Havells growth lit up by revival in demand

Revenues were driven by the 23 per cent growth in the lighting business

Havells exceeded expectations again, this time on all fronts. Net revenue of Rs 1,463 crore, up nine per cent year-on-year in the March quarter (Q4FY16), was ahead of the Bloomberg consensus estimate of Rs 1,448 crore. Operating margins at about 15 per cent, an increase of 170 basis points (bps) year-on-year, were also ahead of estimates of 14 per cent and were the surprise element. Net profit at Rs 366 crore, which more than trebled on the back of divestment proceeds from its foreign businesses, took the sheen away from strong operational numbers. The stock of Havells declined 1.7 per cent on Wednesday. However, analysts say the Street's concerns are misplaced as the net profit at Rs 164 crore (excluding proceeds from the stake sale, unadjusted for taxes) is still higher than the Bloomberg consensus estimate of Rs 150 crore. Ruchir Khare of Kotak Securities says the March quarter numbers of Havells are noteworthy, with operating margin expansion the positive surprise.

"Strong growth in the lighting business, driven by LED sales, has helped Havells," he says. Profit-booking could be another reason for the stock's fall, given the 27 per cent rally since the start of March.

Lighting segment, which now accounts for 16 per cent of the total business (14 per cent in Q4FY15), saw the highest revenue growth at 23 per cent year-on-year in the March quarter. That said, given the recent product launches, the Ebit (earnings before interest and tax) margin for the segment declined 124 bps to 24.5 per cent in Q4FY16. Havells plans to increase its reach, so advertisement spends may remain elevated.

Cables and consumer durables posted 100-230 bps expansion each in Ebit margin, while the switchgear division's improved from 29.6 per cent a year ago to 39 per cent in Q4FY16, more than compensating for the decline from lighting business.

Rajiv Goel, executive president of Havells, says given the downturn in commodity prices, 14 per cent operating margins may be more sustainable in FY17. Likewise, advertisement cost as percentage of sales may hover around 3.3 per cent in FY17 (2.65 per cent in Q4FY16). He is cautious about growth in switchgear and cables divisions, where revenues grew seven per cent despite sales volume growth of 11-14 per cent in FY16.

With the return of consumer spends and its strong dealer network, consumer business, particularly fans and electrical appliances, may do the job for Havells.

Before the results, 20 of 37 analysts polled on Bloomberg recommended buying the Havells stock.