Lit up on global gains

Despite the euro zone problem and domestic slowdown, Havells India beat analysts’ expectations with its performance in the December 2011 quarter. While revenue growth was supported by domestic operations, with robust growth across categories, its 100 per cent European subsidiary, Sylvania, helped boost margins.

Even as Sylvania’s revenue growth will continue to remain under pressure for a few more quarters, due to slowdown in Europe, it will be more than compensated by Havells’ domestic operations, supported by new launches (it recently launched small appliances like water heaters, iron, mixer, toaster, blender and juicer) in the electrical consumer durables (ECD) segment.

Joint Managing Director Anil Gupta says: “We do not see the bearish outlook of the economy impacting our various product categories due to focus on expanding our reach and brand building exercise (three per cent of revenues). On a standalone basis, the business is expected to grow at 15-20 per cent in 2012-13 and the 13.5 per cent operating margin reported in the December quarter is sustainable.”

There is an upside risk to margins, with prices of key raw materials — copper and aluminium — stabilising after witnessing a decline from the peak levels in the first half of 2011-12. Moreover, Havells has shown some pricing power in the domestic market amid an inflationary environment and there is further scope for improvement in Sylvania’s profitability after its recent joint venture in China.

Against this backdrop, analysts remain positive on the stock, which touched a new high of Rs 506.15 recently. It has gained about 14 per cent since the company announced its Q3 results on January 30. At the current level, it trades at 15 times its 2012-13 estimated earnings. And, based on the average target price of Rs 520, there is an upside of six to seven per cent, which could extend if the stock gets re-rated.

Q3: Bucking the trend
While many companies with exposure to global markets have witnessed headwinds, Havells has bucked the trend. Sylvania, forming 50 per cent of its consolidated revenues, reported a decline of four per cent in revenues to euro 114 million, led by Europe (around 70 per cent of the company’s revenues). However, revenues in rupee terms have grown eight per cent to Rs 782 crore, due to the depreciation in the value of the rupee. In addition, strong demand in the domestic market — across product categories — led the standalone business to report a 26 per cent jump in revenues.
 

STEADY GROWTH
In Rs crore	Quarter ended Dec' 2011

FY11 FY12E FY13E Havells*SylvaniaConsolidated Net sales896.0782.01660.05636.06435.87131.5 % chg (y-o-y)26.08.016.08.714.210.8 Operating profit125.053.4176.0572.0650.3735.5 % chg (y-o-y)39.043.038.072.313.713.1 Net profit79.013.089.0307.0349.0421.3 % chg (y-o-y)22.0LTP41.0338.613.720.7 * Standard Electrical merged with Havells; E: Estimates,LTP: Loss to Profit                                Source: Company, Analysts reports

Consolidated operating profit margins rose 167 basis points (bps) to 11 per cent. Though performance of the domestic business was impressive (margins were up 133 bps), Sylvania’s margins jumped by 166 bps, thanks to the benefits of restructuring and turnaround seen by its European operations. Net profit margin rose 94 bps, mainly led by Sylvania, which made a net profit of Rs 13 crore, compared to a loss of around Rs 2 crore in the same quarter last year. Domestic margins slipped marginally, but remained around nine per cent.

Potential for re-rating
Analysts say Havells deserves to be re-rated, as the benefits of restructuring Sylvania play out and its improving performance (especially profitability),in recent times is sustainable. This is because Sylvania currently outsources 60 per cent of its requirement, which can be increased. The management expects8.5-9 per cent margins currently, though it is targeting double-digit margins next financial year. Havells’ 50:50 joint venture with Shanghai Yaming Lighting, for manufacturing lighting products in China (to be fully operational by November 2012) and supplying to Sylvania's global operations, will help achieve this objective.

Besides the improved outlook of global business, strong demand in the domestic market, especially for consumer-oriented products (lighting, ECD) and better pricing power will sustain the robust performance of standalone business. Bank of America Merrill Lynch analyst Sanjaya Satapathy sees upside risk to FY13/14 earnings estimates on account of the China joint venture and new products. Citigroup Global Markets analyst Atul Tiwari says: “Since domestic business momentum remains strong and Sylvania profitability has recovered, we reiterate BUY.”