Emkay Global analysts are skeptical of the firm sustaining revenue growth momentum due to intermittent lockdowns
Jefferies India believes Havells’ product mix, market leadership, entrenched distribution aid premium valuation
MUMBAI: Havells India shares are about 12% away from its pre-covid highs seen in January on NSE. This seems pretty resilient considering the hit to the business from covid-19 led disruptions. In fact, the electrical equipment maker’s revenues for the June quarter have declined by about 45% year-on-year to Rs1479 crore, reflecting the damage owing to the pandemic.
Nonetheless, there are some bright spots. True, revenues of all segments: switchgears, cable, lightning & fixtures, electrical consumer durables, Lloyd consumer and ‘others’ have declined for the quarter. However, on an overall basis, there was an improvement by June. The company said revenue growth has improved in the month of June to 4%. This is after registering a 40% revenue decline in May.
It is also worth noting that Havells managed to keep a tight lid on costs, especially advertising expenses, to salvage the situation. This proved helpful given that operating leverage was weak. Advertising expenses almost evaporated, declining by a whopping 96% year-on-year. True, employee costs too declined by 27% on an absolute basis but they were up by 300 basis points as a percentage of revenue.
Overall, earnings before interest, tax, depreciation and amortisation (Ebitda) margin decline to about 140 basis points year-on-year to 8.8%. One basis point is one-hundredth of a percentage point. Higher depreciation and finance costs led to a decline of 64% in Havells’ net profit to Rs63 crore.
Now, while the company has sailed through a challenging quarter effectively, there are hurdles on the road ahead. According to Havells, “Owing to frequent regional disruption and shutdowns, demand scenario remains hazy and uncertain."
As analysts from Emkay Global Financial Services Ltd point out in a report on 27 July, “Although Q1FY21 results are better than expected on pent-up demand and market share gains from unorganized players, it is unclear whether the company can sustain revenue growth momentum due to intermittent lockdowns and demand decline post pent-up spending."
Further, cost cutting measures can only help to a limited extent.
In other words, investors would have to watch for meaningful sustainable indications of demand improvement. Although some factors may support the high valuations of the Havells’ stock. “We believe that Havells’ diversified product mix (holistic play), market leadership, consistent product launches, strong brand and entrenched distribution should continue to support its premium valuation," wrote Sonali Salgaonkar of Jefferies India Pvt. Ltd in a report on 27 July.
Currently, Havells’ shares trade at almost 42 times estimated earnings for financial year 2022, based on Bloomberg data.