Havells India Ltd (Q4 FY14)

• Led by strong performance in the cables business, topline increases 12% yoy and 10.6% qoq

• Revenue from the cables and wires division jumped 21% yoy due to a weak base in Q4 FY13 and strong growth in industrial cables

• Operating profit of Rs1.7bn was inline with our estimate as the impact of higher EBIT from the cables division was offset by a weaker performance in its switch gears division

• Switch gear division EBIT margin shrunk 657bps yoy to 24.8% due to a one-time provisioning of Rs400mn

• Growth to continue going forward; Maintain Market Performer rating with a price target of Rs1,017

Strong volumes boost topline

Topline of Rs13.1bn was higher by 12% yoy and marginally above our estimate of Rs12.8bn. The impact of strong performance in the cables division was offset by a weak performance in the switch gear division. Revenue from the switch gear division stood at Rs3.2bn, increasing by 2.8 % yoy, on account weaker demand in the domestic market. Cables division registered a 21% yoy growth in revenue to Rs5.6bn on the back of strong sales in the industrial cables segment (27% yoy) and an improvement in their flexi cable by 14% yoy. The company managed to register a growth of 8.3% yoy to Rs2.3bn in the Electrical consumer durable division on the back of never products introduced during the quarter. Lightings & Fixtures division registered a 9.3% yoy growth in revenue, steady state achieved in Q3 FY14. For FY14, Havells registered a topline growth of 11.7% yoy, in line with the management guidance. The company expects growth to pick up further in FY15 on the back of increased spending in the domestic economy and introduction of new products in the electrical consumer division. 

Operating profit jumps 49.4% yoy

Operating profit margin in the standalone business for Q4 FY14 witnessed an expansion of 12bps on yoy basis largely attributed to increase in EBIT margin for cables & wires and lightings & fixtures segment. The impact of the increase in EBIT margins at the above two divisions was offset by a sharp decline in switch gear division margins. EBIT margins for the switch gear division shrunk 657bps yoy due to a provision relating to full year and provided in the quarter. Excluding the one-time provisioning, contribution margin for the switch gear division would increase from 24.8% to 37.9%. EBIT margins in the cables division increased by 684bps yoy due to focuses approach on improving margin in both industrial and flexible cables. The expansion in OPM was also due to a decline in advertisement spends during the quarter.

Sylvania results impacted by provision related to pension liability

Revenues (€ terms) from its overseas subsidiary (Sylvania) increased by 1.6% yoy, with 3.6% yoy rise in revenues from Latin American market. European operations revenue grew at 2% yoy to €71mn. Operating margin was 0.4% for European operations and 3.4% for Latin American operations. However, reported operating income includes pension liabilities of €7.7bn. Excluding this, normalized OPM was 6.7%, up 60bps yoy and lower by 110bps qoq. Sylvania reported revenue of Rs35.7bn and operating profit of Rs1.3bn for FY14. Net working capital in Sylvania by the end of FY14 declined to 19 days of sales from 43 days at the end of FY13.

Growth to continue going forward; but valuations expensive at CMP

The management has increased its guidance of 12% revenue growth in FY14 to 15-20% yoy growth in FY15 for standalone business led by stronger growth in the consumer business and a revival in consumer spending. Profitability is expected to remain strong on the back of a) higher share of manufacturing v/s outsourcing and b) various initiatives taken by the company to improve efficiency. We have upgraded our estimates for the standalone business after the strong growth in topline reported by the company in a tough environment in FY14. We have also upgraded our FY15 estimates for the Sylvania after the turn around witnessed over the last two quarters and the positive guidance given by the company. We believe earnings growth to pickup from H2 FY15 on the back of the change in sentiment in the sentiments of the consumer. We maintain our Market Performer rating with revised target price of Rs1,017.