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Havells India: Margins under pressure - Views on News from Equitymaster
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Havells India: Margins under pressure
Nov 3, 2010

Havells India has announced its September quarter results. The company has reported a 17% growth in topline and an 8% growth in bottomline on a YoY basis. Here is our analysis of the results.

Performance summary
  • Topline grows by 17% YoY during the quarter.
  • Contraction in operating margins leads to a 5% growth in operating profits.
  • Lower taxes help boost performance somewhat, leading to a net profit growth of 8% YoY
  • Half yearly bottomline grows 8% YoY on the back of a 19% growth in topline.

(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales 5,980 6,966 16.5% 11,879 14,142 19.1%
Expenditure 5,183 6,129 18.2% 10,357 12,503 20.7%
Operating profit (EBDITA) 797 837 5.1%   1,521   1,639 7.7%
EBDITA margin (%) 13.3% 12.0%   12.8% 11.6%  
Other income     2     1 -39.1%   6   2 -64.1%
Interest (net)   19   13 -32.6% 35 51 44.2%
Depreciation   55   72 30.8%  109  140 28.4%
Profit before tax 725 754 4.0%   1,383   1,451 4.9%
Extraordinary income/(expense)       7       7  
Tax 183 175 -4.2%  349  339 -2.8%
Profit after tax/(loss) 542 586 8.1%   1,035   1,119 8.1%
Net profit margin (%) 9.1% 8.4%   8.7% 7.9%  
No. of shares (m)    60.2 124.8   60.2   124.8  
Diluted earnings per share (Rs)*         19.0  
Price to earnings ratio (x)**         21.8  
(* on trailing twelve months earnings)

What has driven performance in 2QFY11?
  • The company operates through five different segments. Except for switchgears, which grew by single digits, all the other segments performed well and logged in a double digit growth rate during the quarter. However, the major contribution to the topline growth came from the cables and wires segment, which contributed to nearly half of the 17% growth in topline. This segment, which grew by 20% YoY, benefited on account of better realisations. Other segments that did well were lighting and fixtures segment and the electrical consumer durables, with each growing by 23% and 30% YoY respectively.

    Segmental break-up...
    (Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
    Switchgears            
    Revenues 1,749 1,843 5.4% 3,462 3,784 9.3%
    PBIT 654 646 -1.1% 1,263 1,369 8.4%
    PBIT margins 37.4% 35.1%   36.5% 36.2%  
    Cables and Wires            
    Revenues 2,427 2,910 19.9% 4,851 5,821 20.0%
    PBIT 190 272 43.1% 484 471 -2.7%
    PBIT margins 7.8% 9.4%   10.0% 8.1%  
    Lighting and fixtures            
    Revenues 904 1,110 22.8% 1,654 2,156 30.3%
    PBIT 192 189 -1.5% 311 355 14.1%
    PBIT margins 21.2% 17.0%   18.8% 16.5%  
    Electrical Consumer Durables            
    Revenues 797 1,036 30.0% 1,701 2,296 34.9%
    PBIT 242 271 12.0% 459 605 31.7%
    PBIT margins 30.4% 26.2%   27.0% 26.3%  
    Others            
    Revenues 87 3 -96.3% 157 17 -89.5%
    PBIT 22 1 -94.4% 28   6 -78.4%
    PBIT margins 24.9% 37.5%   17.9% 36.7%  

  • As far as operating margins are concerned, they have a taken a hit to the tune of 1.3% and consequently, growth in operating profits has come in at just 5% YoY. The decline has been attributed mainly to rise in raw material expenses, which the company was not able to fully pass on to end users. In terms of segments, it was the lighting and fixtures segment and the electrical consumer durables segment that suffered the maximum fall in margins.

  • At 8%, the growth in net profits has come in better than the 5% growth in operating profits. This is mainly on account of the lower tax rates

What to expect?
At the current price of Rs 414, the stock trades at around 18 times its expected FY12 earnings per share. While we like the company’s business model and its growth prospects, we believe that the stock price at the current levels do not leave much scope for further appreciation from a medium term perspective. Hence, it will not be too bad an idea to book partial or may be even full profits at the prevailing price.

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