Analysts up earnings estimates for Havells after company reports strong Q3

Surge in company's share price and premium valuations do not offer a favourable risk-to-reward equation, say analysts

Shares of Havells India jumped more than 12 per cent intraday on Thursday to hit a new record of Rs 1,144 after the consumer durable products maker's results for the quarter ended December 2020 (Q3) beat analysts’ estimates.

Demand was healthy aided due to festivals sales and footfalls reviving, but top line growth was far higher than estimates. Revenue was up 39 per cent year-on-year to all-time high of Rs 3,165 crore in the October-December period aided by strong growth across all segments. That compares with consensus estimates of Rs 2,627 crore.

The company said its growth came on the back of an expanding distribution footprint with a focus on increasing penetration in smaller towns and rural region, robust supply chain and (market) gains from the unorganised sector.

On a YoY basis, revenue in Havells’ core portfolio (excluding acquired Lloyd business) was up 35 per cent wherein consumer durables surged 46 per cent, switchgear by 32 per cent, cables and wires grew by 27 per cent, and lighting was up 28 per cent. The Lloyd business also posted 70 per cent growth, with margins turning positive.

Analysts at Motilal Oswal Securities said: “The supply chain disruption faced by suppliers, with high import dependence, has further supported market share gains from the unorganised sector.” Revenue in the first nine months is now almost at par with year-ago period, while net profit is up 25 per cent higher YoY to Rs 737 crore.

With the March quarter (or Q4) being seasonally strong, demand momentum is expected to sustain. “Our channel check suggest that growth momentum has been continuing in month of January as well. Dealers are planning for double digit growth in Q4, even as supply chain remains constraint,” said Himanshu Nayyar, Analyst - Institutional Equities, YES Securities.

Although, Havells took price hikes Q3 to mitigate input cost pressures, analysts estimated only a modest growth in margins compared to the year-ago period. However, lower ad spends and overall cost optimisation more than offset those risks as EBITDA margin expanded by over 400 basis points in the December quarter. Subsequently, strong topline growth and operational performance saw net profit jump 70 per cent YoY to Rs 350 crore, also an all-time high, against expectations of about Rs 251 crore.

With better demand and strong execution, analysts have upped their earnings estimates. “We factor-in 10 per cent revenue CAGR between FY19 and FY23 with EBITDA and profit after tax CAGR of 16 per cent and 18 per cent, and EBITDA margin of 14 per cent,” said analysts at ICICI Securities.

However, the sharp surge in its share price and premium valuations do not offer a favourable risk-to-reward equation. Thus, investors are advised to wait for a better entry point and accumulate on dips, said experts.