Shares of Havells India Ltd, a maker of lighting products, cables and fans, have rallied since it announced earnings last week, outperforming the broader markets. The rally was on the back of expectations of better demand during the festival season and a pickup in infrastructure spending.

The company management, during the conference call with analysts, said it expected decent growth in the second half of the fiscal year as there was some traction seen in demand in the past two months.

Domestic brokerage firm Emkay Global Financial Services Ltd in a note dated 9 November estimates 13-15% revenue growth in the second half of FY16 because of a low base, following muted 1% growth in the first half of the fiscal year.

However, sales weren’t very illuminating in the September quarter. Havells India’s stand-alone revenue declined 1% to 1,339 crore in the quarter, clocking the worst decline in over three years.

Revenue growth for the cable and wires segment, which contributes to over two-fifths of overall sales, plunged 5%. Revenue declined for the cables business because of aggressive price cuts due to the fall in commodity prices.

Nevertheless, there were some green shoots. The industrial cables business registered a growth of 16% compared with 9% decline in the June quarter.

Anil Rai Gupta, chairman and managing director of Havells India, said during the conference call that the company is seeing some increase in the sales of industrial switchgears, along with industrial cables and industrial motors, on the back of traction in the infrastructure segment.

The switchgear segment, which contributes around a fourth to the total sales, fell for the third straight quarter, down 1.3% year-on-year. Lighting, fixtures and electrical consumer durables segments, which contribute slightly less than a third to revenue, saw sales growing by 1.5% and 6%, respectively, year-on-year.

Despite growth almost doubling for the LED (light-emitting diode) segment, the lighting division saw moderate growth because of a fall in sales of CFLs (compact fluorescent lamps).

However, operating profit margins are likely to sustain at around 13.9%, seen at the end of the September quarter.

Margins were up by 40 basis points compared with a year ago, following two consecutive quarters of decline. One basis point is 0.01%.

Cost efficiency and price management helped buoy margins. Overall net profit grew 1% to 120 crore.

Havells India shares have rallied despite brokerage firms cutting the earnings estimate by around 4-5% for FY16 and FY17 because of muted performance at Sylvania, its European unit which makes lighting products. Sylvania contributes around 40% of the company’s total revenue. Profitability in Europe continued to be affected because of softening demand and currency depreciation in Latin America.

While the Havells India management expects Sylvania to turn operationally robust, analysts remain cautious due to sluggish sales. The shares are trading at around 24 times earnings estimates for FY17. They had fallen almost 20% since mid-July, which could have led to bargain buying.

The writer does not own shares in the above-mentioned companies.

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