Havells delivers a strong beat in Sept quarter operational performance

While cost control drove margins and consumer demand rebounds, further gains may restricted as projects business is yet to recover and valuations are stretched

Significant improvement in revenues, along with robust operating profit growth in the September quarter (Q2), propelled the Havells stock to its 52-week high, on Thursday.

The electrical consumer durables (ECD) business continues to drive growth, while other segments such as lighting and fixtures, as well as switchgears, saw an impressive rebound and rercorded a year-on-year (YoY) increase in sales. 

Revenues in the cables segment were lower than the year-ago quarter’s level, but have improved significantly following the easing of restrictions. Therefore, the results came in ahead of consensus estimates.

Net revenues at Rs 2,452 crore — up 10 per cent YoY— were ahead of estimates of Rs 2,120 crore. Cost-control initiatives, however, drove higher benefits and consequently boosted operating performance. While effective price and cost management aided segmental margin growth — especially in ECD and lightings — lower advertisement and selling, along with general and administrative costs, added to gains. 

Operating profit at Rs 421 crore, up 79 per cent YoY, beat estimates of Rs 229 crore. Pre-tax profit more than doubled, while net profit grew 80 per cent YoY to Rs 328 crore, beating estimates of Rs 136 crore.

ECD segment (fourth of sales) remains on a strong footing, and grew 18 per cent YoY. 

Consumer appliances saw higher traction, with the work-from-home culture driving demand, and Havells’ large range with new products augurs well. Growth was led by consumer demand across tier-II and tier-III cities, and even rural India. The metro and projects business, however are yet to normalise. The firm said consumer and residential portfolio registered mid-teen growth across segments, and consumer lighting was a beneficiary of Rural Vistaar and deeper distribution.

The acquired Lloyds business also grew 56 per cent YoY. Margins, however, were on the lower side — it being an off-season.  For Llyods, peak June quarter AC sales were lost due to the lockdown. Yet, some contribution from refrigerators  launches and washing machines will help offset the impact, with Havells planning a range of white goods. 

Medium-term prospects have also improved thanks to the backward integration for manufacturing ACs and other cooling products, which should help gain market share at a time imports from China are being banned. After a strong Q2 operational performance, analysts see the scope for upgrades in forward earnings. If the infrastructure and real estate sectors recover, there could be more upgrades.

Valuations are stretched at 50x its FY22 estimates, partly because Havells commands higher multiples than peers on account of its diversified portfolio. This, coupled with the strong 57 per cent rally over the past five months — are among reasons why the Havells stock slipped 0.44 per cent on Thursday.  Amarjeet Maurya of Angel Broking feel corrections could be a good opportunity to enter for long-term gains.