Lower margins weigh on Havells' Q1 performance as input, staff costs surge

Even as the trend is seen continuing in Q2 before reversing in the second half, analysts are positive on the company

Domestic appliances and household electrical goods major Havells declared strong year-on-year (YoY) revenue expansion but lower margins in the first quarter of the 2022-23 financial year (Q1FY23). Revenues grew by 63 per cent YoY to Rs 4,230 crore (the 3-year compounded annual growth rate or CAGR is 16 per cent, which indicates revenues have grown compared to the pre-Covid-19 levels).
 

Lloyd (which Havells acquired in 2017-18) delivered revenue expansion and across segments like switchgear, lighting, cable & wire (C&W), revenue expansion occurred on the YoY basis. However, QoQ (quarter-on-quarter) revenues were down 4 per cent – there is a seasonal bias which may make Q1 weaker than Q4.
 

EBITDA at Rs 361 crore was up just 2.3 per cent YoY, and down 31 per cent QoQ. The EBITDA margin dropped over 5 per cent YoY to 8.5 per cent and was down 3.25 per cent QoQ. The gross margin also contracted by over 3 per cent QoQ and by over 6 per cent YoY. The PAT (adjusted) was at Rs 242 crore.

Expenses were up 72 per cent YoY and flat QoQ. While raw materials costs were up 80 per cent YoY, employee costs were up 30 per cent and other operating expenses were up 65 per cent. Cost of finance, at Rs 9.8 crore, is down 48 per cent QoQ. The net working capital days is down to 23 days from 28 days QoQ.
 

Management guidance is fairly optimistic with inflation in raw material costs levelling off and commodity prices expected to soften. This should lead to improving margins. Lloyds is loss-making and it has taken losses for four successive quarters but it has also regained the lost market share in room air-conditioners (ACs) and it has a complete portfolio across washing machines.
 

But Q2FY23 will still see some negative inflationary impact due to the existence of raw materials inventory bought at high prices. Employee costs are also expected to remain elevated. The 2022-23 capex guidance is at Rs 700-800 crore. Most of this spend will be on a new manufacturing facility for room ACs. Since there’s ample free cash flow, and the company is practically debt-free, capex funding will not be a stress factor.
 

Possible upsides, assuming commodity cycle correction continues, are more likely to be visible from the second half since high inventory costs will negatively impact Q2 margins. Other upsides could be a turnaround at EBIT levels for Lloyd. There could be generic rise in demand for the entire switchgear and C&W range if the real estate cycle sees a strong rebound.
 

Stock valuations are quite high. The trailing EPS (2021-22) is around Rs 19 while 2022-23 is expected to deliver EPS of around Rs 23. At the current price of Rs 1,220, the trailing PE is roughly 64. But the stock has gained around 11 per cent in the last month even though it lost some ground post-results.
 

Post the Q1 results, analysts are calculating target prices ranging from Rs 1,240 to Rs 1,345 to Rs 1,420. But most have either Buy or Hold recommendations despite the margin pressures.