BackWill Havells continue to outperform?
Currency volatility may have some impact on the margins in the June quarter
Premium(Havells’s industrial cables segment is not doing so well, which may weigh on the stand-alone business.)
Havells India Ltd has outperformed the broader markets and peers in the past one year. The stock was trading at an all-time high on Thursday, gaining 24% year-to-date, while S&P BSE 200 index declined 4%. Investors seem to be giving a premium valuation to the stock because of strong brand strength, dealer franchise and demand growth, despite a challenging macro-economic environment.
Analysts expect earnings growth of 15-20% for FY14, compared with tepid 10% earnings growth in FY13. The company has been very aggressive on branding, which will improve product recall and loyalty, helping it to maintain strong volume growth.
Advertising spending for FY13 was at 3.4% of consumer business compared with around 2.8% in FY12. Havells also introduced a new product called the Reo switch to target the mass market, which contributed around a third of the sales growth in the switch segment. In the March quarter, switch gear segment revenue grew 31% from a year ago. This segment contributes around 32% to the stand-alone margins.
Debt concerns from the Sylvania business have abated. Around half of Havell’s revenue comes from overseas operations. Sylvania Global’s profit after tax more than doubled to €31 million in FY13 from the previous year, while finance costs declined on the back of regular bullet repayments and refinancing with lower debt. Total net debt as a result also fell 44% to ₹ 66.7 crore in FY13.
The cash on books also increased over 80% to ₹ 247 crore. Barclays, in a research note dated 11 June, said that strong cash flows gives room to increase dividend payout and should help expand multiples. The stock has been clocking new highs recently, but further upside may be limited because it is already trading at 19 times its FY14 price-to-earnings multiple.
There could be some impact on the margins from currency volatility in the June quarter. The company has maintained operating profit margin at 12.6% in FY13. Also industrial cables segment is not doing so well, which may weigh on the stand-alone business. While debt woes at Sylvania are over, it may not be able to see any demand improvement because of the slowdown in Europe.
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