Q2FY24 Review: Havells India: Awaiting pick-up in consumer offtake

23 Oct 2023 , 01:31 PM

Havells reported weak consumer offtake across FMEG categories (Switchgears, housing wires & ECD), but expects sentiments to turn with the upcoming festive season. Industrial products which has held steady is facing capacity constraints in cables in FY24. Despite increase in competitive pressures, HVAL is hopeful of OPM expansion with better price transmission and operating leverage in H2FY24. Steady improvement in contribution margin in Lloyd increases optimism of faster turnaround with step-up in seasonal volume offtake towards Q4FY24. Analysts of IIFL Capital Services trim FY24/25/26 EPS by 5/8/9%, respectively with moderate OPM expansion. Recent correction in the stock price discounts the weakness in FY24 performance. Maintain ADD with TP of Rs1535 (implies 19% upside). 

Industrial demand leads: 

Industrial switchgears and under-ground cables continue to see healthy demand. Capacity constraints in UG cables will be addressed in FY25 with commissioned of a new green field facility, at Tumkur. B2C demand lags across both categories was soft while that in lighting was marred by further 10-15% price erosion in Q2, offsetting double digit volume growth. Sub-par growth in housing wires despite sufficient capacities raises concerns on potential share loss from new entrants in C&W market. 

Confident of improvement in Core OPMs: 

While FMEG market has always been marred by intense competition, HAVL believes improvement in demand offtake and operating leverage should aid Core margins in 13- 14% range, given its strong brand positioning and in-house manufacturing driven business model. Increasing peers are eyeing entry and expansion in switches segment, which is less competitive & high margin business; this in our view will keep HAVL on its toes to retain strong margins & shares. 

Lloyd on healthy turnaround trail: 

HAVL’s strategic choices for Lloyd is paying off well wrt consistent share gains and a superior brand positioning. Improvement in contribution margins in Q2 despite weak volume base infuses in Lloyd’s turnaround during the next summer (2024). Strong cash flows and continued capacity expansion should support growth when demand rebounds towards H2FY24.