Robust summer demand across fans, ACs to drive gains for Havells India

Electrical Consumer Durable (ECD) companies like Havells India have seen strong Q4FY24 sales and continuing seasonal demand across fans, air coolers, and room air conditioners (RAC) in addition to business-to-business sales of cables, switchgear, and professional lighting, among others. 

Havells India’s Q4FY24 revenue rose 12 per cent year-on-year (Y-o-Y) to Rs 5,400 crore, in-line with consensus. Strong summer demand led to robust volume growth in fans and RAC and volume growth in cable and wires (C&W) due to infrastructure spending and real estate activity.

Gross margin improved 230 basis points Y-o-Y to 32.8 per cent, led by cost improvement and better results for Lloyd. Employee costs were higher by 29 per cent, while other expenses grew 17 per cent Y-o-Y. Advertising and promotional (A&P) expenses saw a surge and were up 21 per cent Y-o-Y.

Operating profit rose 20 per cent Y-o-Y to Rs 630 crore and margin improved 80 basis points Y-o-Y to 11.7 per cent. Other income and interest costs jumped 62 per cent Y-o-Y and 82 per cent Y-o-Y, respectively, and depreciation was up 21 per cent. Net profit rose by 24 per cent to Rs 450 crore in Q4FY24. The FY24 revenue was Rs 18,600 crore, up 10 per cent Y-o-Y. The FY24 operating profit margin rose 40 basis points Y-o-Y to 9.9 per cent, while net profit was Rs 1,270 crore, up 18 per cent Y-o-Y.

The signs of a turnaround in Lloyd are a good signal. Lloyd’s revenue grew a moderate 7 per cent Y-o-Y to Rs 1,350 crore in Q4 but segment margins moved into surplus at Rs 37.2 crore Q4, after 10 consecutive quarters of losses. Improved product mix, cost efficiency, and operating leverage led to positive margins.

C&W growth was 14 per cent Y-o-Y to Rs 1,790 crore in Q4, with 18 per cent volume growth. Electrical consumer durables (ECD), led by fans, grew 22 per cent Y-o-Y to Rs 910 crore in Q4 and lighting grew 5 per cent Y-o-Y to Rs 440 crore with continued fall in LED prices. Switchgear's revenue was up 8 per cent Y-o-Y to Rs 650 crore and other revenue rose 22 per cent to Rs 310 crore in Q4FY24.

Fans have seen uncertainty due to the Bureau of Energy Efficiency (BEE) norm changes but Q4 growth rates were strong. RACs also saw robust demand. April saw continued demand for fans and RACs. While lighting saw healthy volume growth, led by good B2B demand, continued LED price erosion offset volume growth. The management focus is on innovation and technological changes to improve margin.

There is FY25 capex guidance of  Rs 800 crore with most of the expenditure towards cables and a new R&D centre in Noida. Lloyd is operating at an optimum level, with a capacity of 2 million RACs. New capacity for C&W will be operational from Q2FY25, which could push up cable revenues by around 25 per cent.

Management says Havells aspires to be among the top-5 players in large kitchen appliances (market size around Rs 12,000 crore) where it has made a foray. Lloyd has levers for major margin expansion, including operating leverage on A&P, and manufacturing efficiencies, among others.

The switches & switchgears division can deliver high single-digit growth in the medium-term and falling LED prices are a cause for concern, but the pace of decline has eased. Key downside risks could be lower discretionary spending, volatile commodity prices, downturns in the real estate market, and increased competition.

The analyst consensus is on earnings growth of 25 per cent plus through FY25 and FY26 with return on equity and capital employed are both above 20 per cent. The stock is up 49 per cent in the last year which may reflect its growth prospects.