Havells India Ltd’s shares slumped by around 10% in morning trading on Thursday on the National Stock Exchange (NSE) after the electrical equipment maker reported weaker-than-expected margins in its second-quarter performance report, released after market hours on the previous day.
Gross profit margin contracted as much as 600 basis points (bps) year-on-year to 34 percent. One basis point is one-hundredth of a percentage point.
A sharp rise in commodity costs exerted pressure on the margin. Staggered price hikes led to a lag effect on the margin and the revenue mix deteriorated.
Havells India's cables and wires segment, which has the lowest earnings before interest and tax (EBIT) after the Lloyd brand that comprises refrigerators, air-conditioners and LED television sets, "reported 45.8 percent year-on-year revenue growth leading to revenue mix deterioration,” ICICI Securities Limited said.
The broker added: “Steep inflation, higher freight costs and delayed/ limited price hikes impacted margins.”
It helps that Havells was able to restrict the drop in its EBITDA (earnings before interest, tax, depreciation and amortization) margin to about 340bps year-on-year to 13.8 percent. This was owing to a comparatively slower place of increase in employee costs and other expenses.
The upshot: on an absolute basis, EBITDA increased by 5.5 percent year-on-year to Rs 443 crore. This is at a time when revenue rose as much as 31 percent to Rs 3,221 crore, nothing to sneeze at.
Among the various segments, the cable business posted 46% growth and the lightning business expanded 34 percent, benefitting from deeper market penetration and new launches. Revenue growth in switchgears, electrical consumer durables and Lloyd was 20 percent, 26 percent and 22 percent, respectively. Lloyd, however, posted a loss at the EBIT level.
According to Havells, “Adequate price increase in Lloyd has been challenging due to the hyper competitive environment. Margins were further impacted by under absorption of overheads due to lower production.”
Needless to say, investors would keep a close eye on margin performance in the days to come. JM Financial Institutional Securities Ltd’s analysts said in a report on 20 October: “While commodity price pressure seems to be easing (Copper -2% QoQ in 2QFY22), partial pass through of cost inflation may impact margins in the short term.”
Meanwhile, it helps the revenue outlook that demand conditions are improving. To be sure, valuations of the Havells India stock are not cheap. Over the past one year, the stock has outperformed the broader markets. JM Financial has raised its estimates and maintained its HOLD rating with a September 2022 target price of Rs 1,270 (versus Rs 1,200 earlier). Currently, the Havells India stock is trading at around Rs1,330 per share on the NSE.
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