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Buy Havells India, target Rs 840: Edelweiss Securities

Havells India is a largecap company, operating in electric equipment sector.

Last Updated: Jul 11, 2019, 03.06 PM IST
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The brokerage has set a one-year horizon for the stock to hit the target price.
Edelweiss Securities has given a buy recommendation on Havells India with a target price of Rs 840.

Shares of Havells India traded at Rs 715.95 around 3 pm on 11 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

Despite a difficult year with players battling market share and cost challenges, the company clocked superior revenue growth of 24 per cent while sustaining investments in manpower (up 28 per cent) and ad spends (up 25 per cent)--- both highest versus peers.

However, free cash generation dipped to Rs 10 crore (against Rs 680 crore adjusted for Lloyd acquisition). "We attribute this largely to prepayment of creditors due to management’s risk aversion in a volatile currency environment, an industry wide phenomenon," said the brokerage.

The brokerage expects the company’s superior growth momentum to sustain given its vast product coverage (90 per cent plus), deep distribution penetration and brand heft.

While peers focused on controlled increase in employee cost in FY19 (3-5 per cent increase), Havells continued to invest in talent reflecting in 28 per cent jump in employee cost owing to senior level hiring in Lloyd and R&D.

Key Managerial Personnel (KMP) remuneration growth stood higher at 19 per cent (though lower than overall employee cost) versus peers’ average increase of around 10 per cent.

Absolute ad spends rose 25 per cent to Rs 380 crore around the launch of new products in Havells and Lloyd; as per cent of sales they remained at FY18 levels i.e., 3.8 per cent (peers cut ad spends, refer to chart 8).

In line with peers, prepayment of creditors during currency volatility (91 creditor days versus 120 days as on March 2018) led to rise in working capital.

This resulted in lower free cash of Rs 10 crore in FY19. Contingent liabilities in FY19 increased to 11.5 per cent of net worth versus 8.5 per cent in FY18 due to significant increase in unexecuted contracts.

Given Havells’ focus on technology, 80 per cent of the company’s FY19 sales (63 per cent in FY18) were from orders booked on the dealer portal (highest versus peers).

"Near-term challenges in sustenance of infra push and rising input costs are likely to continue. We believe, Havells will sustain high free cash generation and growth over the long term with front ended investments for growth and back ended returns," said the brokerage.

The brokerage has retained ‘BUY/SO’ with a target price of Rs 840 assigning 47 times September 2020E EPS.

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