Value investor- India mid & small caps

Bhaskar Chakraborty

Equity Bottom-Up

<ul><li><a href="https://www.smartkarma.com/entities/9158" target="_blank" data-smartkarma-citation="entities:9158:1">Havells India Ltd (HAVL IN)</a> says real estate construction activity is subdued on the back of demonetization and RERA, impacting switchgear, cables and durables demand. Company saw no improvement in demand in the just-concluded festive season extending into 3 weeks of 3QFY18.</li><li>Dealers may not restock to pre-GST levels at all as they improve efficiency and manage on lower inventory</li><li>GST rate of 28% applicable on Havells’ product categories sharply higher than the 18% (excise and VAT put together) in pre-GST regime. This is incentivizing unorganized players to stay out of the GST regime and driving customers to unorganized products owing to the pricing arbitrage. Please see our note highlighting this shift in market share in July <a href="https://www.smartkarma.com/insights/v-guard-4qfy17-strong-growth-lower-margins-gst-springs-negative-surprise" target="_blank" data-smartkarma-citation="insights:10959">V-Guard 4QFY17- Strong Growth, Lower Margins; GST Springs Negative Surprise</a>.</li><li>1-off inventory gains (our estimate Rs340m) and lower A&amp;P (Rs143m) aided EBITDA by 270bps. Adjusted for the same, PAT would have been 6% lower YoY (even after including Lloyd).</li><li>Consensus remains cheery with 38% EPS growth forecasted for FY18. This would require an almost doubling of EPS YoY over 2HFY18. Given the continued slowdown in construction activity and job losses in the unorganized sector, we think EPS estimates will see large cuts over the next few months.</li></ul>

Havells India Ltd (HAVL IN) says real estate construction activity is subdued on the back of demonetization and RERA, impacting switchgear, cables and durables demand. Company saw no improvement in demand in the just-concluded festive season extending into 3 weeks of 3QFY18.Dealers may not restock to pre-GST levels at all as they improve efficiency and manage on lower inventoryGST rate of 28% applicable on Havells’ product categories sharply higher than the 18% (excise and VAT put together) in pre-GST regime. This is incentivizing unorganized players to stay out of the GST regime and driving customers to unorganized products owing to the pricing arbitrage. Please see our note highlighting this shift in market share in July V-Guard 4QFY17- Strong Growth, Lower Margins; GST Springs Negative Surprise.1-off inventory gains (our estimate Rs340m) and lower A&amp;P (Rs143m) aided EBITDA by 270bps. Adjusted for the same, PAT would have been 6% lower YoY (even after including Lloyd).Consensus remains cheery with 38% EPS growth forecasted for FY18. This would require an almost doubling of EPS YoY over 2HFY18. Given the continued slowdown in construction activity and job losses in the unorganized sector, we think EPS estimates will see large cuts over the next few months.

Havells: Weak Demand, Unorganized Gaining Market Share, Rising Input Cost Muddies Water for Durables