Markets
Havells, Voltas trip on valuations
Summary
- Shares of Havells and Voltas have fallen by about 7% and 3%, respectively, after results. The margin performance was nothing to write home about.
In a seasonally lean quarter, Havells India Ltd and Voltas Ltd’s air conditioner segments put up a good show on the revenue front in the September quarter (Q2FY24). Havells’ Lloyd and Voltas’ unitary cooling products (UCP) segments clocked year-on-year revenue growth of about 19% and 15% in Q2, respectively.Lloyd segment also includes other products such as refrigerators and washing machines.
But investors are not impressed. Shares of Havells and Voltas have fallen by about 7% and 3%, respectively, after results. The muted response is understandable. For one, the margin performance was nothing to write home about. Voltas’ UCP segment witnessed just 40 basis points margin expansion year-on-year, and Lloyd continued to be in the red. However, Lloyd’s air conditioner market share is inching up, implying that the gain is at the cost of profitability. On the other hand, Voltas’ market share dropped to 19.5% in August from 20.6% in June. Moreover, margin pressures continue to linger considering the intensifying competition.
In fact, Q2 results have triggered analysts to cut earnings estimates for FY24. The pressing worry in both the companies, which led to earnings cuts, emanates from their other segments. In the case of Havells, the cables and wires business was impacted by capacity constraints. The segment’s revenue growth of 8% year-on-year lagged expectations. In comparison, Polycab India Ltd’s wires & cables revenue growth stood at 29%. As such, the near-term outlook for Havells’ cables and wires business is not particularly encouraging. The new facility for cables is expected to be commissioned only by early FY25, which would enhance capacity by about 25%.
“Havells has clearly lost market share in cables over the recent quarters, suggesting a lack of attention to the business-to-business part of the segment. Whether the company’s high degree of diversification has led to a loss of focus is a question that can be answered only with hindsight," said analysts at Kotak Institutional Equities in a report on 22 October. Havells is also present in switchgears, lighting and electrical consumer durables (ECD). Switchgears saw revenue growth in Q2, but lighting was hurt by price deflation and subdued demand weighed on ECD. Kotak has cut its earnings per share estimates for Havells by 5-6% over FY24-26 led by the cables segment and to a lesser degree–ECD, switchgears and others.
In this backdrop, how consumer demand pans out in the upcoming festival season is crucial. This would also benefit Voltas’ products such as refrigerators and washing machines. But given that Q2 earnings were marred by loss in the electro-mechanical projects and services segment, the outlook is blurry. This segment’s Ebit loss stood at ₹49 crore due to provision made of ₹86 crore on account of delayed collection in overseas projects. The company said in the earnings call that the provisioning problem would persist for another two-three quarters. To factor in full year provisioning, Kotak analysts have cut their earnings per share estimates for Voltas by 44% in FY24.
Notably, this problem comes at a time when the loss of market share in the air conditioner segment persists. “While absolute earnings may have bottomed out, the uncertainty around earnings recovery is high. The newly added uncertainty may make the (Voltas) stock languish in the medium term, as the market awaits clarity on market share and provisioning," said analysts at Nuvama Research in a report on 20 October. Valuations of both the companies are on the higher side. Havells shares have outperformed those of Voltas and now trade at 46 times their FY25 estimated earnings, which is expensive. While shares of Voltas trade at a lower multiple of 36 times, near-term growth visibility is dim.
