Havells India — Follow-up call: HOLD. LED by demand

Investors can continue to hold the stock of Havells India. From our ‘buy’ recommendation at ₹266 in October last year, the stock rallied to ₹333 in December, but lost steam thereafter and now trades at ₹270.

Weak consumer sentiment and slow uptick in the residential and commercial real estate sector have impacted the performance of the company.

From a 19 per cent growth in the first half of 2014-15, revenue growth slipped to 4 per cent in the second half.

Growth in the cables and wires segment was muted. As copper prices corrected sharply in January, traders didn’t place fresh orders and this resulted in revenues slipping.

However, the company should see growth revive over the next year or so, if inflation continues to moderate and interest rates move south. Havells has four business divisions — cables and wires (the largest), switchgear, lighting and consumer electronics. Increase in disposable income can lead to an increase in demand for consumer electronics. Lower interest rates can revive housing demand and, in turn, the demand for cables, switchgears and lighting fixtures.

Copper prices, which have been on an uptrend over the last three months, have also more or less stabilised. Hence traders can start re-stocking.

At the current market price, the stock trades at 27 times its estimated earnings (consolidated) for FY16. Bajaj Electricals and V-Guard Industries trade at 21-26 times.

The small premium for Havells is justified given its size. Havells’ increasing market share in tier II/III cities, new product launches in the consumer electronics space and aggressive marketing should also help it grow in the long run.

Diversified presence

Havells is present both in the pure consumer as well as industrial segments. It exports through its European subsidiary — Sylvania. Cables and wires make up 40 per cent of revenues and switchgears about 24 per cent. The lighting segment adds another 15 per cent and electronic consumer durables — fans, water heaters and domestic appliances — the rest.

The company’s diversified product portfolio helps it weather the slowdown in any specific market better. For instance, during the March quarter, the company reported revenue growth of 3 per cent (standalone).

The consumer electronics business recorded a strong 24 per cent growth, negating the weakness in other segments. For the full year 2014-15 (standalone) too, the consumer electronics business has done well. While the company’s overall revenue growth was 11 per cent, the consumer electronics business grew 20.5 per cent. Cables grew 13.7 per cent, while switchgears recorded a 5 per cent growth.

The lighting segment was a disappointment with just 2.8 per cent growth.

CFL (compact fluorescent light) demand is tapering off and the market is moving to LED (light emitting diode) lights as they are more energy efficient.

Havells is building its market share in the LED space. LED lights contribute over a third of the company’s revenues in the lighting segment.

Sylvania’s revenues and profits were flat for 2014-15. Going ahead, the company intends to focus on Latin American markets and improve margins.

Stable margins

While the correction in copper prices should have improved the margins, the operating profit margin for the full year was 13.6 per cent, almost flat from the previous year.

This is because the benefit of lower raw material price was passed on to consumers and channelled towards higher marketing spends.

If sales in switchgears and cables pick up, profitability may improve as both are high-margin businesses.

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