Havells: Investors in dilemma over growth versus valuations

As company firms up strategy to secure medium-term prospects, valuations could play spoilsport

Ever since Havells sold its stake in Sylvania, its erstwhile European arm in 2015, the company has repeatedly emphasised its aspiration to become a dominant player on the home turf. If acquisition of Lloyd Electric’s consumer business last year established the point, the recently held analyst meeting reiterated Havells’ commitment. While the company has charted clear plans to grow its business across verticals, the key takeaways are its efforts to foray into new products such as water purifiers, enter new markets, expand distribution in western and southern India and adopt new technology.

With these strategies in place, Havells aims to be among the top three–five players across product categories in the domestic market, and this in turn emphasises Street’s confidence on Havells’ medium-to-longterm business prospects. Analysts say it’s time for Havells to look beyond its core business units — switch gears and cables, which together accounted for 60 per cent revenue last year. With the demand for these remaining lumpy in the recent times, relevance of Havells’ consumer business has increased.

While demonetisation shook up the company in the December 2017 quarter, the introduction of goods and services tax (July 2017) was a blessing in disguise. This did appease the earlier criticism around Lloyd’s acquisition, as it helped Havells gain from the shift in purchasing preference from unorganised to organised players. Even if Lloyd’s business earns relatively lower margins, it reduced the dependence on the core businesses to a large extent. In the September quarter (Q2), the share of revenue from Lloyd stood at 15 per cent, while that of core products fell to 51 per cent. The Lloyd business, with a seven per cent margin in Q2, weighed on the overall profitability; operating profit margin slipped to 14.5 per cent, against 15.8 per cent for other businesses, excluding Lloyd. The trend though could change in the longer run if Havells is able to lower Lloyd’s cost structure. Nonetheless, as the Street gets a grip on how Lloyd has helped chart a new growth trajectory for Havells, a majority of analysts are upbeat over the company’s recent strategic initiatives. Analysts at Morgan Stanley, who remain overweight on the stock, explain Havells’ leadership position in the consumer electrical segment, including its focus on people and technology, and on its growing consumer durable business, will continue to drive strong earnings growth and stock performance.

Against this backdrop and with the stock more than doubling in a year, the Havells stock may be attractive only for long-term investors, who place growth ahead of valuations.

Otherwise, at 42 times its FY19 earnings, the stock isn’t very affordable for all. There’s a word of caution, too. JPMorgan says the market is taking a big leap of faith on a Lloyd turnaround. UBS India’s research head, Gautam Chhaochharia, also feels consumer appliance (Lloyd) is an uncharted territory, as it’s a totally different channel with well-established competitors. Risk-reward, therefore, is unfavourable at current valuations, he adds.