A decline in Havells India Ltd’s profitability in the September quarter is likely to catch the Street off guard. Whether this is a one-quarter phenomenon or a longer one will determine how the company performs in the quarters ahead.
The electrical equipment maker’s revenue grew by 23% over a year ago to ₹ 2,191 crore in the September quarter. But its Ebitda rose by a much slower pace of 2% year-on-year and margins fell by 247 basis points to 12%. Ebitda is earnings before interest, tax, depreciation and amortization. A basis point is one-hundredth of a percentage point.
Jefferies India Pvt. Ltd had estimated Ebitda margin at 13.5%, whereas HDFC Securities Institutional Research projected it at 14.5%. Margins came under pressure due to delayed price hike (volatility in commodity prices) and a high base (inventory gain in cables and wires in the September 2017 quarter), analysts at HDFC Securities said in an 18 October report.
Overall, the company’s raw material cost increased nearly by a third compared to a year ago. Employee costs, and advertisement and sales promotion expenses too increased at a rapid rate of 26% and 46%, respectively.
Which segments contributed to growth during the quarter? Havells India’s electrical consumer durables segment accounts for 21% of total revenues and sales rose by 42%, helped by good contribution from each sub-category. According to the company, recent launches of water purifiers and personal grooming products did well.
Its cables business contributed 35% of Havells India’s September quarter revenues. While this division’s sales rose by 35%, it was one of the contributors to lower margins as segment profit fell by 5.6%. Sales grew on the back of volumes and support from rising commodity prices.
Revenues from switchgears, contributing 19% of total revenues, increased by 28% helped by government focus on electrification. Here also, profit growth lagged revenue and rose by 19.5%.
Lastly, the Lloyd consumer business (acquired in the June 2017 quarter) disappointed with revenues declining 4.4%. This division was adversely affected by forex headwinds and an unfavourable business climate.
Weak operating profit performance meant the company’s net profit increased by a mere 4.4% to ₹ 178.6 crore.
What of the stock? It is encouraging that Havells India shares have outperformed the BSE 100 index so far this fiscal year. Still,they have fallen by 19% from its 52-week closing high of ₹ 723.85 apiece.
Valuations stand at 36 times estimated earnings for fiscal year 2020, and aren’t particularly cheap. Havells India’s ability to pass on higher costs in the cables and switchgear segments without hurting sales growth, and a recovery in the Lloyd consumer business are key factors to watch for in the next few quarters.