All-round growth lights up Havells' Q1

Expected to outperform peers across categories over 2-3 years

Havells' June quarter performance surprised the Street positively. Even as it may not be indicative of the full year's performance, given the year-ago quarter's low base, good fundamentals have kept analysts positive. Havells' expanding product range, improving margins and expected rise in consumption of electrical equipment, are keeping the Street enthused. Following the strong results which came on Saturday, the stock scaled to its 52-week high of Rs 388.70 on Monday.

Revenues grew 17 per cent year-on-year to Rs 1,467 crore in June quarter. The electrical consumer durables, which contribute a fourth to overall revenues, grew 21 per cent, led by good growth in fans, water heaters and other appliances segments. The switchgears segment, which also contributes a fourth of revenues, grew 20 per cent, propelled by 34 per cent increase in exports. The largest segment of cables, which contributed 36 per cent to revenues, grew only five per cent, largely due to lower commodity prices. Volumes in the cables division grew at robust 20 per cent, more than offsetting the decline in commodity prices. The growth of 22 per cent in lighting and fixtures segment (rest of revenues; 13 per cent) was fuelled by a 32 per cent jump in fixtures revenues (about two thirds of the segment). Havells said that the growth in LED segment was offset by decline in CFL, while there was consistent improvement in margins in lighting division. One of the reasons for improved margins was the focus on profitability even as it participates in the government's energy saving schemes.

Earnings before interest, taxes, depreciation and amortization at Rs 200 crore was up 24 per cent year-on-year with margins expanding 80 basis points to 13.7 per cent in June quarter. Of the margin expansion, 70 basis points gain was due to discontinuation of royalty expense, say analysts. Havells said that Rs 40 crore savings accrued from April 1 2016 due to discontinuation of brand royalty payments to Sylvania, a foreign subsidiary it sold last fiscal (this company incidentally enjoyed low margins). Consequently, net profit at Rs 146 crore grew 36 per cent year-on-year.

Analysts at Edelweiss say that induction of key personnel in past 10-12 months from various industries and company's expanded reach to last mile (retailers/consumers) explains its higher-than-industry growth across many segments and also equips Havells to outperform peers across most product categories over two-three years.

However, after a good 41 per cent run-up in the stock price since March, valuations have become rich, leaving limited room for upside in the near-term. The price targets of Kotak Securities, Antique Stock Broking, HSBC and Edelweiss are Rs 355-415. The stock closed at Rs 381.25 on Monday.