The first three quarters of the last financial year were comparatively impressive for electrical equipment maker Havells India Ltd. Revenues had increased as much as 30% from the year earlier for the nine months ended December.
Sure, things were expected to slow down in the March quarter owing to the demand slowdown and delayed summers. In that sense, expectations were not running high.
Havells India’s last quarter revenue of Rs. 2752 crore was below Bloomberg poll estimates, translating into 8.5% growth over the corresponding period of the last year.
Collectively, liquidity problems, extended winters and impending general elections weighed on consumer sentiment.
The Lloyd consumer business (acquired in the June 2017 quarter) took a beating. Lloyd, which derives as much as 80% of its revenue from air conditioners, saw a 9% year-on-year drop in its revenue.
The business contributed about 19% of Havells India’s overall revenue. Still, it’s not as if other streams of revenues fared exceptionally well.
According to Havells, growth in the lighting business was affected by lower project orders owing to a general slowdown in the infrastructure segment.
Switch gear revenue growth at 11% was hardly encouraging. Revenue from cables increased at a decent pace of around 17%, compensating for the muted show from other segments to some extent.
Havells India manufactures switch gears, cables, lighting and fixtures, among others.
Overall, there hasn’t been much cheer on the margin front either. The company’s earnings before interest, tax, depreciation and amortization (Ebitda) margin contracted by almost 240 basis points (bps) year-on-year to 11.7%. One basis point is one-hundredth of a percentage point.
Note that the Ebitda margin had declined by 164bps in the December quarter as well.
As such, investors would do well to follow the margin trajectory going ahead. Here, the company’s ability to pass on increased costs will be critical.
Eventually, profit before tax and exceptional items for the March quarter declined by 9% to about Rs. 309 crore. For perspective, the measure had seen a robust increase of 28% for the nine months ended December.
As far as the stock is concerned, Havells India’s investors are a happy lot, what with the shares outperforming the Nifty 500 index in the past year.
Currently, the stock trades at 44 times estimated earnings for fiscal year 2020, based on Bloomberg data.
Valuations don’t appear cheap. As such, investors would watch for a recovery in demand translating into better revenue growth rates and better margin performance.―Livemint