Hope of demand recovery drives gains for Havells' stock

Margin performance will be an additional trigger going ahead

After a sharp 23 per cent correction since the start of the year, the stock of India’s largest fast moving electrical goods (FMEG) maker has made a smart recovery. The Havells India scrip is up 16 per cent since mid-March on expectations of demand recovery and attractive valuations. Amid multiple challenges for the FMEG space, brokerages are betting on market leaders which are either dominating their categories or are competitively positioned. Havell’s (top three position across most categories barring air conditioners) has seen the highest earnings upgrades for FY23 across larger companies in this space. 

Say Amit Mahawar and Angad Saluja of Edelweiss Securities, “For Havells, the recent correction coupled with robust business positioning in the electrical segments impart strong business resilience, leading us to upgrade its rating and portfolio weight.”

While its product and distribution expansion has helped it to significantly ramp up in market share in electrical business (switchgears, wires, lighting), one segment which the street will keenly track especially from the profitability viewpoint is the cooling business which it operates under the Lloyds brand. Amid an hypercompetitive environment, the segment was the biggest drag on the company’s margins. Higher inventories after two consecutive years of a peak season washout made it difficult to pass on costs. The revival in demand in this season and stable market shares could ease the pressures on the profitability front. 

Says Shrinidhi Karlekar, an analyst with HSBC tracking industrials, “Ongoing heatwaves in various parts of India coupled with high pent-up demand bodes well for Havells’ Lloyd business.” Commenting on the company’s prospects he adds that India’s largest and most diversified consumer durable play will benefit from the above-industry growth in the premium end of the market. HSBC expects Havells to post a 19 per cent earnings growth annually over FY22-24 driven by 17 per cent revenue growth.

Though a small part of its current portfolio, personal care appliances could be an incremental growth driver for the company. Says ICICI Securities, “Among the listed companies, we believe Havells has established a strong product portfolio across sub-segments of personal care appliances except toothbrushes. We model personal care products to be a major growth driver for the company in FY22-24.”

While there are multiple long term growth drivers, the near term trigger would be the March quarter results—especially the margin expansion on a sequential basis and revenue growth. Nirmal Bang Research expects revenues to rise 15.9 per cent y-o-y (5.7 q-o-q) and margins are expected to slip by 50 basis points sequentially to 11.6 per cent.

While long term growth prospects for its segments remain strong, given the margin pressures in the near term, investors should await a recovery of the same before considering the stock.