Investors with a long-term investment horizon can buy the stock of Havells India. The company is the largest player in the listed space in consumer electricals.
With the broader market correction, the stock of Havells India has dropped 16 per cent since August to ₹602 now. At the current market price, the stock discounts its estimated earnings for 2019-20 by 36 times. The stock was trading at a multiple of 41 times its one-year (2018-19) forward earning in December last year.
V-Guard Industries, the company’s peer in the electrical appliances and cables space, which was trading at a premium to Havells last year, is now at a discount. It trades at 29 times its expected earnings for 2019-20.
Havells’ premium valuations are, however, justified, given its diversified product portfolio.
Over the next year, if revival in the real-estate sector picks up pace and the switchgear business recovers, Havells will do well. Also, margin improvement at Lloyd Electric (Havells had acquired the consumer business of Lloyd Electric in 2017), a change in product mix with increased contribution from high-end premium consumer electrical products, and improved market share due to increasing preference for branded goods as a fallout of GST, will also help.
The September 2018 quarter was good for Havells with strong volume growth (20 per cent) in cables, good traction in consumer appliances and fans, and increased demand for industrial switchgear (accounts for 30 per cent of the overall switchgear business) from government’s electrification projects. A favourable base, too, helped.
Diversified business
While cables is the company’s largest segment, contributing 39 per cent to the revenue, switchgears, electrical consumer durables, and lighting and fixtures account for 21 per cent, 23 per cent and 17 per cent of the revenue, respectively. Havells is among the top five players in the organised market across product categories. It competes with players such as Crompton Greaves, Bajaj Electricals, Orient Electric, Usha Electronics, Philips, Finolex Cables and Polycab.
Havells acquired the consumer business of Lloyd Electric and Engineering in February 2017 for ₹1,600 crore. Lloyd’s air-conditioners and washing machines are at present in the mass premium segment. The company enjoys 13 per cent market share in ACs and 3 per cent market share in LED televisions. It has a network of dealers/distributors across 450 cities, and 600-plus service centres. For better reach and growth, Havells is now introducing Lloyd’s products in modern format retail stores, through its already established network.
Currently, manufacturing of a good portion of Lloyd’s products are outsourced. But Havells is trying to develop some products in-house, and has earmarked ₹350 crore for an AC plant at Neemrana, Rajasthan. In-house production will improve profit margins.
For Havells, in periods when business is weaker in industrial segments such as switchgears, the consumer products segment helps keep the momentum going.
Havells has made strong inroads into tier I and II towns in recent years for its consumer electricals and other products. The company has a network of 8,500 dealers across the country and one lakh retailers. Its own outlets — Havells Galaxy stores — now make for 22 per cent of the revenue.
In 2017-18, the company recorded a total revenue of ₹8,138.5 crore (including Lloyd’s ₹1414 crore since May 2017). The operating profit margin was 12.9 per cent, dragged lower by Lloyd’s 8 per cent profit margin for the period. On a standalone basis, Havells’ operating profit margin was 13.9 per cent versus the previous year’s 13.4 per cent.
In the September 2018 quarter, while Havells recorded a 28 per cent revenue growth y-o-y, a muted show by Lloyd dragged the overall revenue growth to 23 per cent. However, profit growth was not impressive (at 4 per cent, y-o-y) because of contraction in operating profit margins (due to higher commodity prices) both in its standalone business and in Lloyd’s.
Operating margins on a consolidated basis were 11.8 per cent in the September 2018 quarter versus 14.5 per cent in the same quarter last year. Higher spending on sales promotions, too, weighed on profits. Promotional expenses jumped 46 per cent and were at 3.4 per cent of the revenue, up from 2.9 per cent in the same quarter previous year.
Lloyd’s business to grow
While Lloyd’s performance was muted in the September quarter due to adverse climatic condition for sale of air-conditioners and high channel inventory, it is expected to improve.
The operating performance should improve in the next one-two quarters as the company passes on higher commodity prices and headwinds from a weak rupee to consumers through price hikes. In the September quarter, operating profit margin of Lloyd was 3.3 per cent, versus 7 per cent in the same period last year.
As the new AC plant starts production by the March quarter, there will be some more margin saving. Havells intends to reduce import of components for Lloyd’s AC and ensure maximum requirement is met in-house or locally sourced. From 2019-20, Havells’ management estimates 60-70 per cent of components to be be sourced in-house.