Cost increases, GST dent Havells profitability

Promotional and staff expenses surge; lower off-take hurts sales in Q1

Havells India witnessed a higher-than-anticipated impact of goods and services tax-(GST) led disruption on its sales in the June quarter. Revenue growth, excluding the Lloyds business, came at 9 per cent. Accounting for 50 days of Lloyds revenues after acquisition, Havells' net revenue grew 27 per cent yearon-year at ~1,860 crore, short of a consensus estimate of ~2,020 crore.

The company claims uncertainty, lack of clarity and a general regulatory fear led to a significant decline in primary off-take by channel partners. Growth was impacted across segments, except cables. The switchgears segment's revenue declined 4 per cent year-on-year (y-o-y). Lighting & fixtures, electrical consumer durables saw a single-digit growth against general expectations of 10-15 per cent. An improvement in copper prices was expected to drive growth of the cables segment. While analysts at Motilal Oswal Securities anticipated a 10 per cent sales increase during the quarter, the growth at 19 per cent offered some respite.

Cables remain a low-margin segment, with margins of 13.5 per cent compared with 22-39 per cent in other segments. Hence, the overall operating performance suffered. Further, since the company expected the impact to be transitional, it refrained from short-term adjustments in advertisement or manpower costs. Employee costs also surged 30 per cent y-o-y, while advertisement and promotional expenses jumped 51 per cent. The Ebitda (earnings before interest, tax, depreciation and amortisation) declined 20 per cent year-onyear to ~159.6 crore. Including Lloyds' contribution, the Ebitda at ~172.4 crore is still short of consensus estimates at ~240 crore. Net profit at ~121.4 crore was also below the Street's estimate of ~163 crore.

The level of restocking during initial periods may remain weak as dealer network adjusts to the new system, but things are expected to stabilise. Analysts do not see much impact of higher tax as there will be input tax credit for organised players and institutional customers. While in categories like fans, appliances and switchgears, the hike should be marginal; in cables and wires the price hikes will be a larger 8-9 per cent, which needs to be passed on.

Analysts expect a good growth led by Havells' strong focus on consumer durables business, with non-cable segments expected to regain a 1015 per cent growth momentum. The Lloyds’ business and margins are expected to improve gradually. Expectations of a rebound in business and the recent correction possibly explains why the stock gained despite weak results. On valuations, Himanshu Nayyer at Systematix Shares says from one-year perspective the stock looks fairly valued, but, long-term investors can enter at current levels.