Havells India: Gearing for recovery when market rebounds

19 Jun 2023 , 10:30 AM

Recommendation: Add

Target Price: Rs. 1,504

Though OPMs, NWC cycle and FCF were impacted in FY23, the worst seems to be behind for HAVL and for Lloyds in particular. With wider traction in RAC volumes (top 3 player) and gradual growth in non-RAC portfolio, HAVL is more confident on Lloyd.

Focus on innovation and Omni-channel presence

HAVL has sharpened focus on expanding portfolio within the 20 product categories it operates in; leveraging its R&D team efforts (600 people; 1% of sales in FY23) to drive innovation based on consumer needs. HAVL improved presence in MFR, RR & E-commerce with share of emerging distribution channels improving to 23%; while VISTAAR program aided deeper penetration of the brand in Bharat with >3,400 touch points across Tier-III and IV towns. With 6 brands under its fold, HAVL has charted a GTM strategy to distinctly position each brand to serve all sections of the market with minimal overlap.

OPMs bottom-out in FY23

After 3 years of consolidation, headcount increased by 14% in FY23 (>FY19 levels) to support GTM and strengthen marketing and R&D. Despite commodity prices cooling off (~10% across the board), elevated competitive intensity and near-term weakness in B2C demand kept gross margins under stress in FY23. Discretionary spends normalizing continued to impair OPM. In FY24, calibrated pricing strategy is expected to help OPMs recover to 11-12%.

Increasing manufacturing footprint and localization

Lloyds’ 2^nd greenfield RAC plant at Sri city doubles capacity to 2mn p.a. Shift from outsourcing to in-house manufacturing is resulting in Lloyd accounting for ~46% of the cumulative capex in 5 years (at Rs. 8.8 billion) while ECDs, S/G and C&W’s share stood at 16/10/13%, respectively. Elongated NWC cycle impacted cashflows in FY23 with negative FCF. With the worst on OPMs and bulk of capex behind, RoE is expected to recover from lows of 17% in FY23 to 21-23% in FY24-25.