Havells India: Valuations bright but concerns cast a shadow
The Havells India Ltd stock fell 6.4% since it announced its March quarter results in May. Even after this decline, its share is still up by 31% over a year ago and trades at rich valuations, at a price-to-earnings multiple of 42 times its estimated earnings per share (EPS) for fiscal year 2018 (FY18) and 35 times its FY19 estimated EPS.
To be sure, fourth-quarter earnings weren’t bad. Revenue had increased a reasonable 17% year-on-year. However, its operating profit margin narrowed. The goods and services tax (GST) rollout is expected to bring some pain for the company.
According to analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd, inventory destocking by dealers pre-GST signals a weak first half for FY18. “Moreover, rising tax incidence on cables (partially offset by a cut in lighting) we believe will add margin/ growth pressure and delay a shift from ‘unorganised’ to ‘organised’,” it pointed out in a 22 June note.
There are other concerns too. The housing market is lacklustre and Havells India will have to bear the resultant adverse impact on demand and eventually, growth. Further, the company acquired the consumer durables business of Lloyd Electric and Engineering Ltd in February. Investors would do well to follow the synergies from this deal. As such, expectations are not too rosy. “Lloyd’s consumer durables business is margin dilutive and will take time (two-three years) to yield returns; we expect 27% sales compounded annual growth rate (CAGR) (14% ex-Lloyd) and 19% earnings per share CAGR over FY17-20,” said IIFL Institutional Equities in a note on 21 June.
The good news is that Havells India’s FY17 annual report shows an improvement in its working capital management. Continued efforts to improve payables with better credit terms have led to negative working capital in FY17, says IIFL. But return on equity (RoE) is impacted by a high cash balance. A high cash balance (more than three times over FY14-17 to Rs2,100 crore), primarily from retention of Sylvania proceeds, and lower asset turns have kept RoEs weak (19%) in FY17, added IIFL.
In December 2015, Havells India had decided to sell 80% stake in Sylvania, a lighting business it acquired in 2007. The company has decided to exit its international business completely and focus more on its domestic one. Progress on this front needs to be tracked.
The concerns on GST, the dull housing market and the integration of Lloyd’s business are likely challenges to Havells India’s high valuations. On the positive front, an improvement in consumer demand can be of help.
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