Q1 results: Havells feels the heat of weak demand, stock falls over 4%

Growth moderates in cables, lighting; poor show in switchgear and Lloyd business

Havells lost 4.7 per cent on the bourses on Monday after it posted a muted June quarter performance. The company felt the heat of the ongoing slowdown in demand for most of its segments. Demand, according to the company, continues to be weak, aggravated by real estate slowdown, liquidity squeeze, and delays in projects.

The switchgear segment, which accounts for about a fifth to revenue (excluding Lloyd), saw flattish returns, given the lower demand from the construction sector, especially project offtake. The slowdown in these sectors started in November last year but has intensified since then.

The cable segment, which accounts for 38 per cent to revenue, and lighting and fixtures (13 per cent contribution), too, saw tepid growth of 4-5 per cent in revenue. The company indicated that industrial cable and professional lighting demand, too, was impacted by delay in fresh government projects since elections. Notably the above three segments had reported 16-24 per cent growth during 2018-19 (FY19) and with growth coming off, the overall performance was bound to get impacted.

Meanwhile, the electrical consumer durables segment provided some boost to the overall performance, reporting a 24 per cent year-on-year (YoY) growth amid tepid market scenario. The company indicated that investments in distribution, new products, and teams have contributed to growth. Within this, fans, water heaters, water purifiers, and air coolers witnessed good growth. While this is lower than the 30 per cent reported by the company during FY19, it is still at robust levels.

The Lloyd business continues to disappoint, with revenue declining 8 per cent YoY. Though the company said that air conditioners’ (ACs’) offtake recovered from the fourth quarter, it has, however, remained soft. It was the steep decline in light-emitting diode panels that led to lower sales for the Lloyd segment.

With various segments underperforming, overall revenues at Rs 2,712 core came much lower than analyst estimates of Rs 3,015 crore. The rising selling, general and administrative expenses (up 18 per cent YoY) impacted the company’s operating performance as well. The overall earnings before interest, tax, depreciation, and amortisation at Rs 275.6 crore declined 14 per cent YoY and was lower than analyst’s estimates of Rs 363 crore. Not surprising then that profits at Rs 177 crore came much lower than the consensus estimates of Rs 246 crore.

With elections behind, the Havells management now expects government spending to improve demand for cables and other segments. The AC manufacturing facility to be completed soon will also boost the operating performance for Lloyd. The rising duty on AC component imports and exchange volatility has been posing challenges for most AC players.  While volume growth has improved in the AC segment, the challenges on price hikes for the industry continue, given the competition. Havells is focusing on the premium segment, which is likely to drive profitability over time. The management expects Lloyd’s performance to improve over the few quarters.

Meanwhile, analysts say that the impact of slowdown that was visible from the March quarter has continued.  Arafat Saiyed at Reliance Securities expects challenges to continue for a few quarters more. The stock is trading at 42x 2019-20 and 33x 2020-21 estimates and for valuations to sustain, growth momentum needs to catch up, say analysts.