Havells' margins contract in December quarter

Overall show ahead of estimates

Havells was among a few firms analysts were leaning on, to understand note ban impact on the consumer sector. But its December quarter (Q3) results were mixed. Analysts had subdued expectations and those polled on Bloomberg estimated revenues and net profit at Rs 1,388 crore and Rs 129 crore, respectively. But Havells exceeded those expectations by a comfortable margin. Consolidated revenues came at Rs 1,506 crore (up 13 per cent year on year) and net profit at Rs 153 crore (up 27 per cent year on year), helped by exceptional gains of Rs 18 crore. Segmental performance was in line with expectations. Revenues of cables division (which caters to industrial demand) grew 18 per cent year on year at Rs 609 crore. All this is noteworthy, given its lacklustre September quarter (Q2) show. The switchgears segment has been a worry for some time; in Q3, revenues for the segment grew two per cent year on year to Rs 331 crore. This is largely attributable to increasing commodity costs, which are passed on to customers. 

As for consumer-facing segments, the declining demand for CFLs (compact fluorescent lights) became pronounced in Q3, with the lighting segment growing by two per cent year on year to Rs 212 crore. Revenues from CFL division plunged 40 per cent, a dampener given the 22 per cent growth posted by other lighting products including LED (light-emitting diode). However, electrical consumer durables posted strong revenues of Rs 330 crore, up 18 per cent year on year. 

Demonetisation impact shows up in operating profit margin, which declined 110 basis points (bps) year on year to 12.7 per cent in Q3. Most of the impact was felt in consumer durables and lighting, down 150 bps and 420 bps, respectively. Fall in margins dragged Havells' stock down by two per cent on Tuesday, despite good headline results. 

Havells extended certain trade schemes to its dealers, particularly in the switchgears and consumers businesses, to help overcome demonetisation. Investors are unlikely to see a meaningful rebound in margins any time soon. Rajiv Goel, executive president, Havells, is cautious as the success of trade schemes depends on improvement in demand. "Goods and services tax rollout, too, may impact business," Goel warns. In this landscape, analysts may lower their FY18 earnings estimates.