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Motilal Oswal Report
Havells India Ltd. has been generating positive free cash flows in most of the years despite higher capex (due to focus on in-house manufacturing). We expect cumulative operating cash flow to be at Rs 33 billion over FY24-25 and cumulative capex at Rs 11 billion over this period.
Return on equity and return on capital employed are likely to be at 21% and 20% in FY25 verssus an average level of 18% and 17% over FY15-23, respectively.
We reinitiate coverage on Havells India with a 'Buy' rating and a target price of Rs 1,580 based on 55 times FY25E earnings per share. This valuation is in line with the average one-year forward price/earning ratio observed over the past five years.
We believe that Havells India has the potential to maintain premium valuations given:
the 29% earnings compound annual growth rate over FY23-25E and
strong return ratios (RoE/ROCE of 21%/20% and return on invested capital of 30% in FY25E).
Investment Rationale
Havells India has the highest total addressable market of Rs 2.2 trillion among listed companies in the consumer durable space. Havells' TAM has increased over the years due to its diverse product portfolio, presence in various sectors, and entry into the large home appliances segment through the acquisition of Lloyd.
The Indian appliances and consumer electronic industry was estimated to be at Rs 2.4 trillion in FY22. The sector is likely to post a 10% CAGR over the next five years with higher growth estimated for white goods (10-12% for refrigerators/washing machines and 12-15% for air conditioners).
Lloyd's market share is estimated at 10% plus in room air conditioners versus ~8% a few years back. It has established itself among the top three players in RAC. Lloyd is in a favorable position to leverage the success of its AC products to drive growth in other offerings, such as washing machines and refrigerators. In FY23, Lloyd contributed 20% to Havells' revenue. We estimate Lloyd's revenue share to rise to 22.2%/23.5% in FY24/FY25.
Havells is diversifying its distribution channel through various digital and physical platforms. The company has expanded its presence in emerging channels. Further, Havells' sustained investments toward in-house manufacturing, research and development, and brand building give it a competitive edge over its peers.
Key downside risks:
rise in commodity prices,
higher competitive intensity in the sector and
a demand impact due to economic slowdown.
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