Hold Havells India; target of Rs 416: ICICI Direct

ICICI Direct's research report on Havells India

Havells reported 9% YoY growth in sales during Q2FY17 supported by 22% and 9% YoY growth in electrical consumer durable (ECD) and lighting segment, respectively. Lighting division (excluding CFL) recorded growth of 22% YoY while ECD sales growth was largely driven by pre-festive demand. Though the cables division registered 9% YoY volume growth, aggressive price cuts due to lower commodity price, resulted in muted sales growth. Switchgear sales growth at 5% YoY was largely due to lower-than-expected demand from real estate segment. EBITDA margins remained flat YoY as higher employee expenses (up 39% YoY) offset the benefit of saving in raw material costs and discontinuance of royalty payment in the quarter. Higher depreciation charges (due to change in accounting norms) were partly offset by the higher other income (due to higher other interest income). As a result, the company recorded strong PAT growth of 22% YoY to Rs 146 crore in Q2FY17.

We expect Havells to record revenue, EBITDA CAGR of 15%, 18% for FY16-18E, respectively, supported by ECD and lighting segment revenue CAGR of 24% and 20%, respectively. However industrial product category sales may be lower than historical growth due to a slow pick-up in infrastructure spending, which would restrict any sharp movement in EBITDA margin. Considering HIL’s debt free status, strong return ratios and improving payout ratio (30%) we maintain our target price at Rs 416 (36x FY18e EPS) and revise our rating from BUY to HOLD.