Havells India’s stock gained as high as 3 per cent today after the company’s promoters announced their decision to transfer ownership of the “Havells” brand from QRG Enterprises (one of the promoter group companies) to the listed entity (the company, Havells India) from April 1, 2016 without any consideration. Atul Tiwari and Venkatesh Balasubramaniam, analysts, Citi Research Equities see this as a significant positive move but have not revised their target price of Rs 664.
'The brand licensing arrangement between the promoters and the company has caused some concern among investors given the fact that “Havells” brand gains immensely from advertising expense incurred by the company (Rs100-120 crore per anum) but Havells India did not own the brand. Now, these concerns have been addressed. Besides, the move gives strong signal of good corporate governance,” they say in their post event note.
Further, under the current brand licensing agreement, which is expiring on March 31, 2016, the Havells India pays 1 per cent of sales to promoters subject to a cap of Rs 40 crore per anum. Post the transfer, this payment will stop and hence the company will gain.
Fundamentally, domestic business’ double digit sales growth (management guidance of 15-20 per cent) and double digit margin is expected to continue thanks to robust momentum in electrical consumer durable division (17 per cent of standalone sales), new launches (switches under the mass brand ‘REO’, sockets), further widening of distribution and commissioning of largest lighting fixtures plant in Rajasthan. Advertising costs is a key moniterable as it jumped from 3.6 per cent of revenue in September 2012 quarter compared to 1.7 per cent in same quarter in the previous year.
The company’s 100 per cent subsidiary, Sylvania (45 per cent of consolidated revenues) is also expected to witness recovery after a tough year of 2012. The management expects improvement in Sylvania’s margins in FY14 partly led by price hikes, better product mix and cost efficiencies though revenue growth may remain in single digit. It has already achieved 6 per cent operating profit margin after a weak September 2012 quarter. Europe (60 per cent of Sylvania’s revenues) remains sluggish as demand is flat but the company has improved its market share. Further other markets like Latin America and emerging are seeing good growth.
However, all this seem to be reflected into the company’s stock, which is trading close to its all time high level of Rs 672 and looks fully valued at 18 times FY14 estimated earnings given historical average of 14 times. But the stock may continue to witness strong buying support, say some analysts. Vibhor Singhal, analyst, Phillip Capital, believes the company has similarity with FMCG companies in terms of business model (high asset turnover, net cash, small working capital cycle) and hence deserve higher multiple. Long term investors can buy the stock as dividend payout, which was increased by the company from 26 per cent in FY12 from 10 per cent, is likely to go up further.
