In 2007, when Havells acquired Sylvania, many had their doubts. While Sylvania was a well-known brand in Europe, it was making losses at the net level due to ineffective cost management.
After three years, thanks to Havells' efforts, the company turned around to record profits and the news made Havells' stock hit new highs. But since 2012-13, Sylvania has once again been making losses.
On Thursday, as Havells announced its decision to sell its majority stake (80 per cent) in Sylvania, the market gave a thumbs up and pulled the stock up by almost 8 per cent.
Was the stake sale in Sylvania – a wise move? Yes, for many reasons.
One, it can save the company the cash that it was ploughing every year into Sylvania. This cash can be invested in the more promising Indian business.
The prospects of this business look brighter with consumer demand set to recover on the back of the pay commission bounty, and dropping inflation and interest rates. The European market is still not out of the woods and the central bank is contemplating fresh stimulus measures there.
Sylvania makes about 60 per cent of its revenue from Europe and the balance from Latin America.
Between 2012-13 and 2014-15, Sylvania has been recording losses. While the profit margins of Sylvania have improved on significant debt repayment over the last few years and improved operational efficiency, it has been finding it tough to make profits at the net level and been on a drag on Havells.
The sale of Sylvania will help improve Havells' return ratios.
For 2014-15, return on assets for the standalone company was 13.2 per cent, while for the consolidated business, the ratio was 7.58 per cent. Similarly, return on capital for Havells' standalone business was 19.8 per cent, higher than the consolidated 17 per cent.