Dark days might be over for Havells India

Low valuations adequately capture the expected weakness in the company's FY16 performance

A weak performance by the cables' business (42 per cent of FY15 domestic revenues) and continued sluggishness in the global operations under Sylvania, which forms 39 per cent of FY15 consolidated revenues, weigh on the Havells India stock. The scrip has under-performed the S&P BSE Sensex over the past one year and trades close to its 52-week low of Rs 239.5, which it made last Tuesday. That's where the bad news ends.

At the current price of Rs 256, the Havells scrip is trading at 24 times FY17 estimated earnings. Analysts believe the stock captures most of the negatives and offers attractive entry to long-term investors. So, what's making the Street positive on Havells?

Even as revenue growth is likely to be subdued at 10 per cent in FY16, mainly due to the pressure in the cable business, analysts expect it to re-bound to high teens in FY17. Among the key drivers, product launches, with an improvement in the economic environment, should lead to higher demand and revenue growth FY17 onwards. The ongoing restructuring of its Europe-based lighting products subsidiary, Sylvania, will be another positive. This subsidiary, which has a century-old history, has not been contributing to Havells bottomline for some time now. Notably, the restructuring expenses will be entirely funded by Sylvania. Such a move will allow Havells to invest money in growing its more profitable domestic business, where it has lined up capex of Rs 150 crore this financial year. The company is also strengthening its consumer appliance business.

The flip side is Sylvania may not contribute meaningfully to Havells' profitability over the next two to three years. Slowdown in Europe and high pension liabilities (^58 million payable over the next few years) will prove limiting factors. Sylvania's buyout has been a drag on Havells' return ratios and some analysts believe the company is better off exiting the business.

In India, higher wages for government employees, push to affordable housing, and increased government spending, will boost demand for Havells' products across segments. Apart from cables, switchgears (24 per cent of domestic revenues), lighting and fixtures (14 per cent) and electrical consumable durables (20 per cent) stand to gain from improving consumption demand.

Despite slowing revenue growth in recent quarters, Havells' domestic business Ebitda margin has held on, due to falling commodity prices. Continued weakness in commodity prices and improving revenue mix in favour of consumer electrical products will aid a 100-125-basis-point improvement in domestic Ebitda margin to 14.6 per cent in FY17 from 13.5 per cent in FY15, say analysts.