Havells' underperformance may take a while to reverse; stock falls

Valuation of 34x FY21 earnings does not capture whole picture

When stocks in the cooling solutions segment such as Voltas, Blue Star, and Whirlpool delivered handsome gains, diversified consumer durables player Havells failed to live up to expectations. With the stock down 6.5 per cent in 2019, the question is how soon it can reverse the past year’s underperformance.  Going by the current trend, it appears that it is some time away. 

For one, Havells’ dependence on traditional segments such as switchgears, lighting, and cables remains high at 65 per cent of its total revenues. With the economic downturn showing little signs of reversal, revenue streams from these pockets could stay stressed. 

Among these, while cables and wires fared better than the rest in terms of revenue growth in the September quarter (Q2), thanks to last year’s price hikes, revenue growth in the cables segment in FY20 has been only 6 per cent, which hasn’t been enough to make up for the muted show by other segments. 

Even as Havells maintained its market share across product offerings, challenges remain elevated for its switchgears and lighting businesses, which hinge more on industrial projects. The lighting business has been vulnerable to competition from Chinese imports in the LED segment. 

The saving grace is Havells’ consumer durables business, which has seen a healthier 19 per cent year-on-year growth in revenues for the first half of FY20. 

Contributing to about 19 per cent of the company’s overall kitty, Havells’ has managed deeper customer penetration and market share gains in the past year for categories such as fans and water heaters. 

But what could weigh on these gains for a reasonable period could be the Lloyd’s consumer business, a vertical acquired in 2017. Work is still underway in terms of rationalising its operations.

Pointing out that much of the revenue decline in Lloyd’s business could be attributed to intense competition in the television panels segments, analysts at HDFC Securities say FY20 will remain to be a year of work in progress as far as this Lloyd’s is concerned. 

“We see Lloyd’s business turning around from FY21 with benefits of portfolio diversification and backward integration reflecting in the numbers,” say analysts at CLSA. 

In short, the near future offers little cheer to investors and hence the chances of its stock price reversing the past year’s underperformance appears low. 

While valuations at 34x its FY21 earnings appears reasonable after the correction, it may not fully capture the pain ahead for the stock. 

Investors should, hence, remain cautious.