Havells India: What should investors do?

The Indian Fast Moving Electrical Goods (FMEG) industry has experienced steady growth, propelled by ongoing infrastructure development, rising disposable incomes, government initiatives such as Production Linked Incentive (PLI) schemes, and technological advancements such as smart home automation and energy-efficient solutions.

As a diversified FMEG company and a constituent of the BSE Consumer Durable Index, Havells is levered to benefit from the “Make in India” theme.

However, with the stock currently trading at a one-year forward P/E of 56 times, around 8 per cent premium to its historical five-year average P/E of 52 times, this appears to factor the structural long-term growth prospects it is levered to. Also, multiple expansion is less likely till growth accelerates. In the last five years, ie FY19-24E (including consensus estimate for Q4FY24), the revenue and PAT CAGR of Havells is around 13.2 and 9.5 per cent respectively. Hence, given the balanced risk-reward, while existing investors can continue to hold the stock, fresh positions need not be considered at this juncture.

Business

Havells India operates as a manufacturer and seller of electrical goods, consumer durables, and power distribution equipment. Its operations encompass six distinct brands — namely, Havells, Lloyds, Crabtree, Standard, REO, and Havells Studio. Its business primarily comprises six segments — switchgear (12 per cent of 9MFY24 revenue), cables & wires (34 per cent), lighting and fixtures (9 per cent), electrical consumer durables (ECD, 20 per cent), Lloyd consumer (19 per cent), and others (6 per cent).

Within the switchgear segment, Havells produces domestic and industrial switchgear, electrical wiring accessories, and capacitors. The cables & wires (C&W) segment includes domestic cables and industrial underground cables. The lighting & fixtures segment caters to both consumer and professional lighting needs, selling LED lamps, luminaires, outdoor lighting fixtures, and specialty lighting items. Under the ECD segment, Havells sells fans, water heaters, and other domestic appliances.

The Lloyd Consumer business includes consumer durables products such as ACs, TVs, and washing machines. Furthermore, Havells has extended its presence into the solar energy sector, offering on-grid and off-grid rooftop solutions and on-grid inverters catering to consumers and industries. Additionally, the company produces industrial motors, consumer pumps, water purifiers, and personal grooming items such as trimmers, and hair stylers, all of which fall under the “Others” segment.

The company, over the years, has been able to diversify segment-wise through organic and inorganic ways. For instance, in 2017, it acquired Lloyds to gain a foothold in the consumer durables business. While Havells is exploring new territories such as venturing into Electronics Manufacturing Service and evaluating refrigerator manufacturing plant, currently, the C&W and Lloyds segments together contribute more than half of the total revenue.

The C&W segment’s operating income margin for 9MFY24 stood at 11.1 per cent. On the other hand, Lloyds has posted operating losses since FY22 due to increased expenses aimed at enhancing its brand visibility. As of FY23, Lloyds has a domestic market share of 12 per cent in the Indian room air conditioners (RAC) market, per Frost & Sullivan report, placing it in the top three in the Indian market.

While Havells’ underground cables have reached max capacity utilisation, the new plant in Karnataka is expected to be operational by March 2024. Similarly, Lloyds has also been undertaking expansion plans, including the commencement of a new AC manufacturing plant in Andhra Pradesh and the formation of a new subsidiary, Havells International LLC, to explore opportunities in the US market.

Presently, export revenue accounts for 3-4 per cent of the consolidated revenue.

Financials

During the first nine months of FY2024, the company recorded a 9 per cent increase in revenue Y-o-Y from operations, amounting to ₹13,148 crore, mainly contributed by the Lloyd consumer and cables & wires segments which grew at 16 per cent and 14.2 per cent, respectively. Amongst other segments, while the switchgear business registered a sales growth of 5 per cent y-o-y, both lighting & fixtures and the ECD segment posted flat y-o-y growth in 9MFY24.

The company’s EBIT margin was marginally up to 9.1 per cent in 9MFY24, from 8.6 per cent in the same period in FY23 while the EBIT grew by 19.7 per cent to ₹1,195 crore. The lack of stronger improvement in margins can be attributed to subdued consumer demand for electrical goods, coupled with elevated advertisement spending, although this was partially offset by robust demand for industrial cables and professional lighting.

Havells maintains a strong financial position as a net cash company, with a net cash balance of around ₹2,311 crore as of December 31, 2023. Though the growth trajectory remains robust, we need to look at how the margins shape up for the company in the coming quarters, with a close watch on whether concerns regarding revival in consumer interest and Lloyds’ operating losses are easing up.

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