Q4 results review: Havells India shares hit record high on strong earnings despite MOSL downgrade

After an around 10 percent jump in April, brokerage house Motilal Oswal has downgraded FMEG (fast-moving electrical goods) firm Havells India to neutral from buy on the back of its expensive valuations.

However, the brokerage still sees a 7 percent upside to ₹1,780 for the stock post its March quarter (Q4FY24) results reported yesterday on May 1.

Stock price trend

On the back of strong results, the stock jumped 2.5 percent in intra-day deals to hit a new high of ₹1,706.70, however, it later erased some gains to turn flat but remained in the positive territory.

It has now surged 41 percent from its 52-week low of ₹1,211.05, hit in May 2023. In the last 1 year, the stock has advanced 36 percent while adding almost 25 percent in 2024 YTD.

The stock has been volatile in 2024 so far giving positive returns in 2 of the 4 completed months this year and negative in the other 2. The scrip gained almost 10 percent in April after a 1 percent fall in March. In February as well, the stock rallied over 18 percent but had shed over 5 percent in January this year.

Earnings

The FMEG major reported a 24 percent year-on-year (YoY) increase in its net profit at ₹448.86 crore in Q4FY24 versus ₹361.71 in the same period last year. Meanwhile, its revenue rose 12 percent YoY to ₹5434.34 crore in the March quarter against ₹4,849.59 crore in the same period a year ago. Its Earnings before interest, tax, depreciation, and amortisation (EBITDA) grew 20 percent to ₹637 crore in the fourth quarter of FY24.

The company has also declared a final dividend of ₹6 per equity share. “The Board of Directors decided to recommend a Final Dividend @ ₹6/- per equity share of Re. 1/- each i.e. 600 percent for the financial year 2023-24. This is in addition to the Interim Dividend declared during the FY 2023-24 for an amount of ₹3/- per share," said the company in an exchange filing.

Meanwhile, for the full financial year FY24, the company's net profit rose 18.4 percent to ₹1,273.21 crore while the revenue increased 10 percent to ₹18,549.90 crore.

Q4 results review

Reviewing the company's March quarter results, the brokerage said that HAVL beat its estimates in Q4FY24, aided by better margins in all business segments, except ECD (Electrical Consumer Durables). Lloyd reported an EBIT margin of 2.7 percent after losses in 10 consecutive quarters. Revenue growth of mere 6 percent YoY for Lloyd was disappointing, though FY24 revenue growth stood at 12.5 percent YoY.

MOSL further noted that Havell's management highlighted that primary sales have been strong for RACs (room air conditioners), though the north region is yet to witness demand pick-up. The company is neither stocking too much nor facing stock-outs. Lloyd maintains its market share on a full-year basis and would maintain a balance between growth and profitability, though market share gains will always be preferred.

"The stock has been up 25 percent since our initiation and currently trades at 63x/51x FY25E/FY26E EPS, reflecting the growth we anticipate. Given its expensive valuations, we are revising our rating to Neutral from BUY. We value the stock at 55x FY26E EPS to arrive at our TP of INR1,780 with a 7 percent potential upside," it said.

Estimates

Post the Q4 results, MOSL has raised its EPS estimates for FY25/FY26 by 4 percent/5 percent to account for better margins in the cables and switchgear businesses.

It also expects HAVL to report a CAGR of 14 percent/23 percent/26 percent in revenue/EBITDA/PAT over FY 24-26. MOSL has assumed a revenue CAGR of 20 percent for Lloyd, while other business segments should deliver a revenue CAGR of 11-14 percent, it predicted. MOSL has also factored in Lloyd to break even in FY25E and estimate an EBIT margin of 2 percent in FY26.

The brokerage believes that investments in strengthening the brand equity of Lloyd and increasing the distribution network would benefit the company in the long run.

Furthermore, MOSL expects to see improvements in its Return on Equity (RoE) and Return on Invested Capital (RoIC) by FY26. These metrics are projected to rise to 20.6 percent and 30.4 percent, respectively, compared to 17.1 percent and 23.6 percent in FY24. Over the fiscal years 2015 to 2024, the company averaged a RoE of 18.3 percent and a RoIC of 28.8 percent.

Despite significant capital expenditure (capex), the company has managed to generate free cash flow (FCF) in most years. Between FY15 and FY23, the company generated operating cash flow (OCF) of ₹9,290 crore and spent ₹4,720 crore in capex, noted the brokerage. Going forward, it expects Havells to generate OCF of ₹3,470 crore over FY 24-26, while capex will be ₹1,500 crore. This will help improve net cash to ₹4,360 crore vs ₹3,040 crore in Mar '24, stated MOSL.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

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