Near-term demand uncertainty for Havells likely to weigh on sentiment

Havells may have managed to post a better-than-expected performance for the quarter ended June 30 (Q1), but near-term uncertainties on demand are likely to weigh on its stock valuations. The stock has lost almost 4 per cent since last Monday, when its Q1 results were declared.

Though revenues declined 45 per cent year-on-year (YoY) to Rs 1,479 crore, there was a better-than-expected rebound in June sales, which pushed top line ahead of consensus estimate of Rs 1,302 crore. June saw sales grow 4 per cent YoY, against a 40 per cent decline in May. Higher-than-expected revenues helped Havells post an Ebitda of Rs 131 crore, which was down 53 per cent YoY, yet exceeded the estimate of Rs 66 crore. Analysts said the decline in employee costs was a surprise; selling and general administrative expenses, too, declined. Thus, its profit before tax of Rs 86 crore beat analyst expectations of a loss.

The company said demand markets were tepid initially because of the lockdown, but picked momentum in the latter half of May. The stock price, too, reflected the same with gains of 30 per cent since May lows. However, amid frequent regional disruptions and shutdowns, the demand scenario is hazy, the company stated.

The core business segments, switchgear, cable, lighting & fixtures, and electrical consumer durables (ECD), saw a 41-46 per cent decline in revenues, while the acquired Lloyds business suffered a steeper 53 per cent YoY decline in Q1. The consumer portfolio within all the segments recovered earlier and better than the industrial portfolio. Cables (13 per cent of revenue) and switchgear (31 per cent) are more dependent on housing and construction activities, which remain subdued. The lighting segment may grow well, but is facing intense competition. Lighting margins at 2.1 per cent were much lower than 14.2 per cent in the year-ago quarter. The ECD segment, which contributes about a fifth to revenues, is well placed as appliances sales are likely to be decent, though the peak season for fans have been impacted.

Lloyds’ business, too, has seen the impact and peak summer sales for air conditioners have suffered. Nevertheless, the low base of last year remains a support area for the segment, say analysts. The company, which had added LED panels to its range, is also launching refrigerators and this will be positive.

Tarang Bhanushali at YES Securities said looking at the slowdown in real estate, and the disruption in metro cities, a cautious outlook prevails and the stock trading at 47x FY22 earnings estimates is not cheap.