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Havells India - Turnaround in Lloyd should lead to multiple expansion - ICICI Securities

Posted On: 2021-01-21 22:25:22 (Time Zone: Arizona, USA)

Strong performance of Lloyd is a trigger for multiple upgrade for Havells India (Havells). Add to it the systemic triggers of import restrictions, gain in market share of organised players and inherent distribution strength, manufacturing capacity and strong balance sheet of Havells - and we have a powerful business trajectory. We factor-in 10% revenue CAGR for the company between FY19-FY23E with EBITDA/ PAT CAGR of 16%/ 18% and EBITDA margin of ~14%. Upgrade to BUY with a revised target price of Rs1,198, based on 50x FY23E EPS of Rs24.

- Increase in earnings as well as multiples. We have increased FY21E earnings to factor-in the 9MFY21 performance. We forecast ~19% earnings growth in FY22E/FY23E after accounting for business tailwinds (gain in organised market share, import restrictions, and a possible positive demand cycle). Revival of Lloyd, in-house manufacturing capability and operating leverage should aid margins (we estimate 13.3%/14.5% EBITDA margin for FY22E/FY23E). We increase our valuation multiples from 40x to 50x to take into account the expected earnings traction in Lloyd. Operating leverage should lead to a higher earnings CAGR.

- Establishment of Lloyd as a brand will lead to increase in valuations: The possibility of Lloyd's diversification beyond room ACs to refrigerators, washing machines and a complete array of consumer durables was always a daunting business goal. 9MFY21 performance (9MFY21 Lloyd revenue has been Rs11bn with contribution margin of 12.4%) will lead to significant belief in Havells' ability to establish Lloyd on that course. The import restrictions on room ACs, already completed capex and strong balance sheet will further aid the growth of this segment.

- Gain in organised market share resulting in strong revenue growth. Revenue growth was 39.5%/(-)2% in Q3/9MFY21. Higher revenue growth has driven EBITDA margin to improve to 15.7/11% in Q3/9MFY21 led by operating leverage. Consumer and residential portfolio registered ~40% growth whereas industrial and infra grew in mid-teens as per management commentary. While the gain in organised market share has been a prevalent thesis for some time now, it appears to be much more in play post Covid compared to demonetisation and/or GST.

- Factoring-in 10% / 16% revenue / EBITDA CAGRs between FY19-FY23E: We expect Havells (ex-Lloyd) to report 10-12% revenue CAGR between FY19-FY23E with an EBITDA margin of 14%. Based on 9MFY20, we expect Lloyd to report FY21E revenue at Rs18bn and expect it to grow at 20% CAGR between FY21E- FY23 driven by higher AC sales as well as revenue from new line of products. We expect Lloyd to report EBITDA margins of 10% and 12% in FY22E and FY23E respectively. Capex is likely at ~Rs2.5bn and Rs3bn in FY22E and FY23E respectively.

Shares of HAVELLS INDIA LTD. was last trading in BSE at Rs.1132.2 as compared to the previous close of Rs. 1019.85. The total number of shares traded during the day was 688852 in over 28566 trades.

The stock hit an intraday high of Rs. 1147.5 and intraday low of 1051.8. The net turnover during the day was Rs. 767341683.

Source: Equity Bulls

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