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What new energy norms will mean for Havells India

With Havells focusing on gaining market share over boosting margins, the trajectory of the latter has been disappointing.
With Havells focusing on gaining market share over boosting margins, the trajectory of the latter has been disappointing.

Summary

The change in the energy efficiency norms for fans, effective 1 January, is expected to create volatility in the market.

Investors in shares of Havells India Ltd were devoid of cheer in 2022, with the stock declining by about 17% till now. Subdued demand conditions, along with elevated input costs for all consumer durable companies, including Havells, has been a key concern. Naturally, this took a toll on margins.

While the possibility of meaningful near-term upsides in the stock appears thin, there is a silver lining. The change in the energy efficiency norms for fans, effective 1 January, is expected to create volatility in the market. In the September quarter (Q2FY23), Havells saw destocking in fans due to this factor. Q3 is likely to see some impact as well.

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These norms would entail an increase in fan prices, which would not sit well in an already dull demand environment. But, here, Havells is relatively better placed as its fans portfolio caters to the higher end of the segment.

Customers may be less sensitive to requisite price changes in the premium segment and this segment’s fans are already likely to be better compliant as well, said analysts at Credit Suisse Securities (India) in a report on 13 December.

Shares of Havells India have underperformed
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Shares of Havells India have underperformed (Capitaline)

The economy segment is likely to bear the brunt of the change in norms. Havells’ brand REO operates in the economy segment. The REO brand forms a smaller portion of the overall pie and also includes products such as switches and cables. Increasing offerings under this brand would attract rural markets, contribution from which is now small. As electrification improves in rural areas, these markets can offer huge opportunities for growth.

As such, Havells has fared well on revenue growth with the half-year ended September (H1FY23) three-year compound annual growth rate at almost 17%. Sustenance of this trend and improvement in margin is vital to aid investor sentiments. Havells’ key segment, Lloyd Consumer, is still in the red and a drag on the company’s overall margins.

With Havells focusing on gaining market share over boosting margins, the trajectory of the latter has been disappointing.

In H1, Havells’ standalone Ebitda (earnings before interest, taxes, depreciation and amortization) margin stood at 8.2%. In comparison, the measure in FY21 and FY22 was 15% and 12.7%, respectively. Going forward, softening commodity costs would lead to margin expansion but the recovery is likely to be gradual.

To be sure, despite the fall in Havells shares, valuations do not offer comfort. The stock trades at 45 times its FY24 earnings, according to Bloomberg data. That is not cheap.

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