Investors of electrical equipment maker Havells India Ltd are a happy lot. After all, its share price has appreciated as much as 53% so far in FY19, sharply outpacing the Nifty 500 index. Valuations, therefore, aren’t particularly cheap, what with the stock trading at 45 times estimated earnings for FY20.
The results announced so far for FY19 haven’t disappointed. Net revenue and profit after tax for the nine months ended December 2018 have increased by about 30% and 20%, respectively, over the year-ago period.
Robust revenue growth in the electrical consumer-durables business helped, accounting for 20% of the company’s revenue during this period. The Lloyd consumer business, acquired in the June 2017 quarter, also contributed meaningfully.
Havells India has invested in capability, branding, research and development, innovative products, distribution, and focus on deeper penetration, according to an HDFC Securities Institutional Research report published on 22 January. As a result, its core business, which excludes Lloyd’s consumer business, has clocked 25% revenue growth. This is sharply above the mid-teens growth range for the market in April-December 2018, pointed out HDFC Securities.
However, even as the revenue growth has been encouraging, the Ebitda (earnings before interest, taxes, depreciation and amortization) margin in the past two quarters has declined year-on-year. One of the reasons behind this is higher material costs. The upshot for the year so far is that the Ebitda margin has declined 44 basis points to 11.9%. A basis point is one-hundredth of a percentage point.
Improvement in margins is one thing that investors will keep a close eye on when Havells India announces its results for the current quarter. Further, after posting a commendable 28% year-on-year revenue growth in the December quarter, the question is whether the revenue performance will surprise yet again. “It is likely that the strong December quarter revenue growth run-rate may not persist in the current quarter," pointed out Harshit Kapadia, analyst at Elara Securities (India) Pvt. Ltd.
A combination of factors could be responsible for the relatively lower growth in the March quarter compared to the three months ended December. “First, there is some slowdown in the real estate sector. Second, the delayed summer this time may take a toll on Lloyd’s volumes," said Kapadia.
Overall, these factors could well put some pressure on Havells India margins this time around, on a year-on-year basis.