Havells’ stock price fell sharply after the management scaled down its FY15 standalone revenue growth guidance from 17-20% to 12-14% due to the weak demand environment.
Moreover, the management highlighted that its FY15 ebitda margin guidance of 5-6% for Sylvania is unlikely to be met due to: (a) higher provisions related to pension liabilities; and (b) adverse currency movements in Latin American countries.
Thus, we expect consensus to downgrade its FY15 and FY16 consolidated PAT estimates by 6-9%. The stock is currently trading at rich valuations of 27.0x FY16 P/E, a 50% premium to its cross-cycle average.
Rising competition in switchgears and fans (mostprofitable segments) and no signs of any recovery in the European market can act as negative catalysts for Havells. Our stance and estimates are currently ‘under review’.
Whilst the management’s rationale for the cut in the guidance is the continued weakness in demand in H2FY15 vs the earlier expectation of a revival in demand, we believe one of the reasons can also be the rising competitive intensity.
The management expects an increase in the provisions related to the pension liabilities of Sylvania for FY15. Moreover, the significant currency volatility in Latin American countries is also having an adverse impact on the operating margins of Sylvania. Consequently, the Ebitda margin guidance of 5-6% for Sylvania may not to be met.
Ambit Capital