Havells: Q4 good, FY 19 looks better

Havells finished an otherwise challenging 2017-18 on a strong note with robust revenue growth of 48 per cent for the quarter ending March (Q4), which also pulled up its yearly performance. While the acquisition of Lloyd’s air conditioners (AC) business has expectedly helped, the performance was better than estimates.

The fiscal, which had witnessed challenges on account of the note ban followed by de-stocking ahead of the implementation of goods and services tax (GST), also closed with a healthy double-digit increase in revenue and 14 per cent operating profit growth (excluding acquired Lloyd business). However, analysts believe, the year ahead is even better.

March quarter’s revenue growth, excluding Lloyd, at 14 per cent was led by lighting & fixtures, electrical consumer durables (ECD) and cable segments, which grew 20 per cent, 19 per cent and 13 per cent year on year, respectively. The ECD business (a fifth of revenues) growing 29 per cent, adjusted for excise, has been a consistent driver. Cables, the largest of all contributing 30 per cent to revenues, is expected to gain further traction as the organised sector sales improve versus unorganised players post GST implementation. The switchgear segment, however, continues to grow slower (5 per cent in Q4) given its dependence on new construction and real estate activities, which remain sluggish.

The street’s eyes will, however, be on Lloyd’s sales growth picking up in the seasonally strong quarter. Sales were flat in Q4, but the improvement in operating profit margin of Lloyd’s business to 12.4 per cent for March quarter and 8 per cent in FY18, compared to 6 per cent in FY17, is encouraging. Analysts anticipate this business to gain traction and drive Havells growth over time. HDFC Securities believes that over time with Havells’ pedigree, Lloyd can start delivering improved performance. Capex plan of ~3 billion on AC manufacturing versus outsourcing (80 per cent from China), is making the analysts believe that Havells’ is shaping Lloyd for the next leg of growth.

The cost pressure remains an important factor, going ahead, looking at rising raw material prices. But, despite rising advertising costs, sales and other expenses, a favourable product mix, price hikes and operating leverage led to the expansion in Havells’ core business margins by 119 basis points year-on-year to 14.6 per cent in Q4. Ability to scale up through acquisitions coupled with the launch of premium products in the domestic market could negate the impact of higher commodity prices, say analysts.

In this context, the scaling up of AC segment will be watched by investors and will be an important driver of the stock. However, despite premium valuations of 36x FY19 earnings estimates, analysts remain confident. ICICI Securities says strong cash flow from core business coupled with a strong balance sheet would strongly position Havells to negate any short-term hiccups. A weak summer can impact Lloyd’s AC business but improving demand dynamics leads to a belief that Havells will sustain strong core business growth, leading to re-rating in the near term, say analysts at HDFC Securities. Despite the high base, analysts expect an over 30 per cent growth in Havells’ earnings in FY19.