Havells fails to impress in December quarter

Domestic growth, however, remains strong and is expected to pick up

Havells’ results for the quarter ended December 2015 failed to impress the Street and the stock closed 0.61 per cent lower at Rs 300. However, the softness in overall numbers has been due to decline exports. Domestic growth, nevertheless, has been reasonably good. Given that Havells is in the midst of selling 80 per cent of its stake in Havells Sylvania Malta (Europe business) and that Sylvania has been a drag on its consolidated financial, the divestment of stake will be positive with focus returning to domestic growth where its strength lies. The remaining non-divested entities of US, Chile, Brazil and Thailand are loss-making, but Havells is expected to turn them around in two years, say analysts. The stock thereby remains a good investment pick on declines. It’s not only the benefits of divestment of stakes in Sylvania, but other triggers such as uptick in consumer spending on the back of Seventh Pay Commission's award and potential in industrial business that can boost Havells’ performance.

For the December quarter, Havells India revenues at Rs 1,286 crore grew a good 11 per cent while exports (Rs 58.7 crore) marked a 36 per cent decline year-on-year (y-o-y), and hence, total revenues at Rs 1,344.5 crore grew just eight per cent y-o-y. Besides the decline in exports for Sylvania, the sharp currency devaluation in Africa also impacted growth of export to these countries.

The growth in domestic market across all divisions remains strong. For instance, lighting and fixtures segment (16 per cent of total sales) and consumer durables segment (21 per cent of total sales) grew by a strong 17 per cent and 23 per cent, respectively. Almost half of the lighting division now constitutes LED lights and fixtures, which have seen sales double, and is expected to be a strong growth driver moving forward.

There was some disappointment with the switchgear segment, about fourth of total revenues, which remained flat. However, the segment marked a seven per cent growth in domestic market while exports declined 37 per cent, impacting overall growth. The cables segment – contributing 39 per cent to sales – also grew just six per cent, mainly due to subdued copper prices. In volume terms, industrial cables registered a growth of 29 per cent y-o-y.

While analysts expected improvement in margins as apart from cables and wires, the benefits of lower raw material prices have not been fully passed on to customers, thanks to increase in advertisement and promotional costs Ebitda (earnings before interest, taxes, depreciation and amortisation) margins came in lower than expected. Analysts had expected Ebitda margins of over 14.5 per cent, but it came at 13.5 per cent. Nevertheless, for the first nine months of financial year 2016, margins have remained stable at 13.4 per cent. Net profits, thereby, could grow only four per cent against expectations of 12-17 per cent.

Thus, while the company’s performance may have missed Street estimates on some parameters, strong domestic growth and momentum picking up should raise sentiments. Analysts at Ambit had said Havells’ standalone franchise is trading at a meagre 15 per cent premium to peers on FY17 price to earnings ratio (against 20 per cent premium a year ago) despite it being a market leader with average RoIC (return on invested capital) of 59 per cent in FY16-FY17 against 25 per cent for peers. They have a target price of Rs 343 indicating 14 per cent upside.

Prashant Kutty at Emkay Global values Havells on standalone business (27 times FY18 earnings) and assigns Rs 17 cash value to proceeds from divestment of Sylvania and has a target price of Rs 355. While Ravi Shenoy, vice president, Mid caps at Motilal Oswal said there was a disappointment on margin fronts by about 100 basis points, he will watch for utilisation of the proceeds of Sylvania stake sale. A special dividend can lead to a re-rating of the stock, he adds.