Domestic brokerage house Nuvama has downgraded Havells India to 'hold' post its June quarter (Q1FY24) results on the back of rich valuations and evident weakness in financial performance. However, the brokerage retained its target price for the stock at ₹1,430, indicating an upside potential of around 10 percent from its current market price of ₹1,303 (as on July 21).
The brokerage pointed out that Havell’s Q1FY24 numbers were mixed at best. While C&W (cables and wires) segment clocked over 30 percent volume growth and Lloyds grew 21 percent YoY, weakness was evident in Electronic Consumer Durables (ECD), lighting and switchgear each exhibiting single-digit growth, it pointed out.
The brokerage expects i) weak consumer demand to keep its B2C (business to consumer) businesses under pressure; growth remains a challenge in FY24E, ii) margins to remain subdued due to poor demand in the ECD segment, and iii) Lloyds’s path to decent profitability to be two–three years away, even as it gains share.
Despite these issues, the stock has spiked 22 percent YTD. As per the brokerage, its current rich valuation does not factor in the uncertainties.
Earnings
In the June quarter, Havells India posted an 18 percent jump in its consolidated net profit to ₹287 crore versus ₹243 crore in the year-ago period. Its consolidated revenue, meanwhile, rose 13.8 percent YoY (year-on-year) to ₹4,833.80 crore against ₹4,244.46 crore in the same period last year.
The company's earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter stood at ₹402 crore while its EBITDA margin contracted 20 bps to 8.3 percent against 8.5 percent recorded in Q1FY23.
In an exchange filing, Havells said that during the first quarter of FY24, consumer demand was subdued, while it has recently seen to take up, infrastructure and construction upcycling continued, cooling products were hit by unseasonal rains, and overall margins were maintained.
Stock Price Trend
Shares of Havells India have gained a little over 6 percent in the last 1 year but have advanced over 22 percent in 2023 YTD. The stock has given positive returns in 5 of the 7 months in this calendar year. It has risen 1.2 percent in July so far after a 2 percent fall in June. However, it added 6.3 percent and 3.5 percent in May and April, respectively. Meanwhile, the stock shed 0.7 percent in March. In Jan and Feb, it was up 7.4 percent and 1.3 percent, respectively.
The stock has also gotten multibagger returns in the last 3 years, jumping over 191 percent from its COVID low of ₹447, hit in May 2020.
Why the downgrade?
Q1 Mixed bag as weak trends continue: The brokerage noted that Havells reported sales and PAT growth of 14 percent and 18 percent, respectively for Q1FY24, with weak margins keeping the bottom line below expectation. However, it pointed out that the positives were C&W revenue growth of 24 percent YoY (30 percent volume growth) and Lloyds growing 21 percent in a poor residential air-conditioner (RAC) quarter (implying further market share gains), but, this was offset by slow growth in switchgear (5 percent YoY), ECD (5 percent YoY) and lighting (flat YoY).
Weakness in consumer demand and heightened competitive intensity are evident in the lackluster margins – which remain well below pre-covid levels, noted Nuvama. On balance, performance was mixed with management commentary suggesting a slow path to demand and margin recovery, it added.
Rich valuation incongruent to demand weakness: As per the brokerage, Havells’s B2C (consumer) segments of ECD and lighting are experiencing slow growth (single-digit) due to weak demand, however, even the four-year CAGR stands around 10–11 percent. Nuvama stated that the market has already baked in 10–12 percent CAGR for FY23-26E, which poses downside risks. Further, consensus is building in sharper recovery while management suggests a slower path toward pre-covid levels.
Also, while Lloyds has a huge addressable market to cater to, the medium-term journey is likely to be one of very gradual margin accretion, even as the Street builds in a sharper path. Lastly, Havells’s stock is up 22 percent YTD, despite being set amid tepid demand and with no significant improvement in performance versus early-2023, mentioned the brokerage. In its view, the current valuation is rich given the uncertainties, and we see limited upside and potential stock underperforming.
Outlook and Valuation
The brokerage trimmed Havells’ FY24E/25E PAT estimates by 5 percent/4 percent, however, retain the target price at ₹1,430 as we roll forward by one quarter, valuing it at 50x on FY25E. It has downgraded the stock to a ‘HOLD’ given limited upside.
