Shares of Havells India Ltd have rallied 10% since the beginning of December, outperforming the broader market, which has remained flat, on expectations of a recovery in domestic demand and in its Sylvania subsidiary after dismal September quarter results.
The festival season is expected to lift Havells’s domestic appliances business, which saw a sharp decline sequentially. The company management, in an analyst meet, said the demand for consumer durable products such as wires, fans, lighting and appliances continues to remain strong amid weakening discretionary consumption. The switchgear segment is also expected to clock strong growth following the launch of mass-market products last month.
Analysts expect the domestic business to grow at around 15-20% in FY13 and FY14. The switchgear, lighting and electrical consumer durables segment contributes more than 60% to the revenue and may offset sluggish growth in the cable business. It was not surprising that in the September quarter, the switchgear, lighting and electrical consumer durables segments clocked 13-33% sales growth and the cable segment saw tepid growth of 6% due to weak industrial demand. Stand-alone net sales grew 14% to Rs.958 crore and net profit was up an annual 24% to Rs.89 crore.
Margins from the domestic business are expected to remain stable at around 12-13% in the coming quarters, but there are risks from the Sylvania subsidiary.
Margins at Sylvania plunged 4.4 percentage points to 3.3% as most dealers delayed purchase in anticipation of a decline in raw material costs. The management has already cut the Sylvania margin prediction to 6% after it reported a net loss of €1.5 million (around Rs.11 crore today) in the September quarter. Sylvania will have to report a margin of around 7.5% to maintain its full-year estimate, Barclays said in an 18 December note.
Price increases and a decline in raw material costs may reduce the pressure on margins.
Havells’s stock is up 65% this year, outperforming the consumer durables index of BSE, which gained 47% in the same period. The stock is trading at 15 times one-year estimated price to earnings multiple and a turnaround in Sylvania holds the key to a further upside.