Investors wishing to bet on the recovery in consumer spending can invest in the stock of Havells India, the largest player in the listed consumer electricals space.

The stock has rallied sharply from the May lows. Nonetheless, long-term investors can consider buying the stock at current levels. At ₹634, the stock is a good 20 per cent below its highs of 2019. At the current price, the stock discounts its estimated earnings for FY22, at 45 times, as against its historical average of 35-45 times.

With the festival season around the corner and lockdown being lifted in most parts of the country, it may be a good time to add the stock to your portfolio, if you have a moderate risk appetitie and a long- term investment horizon. A diversified product portfolio, a strong brand and a healthy balance sheet are positives.

While in FY20, revenues declined (6 per cent) due to weak demand, the company sports a good long-term performance, clocking revenue CAGR of 14 per cent, over the past decade, across various demand cycles.

Earnings outlook

In the June 2020 quarter, the company reported a revenue of ₹1,479 crore, down 45 per cent (y-o-y). Sales of cables which makes for almost 40 per cent of revenue, was down 41 per cent. The second largest segment – consumer durables – reported 46 per cent drop in revenue. The switchgears and lighting segments too saw about 45 per cent drop in revenue. Lloyd Electric, the company’s subsidiary (acquired in 2017), makes ACs, refrigerators and washing machines. It has a considerable market share in air-conditioners. It witnessed revenue drop of 53 per cent in the June quarter.

All in all, the June quarter was a complete washout for the company.

But the worst may be over and the company is likely to see notable recovery in the coming quarters.

In the month of June alone, Havells’ consumer business and Lloyd’s revenues saw a growth of 4 per cent and 8 per cent (y-o-y) respectively. With State governments removing movement restrictions and lifting lockdowns, consumer spending should pick up further, led by the pent-up demand and festive season buying.

Grooming products of Havells including beard trimmers, hair straighteners and hair dryers which have been witnessing a strong growth in the last few months should continue to do well as people remain reluctant to visit salons and parlours for more time. The institutional demand in cables/wires and switchgears may also pick up, given industry reports that indicate restart of construction activities.

Market share gains are also possible this year. The company’s initiatives to expand presence in rural markets resulted in adding 1,700 rural distributors covering 18,000 outlets in 2019-20. Havells now has direct reach in 2,000+ rural towns covering 21,000 outlets. Also, encouraging, is the company’s response to changing consumer behaviour post-Covid. Havells plans to expand online presence through its own e-store and through market platforms such as Amazon and Flipkart. The company plans to on-board its partners in the retail network to its e-store. In 2019-20, Havells saw doubling of online sales, though still just about 3 per cent of its revenue.

Growth is also likely to come from new product launches. Havells has been increasing spend on R&D to bring out competitive products. R&D expenses that stood at 0.8 per cent of total revenue for FY18-19 have inched up to 1.1 per cent of revenue in FY19-20. It is interesting to note that in 2019-20 the company filed 123 IPRs (total IPRs the company holds is 386) and launched 20 new product categories.

With regard to Lloyd’s business, though 2019-20 was challenging because of the restructuring in distribution network and margin pressure from import duty hikes on some components for ACs, 2020-21 could be better. Management of Havells expects Lloyd’s to gain market share this year as it has started in-house manufacturing of air-conditioners.

Margin picture

In the June quarter, Havells reported operating margins at 8.8 per cent – this, though lower than last year (10.3 per cent), was better than market expectations, thanks to company’s tight control on costs. This should provide cushion to margins in the coming quarters as well (though savings from rental waivers for warehouses will not continue). The company’s management is cutting corners on travel expenses and replacing it with e-visits and e-meetings and has rationalised employee costs too.

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Havells took a debt of ₹897 crore in the June quarter to help tide over near-term working capital needs (if required). However, the company still carries cash (net of debt) of about ₹837 crore on its balance sheet.

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