Inadequate price hikes hit Havells’ Q4 margin


Havells India Ltd saw growth across all its businesses in the March quarter (Q4FY22) leading to a nearly 33% year-on-year (y-o-y) growth in standalone revenues to 4,417 crore. The Lloyd consumer segment did particularly well with revenues rising by 62% to 959 crore, helped by the onset of the summer season and the pent-up demand. In the post-earnings call, Havells said air conditioners (AC) constituted about 80-85% of Lloyd’s revenue in Q4.

However, the profitability of the segment was a sore point. Lloyd’s contribution margin was low at 5.2% compared with 13.3% in Q4FY21 as it was impacted by sustained competitive intensity and the inability to pass on the entire increase in commodity costs. The segment’s earnings before interest and tax (Ebit) margin was negative. Price increases in the lighting and fixtures segment were also insufficient.

Steady growth

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Steady growth

As such, all big segments saw drops in Ebit margin except electrical consumer durables (ECD), which saw a 200 basis points (bps) y-o-y rise. One basis point is 0.01%.

There was a renewed cost escalation in commodities because of the Ukraine crisis. Overall, Havells’ Ebitda (earnings before interest, taxes, depreciation, and amortization) margin fell by 340 bps y-o-y to 11.8%. Pre-tax profit grew at a slower pace of 4.5% to 475 crore.

With the harsh summer season, Lloyd is likely to see good demand for air conditioners. As volumes grow, the product mix is expected to dilute the overall margin profile of Havells as Lloyd’s margins are lower.

However, the company expects the overall margin to gravitate to normal levels eventually.

In the call, the management said that commodity costs have come down a bit lately and if they drop more, price hikes would not be required.

However, at current cost levels, price hikes are needed in certain categories such as air conditioners, fans, lighting, and appliances, the management said. In FY22, the company hiked prices across segments. In the Lloyd segment, price increases stood at 10%.

Meanwhile, Havells’ shares gained 25% in the past one year, but they are down by nearly 11% so far in CY22. Havells is likely to benefit from the shift in consumer preference from unorganized to organized in the near term.

“We expect Havells to report a strong uptick over the next three years, led by a recovery in consumer sentiment and government’s push for infrastructure development,” said analysts at Reliance Securities in a first-cut note.

While the outlook for its segments is healthy, there are offsetting factors. “Key risks to the stock include inability to pass on rising costs in a timely manner which could impact margins and overall slowdown in demand impacting B2C categories such as ECD and durables,” said the results first-cut note by Jefferies India.

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