From its annual closing high of Rs451 on 4 October on BSE, the share price of Havells India Ltd fell to a low of Rs311.55 on 21 November. That’s nearly a 31% decline. The stock of the maker of lighting products, cables and fans took a beating initially due to disappointing September-quarter results. And then, there was the unforeseen demonetisation blow to cope with.
But if there was any serious injury caused due to demonetisation, Havells India’s December-quarter (Q3) results don’t show the pain. Last quarter’s numbers were better than expected. Revenue increased 13% year-on-year, comparing favourably with about 9% revenue growth in the September quarter. One reason why the company performed better than expectations is because it decided to offer certain relaxations under ongoing trade schemes to alleviate dealers’ concerns amid lower secondary offtake and likely fund crunch. This helped Havells India gain market share from the unorganized firms, said analysts who attended the company’s post-results conference call.
The company’s cable and electrical consumer durables (ECD) segments saw 17% and 19% revenue growth, respectively, which is commendable. Volume growth helped the cable business revenue. All subcategories in the ECD business did well. Revenue from switchgears grew at a slower rate of 1.7% (about 5% growth was seen in the September quarter). Switchgears is driven more by new housing starts, which were likely to have been adversely impacted by demonetisation, wrote analysts from Credit Suisse Securities (India) Pvt. Ltd in a report on 17 January.
Operating profit margin though declined 110 basis points compared with the same quarter in the previous year. Credit Suisse attributes this to higher trade schemes and higher mix of the lower- margin cables business in sales. A basis point is one-hundredth of a percentage point. Net profit increased 27.5%, faster than the 22% growth in the September quarter, to Rs153 crore.
What next? Investors would keenly watch whether the December-quarter momentum sustains in the current one as well. From a medium-term perspective, performance of the housing market remains key, given that a good portion of Havells India’s revenue is influenced by that. Weak housing sales and expectations that home renovation demand will be muted are likely to weigh on the sentiments for the stock.
What’s comforting, however, is that the Havells India stock has recovered a part of the losses, going up by about 21% from its low. But valuations aren’t cheap. Currently one share trades at an expensive 35 times estimated earnings for the next fiscal year.