Havells India Ltd. put up a robust revenue performance in the quarter ended June (Q1FY24), but the same could not be said about its margin performance.
The company’s standalone Ebitda (earnings before interest, tax, depreciation, and amortization) margin slipped 20 basis points year-on-year to 8.3%. The Lloyd segment has been a persistent drag on the margin, with a loss of nearly ₹61 crore at the Ebit (earnings before interest and tax) level in Q1, following a ₹221 crore loss in FY23.
However, analysts forecast an improvement in the margin trajectory, thanks to softening commodity prices. Excluding Lloyd, Havells expects an Ebitda margin in the 13-15% range. “While Lloyd has a huge addressable market to cater to, the medium-term journey is likely to be one of very gradual margin accretion, even as the Street builds in a sharper path,” said analysts at Nuvama Research in a report on 20 July.
Interestingly, the unexpected 20.5% revenue growth from Lloyd in an unseasonal quarter buoyed the company’s overall revenue growth in Q1. The cables & wires business also contributed to overall revenue growth. As a result, Havells reported a 14% year-on-year revenue growth to ₹4,824 crore.
It should be noted that despite a muted demand environment in April and May, Havells witnessed improved consumer demand across all categories in June. It anticipates a demand surge in the second half of FY24.
However, the margin concern seems to overshadow this positive outlook. Analysts at Kotak Institutional Equities expressed caution, “Though Havells is posting healthy revenue growth overall, margins have remained below expectations and a recovery may be protracted as Lloyd remains in investment mode over the next few years and subdued consumer demand and stiff competition create headwinds.” Consequently, the brokerage firm slashed its FY2024-25E earnings per share by 9-11%, as lower margins outweighed higher revenue assumptions.
Against this backdrop, Havells’ stock valuation appears expensive. Despite hitting a new 52-week high on Thursday, the stock has declined over 3% in the past two days. It trades at a hefty 45 times FY25 earnings, according to Nuvama’s estimates. Havells’ shares have risen 19% in 2023 thus far. Nevertheless, the Nuvama report said, “In our view, the current valuation is rich given the uncertainties, and we see limited upside and potentially stock underperforming.”