Markets
Havells India is not completely out of the woods yet; demand prospects blurry
Summary
Performance of the summer season, particularly May and June, remains uncertain as Q4 sales fell short of expectations due to unseasonal rains. This had an impact on air-conditioner sales and led to a higher channel inventory in Lloyd at the end of March.
Challenges for Havells India Ltd continued into the March quarter (Q4FY23), with sluggish B2C demand accounting for 70% of the sales mix in Q4. Although infrastructure and construction activities drove steady B2B demand, softer demand trends are expected to persist into Q1 due to rising interest rates and elevated inflation levels weighing on consumer spending.
Moreover, the performance of the summer season, particularly May and June, remains uncertain as Q4 sales fell short of expectations due to unseasonal rains. This had an impact on air-conditioner sales and led to a higher channel inventory in Lloyd at the end of March.
The Lloyd consumer segment, crucial for Havells, reported a positive surprise with a 32% year-on-year (YoY) revenue growth in Q4. However, the segment continued to operate in the red at the Ebit level, with a margin of -1.7%. With the company focusing on increasing its market share in room air conditioners, the chances of breaking even in the near term seem low.
“Lloyd continues to gain market share in room air conditioners, albeit while losing money – a trend unlikely to change over FY24/25E given the hunt for market share," said analysts at Nuvama Research in a report on 3 May.
Meanwhile, in Q4, Havells’ switchgear and cables & wire segments benefited from construction-led demand. However, the performance of electrical consumer durables fell short of expectations due to excess channel inventories of fans, with demand pickup contingent on the summer season. “We see FY24E as a year of two halves – H1 to be sombre and then H2 potentially benefitting from a low base effect of H2FY23E," said Nuvama analysts.
Regarding capital expenditure (capex), Havells anticipates FY24 to be similar to FY23, with guidance for ₹600 crore in capex for FY24, half of which will be directed towards the cables and wires segment. The capex will primarily be funded through internal accruals.
Although Havells’ shares have declined nearly 13% from their 52-week highs of ₹1,405.55 apiece in September, valuations are not exactly inexpensive. Based on Jefferies India’s FY25 earnings estimate, the Havells stock trades at 46 times. The brokerage acknowledged Havells as a strong franchise in core electricals and appliances categories but pointed out that most positives appear to be priced in already.
