Havells India’s growth prospects are bright, but the stock is pricey

Yes, analysts are upbeat on the company’s growth prospects. In a report on 1 September, analysts from Credit Suisse Securities (India) Pvt. Ltd said, “We expect Havells to deliver a 20% CAGR in earnings over FY21-24E, driven by: (1) revival in switchgear and cables; (2) market share gains in durables; (3) an increasing presence in electrical consumer goods; and (4) margin gains in the Lloyd’s portion of the business.” CAGR is short for compound annual growth rate. The brokerage believes returns will be driven by addressable market expansion in white goods and growth visibility on the back of that.

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Even so, the stock’s significant appreciation suggests investors are factoring in a good share of the positives about demand recovery and growth into the current valuations. To that extent, upsides could well be capped.

Meanwhile, Havells India’s revenues for the June quarter (Q1FY22) naturally declined sequentially owing to the adverse impact of the second covid wave. Note that revenues had shown a consistent sequential improvement for three quarters before Q1.

Nevertheless, the Q1 results exceeded analysts’ expectations. Analysts from HDFC Securities Ltd point out that Havells and Hawkins posted +13% and +5% Ebitda on two-year CAGR in 1QFY22, respectively, while all other consumer durables companies under its coverage reported a decline. Ebitda is earnings before interest, tax, depreciation and amortization.

To be sure, after a robust Q1, investors will watch if the demand momentum sustains going ahead. Improvement in Lloyd’s performance remains a key monitorable, too.

In Q1, Lloyd’s business wasn’t able to capitalize on peak seasonal sales owing to the second wave. Further, to cope with higher commodity prices, the company has taken price hikes across most categories. As such, some analysts reckon the price hikes may help the September quarter show.

Be that as it may, even as growth prospects for Havells remain bright as mentioned earlier, the stock’s valuations already capture a good portion of the optimism.

Overall, according to Credit Suisse, key risks include “(1) high expectations; (2) margins (given a margin spike from lower ad spend in FY21); (3) demand impact from recent price hikes; and (4) increased competition as rivals catch up in systems/processes, especially in durables.”