Amid higher raw material costs, margin pressures may continue for Havells

Demand recovery, however, has been strong which could help partially offset cost inflation

The stock of the country’s largest fast moving electrical goods maker Havells India slipped over 8.5 per cent in trade on worries that pressure on profitability could continue in the coming quarters.

The company, which owns the Lloyd, Crabtree, Havells and Standard brands, reported a steep 605 basis points decline in gross profit margins in the September quarter. The drop in margins was on account of higher raw material costs, lag effect of price hikes and inferior mix. Growth in the switchgear business, which contributes the most to margins, was lower than other segments.

The stock continued to decline despite positive management commentary on demand growth and expectations of margin improvement going ahead. What has been dragging down margins is lack of requisite hikes to compensate for commodity headwinds (sharp rise in steel, copper prices). 

One segment which has weighed on margins is the Lloyd franchise. The company highlighted the hypercompetitive nature in the air conditioning (AC) market with two years of peak season washout due to the Covid situation leading to high inventories. This made it difficult for the company to pass on costs though it indicated that market shares in ACs as well as the other segments (washing machines, freezers) have been healthy. The company is looking at the export market and higher volumes to improve margins. 

While the company has not been able to fully pass on the costs, it indicated that if commodity prices do not increase going ahead, it will refrain from taking hikes. Its focus will be on revenue growth and cost efficiencies to offset the inflation pressures. 

What should help on the growth front is resilient demand led by an upcycle in the real estate sector and traction in the industrial and infrastructure segments. The management highlighted that demand in the year ago quarter was pent-up in nature with tier 2 and tier 3 regions driving growth. Now, the demand is across segments and geographies with both retail and institutional sales contributing to this. 

Prior to the fall on Thursday, the stock had gained 28 per cent over the last three months to its highs in mid-October. While demand has improved, given the uncertain picture on cost and competitive pressures, investors should await the stability on the margin front before considering the stock.