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Havells Q3FY13 results update

Contributed by Nirmal Bang

Havells’ reported improved performance in the domestic business and Sylvania margin started to pick-up after bottoming out last quarter. Havells’ domestic operation has grown by 17.4% YoY and by 9.8% QoQ growth due to significant jump in electrical consumer and durable business due to growth in fans by 30% and success of newly launched domestic appliances. The EBITDA margin was up by 10bps YoY to 12.9% and down by 60bps QoQ due to Forex loss of Rs. 3.7 crore in Q3FY13; excluding that the margin was down by 100bps YoY to 13.3% in Q3FY13 and up by 110bps QoQ. Sylvania, on the other hand the EBITDA margin stood at 4.6% in Q3FY13 improved sharply on a QoQ basis (Q2FY13 margin: 3.3%) as Europe margin improved to 5% following price hikes. We believe that with its focus on profitability from Sylvania (margin improvement in Sylvania), sustained domestic demand, steadily expansion of product portfolio and strong free cash flow generation, Havells will continue to perform.

- Domestic Business expedite: Net Sales for Q3FY13 was up by 17.4% YoY to Rs. 1052.1 cr and by 9.8% QoQ boosted by strong performance from all the segments. The consumer durable business grew by 51% YoY due to the combination of festive season demand and severe winter season resulting into the demand for water heaters and convection heaters. The Lighting and Fixtures and Switchgear grew by 22.2% YoY and 19.3% YoY respectively. Though the Cable registered a muted growth of 5% owing to the decline of 11% in industrial cable division YoY due to slower industrial and commercial activities.

- The higher advertisement and sales promotion expenses to promote new products further impacted EBIDTA margins (ex forex loss) by 100bps to 13.3% in Q3FY13 as compared to Q3FY12. However contribution margins remain intact during the same period of 21.7% in Q3FY13 though improved from Q2FY13 of 20.6%.

- The PAT margin was 9% in Q3FY13 as against 8.8% in Q3FY12 and 9.1% in Q2FY13. The significant jump in depreciation and tax rate restricted growth in the profitability of the company.

Valuation & Recommendation

At CMP of Rs. 659, the stock is trading at a PE of 19.8x FY13E and 15.4x FY14E. Havells has reported strong growth which was mainly driven by success of new product launches and expansion of Sylvania margin due to the pick-up in Europe and lesser interest cost. We have revised our estimates owing to steady domestic demand, success of new product launches which will accelerate the revenue growth and improvement in Sylvania margin. We have increased the EPS by 3.9% to Rs 33.3 FY13E and by 7.3% to Rs. 42.8 FY14E. We have revised our target price of Rs. 685 per share (PE 16x FY14E) from the earlier Rs. 559 per share. We recommend our investors to HOLD the stock.