Sachin Pal Moneycontrol Research Havells India reported a strong set of Q1 FY19 earnings. The solid performance was driven by a number of factors including: acquisition of Lloyd Electric & Engineering, favourable base led by Goods & Service Tax destocking and expansion in operating margin across its key business segments.
Revenues increased 40 percent year-on-year (YoY) to Rs 2,596 crore. Earnings before interest, tax, depreciation, and amortisation (EBITDA) surged 81 percent year-on-year to Rs 312 crore. PAT came in higher at Rs 210 crore in comparison to Rs 121 crore in the same quarter last year.
Strong performance across business segments The switchgear segment reported adjusted revenue growth of 26 percent after a period of sluggish growth in the past few quarters. Segmental performance was aided by stabilisation in industrial demand after introduction of GST and Real Estate Regulatory Authority (RERA) last year.
Revenue growth of 18 percent in cables and wires was driven by a combination of volume (increase of 8 percent YoY) and price hikes (up 8-10 percent YoY). The sharp increase in commodity prices, especially copper, impacted margin over the past 2-3 quarters. However, implementation of price hikes eased off margin pressure, which came in at 17 percent compared to 13 percent in the year-ago period.
New product launches and deeper market penetration leading to an increase in market share drove growth in the consumer durables segment. This segment grew 43 percent compared to last year. Margin increased on account of higher volumes and richer product mix.
Adjusted growth of 25 percent in lighting and fixtures segment, excluding Energy Efficiency Services, was aided by deeper distribution and higher business-to-business and business-to-consumer sales. The latter was offset by poor performance of the EESL business which had high contribution of government projects last year. Absence of high margin orders resulted in a sharp decline in revenue from EESL during Q1.
Lloyds’ business had a like-for-like revenue growth of 14 percent. This was aided by price hikes as well as seasonal uptick in air conditioner sales (mainly inverter ACs). Earnings before interest and tax (EBIT) margin improved to 19 percent from 15 percent YoY.
Expansion plans and business strategy The company plans to incur a capital expenditure of Rs 5,000 crore in FY19. Majority of these funds (around Rs 3000 crore) will be used to set up a 600,000 unit AC manufacturing facility for Llloyds, which is expected to be operational by FY19-end.
As a part of its expansion strategy, Havells plans to add refrigerators under its Lloyd’s portfolio, which currently consists of ACs, washing machines, and televisions. Lloyd’s brand has 55 exclusive stores and the company has tied up with modern retail stores (Reliance and Croma) to increase customer touchpoints.
On the consumer durables side, growth is being driven by its ‘deeper into homes’ strategy. The company added newer products - water purification and personal grooming - in this category and is focusing on increasing penetration in Tier II and III markets.
Outlook and recommendation A strong quarterly performance on almost all fronts reinforces our faith on the management's execution capabilities. Over the past couple of years, Havells has gained a strong foothold in the sector with the launch of new products and higher market share across segments. The company seems well positioned to benefit from an expanding distribution network and increased brand visibility. The repositioning of Lloyd brand and expansion of its portfolio seems to be going on track. Reduction in GST rates on white goods (TV, washing machine, refrigerator etc) should further spur consumer demand.
The stock currently trades at 38 times FY20 projected earnings and seems priced to perfection. Given its strong positioning, we recommend accumulating the stock during any weak phase in the market.
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