Havells Q1FY18 Concall Summary

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Financial Highlights

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Margins

  • EBIDTA margin is 10.5x after adjusting for Lloyd
  • Contribution of Rs. 39 crore in EBIT translating to 14.7% margin
  • EBIDTA margin for last year was 13.5% instead of increased hiring cost and driven by sales growth
  • They have made a margin of 6 to 6.5% last year and confident about positive growth
  • Contribution margin was lower due to factory overhead cost which should have been covered in fourth quarter, but it has not even passed on completely in first quarter
  • Contribution margins would not be negatively impacted or stay at a lower level coming in the second quarter
  • Since Q3, company has continued to beat sales but continued to miss EBITDA margins
  • SG&A has gone up by 30 crores including Rs. 13 crore one-off expense
  • The increase in cost is due to hiring and increment which would pay off with higher sales and growth in future
  • The increase in salary cost is 1% of sales and with increase in sales, the company would achieve 13.5% EBIDTA margin for core Havells
  • Promotional cost in Havells is higher than 6.8%: 3.5% cost and rest consumer finance cost

    Business Segments

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    • Reduction in sales in core business in first quarter which would come back to normal level
    • Reduction in sales in ECD segment
    • Cooler segment is very small and saw decline as compared to last year
    • Around 13-14% volume growth in cables
    • Around 9% volume growth in wires
    • There was some stocking up in Cables and Wires segment due to rate hikes
    • Fan segment had good sales in April which dropped down by 30-40% due to destocking in May and June
    • Reduction in sales by 30% in Fixture business, ECD business, and lighting business in June
    • Cables and Wires, the export business, and the EESL business brought in overall growth for company
    • There is growth in EESL in Q1 by getting contracts and setting factories in Neemrana and Promptec
    • Expansion of sales in domestic Switchgear will now come from Guwahati
    • Reo is not economy segment and provides mass premium products and filling the gap of Havells
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      Lloyd Acquisition

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      • Lloyd had EBIDTA margin of 4.8%
      • Lloyd is performing in line with initial forecasts with focus on strengthening the institutional framework including product, sourcing, manufacturing and marketing function
      • Expense of Lloyd acquisition mounted to 12 to 14 crores which was borne by Havells
      • No price hikes for Lloyd for increasing profit margin
      • Focusing on improved sourcing, with focus on manufacturing for improving margin for Lloyd
      • Had a smooth transition period of 50 to 60 days
      • Lloyd had 20% growth on like-to-like comparison for the entire quarter
      • Rs.628 Crore of sales in the durable segment
      • EBITDA minus depreciation is around 3.3%
      • April saw higher growth which slowed down in May and June due to transition and GST but margins are intact
      • High trade payables with credit period of 75 days are due to imports from China which they inherited from Lloyd
      • There are no new product introduction plan as Lloyd has significant portfolio of products with growth prospects
      • High promotional spend of 6.8% of sales as they have high consumer finance-driven sales
      • Lloyd is driven by consumer sales so promotional cost will be between 5.5%-7% in future
      • Almost 80% of total revenue of Rs. 267 crore was due to A/C sales and balance mainly LED
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      Impact of GST

      • Positive for business as unorganized sector would have limited ability to evade the system.
      • GST caused destocking of trade channels which impacted the quarter and they are recovering
      • They worked with channel partners and organized GST seminars across branches to explain and address their concerns on a range of issues
      • The GST rate is high for this sector, especially Wires and Cables which resulted in price hike in the industry from July 1, 2017
      • The higher cost due to GST is finally passed on to the consumer
      • Price rationalization w.e.f. July 1, 2017 was done considering impact of GST and raw material prices
      • Price rationalization to maintain balance between contribution margin and customer benefit
      • They were the first to announce pricing policy for all products category and started billing accordingly on July 1, 2017
      • Destocking was done to the extent of 30% and 50% depending upon market-to-market to dealer-to-retailer which impacted the business
      • Restocking will happen and growth will be back to normal
      • Restocking will take some time as a lot of dealers and retailers are still coming to terms with the new system
      • There is landed price concept in industry; discount is given and distributors and dealers have to meet the margin over and above that. There is no structural change due to GST.
      • The organized retailer and dealers will get rightful margins as they will get credit and competition with unorganized traders would reduce
      • The June sales for unorganized brand was high however sustainability is uncertain
      • Only primary sales were impacted and not secondary and tertiary sales

      Future prospects and Strategy

      • Demonetization, RERA and GST would create long-term structural benefits, though may inflict short-term costs
      • Potential and opportunity would increase with these reforms
      • They are continually investing in manpower and branding and monitoring market for interim course corrections
      • They have not implemented new strategy for margins due to constant reforms such as demonetization and GST and raw material price hikes
      • Clubbing a few warehouses which are close to each other and advantage would come in some time
      • The growth in overall housing demand will induce growth by being more vigilant and aggressive in the marketplace
      • They are trying to extend credit period for about 30 to 40 days
      • Procuring its A/C products with 30% with its own in-house and 70% is from outsourcing

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