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Havells India: Hampered by margins - Views on News from Equitymaster

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Havells India: Hampered by margins

Jul 30, 2010

Havells India has reported a 22% and 8% YoY growth in topline and net profits respectively for the quarter ended June 2010. Here is our analysis of the results.

Performance summary
  • Topline grows by 22% YoY during the quarter
  • Company reports a margin contraction of 1.1% and as a consequence, operating profit growth is restricted to 11%
  • Bottomline grows by 8% YoY as apart from lower margins, higher interest expenses also take a toll


Financial picture
Rs m 1QFY10 1QFY11 Change
Net sales 5,899 7,177 21.7%
Expenditure 5,174 6,375 23.2%
Operating profit 724 802 10.7%
Operating margins (%) 12.3% 11.2%  
Other Income 4 1 -78.0%
Interest (net) 16 38 133.7%
Depreciation 54 68 26.0%
Profit before Tax 658 697 5.8%
Extraordinary item - -  
Tax 166 163 -1.4%
Profit after Tax/(Loss) 493 533 8.3%
Net profit margin (%) 8.4% 7.4%  
No. of Shares (m) 60.2 60.2  
Diluted Earnings per share (Rs)*   38.4  
Price to earnings ratio (x)*   17.4  
*12 months trailing earning

What has driven performance in 1QFY11?
  • While there was some or the other degree of traction witnessed across all segments, the business segments of lighting and fixtures and that of electrical consumer durables performed the best, growing their revenues in the region of 40%. Essentially, the company is a play on the power infrastructure growth story and also on the consumer spending story and with both these stories looking robust, Havellísí topline growth also came in quite strong. We expect the topline growth to stand in the region of 15% in the medium term. Looking at the performance of the past few quarters, the projected topline growth looks well within reach.
    Segmental break-up...
    (Rs m) 1QFY10 1QFY11 Change
    Switchgears      
    Revenues 1,713 1,941 13.3%
    PBIT 609 723 18.8%
    PBIT margins 35.5% 37.3%  
    Cables and Wires      
    Revenues 2,424 2,910 20.0%
    PBIT 294 198 -32.5%
    PBIT margins 12.1% 6.8%  
    Lighting and fixtures      
    Revenues 750 1,046 39.4%
    PBIT 119 166 39.4%
    PBIT margins 15.9% 15.9%  
    Electrical Consumer Durables      
    Revenues 904 1,259 39.3%
    PBIT 217 334 53.7%
    PBIT margins 24.0% 26.5%  
    Others      
    Revenues 70 13 -81.0%
    PBIT 7 5 -25.8%
    PBIT margins 9.4% 36.6%  

  • What was concerning though was the fall in operating margins. And this was mainly the result of a huge drop in the margins of the cables and wires business. Infact, had it not been for margin improvement in some of the other businesses, the overall margin drop would have been even higher. Margins for the cables and wires division fell because increase in prices of copper and aluminium by 50% and 30% respectively were not passed on to the consumers on account of competitive pressures. Fan margins on the other hand, continued to show improvement due to better sales realisation, reduction in material cost and economies of scale

  • Apart from lower margins, significantly higher interest costs also affected bottomline growth which managed to put up a modest 8% growth. The companyís net debt at the end of first quarter stood at Rs 1 bn as opposed to Rs 476 m during same quarter last year and this explains the jump in interest expenses. The difference in debt has gone mostly towards providing short term loans to its European subsidiary, Sylvania.

  • Apart from topline growth, a lower tax rate has also helped the companyís cause. With the company starting new units in tax exempt zones of Baddi and Haridwar, tax rates are expected to come down still more going forward.

  • As far as the operations of Sylvania are concerned, the company reported stable performance although it still reported a small loss at the net profit levels. Havellísí financial exposure to Sylvania however remained constant on a QoQ basis.

What to expect?
At the current price of Rs 668, the stock trades at 15x its expected FY12 earnings. While the companyís performance has come in higher than estimates on the topline front, its operating margins are more or less in line with estimates. We expect the company to put up a improved show during the coming quarters as both its interest expenses as well as tax rates come down. The stock has already run up more than 20% since our recommendation and we believe that it is well placed to meet our target price. We maintain our view on the stock.

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