Buy Havells India; target of Rs 416: ICICI Direct

We believe consumer durable companies will be key beneficiaries of the government’s key reforms like implementation of GST and pay hike.  While the Seventh Pay Commission will boost the disposable income of the 1.4 crore govt employees, GST will bring down the effective tax rate of the company. Additionally, a reduction of tax arbitrage for the unorganised segment will provide additional benefit for organised players in the long run. Further, the company has created a strong brand in electrical consumer products in India, which was traditionally a low involvement product category. Advertisement expenditure always remained at 2-3% of net sales to build the brand image and awareness in Tier I, Tier II cities. Appliances have lower penetration in India. Hence, improvement in power availability, increase in disposable income and shift in focus towards branded category products would help grow  consumer durable segment at CAGR 23% in FY16-18E.    

We expect Havells to record revenue, EBITDA CAGR of 18%, 25% for FY16-18E, respectively, supported by a revival in industrial and consumer products. Further, cessation of royalty payment and benefit of benign raw material prices would help in expansion in EBITDA margin. Its debt free status, strong return ratios and improving payout ratio (30%) justifies its premium valuation. We reiterate BUY recommendation with a revised target price of Rs 416 (value company at 31x FY18E earnings).For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.