 "Havells' correction a buying opportunity")
Havells, known for its lighting business and consumer appliances, has been among the top mid-cap gainers since last year’s Diwali, having gained 57 per cent since November 11, 2015.
The stock scaled its all-time intra-day high of Rs 459.80 in early October, before cooling after posting its September quarter results on October 18. Its consumer business, around 35 per cent of both revenue and profit, has been doing well and driving growth. Challenges to other segments exist due to subdued industrial activity and housing demand but there is hope for better growth with a revival in economic activity.
All these should help good growth at Havells in the next few years. As a result, analysts believe the recent correction offers a good opportunity to buy the stock.
Consumer business leads
With focus on increasing its penetration and market share, the consumer business should continue growing. And, with the government’s initiatives on economic revival and the power sector, demand for cables and switchgears could improve. Implementation of the goods and service tax legislation is another trigger for organised entities like Havells — analysts say it will help them gain market share and volume from unorganised players.
Already, Havells is among the top three in the segments of switchgears, lighting and appliances (fans). After divestment of its European lighting (Sylvania) business, at a good valuation, domestic operations are getting more attention. Cash from the divestment is being used to strengthen the domestic portfolio, brand and distribution.
Q2 blip
The September 2016 quarter (Q2) numbers were a bit soft, led by the industrial and housing segments. Switchgears and cables, two-third of company revenue, saw lower single-digit growth, indicating challenges in the near term. After a strong push on switchgears in Q1 that led to a 20 per cent year-on-year spurt in sales (albeit on a low base), Q2 was characterised by delayed recovery, leading to only five per cent growth over a year. The flattish growth for cables was also due to lower commodity prices but volumes grew 12 per cent.
Nevertheless, the consumer business held the fort with 25 per cent yearly sales growth in the September quarter, and the first half of 2016-17 as well. Analysts say this was led by a better-than-industry growth in fans and a much higher growth in new products like domestic appliances, water heaters etc. The lighting and fixtures segment also continues to grow at about 8.5 per cent, driven by the LED segment. This growth is reasonable, given the decline in the CFL segment on changing preferences. Outlook for the consumer business is strong backed by the robust prospects in the lighting segment.
Ahead
While near-term growth challenges around the cables and switchgear segment remain, the second half of 2016-17 is likely to be better. The management remains cautiously optimistic for the second half. The rebound in economic activity holds the key and experts feel the government’s initiatives will lead to better growth from the second half.
Overall, analysts remain positive. Those at IIFL say the company would continue to register strong volume growth over the next two years, on the back of strong brand positioning and increased reach in tier-II and tier-III cities. The company derives about 70 per cent of its current sales from tier-I but is penetrating and expanding in the others.
Analysts at Edelweiss believe Havells will sustain its industry-leading growth, riding on robust distribution and an expanding product portfolio. They maintain their ‘Buy’ rating on the stock.
