Structural demand in consumer durables was weak due to GST, said Anil Rai Gupta, CMD, Havells.
For second quarter ended September 30, Havells missed its topline growth but beat on the margin front. The cable revenues were down 10 percent at Rs 569 crore but EBITDA was up 20 percent compared 12 percent year on year (YoY).
Revenues for the consumer durables to were flat at Rs 320 crore and EBITDA was marginal up at 27.7 percent versus 25.8 percent YoY. The revenues for switch gear business to were lower at Rs 329 crore versus Rs 362 crore YoY, with EBITDA at 41 percent versus 39.7 percent YoY.
Margins on the Lloyd business were up at 19.3 percent versus 14.6 percent quarter on quarter.
Throwing more light on the second quarter subdued performance, Anil Rai Gupta, CMD, Havells said the better performance on the margin front in the cable business was due to inventory gains, otherwise structurally demand was low due to tepid construction activities. Therefore growth was sluggish.
When asked if these margin growth was sustainable going forward, Rai said they would have to wait for the next quarter but assured that they would be able to improve margins for the cable business going ahead as well.
On the consumer durable business, he said the growth on like-to-like basis was 11 percent but structurally the demand was weak due to goods and services tax (GST).
Similarly, demand for switch gear business is also expected to be weak, he added.
He said GST contracted demand for most of their segments and this sluggishness could continue in Q3 as well. Festive demand was also sluggish.
However, he is confident of tripling revenues in the next 5-6 years through both inorganic and organic plays.
With regards to market share, he said they have either managed to retain or grow in each of their categories.
Below is the verbatim transcript of the interview:
Latha: Help us understand your numbers. The cable business revenue is lower but margins are much better, at 20 percent compared to 14 percent last quarters. How should we read this? Can you tell us how your volumes were and what part of this is inventory gain?
A: A part of this is inventory and so we did experience better margins in this quarter, growth has been sluggish because structurally demand was lower because of construction activities but there is an improvement in overall margins but this margin has one-off advantage also because inventory gains. We had inventories at lower levels and it was an inflationary period and hence there is one-off kind of an improvement there.
Anuj: Can you quantify the inventory gains since you are talking about it and was there decline in volumes?
A: There is no degrowth. It will be very difficult to quantify this but one can say that we will be able to improve margins over the previous that we used to have.
Latha: What can be a sustainable margin level for the cable business and even for your overall business?
A: As I said let's wait for next quarters.
Latha: Moving to another important segment - consumer durables. The reported numbers look weak. Can you give us volumes, margins without including the goods and services tax (GST)?
A: The numbers which we are quoting are without GST and if we take away the GST impact over last year then the growth in consumer durables is 11 percent as against 4 percent which is reported. Yes, there has been structurally weak demand during this quarter because of the GST impact initially because of initial adjustment of the trade to the GST. But still, we have achieved 11 percent like-to-like growth in consumer durables.
Surabhi: Let us talk about the switchgear business as well. That has been a little sluggish last 2-3 quarters. What trends can we expect in the second half?
A: Again, impacted both by GST as well as lower demand in the construction sector due to Real Estate Regulatory Authority (RERA) and many other things. So structurally there is a low demand scenario in the last two quarters and again, if we adjust like to like then it is a flat growth. There is no negative growth in switchgears as well.
Anuj: Your working capital days seem to have deteriorated a bit. Is it just because of Lloyd and talking about Lloyd, how has the business been compared to your expectations?
A: This is with the Lloyd coming in. In Lloyd the working capital is barely minimal. So we have not seen any changes in the overall working capital days.
Latha: Can you detail the medium-term plan? Some news reports quote you as saying that you will triple revenue by FY20 to about Rs 20,000 crore. What is the strategy? Is this going to be all organic or is there an inorganic plan as well?
A: Yes, there is an overall aim of tripling our revenues in the next 5-6 years and both organic and inorganic play will be there.
Surabhi: One of the worries in the mind of the investors has been the volatility that we have seen in earnings. A lot of one-offs have happened. There is GST, Lloyd acquisition, etc. So can you give us a broad guidance maybe for the next year, any specific guidance on revenue or on margins?
A: I would rather leave it to the analysts to work on that because we work on making sure that we are trying to gain market shares in these environments and that is what we will continue to work on. I do not think I am in the position to report any particular expected numbers to you at this stage.
Anuj: What about market share? How has that moved in various segments?
A: Every product category has different market shares for us, but we believe that we have either retained or gained market shares in every category.
Latha: Let us get to the GST impact. You did mention slowdown due to the GST impact in the second quarter, but how does Q3 look? How have been the festive sales in the past three weeks?A: Overall, I would say as I said, after GST also, one of the things is very clear that in our product categories GST rate at 28 percent which is not really a luxury product, is a daily needs product for consumers, it is a bit high and it has contracted demand for the consumers and that has gone into the festive season as well. So, hopefully if there are adjustments in rates and the inflationary environment is not there for the consumers, things will get better from here, but today, there is no doubt that the second quarter has been weak and we have seen this sluggishness coming into the festival period as well.