Havells' bet on the Indian consumer fails to fire its growth engine

Topics Havells India | LED TV | Lockdown

Experts see a rough road ahead for its consumer durables business, thanks to the presence of multinationals in these segments and the technologically intensive nature of many of these categories
Havells India has an opening for its struggling Lloyd consumer division in the rising tide of protectionism in India’s trade policy.

The company, one of the smallest players in the country’s air conditioning, LED TV, and washing-machine markets, is expecting to raise its market share owing to tariff barriers imposed on imports of consumer goods such as air conditioners in the past two years.

“We have commissioned our brand new manufacturing unit for air conditioners, which gives an edge …,” said the company in a statement.

Experts, however, see a rough road ahead for its consumer durables business, thanks to the presence of multinationals in these segments and the technologically intensive nature of many of these categories. “The company owes its financial success to its dominant position in segments with limited competition and high margins such as switchgears, wires and cables, fans, and motors. In newer segments such as AC, TV and other consumer appliances, margins are wafer-thin and Havells is in direct competition with global majors,” said an industry expert. Havells acquired the Lloyd Consumer business in February 2016 to complete its portfolio of consumer products, a journey that had started with the fans business in 2003.

At the time of the acquisition, Lloyd was present in air conditioners, washing machines, and LED TV.

Havells says its products now cover 70 per cent of the sockets of a typical home in India — one the widest product ranges in the industry.

The acquisition has, however, failed to fire Havells’ growth engine. In FY20, the company reported its first decline in annual revenue and profit after two decades of uninterrupted growth. Its net sales were down 6.3 per cent while its profit before tax declined by 21.3 per cent. 
Revenue at the Lloyd division was down 14.3 per cent in FY20, unlike industry peers such as Voltas and Blue Star, which reported growth.

The company attributed this to the pandemic and lockdown.

“February to April is peak season for us in terms of sales of fans, coolers and air conditioners. But thanks to the lockdown we lost large part of our summer sales,” the company said.

Analysts are, however, not convinced.

“Sales growth in Havells’ core segments of switchgear, wires and cables, and lighting peaked in FY19 and then fell due to a mix of slowdown in real estate, poor consumer sentiment, and growing competition,” said Amnish Agrawal of Prabhudas Lilladher. The quarterly numbers suggest a steady deceleration in Havells’ top line from its peak in FY19.

The company’s net sales were down 10 per cent year-on-year in the December 2019 quarter, the biggest contraction in the past 15 years, and have continued to decline since then.

Anil Gupta, the company’s promoter and chairman and managing director, attributed this to industrial slowdown and an unfavourable economic environment. “Deterioration in economic macros, sectoral liquidity challenges, and slowdown in infrastructure have segment affected demand for industrial products that account for nearly 30 per cent of our business.”

In the past three years, the combined revenue of its three oldest divisions — switchgear, wires and cables, and lighting — has grown at a compound annual growth rate (CAGR) of just 2.8 per cent. These three divisions accounted for 60 per cent of its revenue and nearly two-thirds of profit in FY20.

The consumer durables segment did better with 16 per cent annualised growth during the three-year period as it entered new categories. In FY20, however, the segment reported just 6 per cent YoY growth despite an expanded products range. Diversification has allowed the company to keep the revenue needle moving. “Havells has reached where is today precisely because it diversified into consumer products. We would have been struggling by now if we had confined ourselves to industrial products,” the company said.

Analysts say incremental growth has come largely at the expense of margins.

“Originally Havells was a premium player but increasingly it is launching products at entry-level prices, which is hurting its margins and cannibalising its premium products,” said an industry analyst. Experts say that in-house manufacturing may not be enough. “It’s time Havells started innovative things in its newer categories, including products and technologies. It has done reasonably well so far but it is now up against global behemoths, which may require a completely new approach,” said Arvind Singhal, managing director, Technopak Consulting.

This may require big investment in products and technologies. Havells, sensing this, spent Rs 102 crore on research and development in FY20, double that of FY17, but it’s open to question if the amount is sufficient, given competition is now with multinationals whose global revenue 15-20x that of its annual turnover.

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