Havells Q2 results disappoint; slowdown in real estate, infra hits growth

Higher competitive intensity in LED panels impacted growth of the acquired Lloyd's business, which slipped into losses at the operating level

Havells performance for the September quarter (Q2) disappointed, both in the core consumer electrical as well as the acquired Lloyd’s business. Demand deterioration, extending from real estate to industrial and infrastructure segments, impacted growth in the core segments. And, the outlook isn’t encouraging too.

The switchgears and lighting & fixtures segment, which contribute about 30 per cent to overall revenue, saw a 1-2 per cent year-on-year decline in sales. Though the consumer durables business (a fourth of revenue) provided support with 15 per cent growth and the cables (over a third of revenue) grew by 7 per cent year-on-year, sales of Lloyd branded products fell by 30 per cent year-on-year. Consequently, overall revenues grew by just two per cent year-on-year in Q2.

Havells said the decline in Lloyd’s business was due to LED panels, thanks to the aggressive competitive landscape and substantial decline in prices. This segment’s growth also remains a matter of concern for the Street. While in FY19 Lloyd’s sales were impacted due to the demand environment not being conducive for air-conditioner (AC) sales, FY20 is seeing impact on LED panel sales. The segment also reported a loss at the operating level. Analysts believe that the segment will require more time to stabilise. The company has made changes in the distribution channel and also started its AC manufacturing facility (which should help over time), but the near term concerns on LED business will persist.

The company’s profitability also came below analysts’ expectations with overall operating margins declining to 10.5 per cent in Q2 from 11.8 per cent in year ago quarter. EBITDA or earnings before interest, depreciation and amortisation, at Rs 234 crore missed Bloomberg consensus estimates of Rs 281.9 crore, by a big margin.

Analysts at a foreign brokerage said that excluding Lloyd, the core electrical business is a bigger worry with two years of low revenue growth and margins.

Not surprising then, the stock price of Havells has corrected more than 11 per cent since its highs in September, despite the government cutting corporate tax rates. Arafat Saiyed at Reliance Securities says that while tax cuts will benefit, for now he has cut his forward estimates and has a ‘hold’ rating on the stock. Trading at about 42 times FY21 estimated earnings, the stock is not cheap either.