 "Havells: Valuations increasingly demanding")
When the volume growth wasn’t showing enough promise in the fast-moving consumer goods space, the Street shifted its preference to consumer goods stocks. Havells, a market leader in the cables and switchgear business, was among the choices.
But with the September quarter results failing to spring any surprise, analysts are questioning the 42x FY17 price-earnings ratio of the stock (industry average of 25x). “While Havells deserves premium given its market leadership and the operating margins, maintained over years, we need to take a call on how much premium is justified,” says Ruchir Khare of Kotak Securities.
That said, while net profit was a bit short of expectations, operational results were in line with expectations. Analysts say they would revise their recommendations on Havells, if necessary, after the earnings call on Tuesday.
Standalone revenues grew eight per cent year-on-year to Rs 1,559 crore in the September quarter (Q2), bit ahead of Bloomberg estimate of Rs 1,520 crore. Though operating margins were maintained at 14 per cent, the operating profit at Rs 203 crore was a bit below Bloomberg estimate of Rs 214 crore.
Higher costs, especially employee and advertisement expenses, have curtailed profitability. Nevertheless, even after the foreign exchange benefit of Rs 8.3 crore and 158 per cent surge in other income to Rs 25.3 crore, the net profit at Rs 146 crore (up 22 per cent year-on-year) disappointed, falling short of Bloomberg estimate of Rs 153 crore.
However, analysts don’t attribute much to this blip, as margins have improved in a noteworthy manner across product profiles. The switchgears segment, which has for some quarters faced sluggish revenue growth due to slowdown in industrial demand, saw 200 basis points (bps) year-on-year increase in operating margins in Q2.
Likewise, despite the cables business being vulnerable to fluctuation in commodity prices, margins expanded 70 bps to 14.2 per cent. Maximum margin expansion was witnessed by its retail-oriented electrical consumer durables business; up 26.6 per cent in Q2 as against 21.9 per cent a year ago. “The manner in which Havells has bettered its operating margins suggests market share could have improved in Q2,” says Khare.
While all these work in favour of the company, analysts believe it would be prudent to exercise some caution on the stock, given this year’s rise of over 40 per cent. They say the current level (Rs 431) may not be a good entry point for the stock.
In fact, analysts seem to have already started exercising caution on this counter. Twenty one of 39 analysts polled on Bloomberg recommended ‘buy’ on Havells in May. This number is 18 in October. The target price of Rs 343 suggests the stock has rallied beyond expectations.
