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Buy Havells India, target Rs 800: JM Financial

Buy Havells India at a price target of Rs 800.

Last Updated: Jan 24, 2019, 12.22 PM IST
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The current market price of Havells India is Rs 702.60.
JM Financial has a buy call on Havells India with a target price of Rs 800.

The current market price of Havells India is Rs 702.60.

Time period given by the brokerage is one year when Havells India price can reach the defined target.

Investment rationale by the brokerage-
Strong revenue growth: Havells reported revenue of Rs 25.2bn, up 28 per cent YoY on robust growth in Havells’ core business (+29 per cent YoY; across product categories) while Lloyd revenue rose 22 per cent on a) festival season (LED panels) and b) higher price for AC (change in energy norms, input cost increase). EBITDA (ex-Lloyd) grew 14 per cent YoY while margins for switchgears, cables and wires, ECDs contracted due to escalation/volatility in raw material, although Havells is confident about passing this on to customers in the next few quarters. Havells’ (ex-Lloyd) EBITDA margins were 13.3 per cent in 3QFY19 (-180bps YoY; Management Guidance: 14.0-14.5 per cent) while Lloyd’s margin contracted 120bps to 1.7 per cent. Adj. Net income came in at Rs 1.9bn, up 13 per cent YoY (8 per cent above JMFe; 2 per cent below BBRG).

Broad based growth across segments; securing future with strong initiatives: ECDs grew 34 per centYoY (broad-based; fans grew in high teens; largely volume growth), switchgears (+21 per cent), cable and wires (+31 per cent; 25-26 per cent volume growth), while the lighting segment grew (+29 per cent; including Rs 0.5bn of B2G and EESL). Havells continues to focus on initiatives such as a) internal product refurbishment, b) deeper distribution (in semi urban/rural areas), and c) investments in R&D and capability building, which augurs well for its long-term growth. The management believes last two years had been relatively weak due to demonetisation and GST and hence FY19 industry growth appears unusually high.

Lloyd weak season; long term strategy underway: Lloyds’ 3QFY19 revenue came in at Rs 3.6bn (+22 per cent YoY; largely led by LED Panels and price increase in AC), on account of a unfavourable summer and inventory in the channel. However, the company continues to focus on its long term objective to transform Lloyd from ‘mass’ to ‘mass premium’ brand and has been undertaking a) distribution expansion (multi-brand outlets as well as traditional channel), b) newer offerings and c) brand spends. Contribution margins declined 150bps YoY at 14.9 per cent on adverse currency movements and increased inventory, while it continues to spend on brand-building initiatives (c.6 per cent of sales).

Maintain BUY: We revise our FY19-21estimates by 1-3 per cent to reflect 3QFY19 results. We continue to like Havells’ long-term strategy of market leading growth through continuous portfolio expansion (water purifiers, personal grooming, air coolers, etc.), distribution expansion (enhanced focus on rural and semi-urban markets) and brand-building initiatives. We value Havells at 40x Mar’21 EPS to arrive at a Mar’20 target price of Rs 800; we maintain BUY. A delayed recovery in macros is the key risk to our rating.
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