ICICI Direct recommended hold rating on Havells India with a target price of Rs 550 in its research report dated October 24, 2017.
ICICI Direct's research report on Havells India
Havells’ record sales growth of 4% YoY (22% YoY growth including Lloyd) in Q2FY18 was led by strong 21% revenue growth in the lighting & fixture segment. However, transition to GST regime that led to a decline in primary offtake starting May 2017, continued its impact on electrical consumer durable (ECD) (mainly due to higher GST rate). However, despite weak season Lloyd’s business grew ~11% YoY in Q2. On the other hand, sluggishness in construction activities marred the performance of the switchgear segment During the period, a change in product mix, withdrawal of discounts, lower advertisement expenses and price hike (to offset higher raw material prices) helped drive overall EBITDA margin up by ~45 bps YoY. We believe there would be short-term pressure on the margin owing to lower operating leverage and higher advertisement expenses (under ECD category).
We expect Havells to record revenue, EBITDA CAGR of ~24%, 10%, respectively, in FY16-19E supported by a change in product mix, revival in industrial and consumer products (led by acquisition of Lloyd’s CD business). Scalability through acquisition coupled with launch of premium products into domestic market would negate the impact of higher commodity prices. Further, strong cash flow from Havells’ core business coupled with minimal debt/equity (as large part of acquisition financed through internal accrual) would strongly position the company to negate any short-term hiccups. Despite being on a strong footing, we believe at the current market price the stock discounts all near term positives. Hence, we change our rating from BUY to HOLD with a revised target price of Rs 550/ share (36x EPS of FY19E).
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