Dec 07, 2017 05:53 PM IST | Source:

Upgrade Havells to buy; share expansion in electrical segment, Lloyd to boost growth: Motilal Oswal

Havells India has consistently identified and entered new product categories over the years.

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Motilal Oswal has upgraded Havells India, the electrical equipment manufacturer, to buy with target price of Rs 590, citing cut in GST rates and entry into new categories.

"With the Lloyd acquisition, Havells has turned itself into a complete electricals and durables behemoth, and is well positioned to tap into the under-penetrated Indian market," the research house said.

Motilal Oswal expects the company to report 21 percent EPS CAGR over FY17-20, with EBITDA margin expanding 40bp to 13.8 percent.

Its EBITDA margin had dipped to 12.7 percent in Q3FY17, as discounts/schemes were offered to counter the impact of demonetisation. EBITDA margin further dipped to 10 percent in Q1FY18 on GST-related destocking and delays in passing on raw material cost hikes to the channel.

With all the demonetisation-related schemes being rolled back and price hikes taken, EBITDA margin has bounced back to 15.8 percent in Q2FY18 and should sustain at the historical 13.5-14 percent, the brokerage house said.

It expects sales growth to accelerate, led by lighting, consumer durables, and Lloyd Electric, and market share gains in cables/wires and switches.

Havells India has consistently identified and entered new product categories over the years. Some of the key categories where it has made a successful entry include lighting in 2003, premium fans in 2005, water heaters in 2010, REO Switches in 2012, air coolers in 2014, re-launch of the Standard brand in 2016 and EHV cables.

The recent acquisition of Lloyd gives Havells a strong foothold in the fast growing durables segment – the aim is to double revenue in the next three years through new product launches, expansion of existing product portfolio and increased channel penetration (in talks with large format stores to stock Lloyd products).

The government has cut GST rates across electrical categories from 28 percent to 18 percent and this should accelerate the shift towards the organised sector, especially in categories like cables/wires, fans, switches and lighting, where the share of the unorganised segment is high, Motilal Oswal said.

Implementation of the E-waybill from April 2018 would further accelerate this transition, it feels.

Meanwhile, the market has been concerned on the impact of Energy Efficiency Services' (EESL) bulk sourcing on prices of fans, lighting products and durables (air conditioners, washing machines and refrigerators).

"Our recent meeting with EESL indicates that its focus has now shifted to electric vehicles, smart meters and solar rooftops from fans and lighting (LED bulbs, streetlights). This is positive for electrical companies like Havells that can leverage their strong channel relationships to drive sales," the research house said.

It believes the change in EESL’s stance is driven by installation issues with durables unlike LED lamps, which are ‘plug and play’; regular servicing requirements of durables; and high cost of raising product awareness with the customer.

Havells India share price closed at Rs 525.90, up Rs 15.60, or 3.06 percent on the BSE.
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