With demand expected to be strong, Havells may reverse muted performance

Illustration: Binay Sinha
With demand improving, stocks of consumer electrical companies are expected to better than the benchmark average. An example being Havells, whose share price has risen 25 per cent since October; analysts expect more gains.

The Street’s optimism on consumer durables/electrical companies, Havells in particular, is because 2019 is expected to see a much better demand environment than in 2018. Demand over the past couple of quarters was muted due to unseasonal rain in the peak June quarter, coupled with floods in southern India, higher customs duties and currency depreciation. In the festival season, sales have been strong across segments for Havells and Lloyd Electric. The momentum for Havells’ products continued into December, say analysts at Motilal Oswal Securities. 

With winter onset, sale of water heaters has been robust, with the company struggling to meet demand, despite its Neemrana plant running to near-full capacity, say analysts. 

The electrical consumer durables (ECD) segment has been a consistent revenue driver over many quarters for the company. Contributing to a fourth of overall revenue during the first half of 2018-19, the segment has grown 37 per cent year-on-year (43 per cent, adjusted for excise duty). The company continues to have a dominant presence in the sector, with 15 per cent share in fans and similar market presence in the other segments.

In the current financial year, it launched a range of water purifiers and personal grooming products, with good response from consumers, say analysts. 

In water heaters, the ‘Adonia’ range with colour-changing LED to indicate temperature (launched in 2017) continues to see strong demand. While the outlook for ECDs remains firm, other categories such as switches and switchgear sales have started seeing better progress, on higher housing construction, say analysts. The segment contributes a fifth to overall revenue and grew 27 per cent year-on-year during the first half of FY19.

The cable and wire segment is seeing higher demand from retail consumers, while higher government infrastructure spending is rubbing off positively on the demand for power cables. 
The segment, however, has seen variation in margins, primarily due to volatility in commodity prices, such as those of copper. 

While the September quarter saw softer margins among segments (14 per cent, compared to 27-39 per cent in other segments), analysts say the company regularly raised prices during the quarter and passed it on.

The acquired Lloyd's air-conditioner (AC) segment remains in the spotlight and is expected to drive overall growth. 

The AC segment saw softer than expected growth during the peak summer season (impacted by unseasonal rain), which led to higher than normal inventory in the channel. 

The company has been liquidating this over the September and December quarters. 

While it raised prices by three to four per cent, to offset the rupee's depreciation, schemes/promotions were offered to clear channel inventory, say analysts.

Overall, Lloyd’s strategy of pricing parity with peers is much ahead of schedule and a uniform dealer structure is in place. 

The second leg of penetration, targeting tier-III and IV cities, is underway, with retail focus along the lines and scale of the fast moving consumer goods sector. 

With significant investment in people (eight per cent of sales in FY18), products and branding & distribution (3.8 per cent of sales in FY18), the management  expects operating leverage to improve, say analysts.

Havells, though, depends on import for a majority of the Lloyd AC requirement and will see an impact of a hike in customs duty and volatility in foreign exchange. This should, however, moderate by the next financial year, with its own AC facility coming up. 

Analysts at Edelweiss say Havells is focusing on a differentiation product basket, distribution and branding reach, opening multiple avenues for the company to improve its share across most electrical/white goods verticals.


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