The recent Budget announcement has brought consumption into focus with the moderation of personal taxes. Consumer Durables is at the forefront of such a tilt. Havells India, a well-diversified Consumer Durables player, can be accumulated on dips for investors looking to ride the wave. Margin improvement is a key task for the company and valuations appear to be fully factoring in the growth prospects. But earnings growth should be strong with a turnaround in cables and switchgear segment, and margin improvement in others. Investors should wait for opportune corrections to accumulate the stock to create a safety buffer in terms of valuation.
Havells has a diversified presence (see table), split across fast-emerging sectors and slow-growing mature sectors. The diverse presence also covers seasonal segments, commercial government business and retail exposure. It has urban and rural presence. This makes Havells a comprehensive play on Consumer Durables.
The sector itself has strong tailwinds to it too. Higher proportion of middle-class in the demography, urbanisation and nuclear families with constrained housing and increased financial reach and digital connectivity are long-term structural drivers.
Growth drivers
Switchgear, cables and lighting
The switchgear segment is expected to benefit from revival in government capex, impacted in the first nine months of current FY owing to elections and also demand slowdown in the real estate sector. The Central government must spend the last third of the budgeted capex in the fourth quarter to meet its revised estimates. The Central government capex allocation, fixed at ₹11 lakh crore for FY26, and the backlog in projects should marginally elevate growth prospects.
Cables and wiring segment is expected to face strong demand. The company completed a ₹300-crore facility in Tumkur after reaching 90-95 per cent utilisation and announced another expansion worth ₹450 crore. Power capacity expansion in the country is expected to drive the demand along with retail demand. Havells has a premium portfolio in lighting, but has faced price erosion last year. The recently-stabilised pricing is expected to result in normalised single-digit growth for the next few years. .
Durables segment
This half of the revenue base benefits from strong structural growth tailwinds, with the exception of fans in ECD (Electrical Consumer Durables). Even within ECD, premiumisation in fans and different kitchen appliances has enabled strong growth in 9MFY25 and is expected to continue by gaining share in different segments.
Acquisition of LloydLlyods in 2017 provided a much-needed AC diversification for the company. Havells is adding a back-end integrated refrigeration production (₹480-crore facility in Rajasthan) to further diversify. The others segment addresses personal grooming, water purifiers and air coolers, and strong growth is expected to continue as Havells increases market share in the segments.
Margin turnaround
The effect of increased competition has been evident (see table) on margins. But Havells’ margin contraction has not been price-led, as gross margins have expanded in the period. The company has been investing on employees, advertising and other expenses to improve market shares in ECD, Others and, primarily, Lloyd. The three operating heads’ cost as a percentage of sales have expanded by 180/140/110 bps respectively in FY22-24 which has led to the 360-bp decline in EBIT margins.
The advertising budget had increased to support Lloyd, and by extension the wider portfolio, and is expected to contract back to a normal range. The employee addition had increased to improve market share by adding personnel across product categories and across retail, e-commerce and online channels. While this expense growth will slow down on expansion, the utilisation of investment is expected to aid margin expansion.
While the impact of competitive intensity on margins is expected, Havells can deliver 100-120 bps EBIT margin improvement by FY26. Lloyd, which has been on an investment mode, will continue to remain so, but the segment has broken even on margins and should see 100-150 bps EBIT margin expansion by FY26. Peer Bluestar, which is focused on ACs and can be viewed as a benchmark, has a EBIT margin profile of 3-4 per cent.
Cables and Switchgear segment was impacted by inventory destocking, driven by commodity prices and slowdown in government spending respectively and are expected to reverse in the next one year. Lighting and fans’ price erosion has been ongoing and is expected to find a bottom soon, further aiding margins. Smaller and kitchen appliances’ improved market share based on past investments is also a lever. The impact of high top-line growth on operating leverage and the cost efficiency programme the company is currently undertaking are also expected to aid the margin expansion.
With several moving parts and limited margin expansion expectations compared to past contractions, there is scope for upside surprise on margins.
Valuations
Post-Covid, in the last five years, Havells has traded at one-year forward PE of 55 times average. It is trading in the same range now after contracting from a peak of 70 times in September 2024.
The estimated earnings growth of 22 per cent CAGR (Bloomberg estimates) in FY24-26 is powered by revenue growth expectation of 15 per cent CAGR and a modest EBITDA margin expansion of 90 bps. The margin levers and natural tailwinds to growth and recovery in cables, switchgear, and lighting and fans should ensure growth. But the current multiple is at a higher range and fully captures the stock prospects. Investors should still look for a margin of safety in valuations and hence can accumulate stock on corrections.