Q4FY23 Review: Havells India: Decent close to FY23, but uncertainties ahead

4 May 2023 , 11:58 AM

Havells India’s (HAVL) Q4FY23 were ahead of estimates, led by 100 basis points beat on OPMs at 10.9%, as volumes and mix aided core OPMs and losses in Lloyd reduced QoQ. Broad weakness in consumer demand remains a near-term dampener, whilst the company is seeing green-shoots from new-build real estate emerging in FY24. B2B portfolio (higher margin) remains in sweet spot, leveraging growth in Infra and Industrial capex. Analysts at IIFL Capital Services have cut their FY25 EPS estimates by 3%, keeping FY24 unchanged, on weakness in ECD profitability. Valuations for HAVL continue in top quartile at 42xFY25 estimated EPS; clues on pickup in consumption trends will be closely monitored to drive stock performance.

Notables from Q4FY23

1) B2B demand outlook remains robust – driving growth and margins for HAVL. 

2) Double-digit decline in ECDs attributed to Fans (others were flat) and inability to take adequate price actions amid intense competition impact OPMs. 

3) Lloyd – volume-driven growth strategy paying off; margins now getting addressed with higher insourcing, operating leverage and portfolio optimization. 

4) NWC increase for FY23 led by year-end inventory built-in summer products (up-stocking for season + soft offtake from change in weather conditions and late onset of summer).

Continue investments in brand, distribution and portfolio

HAVL is investing Rs. 12 billion in FY23-24 for two new greenfield manufacturing plants in South (Sricity for RAC and Tumkur for C&W), to strengthen portfolio and reach in the region. In addition, ASP spend is expected to be in 2.5-3% range with higher skew towards Lloyds, ECD and other consumer-facing products. Increased in-sourcing, mass premium positioning across portfolio and investment in under-penetrated regions are targeted to drive higher growth and OPMs back to pre-COVID levels.

FCF impacted in near term, eyes faster growth

Sharp increase in NWC cycle (cash conversion cycle of 44 days versus 36 days in PY) due to inventory, led to lower OCF. Further, capex of Rs. 6 billion in FY23 led to negative FCF after 4 years. With peak capex completion by FY24, HAVL is eyeing organic growth and focused investments to strengthen its franchise and drive 30% EPS CAGR in FY23-25.