Buy Havells India; target of Rs 650: ICICI Direct

ICICI Direct's research report on Havells India

Strong topline growth led by Havells’ core business (up by 28%) was on account of lower base, new product launches and revival in demand from project business However, Lower EBITDA margin was on mainly due to 1) muted performance of Lloyd business on account of adverse season, trade inventory & forex headwinds 2) delay in passing on higher RM prices in cable segment. ECD business (excluding Lloyd) recorded a strong growth of 42% YoY driven by new launches and fan segment. Switchgear, cable and lighting business (excluding EESL) have witnessed demand traction from government & residential projects Havells has not been participating in EESL’s low margin business. As a result, revenue declined to Rs 1.2 crore from Rs 45 crore in Q2FY18. According to management, necessary steps have taken to bring back margin of cable business in the range of 16%-17% which would help in recovery in overall EBITDA margin by upcoming quarters.

Outlook

We expect Havells to record revenue, earning CAGR of ~21%, ~23% respectively, in FY18-20E supported by a change in product mix, revival in industrial and consumer products. Scalability through acquisition coupled with launch of premium products in domestic market would negate the impact of higher commodity prices. However, key triggers for future growth would be sales growth in the switchgear segments and margin improvement in Lloyd business. Considering the company’s strong balance sheet position (RoE, RoCE ~21%, 28%, respectively) coupled with integration of Lloyds business within itself (lower working capital and margin efficient) would be key reason for future growth. We maintain our stance on stock as BUY with a revised target price of Rs 650.