Havells India: a brighter picture
Havells India Ltd’s shares have outperformed vis-à-vis the benchmark Sensex in calendar year 2017. One reason for the optimism was the expectation that the implementation of the goods and services tax would enable the shift to the organized market and thus benefit the company.
The management met analysts in December and offered an insight into the future plans and the initiatives it shall take to remain ahead of the curve. The performance has been commendable so far. According to its presentation, over fiscal years 1994-2017 (FY94-17), revenue, Ebitda and profit after tax increased at a compound annual growth rate (CAGR) of 29%, 31% and 32%, respectively.
Ebitda is short for earnings before interest, tax, depreciation and amortization.
The electrical goods company is engaged in the business of manufacturing switchgears, cables, lighting and fixtures, and so on.
Havells India intends to establish a meaningful presence in each product category and expand market share. The company is looking to expand its reach in the west and south regions, and increase penetration in tier-II and tier-III towns across the business units.
Dealers form a key part of the distribution network for Havells India and it intends to continue expanding the width/depth of its distribution channel and also its omni-channel presence, according to Motilal Oswal Securities Ltd.
“Havells is fortifying its competitive position (targeting ahead of industry growth) by focusing on technology, strengthening channel (2x retail network in two years, smaller towns) and addressing untapped markets (B2B, consumer durable, etc.), while ensuring it retains its entrepreneurship culture (independent SBUs to sustain growth),” analysts from IDFC Securities Ltd wrote in a note on 13 December. SBU is short for strategic business unit.
What of the stock?
“Havells has been investing in brand, distribution (retail reach), portfolio expansion and people capabilities to be growth ready and deliver 15-20% sales CAGR when the demand environment improves,” said analysts from IIFL Institutional Equities in a report on 13 December.
“Rich valuations attempt to discount Havells’ ability to grow as an integrated consumer electrical player by leveraging recent acquisitions in lighting and consumer durables space,” they added.
If executed as per management expectations, IIFL sees upsides to its 25% sales/17% earnings CAGR over FY18-20.
Currently, the Havells India stock trades at about 42.6 times its estimated FY19 earnings, based on Bloomberg data. Valuations suggest a good portion of the good news is baked into the price.
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