The stock of Havells India is up 37 per cent from our ‘buy' price in September. Long-term investors can, however, continue to hold the stock. Increasing share in the retail switchgear and cables market due to an expanding dealer network, growing demand for compact fluorescent lamps, entry into consumer appliances and re-branding initiatives are positives for the company.

On trailing 12-month earnings basis, the stock trades at 20 times. However, the good prospects of the company justify the valuation.

Growing sales

After the successful restructuring at Sylvania (the company's European subsidiary), Havells has been focussing on increasing its share in the domestic market. This should help the company grow its sales faster than the industry. From close to 3,500 dealers last year (January 2011), the company now has 4,000 dealers in its network.

In the December 2011 quarter, the company, on a standalone basis, delivered a 26 per cent sales growth and a 21 per cent increase in net profits. This is thanks to both increased sales volumes and higher realisation.

Sales growth has also been helped by the company's recent pan-India launch of mixer-grinders and electric irons. The electrical consumer durables (initially comprised of fans and water heaters) recorded a 35 per cent increase in sales in the December 2011 quarter, year-on-year. For the coming summer season, the company is all set to launch room coolers.

The growing demand for energy saving lighting equipment is helping compact fluorescent lamp sales. This segment recorded 28 per cent growth in the past quarter. In switchgears, the company was till recently highly reliant on export sales. However, with the seven-year UK contract completed, the company has turned its focus on opportunities in the domestic market. The segment recorded a sales growth of 30 per cent in the December 2011 quarter.

ImprovED realisations

Another factor buttressing sales growth for Havells is improved realisations. If the uptrend in copper price seen in January (nine per cent increase) continues, the company may consider another round of increase in prices. The company's pricing power was demonstrated last time in 2010 when there was a rally in copper price. The overall operating profit margin for the company in the December 2011 quarter was two percentage points higher at 22.8 per cent. Margin improvement has also come on the back of improved efficiencies on raw material cost and reducing man power costs.

On consolidated basis, the December-2011 quarter sales were up 16 per cent for Havells. Though sales were flat at Sylvania, operating profit grew on improved margins (at 6.8 per cent versus 5.1 per cent). Going ahead, sales volumes may benefit from entry into new markets of Latin America and Asia for lighting products. The consolidated net debt of Havells, as of end-December 2011, is around Rs 1100 crore and the debt-to-equity ratio is at 1.4 times. The with-recourse debt following Sylvania's acquisition has been completely repaid.

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