Havells reports in-line performance for Q3, improvement in Lloyds' business

Net profit at Rs 1.94 bn helped by one-time gain of Rs 210 mn came significantly higher than expectations of Rs 1.69 bn

Havells reported a steady and in-line performance for the quarter ended December 2017 (Q3). Although revenue for its standalone business at Rs 19.66 billion came marginally lower than Rs 19.96 billion as indicated by Bloomberg consensus estimates, earnings before interest, tax depreciation and amortisation (Ebitda or operating profit) at Rs 2.62 billion was a tad ahead of analysts’ estimates of Rs  2.60 billion. 

Net profit at Rs 1.94 billion helped by one-time gain of Rs 210 million came significantly higher than expectations of Rs 1.69 billion. However, even after excluding the one-off gain, profits were ahead of estimates. 

Revenue growth of 31 per cent was driven by the addition of Lloyd’s business to Havells portfolio. But, even without it Havells’ revenue showed a healthy growth of 11 per cent on a year-on-year (y-o-y) basis in Q3. The bigger positive is the expansion in the margins in Havells’ business to 15.2 per cent, which was much better than 12.7 per cent in the year ago quarter. Notably, even after including the lower-margin Llyods’ business, operating profit margin stood at 13.3 per cent. 

Similarly, most business segments did well. Lighting & fixtures and consumer durables (contribute 17 per cent and 25 per cent to topline, respectively) maintained their growth rates, posting an increase of 21 per cent and 33 per cent respectively in revenues.  

Switchgears (about a fifth of revenue), which has been a laggard in the past few quarters, rebounded posting 11 per cent growth. The cable segment, which contributes slightly over a third to revenue, still is a laggard given the three per cent growth it clocked in Q3. Havells attributed this to delay in orders due to volatility in commodity prices and GST (Goods and Service tax) transition. It expects the segment to pick-up post-GST rate rationalisation.

GST rates for all cables have been reduced from the earlier proposed 28 per cent to 18 per cent now, which should hopefully benefit the segment. Positively, rising share of the more-profitable domestic cables is aiding margins, and will be watched by the street in the ensuing quarters.

On the other hand, the Llyods business grew 16 per cent y-o-y. While the second and third quarters are seasonally soft for the air conditioning business, the segment has suffered, given the high inventory in the channel and measures to liquidate inventory. All these weighed on its margins. Havells said the profitability of Lloyds’ business was impacted due to transition towards energy efficiency norms. As it enters the seasonally strong quarters, all eyes will be on how growth and margins pan out.

Following the results, Havells share price closed about a per cent higher, at Rs  552.15 on Monday. 

The benign reaction can be attributed to the 13 per cent gains in the past three months, and rich valuations of 37 times FY19 estimated earnings.

Himashu Nayyer at Systematix Shares says Havells has reported a decent performance, however the stock is trading at rich valuations and continued earnings growth momentum remains key to maintaining these valuations.