The third quarter is one that typically witnesses higher sales of electrical appliances due to festive demand for FMEG (fast-moving electrical goods) products. This year was different however with a muted festive season, and the onslaught of the Omicron wave in December 2021, impacting sales for Q3FY22. Havells India, a leading player in electrical appliances and electrical cables was able to improve its revenues on a YoY basis supported by higher demand for cables and switchgears from infrastructure projects which picked up in Q3FY22.

Quick Takes

• Consolidated revenues grew 15% on a YoY basis to Rs 3,713.1 crore in Q3FY22
• Cables vertical saw highest YoY growth of 33% at Rs 1,206 crore in Q3FY22 among all the verticals
• EBITDA margin declined 12% YoY to Rs 440 crore, due to an increase in raw material cost and delayed price hikes
• The company is planning a price hike of 5-10% for Q4FY22 to offset higher raw material costs
• New washing machine factory at Ghiloth, with a capacity of 3 lakh units per annum commenced operations in December 2021

Infrastructure projects drive revenue growth in Q3FY22

Q1FY22 saw the second wave of Covid-19 and subdued numbers, but revenues and profits have been rising since then. However, higher raw material costs meant the growth in revenues did not translate into a commensurate rise in profits.

Havells' revenue mix across products is spread across its different verticals. Cables, the core business of the company, contributes the highest to its revenue mix at a third of the total revenues. The company’s strategy to enter the FMEG space a few years ago is bearing results with this vertical being the second-highest revenue contributor. Lloyd, a consumer electricals company acquired by Havells in 2017, also contributed significantly at 13.7% of revenues. It enabled Havells to gain a foothold in the air conditioners segment with an 11% market share. The company also manufactures white goods like washing machines, refrigerators, dishwashers etc., under the Lloyd brand.

Havells is a diversified player in the electrical industry with products ranging from wires, cables, and switchgear. The company is aggressively increasing its market share in the consumer durables/FMEG (fast-moving electrical goods) space. It has a significant presence in light fitting and fixtures.

In Q3FY22, the company’s revenues grew on a YoY basis across its verticals, with the exception of Lloyd. The cables vertical saw a spike in orders due to the revival of infrastructure projects. New product launches in the FMEG segment like water heaters, fans, mixer grinders played their role in generating higher YoY revenue. The Lloyd vertical saw a decline in revenue due to the competitive pricing in the air conditioners segment, where the company chose not to hike prices this quarter. The company is expanding its capacity under the Lloyd brand with the new in-house washing machines manufacturing facility at Ghilod.

The margin contribution of most verticals shows a healthy trend, with switchgears contributing the highest margins at 39.8% followed by lighting at 33.8%. The laggard here again is the Lloyd vertical, with only 3.6% contribution. One reason for the low contribution by Lloyd is that Havells chose to not increase air conditioner prices in a competitive market. The company expects to hike prices in the next quarter and is also expecting higher demand for air conditioners with the onset of summer.

One cause for concern that investors should note is the continuous decline of operating profit margins. These have steadily declined to 12.1% in Q3FY22 from 16.1% in Q3FY21. The increase in raw material prices over the past year has dented margins and profitability. Commenting on the matter, Managing Director Anil Rai Gupta said the company is seeing an unprecedented rise in raw material prices over the last one year or so. They are expecting to pass on the rise in costs to consumers over the next couple of quarters. As a result,  margins should normalize over a period of time. The company expects the rise in raw material prices to taper down or at least stabilize over the next couple of quarters.

When compared to peers, Havells' growth numbers are lower in Q3FY21. V-Guard and Polycab India are Havells’ competitors in both the FMEG and cables vertical. V-Guard saw similar YoY growth in revenues as Havells but its profit growth saw a sharper decline. Polycab registered a YoY growth in both revenues and net profits and this is attributed to a rise in cable sales which contribute 81% of its sales. Similarly, KEI Industries, a pure cable and wire manufacturing company, grew faster than others in the industry.

Havells’ Q3FY22 sales growth was supported by infrastructure projects. Passing on the raw material costs to customers and stabilization of their prices is expected to improve profitability in the next quarter. Aggressive expansion of product categories in the FMEG space, gaining market share in the lighting segment is likely to play out over the next quarters. A favorable combination of these factors might see higher profitability coming back to Havells next quarter