Analyst Corner: Maintain ‘neutral’ on Havells India with TP of Rs 1,290

Strong demand environment, but price hikes inadequate as of now: Havells India (HAVL)’s 2QFY22 earnings were 8% below our expectations despite the topline beat of 5%. Key operating parameters confirm our thesis of margin normalization from highs of FY21 even amid a strong demand environment. We expect the trend to continue over the next 2–3 quarters – leading to strong topline growth, but muted EBITDA/earnings growth. Key positives include a) volume growth (ex-Cables) in the double digits,n which is likely to sustain over the next few quarters; b) an uptick in the B2B business, with volume growth reflecting in Cables hereafter; and c) promising trends for the festive season. Key negatives include a) inadequate price hikes taken to offset the commodity price inflation; b) ad spends continuing to be low at 1% of sales v/s guidance of 2–3% on a structural basis and 3.5–4.0% pre-COVID; and c) other expenses yet to normalize from the low levels of the last year or so. We broadly maintain our FY22–24E earnings estimate. TP remains unchanged at Rs 1,290. Our FY21–24E revenue / EBITDA / adj. EPS CAGR stands at 18%/14% /16%. Price hikes across categories and commodity price inflation are key monitorables as demand is not a concern. Maintain ‘neutral’.

Commodity price inflation offsets strong topline show, as expected: 2QFY22 snapshot: Revenue grew 31% YoY to Rs 32.2b and was 5% ahead ofn our estimate. EBITDA grew 6% YoY to Rs 4.4b and was 6% below our expectation. The EBITDA margin came in at 13.8% v/s 17.2% last year. Ad spends were marginal at 1% of sales. Adj. PAT grew 7% YoY to Rs 3b and was 8% below our expectation.

Valuation and view: We maintain our FY22–24E earnings estimate and TP of Rs 1,290. At CMP, then stock trades at FY23E/FY24E PE of 55x/50x.