High raw material prices, delay in hiking prices hit Havells' Q2 profit

High raw material prices, weak rupee and lag effect to pass on increased costs weighs margins

Even as revenue growth was robust and in line with expectations, Havells’ profitability was muted in the September quarter (Q2). Volatility in raw material prices, rupee depreciation, and a lag in taking price hikes impacted margins. 

However, the pressure on margins should ease soon.

There are no issues on the top line front. Havells’ net standalone revenues at Rs 19.33 billion, excluding the acquired business of Lloyds, grew 28 per cent YoY, while total revenues at Rs 21.91 billion came a shade ahead of Bloomberg consensus estimates of Rs 21.72 billion. Earnings before interest, tax, depreciation and amortisation (Ebidta), at Rs 2.49 billion, however, fell short of estimates of Rs 2.71 billion.

Margins at 12.9 per cent, too, were 290 basis points lower on a YoY basis. On the revenue front, the good news was an all-round growth. 

Consumer durables, about a fourth of overall revenues, continued reporting strong growth (42 per cent YoY) and margins at 27.3 per cent were stable. The cable business, too, registered decent volume growth, aided by rising commodity prices. 

However, it lagged on the profitability front as margins in Q2FY18 were unusually higher owing to favourable commodity prices on inventory. In Q2FY19, margins at 14 per cent were significantly lower than 19.9 per cent last fiscal. Since it accounted for 40 per cent of revenues, it reflected on overall profitability.

Likewise, switchgears and the lighting and fixtures businesses, about a third of revenues, marked strong 28 and 18 per cent YoY growth. But again, margins fell.

The Lloyds business saw a soft quarter, with sales declining 5 per cent and margins down 100 bps. Havells attributed this to an adverse season, channel inventory and forex headwinds. The recent hike in customs duties on import of consumer durables will also remain a concern as Havells is dependent on imports for 70 per cent of its requirement in Lloyd’s air conditioner business. 

Havells, however, is planning to start a plant in FY19, which Arafat Saiyed, analyst at Reliance Securities, says will allay concerns. With price hikes taken in H2, he expects margins to improve.