For Havells, a slow recovery on the cards

The poor performance of Lloyd continues to be a pain point for Havells investors.. Photo: Mint
The poor performance of Lloyd continues to be a pain point for Havells investors.. Photo: Mint


  • In a post-earnings call, the company’s management said it expected Lloyd to clock a low double-digit contribution margin in Q4.

There is no relief for investors in Havells India Ltd stock from its subdued operating performance. In the September quarter (Q2FY23), absorption of high-cost inventory dented Havells’ standalone Ebitda (earnings before interest, tax, depreciation and amortization) margin. The metric dropped by a whopping 595 basis points year-on-year (y-o-y) to 7.8%, a multi-quarter low. One basis point is 0.01%. The stock fell by 3% on Thursday on NSE.

All the segments saw y-o-y decline in Ebit (earnings before interest and tax) margins in Q2, but the biggest impact was in the key Lloyd consumer segment. The poor performance of Lloyd continues to be a pain point for Havells’ investors. This vertical was already making losses, which further got aggravated in Q2.

Under pressure
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Under pressure

The outlook is hardly encouraging. In a post-earnings call, the company’s management said it expects Lloyd to clock a low double digit contribution margin in Q4. However, it may take a while before this segment turns profitable at Ebit level.

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Apart from that, Havells’ electrical consumer durables segment bore the brunt of changes in the energy efficiency norms. As such, the vertical saw destocking in fans, which weighed on Q2 volumes and consequently margins.

The company believes that overall margins have bottomed out in Q2 and the metric will improve from Q3. Softening commodity costs bode well for the company’s margins and should aid a revival in H2FY23. Also, Havells’ would take price hikes in the fans segment in H2 to pass on the increased cost on the back of new energy efficiency norms. However, recovery in margins is likely to be gradual, at best.

This is against the backdrop of the company focusing on prioritizing market share gains especially in the Lloyd’s segment. Havells’ primary focus on market share is evident from the increase in overall advertising spends in Q2 y-o-y and from pre-covid levels (Q2FY20). This is likely to result in higher market shares, said analysts at ICICI Securities in a report on 20 October. “We believe market share gain is discounted cash flow accretive even if it hurts profitability in near term," the analysts said.

As such, near-term upside triggers for the stock are few and far between. Shares of Havells have dropped by nearly 14% in the past year. Even so, the company trades at expensive valuations. The stock trades at 45.6 times its FY24 estimated earnings, showed Bloomberg data. This provides little room for significant upsides.

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