Sachin Pal Moneycontrol Research
Highlights: - Havells’ revenue increased marginally over last year - Consumer durables grew at a healthy pace - Lloyd division’s revenues declined by 30 percent - Operating margins dipped 130 bps YoY - Valuations rich at 46 times FY20 estimated earnings
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Havells India reported disappointing Q2 FY20 results, with sales and margins getting affected by muted consumer demand, liquidity constraints and high competitive intensity. While the earnings picture was muted, a silver lining to this bleak backdrop was its consumer durables segment – which bucked the overall weakness.
Key result highlights
For Havells, revenue growth moderated further in Q2 and sales for September quarter was marginally ahead of last year. Constrained credit environment and slower channel offtake hit the business sales in the quarter gone by. Llyods segment again turned out to be a major disappointment. Consumer durables segment was the only bright spot during the quarter. The category continued to grow in excess of 15 percent on the back of strong performance in the core products (fans, geysers). New product launches (water purifiers, personal grooming, small appliances etc.) along with market share gains in other product categories aided growth in this segment.
Revenues of other business segments (switchgear, cables & wires and lighting & fixtures) saw little change from the year-ago period. Cash crunch in the real estate market and a slowdown in industrial and infrastructure segments hit demand across business segments. For the Lloyd business, sales declined sharply year-on-year due to price erosion in LED business and increased competitive intensity across product lines.
Havells’ gross margins were higher due to lower raw material costs. However, operating margins contracted as higher employee costs (up 17 percent YoY), higher selling, general & administrative expenses and plant initiation costs offset savings from easing commodity prices. Advertisement and sales promotions were unchanged on an absolute basis. Earnings before interest, tax, depreciation and amortization (EBITDA) declined 9 percent as operating margins shrank 130 bps YoY.
For Lloyd, the sales were majorly impacted by distribution realignment with large format stores. Besides, LED panels sales were hit by competitive pressures. Given the market transition, the brand has lost some market share in the first six months of this year. Commencement of in-house AC manufacturing plant kept fixed costs at elevated levels and dragged margins down. Going forward, a ramp-up of this plant’s output will lead to better absorption of fixed costs through economies of scale. Havells will also get better control over quality of its products.
The company has seen a minor uptick in sales with the onset of festive season in October. However, sustainability of demand remains a key factor to monitor, and the management has refrained from sharing guidance on revenue given the market uncertainty.
During the earnings conference call, the management spoke about channel inventory destocking. Trade stocks at dealer level are lower considering the muted end-market conditions and credit squeeze. The management has increased focus on controlling costs and anticipates that the margin profile will improve in the second half of this fiscal year.
Outlook and recommendation
Havells’ earnings have been muted in the first half of this year and are expected to be tepid in the second half as well. While medium and long-term growth prospects for the sector and the company remain intact, the near-term growth prospects remain muted, as tepid consumer sentiments coupled with liquidity concerns continue to weigh on demand.
The stock has corrected 18 percent (from 52-week highs) on concerns of faltering growth and uncertainty with respect to demand. The stock currently trades at 46 times FY20 projected earnings which leaves little scope for capital appreciation given the challenging market environment. There exists a strong possibility of further multiple contraction, if growth fails to pick up in the coming quarters. We advise investors to wait for episodes of price weakness to accumulate shares in a staggered manner, as the company’s long-term outlook continues to be fairly promising.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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