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Havells: Operating margin kicker - Views on News from Equitymaster
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Havells: Operating margin kicker
Nov 5, 2009

Performance summary
  • The standalone topline grows by 1.9% YoY led by growth across all business segment except for cable & wires division during the quarter.
  • Operating profit grows by 34.2% YoY, higher than the topline on the back of significant decline in operating costs, thus EBITDA margins expand by 3.2%.
  • Standalone bottomline grows by 22.3% YoY mainly on account of higher operating margins coupled with lower interest costs during the quarter.
  • Half yearly, bottomline grows by 21.7% YoY on the back of a 3.9% growth in the topline.


Standalone financial snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 5,853 5,964 1.9% 11,387 11,826 3.9%
Expenditure 5,271 5,183 -1.7% 10,262 10,357 0.9%
Operating profit (EBDITA) 582 781 34.2% 1,125 1,469 30.5%
EBDITA margin (%) 9.9% 13.1%   9.9% 12.4%  
Other income 26 19 -29.1% 39 59 51.4%
Interest (net) 53 19 -64.0% 102 35 -65.4%
Depreciation 44 55 24.3% 81 109 34.4%
Profit before tax 511 725   981 1,383 41.0%
Extraordinary income/(expense)       -    
Tax 68 183 171.2% 130 349 167.3%
Profit after tax/(loss) 443 542 22.3% 851 1,035 21.7%
Net profit margin (%) 7.6% 9.1%   7.5% 8.7%  
No. of shares (m)       57.9 60.2  
Diluted earnings/(loss) per share (Rs)*         27.2  
Price to earnings ratio (x)         11.3  

What has driven performance in 2QFY10?
  • Havellsí standalone topline grew by 1.9% YoY during the quarter. This can be attributed to growth across all its business segments except for the cables & wires division. Switchgears revenues grew by 7.1% YoY which included additional sales of Rs 92 m from motor division in 2QFY10 as compared to Rs 18 m during the corresponding period last year. Lightning and Fixtures sales grew by 26.5% YoY led by increased sales of luminaries as well as CFL. Electrical consumer durables (ECD) revenues grew by 17.6% YoY on the back of growth in the branded consumer product portfolio. However, cables & wiresí sales declined by 10.1% YoY despite the robust volumes growth. This was mainly due to fall in commodities prices especially aluminium and copper which resulted in lower realisations.

    Segmental break up
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Switchgears            
    Revenues 1,633 1,749 7.1% 3,099 3,462 11.7%
    PBIT margins 34.7% 37.4%   36.5% 36.5%  
    Cable & Wires            
    Revenues 2,699 2,427 -10.1% 5,227 4,851 -7.2%
    PBIT margins 7.7% 7.8%   9.1% 10.0%  
    Lighting & Fixtures            
    Revenues 715 904 26.5% 1,334 1,654 24.0%
    PBIT margins 25.5% 21.2%   21.9% 18.8%  
    Electrical Consumer Durables            
    Revenues 678 797 17.6% 1,455 1,701 17.0%
    PBIT margins 20.8% 30.4%   20.8% 27.0%  

  • On the operating front, operating profits grew by 34.2% YoY mainly on account of a significant decline in operating costs coupled with better realisations during the quarter. Raw material and staff costs (as a % sales) declined during the quarter. Thus, operating margins improved by 3.2% to 13.1% in 2QFY10. PBIT margins of cables & wires division remained stable at 7.8% during the quarter led by effective price management despite the falling material cost environment, while PBIT margins of ECD segment grew from 20.8% to 30.4% during the same period owing to better realisations and reduced raw material costs. PBIT margins of Switchgear segment increased by 2.7% YoY to 37.4% mainly due to reduced material costs and stable prices during the quarter, while the same for Lightning and Fixtures segment declined by 4.2% YoY to 21.2% owing to increase in import costs of luminaries due to the appreciation of the Rupee during the quarter.

    Cost break-up
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Raw materials 3,528 3,290 -6.7% 6,759 6,647 -1.6%
    % sales 60.3% 55.2%   59.4% 56.2%  
    Staff cost 242 188 -22.2% 464 365 -21.3%
    % sales 4.1% 3.2%   4.1% 3.1%  
    Other Expenditure 1,502 1,705 13.5% 3,040 3,345 10.0%
    % sales 25.7% 28.6%   26.7% 28.3%  

  • Net profits grew by 22.3% YoY on the back of a healthy performance at the operating level coupled with lower interest costs. However, higher tax outgo due to reduction in fiscal exemption for Baddi unit and a higher contribution from the non-exempted units like cable & wire during the quarter has adversely impacted the bottomline growth. Further higher depreciation charges also limited the bottomline growth.

What to expect?
At current price of Rs 307, the stock is trading at a multiple of 6.8x our expected FY12 earnings per share. The performance the company has come nearly in line with our estimates. We continue to remain positive on the stock.

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