Demand uncertainty may weigh on Havells stock; B2C sales show muted trend

Havells India ‘s sales for the fourth quarter of the 2022-23 financial year (Q4FY23) grew 10 per cent year-on-year (YoY) to Rs 4,850 crore. While the business to consumer (B2C) sales of the electrical major was sluggish, the business to business (B2B) segment saw stable growth due to activity across the related sectors of infrastructure & construction. Among segments, the Lloyd subsidiary and the switchgears sales grew 32 per cent and 27 per cent YoY, respectively, but sales for cables and lighting grew only in the 4-5 per cent range. Sales on the electrical consumer durables (ECD) front fell 14 per cent YoY due to high inventory of fans, which contribute over 65 per cent of the segment revenues.

There was stability in raw material prices, which enabled a gross margin expansion of 120 basis points (bps) YoY to 30.5 per cent. But higher advertising spends, which were up by 70 bps as a percentage of Q4 sales, resulted in an 80 bps reduction in operating profit margins to 10.9 per cent. Net profit grew 3 per cent YoY to Rs 360 crore. Losses in the Lloyd business were at Rs 22.1 crore versus losses to the tune of Rs 21.3 crore in the year ago quarter. So far, it has been a cooler than normal summer and this may impact demand for summer products in Q1FY24. The expectation is that B2C demand will also be muted due to the continued trend of retail inflation. Commodity costs appear to have stabilised and this may mean stronger margins going forward.

Despite FY23 revenue growing 21 per cent YoY, Havells faced rising input costs and intense competition with moderation only in Q4. This pulled down its operating and net profit resulting in post-tax return on invested capital dipping to 19.6 per cent versus an average of 23.5 per cent in the last four financial years. The Q4 revenue growth was supported by Lloyd where revenue rose 32 per cent YoY to Rs 1,270 crore. The planned FY24 capex target is set at Rs 600 crore, similar to the Rs 580 crore capex in FY23. The company looks to set up a cable manufacturing plant at Tumkur, Karnataka, with a capacity for 348,000 cable-km.

Working capital (WC) deteriorated with net WC days up to 44 days (up 2 days, quarter-on-quarter or QoQ) and up 9 days YoY due to higher receivable days (plus 6 days QoQ and plus 1 day YoY) while inventory was stable at 80 days. Hence, operating cash flow (OCF) was at Rs 320 crore, down 9 per cent QoQ. Across FY23, Havells generated OCF of Rs 570 crore in FY23 while free cash flow dipped Rs 23 crore and net cash decreased by Rs 1.74 crore QoQ to Rs 2,060 crore.

Although management guidance is for soft demand in Q1FY24, there’s confidence about growth in the medium term, led by residential and consumer portfolio, and a real estate cycle revival aiding switchgear demand. An improving capex cycle is expected to help the industrial and infrastructure portfolios.

The results seem to have beaten Street expectations since the stock rose by over 2 per cent to Rs 1,282.  But analyst opinions are mixed with ‘sell’, ‘hold’ and ‘buy’ recommendations from different houses.

Target valuations are in a wide range as you would expect with conflicting recommendations. On the downside, pessimists assign a stock valuation of Rs 1,009, while the most optimists predict Rs 1,430, but most valuations clustered at around Rs 1,260 and Rs 1,270 levels, which is close to the current market price.