail inflation in recent months.

Weak consumer sentiment is likely to continue in the near-term, at least. Given that raw material prices have again started to inch up towards the end of Q3, it would be tough to take product price cuts, which could perhaps aid demand. Havells’ ebitda margin rose sequentially to 10.3% in Q3 aided by easing raw material expenses and liquidation of most of its high-cost inventory in fan, cable and wire segments. To account for rising costs due to changes in rating norms, Havells hiked prices of fans and air conditioners from Q4 onwards, the management said in the earnings call.

Increased ad spends and employee costs were among the dampeners. Ad spends rose 27% y-o-y in Q3. Consequently, Ebitda margin was lower y-o-y in Q3. Ad-spends are at optimal levels, said the management and it doesn’t anticipate any material rise from here on. However, according to analysts at Investec Capital Services (India), with the company’s focus remains on research and development, brand building and attracting/retaining talent, a reversal in this trend is unlikely. “We raise our employee/opex estimates, more-than-offsetting the benefit of RM cost moderation,” the analysts at Investec said.

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

Consequently, several brokerages have trimmed Havells’ earnings per share (EPS) estimates. Investec cut its FY23-25 EPS estimate by 2-5%. Kotak Institutional Equities has lowered FY2023-24 EPS by 5-8%. Kotak’s revised fair value for the stock is 1,075 apiece and it sees a risk of downgrade to consensus EPS amid demand softness and only a gradual improvement in Lloyd margins.

On Friday, the Havells stock closed at 1,153.60 on the NSE. In recent months, the stock has seen a swift fall from glory from its 52-week high of 1,405.55 in September.

“In the last one year, consumer durable stocks including Havells’ saw de-rating due to various factors such as commodity price-led destocking, change in norms for fans and ACs,” said Naveen Trivedi, institutional research analyst at HDFC Securities Ltd. The company enjoys long-term positives in terms of scale and market positioning, but there are concerns on sluggish demand persisting in the B2C business. “This could keep the stock from seeing a fast-paced recovery,” he said.

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