FMEG major Havells India's positive outlook may be priced in valuations

Good results for the January-March quarter (Q4) of the financial year 2023-24 (FY24) and the promise of seasonal demand for cooling have led to a positive outlook on Havells. The Q4FY24 Ebitda (earnings before interest, tax, depreciation and amortisation) and PAT (profit after tax) beat consensus due to a positive Rs 37 crore Ebit (earnings before interest and tax) in the Lloyd business (vs Rs 23 crore loss in Q4FY23). The revenue growth of 12 per cent year-on-year (Y-o-Y) was in-line and led by ECD – electrical consumer durables (up 21 per cent) and Cables (up 14 per cent) segments. The B2B portfolio continues to do well due to industrial & infrastructure demand. Better cash position – there has been Rs 900 crore rise in cash levels in FY24 to Rs 3,020 crore - will support capex plans. Earnings expectations for FY25 are being upgraded by analysts due to the upside in Lloyd and possible other income on the cash stash. FCF (free cash flow) is expected to be strong despite continued capex of Rs 700-800 crore. The RoCE (return on capital employed) could be in the range of 30 per cent for the next two financial years (FY25 and FY26).

The Q4FY24 Ebitda margin expanded 186 basis points (bps) quarter-on-quarter (Q-o-Q) to 11.7 per cent mainly due to Lloyd’s positive Ebit. Hence, Ebitda and PAT increased 20 per cent and 25 per cent Y-o-Y, respectively. The cash generation was aided by an inventory mop-up. Assuming B2B stays healthy, and industrial demand robust, cables and wires and switchgear will continue to do well. The ECD (revenue up 21 per cent Y-o-Y; Ebit margin of 11.3 per cent) growth was driven by summer products like fans. Price hikes may be on the anvil in Q1FY25. Cables (revenue up 14 per cent and Ebit margin at 12 per cent) saw volume growth of 18 per cent Y-o-Y in Q4 and 15 per cent in FY24. The lighting segment (revenue up 5 per cent Y-o-Y; Ebit margin at 18.2 per cent) continued to be impacted by price deflation, despite volume growth. Havells is building capacity in B2B lighting and in kitchen appliances which will be launched initially with outsourcing.

Management sounded optimistic about growth in FY25. After Rs 790 crore capex in FY24 towards capacity addition in cable, lighting and Lloyd, it plans Rs 800 crore capex in FY25 (mainly on core products). In cables, about 25 per cent additional capacity is expected to be commissioned by June 2024.

In Lloyd, cost saving and business efficiency measures drove Ebit while Q4 revenue grew 6 per cent Y-o-Y (lower than category). Management, however, does not see loss of market share. There were no price hikes in H2FY24. A broad portfolio (RACs, refrigerators and washing machines) and in-house manufacturing should enable sustained growth.

Retail demand in April surged in the south, east, and west, while the north is expected to pick up in May. There is a possibility of price hike in Q1FY25 especially since raw material costs are inching up. The projections are for a 100 basis points (bps) rise in PAT margins in FY25 over FY24, and a 150 bps rise in Ebitda. EPS could grow 30 per cent in FY25, and by another 25 per cent in FY26. The major concern for investors is that the current PE (last four quarters) is at 83x, which is very high.