Havells India posted disappointing numbers for Q1FY18. The operational front performance was weak.
“This was a special quarter because of the transition of value added tax (VAT) regime to the goods and services tax (GST) regime. Things should come back to normal in the coming quarters,” Anil Rai Gupta, CMD of Havells India told CNBC-TV18.
The whole quarter was marred by the GST transition. The company saw huge destocking at the trade level in the month of May and June which has brought down the sales of high margin products.
It is too early to judge GST impact in July, it might take a month or two for things to normalise, he said.
According to him, the growth in cables is transitional. It is due to some preponement of the cable and wire demand because of the higher GST rate coming from the month of July, he added.
Don’t see any change in the trade set up, over a period of time this whole move to GST is positive and should generally improve the industry sentiment over the longer period of time. It should improve the overall demand cycle in coming futures, he further mentioned.
Below is the verbatim transcript of the interview.
Anuj: The biggest disappointment in numbers was the margin picture. Can you tell us what went wrong?
A: This is a little bit of a special quarter because of the transition from the VAT regime to the GST regime. So, I am sure this is something which has reasons for it and of course, things should come back to normal in the coming quarters.
Latha: The 10 percent margin we spoke about is just the standalone business; that does not get impacted by Lloyd. Also, should we read it as a case of letting go of margins for the sake of revenue growth? Was there a non-recurring cost impact?
A: There are a few things. First of all, this whole quarter was marred by the GST transition. So, in the months of May and June, we saw huge destocking at the trade level and that has brought down the sales of our high margin products in the electrical consumer durables (ECD) segment, the switchgear segment, lighting segment and that has impacted the margins in a good way.
But this is, as I said, temporary, because with the GST implementation coming in, things should come back to normal. We do believe that the destocking at the trade level is to quite a significant level. Hence, this change. Of course, you asked about any one-time costs. Yes, certain legal costs associated with the acquisition of Lloyd is also included in this.
Anuj: And what would be that one-time amount?
A: Over Rs 10 crore. It is about Rs 12-13 crore.
Reema: You also said that margins will be back to normal. Would that happen in one quarter or two and what would you say are normal margins for you? Would that be 13 percent? And also, if you could give us your sense of how the initial reading has been in the first 20 days of GST?
A: As far as margins are concerned, if we look at the contribution margins of each business, they are at the same levels. So the earnings before interest, taxes, depreciation and amortisation (EBITDA) margins get hit because we continue to invest in our spendings, whether it is in advertising or people in the field, man-power, because that is all, we believe that this is transitionary.
July is too early to say because people, the trade is still getting into the new system. It is very early to say, but it could be slow for a month or a month and a half or two months, but we believe that it should come back to normal growth very soon.
Latha: One positive in your numbers is that cables is growing very well, 19 percent. Is this growth transient given that the GST rate was expected to increase from July, it will become 18 percent. So is the growth sustainable, this 20 percent growth?
A: The way there is slow growth in other segments due to GST, this is also transitionary. This growth which has come in is also due to some preponement of the cable and wire demand because of the higher GST rate coming from the month of July.
Anuj: From an over 20 percent growth, the consumer durable business is down to 2 percent and margins have also depleted. Is this just one-time destocking impact or is there something more in this?
A: It is because of destocking because we have factories and under absorption of overheads happen when the sales are down. So it is again a one-time thing which should come back to normal levels very soon.
Reema: Would you say the same about the switchgear business? What is your reading of the construction sector? Has there been any meaningful pickup?
A: I would not say there is any change or anything of that sort. Right now, the entire focus is on the trade – how people are viewing the business. So, I believe over a period of time, this whole move is to a positive mood, which should generally improve the industry sentiments over a longer period of time. So, we definitely see whether it is building segment or any other way, it should definitely improve the overall demand cycle in the coming future.
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