Havells India: Excellent quarter, but priced in2 min read . Updated: 26 Jul 2016, 05:04 AM IST
The fortunes of Havells India are closely tied to the performance of the housing market
Havells India Ltd, the maker of lighting products, cables and fans, delivered an excellent June quarter, far exceeding analysts’ expectations. Revenue increased 17% from a year earlier in the June quarter to ₹ 1,467 crore. Revenue growth was led by 20-22% growth across the switchgear, lightning and fixtures and electrical consumer durables (ECD) segments, which collectively account for about 60% of total revenue.
The switchgear segment was helped by lower base and 34% growth in exports. Growth across categories—fans, water heaters and pumps—was resilient in the ECD segment. LED and fixtures performed well in the lighting segment. But the cables segment, which contributed most of the remaining revenue, saw slower growth of 5%.
Still, that may not perturb investors much. That’s because Havells India’s operating profit margin increased 96 basis points to 13.7%. Slower pace of increase in raw material costs and advertising and sales promotion expenses helped operating performance. One basis point is one hundredth of a percentage point. Further, robust other income growth and decline in finance costs meant that net profit increased as much as 36% to ₹ 145 crore.
After a good quarter, the moot question is whether the momentum is sustainable. The June quarter was aided by a weak base in 1QFY16, say analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd. “However, sales had largely recovered in 2HFY16 thus limiting base effect impacts later on," wrote Nomura analysts in a report, adding, non-uniform recovery in key customer segments and the economy add uncertainty.
Also, the fortunes of Havells India are closely tied to the performance of the housing market. As analysts from Spark Capital Advisors (India) Pvt. Ltd point out, “Given the weakness in the housing market, we expect growth headwinds to prevail in the near term, especially in the switchgears and cables segments (64% of FY16 revenue, reliant on new housing construction)."
But valuations don’t seem to be factoring in that scenario. After closing at an annual low on 6 November 2015, Havells India shares have outperformed the S&P BSE 200 index. Of course, the divestment of Sylvania, which was an underperforming asset, is one reason for the optimism. Currently, the stock trades at around 37 times and 32 times expected earnings for FY17 and FY18, respectively. That’s hardly cheap. Although, if consumer demand surprises positively, these valuations could well be sustained.
The writer does not own shares in the above-mentioned companies.