Fall in commodity prices to provide margin relief to Havells

The recent drop in prices of commodities such as steel, aluminium, and copper should provide comfort regarding margins to many companies. Havells India Ltd is a case in point. The company has hiked prices and that, too, should aid margin improvement.

“The benefit of softening raw materials could be visible in the coming quarters. For Havells, we factor year-on-year Ebitda margin recovery to 13.0-13.5% in H2FY23,” wrote Sonali Salgaonkar of Jefferies India in a report on 13 July.

Not electrifying

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Not electrifying

However, near-term margin pressure is expected. Commodity costs remained high in the June quarter (Q1FY23). The Ebitda margin for Q1FY23 could stay lower at 12% (-160bps year-on-year), according to Jefferies.

The potential margin improvement would be a key trigger for the stock, which is down 17.5% from its 52-week high seen in October. “Revenue growth is not a challenge for Havells, given its broad-based white goods portfolio. Though input costs are declining, inflationary concerns continue to loom and the company would do well to implement cost control measures to aid the rise in margin,” said Harshit Kapadia, analyst at Elara Securities (India).

The Lloyd consumer segment, which is key for Havells, has a low margin profile given the stiff competition. Havells’ recent announcement of setting up a 1.1 million unit per annum air conditioner (AC) facility would bode well amid such high competition. The existing capacity is 0.9 million units with capacity utilization of 90%.

In Q4, ACs accounted for 80-85% of Lloyd’s revenue. As demand for ACs wanes after summer, the performance of other products would be a key monitorable for Lloyd’s. This is also true in the case of fans. The pick-up in demand for new launches is crucial for the electrical consumer durables segment’s growth. Further, the lighting business would see increased traction with improvement in electrification across rural areas specifically.

Meanwhile, in Q1, Havells’ revenue growth would be partly aided by the lower base of last year. Jefferies’ industry checks suggested good offtake in the beginning of Q1 for durables and appliances driven by a strong summer. However, demand softened from the second half of May with the advent of monsoon in specific regions and the inflationary pressures.

Havells’ shares trade at pricey valuations. The stock trades at 45 times its FY24 estimated earnings, as per Bloomberg. Given the inflationary environment and low margin profile of Lloyd consumer segment, large near-term upsides may be capped.

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