Havells feels the heat as consumer business slows, Q4 results disappoint

Q4 sales, profit came below estimates; improving growth momentum crucial for stock

Havells’ March quarter (fourth quarter or Q4) performance came below expectations, largely due to soft demand for its cooling products. The consumer business of Lloyd, which Havells acquired in February 2017, saw a decline of 9 per cent, owing to a delayed summer season. 

Even the slower growth of the fan business affected growth of Havells’ electrical consumer durables (ECD) segment. The ECD business’ growth of 9 per cent year-on-year (YoY) was lower, compared to 36.5 per cent YoY in the first nine months of 2018-19. Since it has remained a strong growth driver — contributing about a fourth to Havells’ (ex-Lloyd business) revenue — slower growth reflected in the overall Q4 numbers.

The Havells management said that Q4 experienced demand slowdown, intensified by liquidity crunch, extended winters, and the general elections.

The industrial products business grew 15 per cent YoY, with cables and switchgears recording sales growth of 17 per cent and 11 per cent YoY, respectively. The two segments contributed 40 and 20 per cent, respectively, to the overall (ex-Lloyd business) revenues, and their performance was led by robust growth in government-led initiatives on electrification and infrastructure development. The lighting segment, however, also reported a lower growth of 7 per cent due to fewer project orders. 

Although ex-Lloyd business, Havells’ sales grew 14 per cent. The weak growth clocked by Lloyd and fans meant that consolidated sales were up only 9 per cent YoY at Rs 2,752 crore, coming significantly lower than the Bloomberg consensus estimates of Rs 2,918 crore.

On the profitability front, too, the Lloyd business saw a deeper impact, as segmental profits declined almost 38 per cent YoY. The company said that Lloyd suffered increased costs accruing from higher Customs duty and rupee depreciation. Even margins in the lighting and consumer durables businesses came slightly lower, which the company attributed to an unfavourable product mix. As a result, the operating profit at Rs 323 crore was down 10 per cent YoY in Q4, and net profit at Rs 207 crore missed consensus analysts’ estimates of Rs 255 crore.

Analysts at ICICI Securities said that Havells’ Q4 performance was below estimates, largely due to pressure in the consumer-facing business. The pressure, however, is more on Lloyd air conditioner business and the trend is similar to what has been seen by peers such as Voltas. The input costs have been rising, while slower demand and stiff competition meant that the companies have not been able to take price hikes. 

With softer March quarter sales, the channel inventory, too, remained high at the start of the current quarter and hence, the Street will be watchful on inventory reduction during the June quarter. Analysts such as Ronald Sayoni at Sharekhan believe that after the June 2019 quarter, the demand environment is expected to improve, led by favourable government policies, especially in infrastructure spending. 

This reversal of softer growth is crucial for the stock to sustain its high valuations. Although it has corrected about 6 per cent in May, the stock is still trading at about 36x 2020-21 estimates. Arafat Saiyed at Reliance Sec­urities says that for the premium valuations to sustain, the growth momentum should be similar to what was seen in the past.