Havells India: cables boost performance but may not sustain
The Havells India Ltd stock touched a new 52-week high on BSE on Monday, after its numbers for the September quarter came in better than expected. However, the stock eventually declined 1%.
To be sure, even as the company’s cables business boosted overall performance favourably, the improvement is not expected to sustain. Cables’ Ebit rose as much as 43% on a year-on-year basis and contributed 24% of Havells India’s total segment Ebit last quarter. Ebit is short for earnings before interest and tax.
“Margins in cable segment enhanced due to favourable commodity price on inventory and product mix shift towards domestic cables,” the company said. The cables business performed well as the share of domestic cables increased in the portfolio on a year-on-year basis.
The upshot: cable margins improved. On the flip side, margins of the cable business are expected to taper going forward, as inventory benefits are not expected to continue.
It helps that lighting and fixtures, contributing 16.5% of the total Ebit, performed well too. On the other hand, the switchgear business, accounting for 29% of the September quarter total segment Ebit, declined 5% over the same period last year. Revenue growth in switchgear was affected by the sluggish housing segment.
Overall, excluding numbers from the Lloyd’s consumer business, Havell India’s adjusted (for excise) revenue growth of 6.7% is hardly inspiring. Ebitda (excluding Lloyd’s contribution) increased 17%, helped by lower year-on-year advertisement and sales promotion expenses. Ebitda (or earnings before interest, tax, depreciation and amortization) margin increased 180 basis points to 15.8%. A basis point is 0.01%.
Of course, sustainability of these margins in the days to come is a key measure investors should follow. Demand is another important measure. The impact of the goods and services tax (GST) on the business needs to be watched particularly.
“We are experiencing slowdown in demand due to perceived higher pricing of electrical products and slower primary re-stocking post GST de-stocking in June,” said the company.
Nevertheless, investors are sitting on smart gains in recent months. From its closing low of Rs440.80 on 24 May, the Havells India stock has risen almost 23% so far. Valuations are steep. Currently, the stock trades at about 50 times estimated earnings for this fiscal year, suggesting a fair share of the good news is baked into the price.
Expectations that the organized market will benefit from the GST implementation is one reason for the optimism. As mentioned above, the transition to GST and the impact on the business will be critical for the company to sustain its high valuations.