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Havells India outlook dim; strong balance sheet helpful

Shares of Havells India Ltd, an electrical goods company, are flirting with their 52-week trading lows on the NSE. The firm released a weak set of numbers for the March quarter last week.

Covid-19 clouded last quarter’s performance even though the quarter started on a healthy note with the first two months witnessing revival in consumer products. However, March was painful owing to the disruption in supply chain from China.

According to Havells, the later part of March has a disproportionate effect on the quarter sales, contributing as much as one-fourth of the sales. Growth would have been 9% if wasn’t for the disruption, reckons the company. That appears encouraging, especially when revenues had declined by 1% year-on-year for the nine-month ended December.

Nonetheless, covid-19 has meant about 800 crore revenue loss for Havells in the March quarter. The upshot: last quarter’s revenues declined by about 20% year-on-year. All businesses, switchgears, cable, lightning & fixtures, electrical consumer durables (ECD) and Lloyd consumer, saw revenues drop from a year ago. The switchgear and ECD segments were showing good growth, which could not sustain upon lockdown. Lloyd, too, had buoyant growth till operations ceased in mid-March.

However, Havells’ woes don’t end there. The extended lockdown understandably means the road ahead is dim. Jefferies India Pvt. Ltd estimates this extension (of lockdown) to impact sales, also noting that summer products (Lloyd and Fans) account for 30-35% of Havells’ topline. “Factoring this as well as the Q4FY20 miss, we cut earnings per share estimates by 15-19%. We pencil 55-60% decline in Q1FY21 sales,” added the brokerage firm in a report on 13 May. Jefferies’ earlier estimates had factored a lockdown of about 3 weeks versus 9 weeks now.

Havells has said its operations are gradually being restored since 4 May and that few plants have resumed operations with limited manpower.

Over the medium-term, Havells could well be one of the better placed companies thanks to its robust balance sheet. As on 31 March, Havells had cash worth about Rs1100 crore and no borrowings. “The company’s strong balance sheet, along with strong brand pull with strength in the distribution network in its core business, can help it deliver better-than-industry growth with a macro recovery,” wrote analysts from Emkay Global Financial Services Ltd in a report on 13 May.

However, the near-term business pressures may keep valuations capped. Note that valuations are not particularly cheap with the stock currently trading at nearly 45 times estimated earnings for this financial year, according to Bloomberg data. As such, the stock has declined by around 28%, so far this calendar year. Livemint

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