Stock Review: Havells India

 

 

As 2010-11 comes to an end, analysts are increasingly getting bullish on Havells India. That is because visibility of benefits arising from restructuring activities (between January 2009 and June 2010) carried out for Sylvania, Havells' Europe-based lightings and fixtures subsidiary bought in 2007, is improving. Besides, continued robust growth is expected from standalone operations. The market's liking for this stock is also visible from its 27 per cent gain since February 10 – the day the BSE Sensex closed at its lowest level in 2011. During this period, the Sensex has risen only four per cent.

Global gains

Havells' 100 per cent European subsidiary, which formed 52 per cent of its consolidated revenues in 2009-10, reported a net profit of Rs 8.1 crore in the September 2010 quarter (first time since the June 2008 quarter). The turnaround is aided by the restructuring exercise undertaken earlier, consequent to the global crisis in 2008 and 2009.

Though it made a marginal loss of Rs 2 crore in December 2010, the broader picture shows that things are improving. For the nine months ended December 2010, Sylvania's sales declined eight per cent (in euro terms) but operating profit margin (OPM) jumped 440 basis points (100 basis points is one percentage point) to 4.4 per cent and it made a marginal net profit of Rs 4 crore, compared to a loss in the period a year ago.

This subsidiary is expected to break even in 2010-11 and witness a significant jump in performance from 2011-12, also aided by an increased focus on fast-growing emerging economies like Latin America and Asia, analysts say.

Sylvania's sales are expected to grow at a CAGR of three per cent (in euro terms) between 2011 and 2013 to 485 million euros. However, its operating profit and net profit margins are likely jump by around 250 bps each to 7.8 per cent and three per cent, respectively, boosting the overall profitability of Havells.

Margin pressure in domestic operations

In the domestic market, Havells is expected to continue its robust sales growth trend, led by switchgears, consumer durables (new launches), cables and wires segments, and helped by industrial expansion, ramp-up in power capacity and strong demand for consumer products. However, margin pressure is not ruled out due to rising raw material prices and the competitive intensity for almost all products, especially in cables and wires that form 42 per cent of its domestic sales and 19 per cent of gross profit.

In the nine months to December 2010, while standalone sales jumped 20 per cent to Rs 2,143 crore, operating profit margins dropped 115 bps to 12 per cent and net margins declined around 100 bps to 8.1 per cent.

Outlook

Analysts expect Havells' consolidated sales to record a compounded annual growth rate of 6.4 per cent between 2010 and 2013. However, its operating profit is likely to grow by a handsome 22.5 per cent in the same period. While the company is expected to return to profitability at the net level in 2010-11, profits are expected to grow at 22 per cent between 2011 and 2013.

Based on the average estimated target price of Rs 454, analysts see a 26 per cent upside in the stock, which it trades at an attractive valuation of 13 times 2011-12 estimated earnings.