Havells, Polycab flip the switch on high-voltage growth potential

Margin constraints could trip up earnings performance

The July-September quarter (Q2) results for 2024-25 (FY25) from the largest listed consumer electrical solutions companies, Havells India and Polycab India, followed similar trends, demonstrating robust revenue growth while falling short of profitability expectations.

Both companies witnessed overall growth in the 16-30 per cent range, but margins declined by 130-290 basis points (bps) year-on-year (Y-o-Y). Although brokerages are bullish on long-term prospects and have raised revenue projections, earnings forecasts have been revised downward due to margin pressures.

The cable and wire (C&W) business remains the core growth driver for both companies. For Havells, this segment, which accounts for about 40 per cent of revenues, reported a growth of 23 per cent Y-o-Y.

Polycab, the market leader in the organised WC&W segment in India with a share of 25-26 per cent, reported a 24 per cent increase compared to the year-ago quarter. The C&W segment constitutes 85 per cent of the company’s overall revenues. Within this segment, wires outperformed, driven by channel restocking due to lower inventory levels.

Havells’ management indicated that demand in urban markets has remained steady, while rural demand is recovering after a subdued 2023-24 (FY24). The market will closely monitor demand during the festival season; however, Polycab expects growth to accelerate in the second half (H2) of FY25, supported by government spending, continued investments from private players, and strong real estate offtake.

In addition to C&W, Polycab’s sales in fast-moving electrical goods grew by 18 per cent Y-o-Y, primarily driven by the fan segment, which had a low base last year, along with robust online sales. While the switchgear segment saw solid growth due to demand in real estate, lighting faced challenges from ongoing price erosion, which offset volume gains.

Analyst Sonali Salgaonkar of Jefferies Research projects Polycab’s C&W revenues to grow at a run rate exceeding 20 per cent from FY24 through 2026-27 (FY27), primarily driven by projected capital expenditure recovery, infrastructure development, and a housing upcycle in India. Although the brokerage has maintained a ‘buy’ rating on the stock, it has lowered its earnings estimates by 2 per cent due to margin pressures.

For Havells, the electrical consumer durables business grew by 17 per cent, supported by broad-based growth across categories (fan, small domestic appliance, and water heater) due to festival demand and enhanced brand acceptance.

In the Lloyd segment, the company posted a value growth of 19 per cent Y-o-Y during a seasonally weak quarter, with the non-room air conditioner (AC) portfolio, including refrigerators, washing machines, and light-emitting diode panels, outperforming room AC products. The company reduced segment-level losses to Rs 22 crore from Rs 73 crore in Q2FY24.

Although HDFC Securities has adjusted Havells India’s earnings per share estimates downward by up to 3 per cent for FY25-27, analyst Paarth Gala expects improved operational performance from the market leader in H2FY25. This optimism is based on Havells’ diverse product portfolio covering 70 per cent of household electrical sockets, its leadership in most product categories, the growing traction of the Lloyd portfolio, and its focus on innovation.

A major disappointment for both companies was the margin decline during the quarter. Havells’ operating profit margin dropped to 8.3 per cent, down 130 bps, missing market estimates by 200 bps. This decline was primarily due to a 54 per cent increase Y-o-Y in advertising expenditures and a 21 per cent rise in manpower costs.

The increase in advertising spend was influenced by the festival season, while volatility in commodity prices in the cable segment and heightened investment in new channels contributed to lower margins. Profitability is expected to stabilise moving forward, as the company has implemented price hikes across most categories, excluding the C&W segment.

Polycab’s margin decreased by 295 bps to 11.5 per cent due to intensified competitive pressure and lower contributions from the higher-margin domestic distribution business within the C&W segment. Moreover, strong growth in the relatively lower-margin others/engineering, procurement, and construction (EPC) business, along with losses in fast-moving electrical goods due to increased advertising and employee costs, led to weaker margins.

ICICI Securities believes that a revival in contributions from the high-margin domestic C&W business and the lower-contribution EPC business may lead to margin expansion in 2025-26.