Havells India - Europe ops a drag but upgrade to BUY on valuations - Religare

HAVL's Q2FY13 results missed expectations on lower offtake in the Cable segment – Standalone sales/PAT came in at Rs 9.6bn/Rs 802mn (up 13%/1% YoY). Q2FY13 standalone EBITDA margin slipped 130bps YoY to 12.4% on higher ad spends. Sylvania's performance was impacted by its European operations, where slacking demand impacted volumes/margins. But we believe at the current price, risk-reward is favourable as domestic margin is expected to surprise positively in H2FY13, while European operations' metrics are likely to improve in H2 – upgrade to BUY.

- Lower offtake in underground cables impacts revenues: The Cables segment (44% of business) witnessed a muted growth of 6% YoY vs. 29% in FY12 on lower offtake in underground cables, which in turn were impacted by weaker demand. Growth in Consumer durables (16% of business) remained strong at 33% YoY, while the Switchgears/Lighting segments grew 15%/14%.

- Higher ad spending dents operating margins: Ad spending in Q2FY13 rose Rs 0.2b YoY or Rs.0.348b, which impacted EBITDA margin (it slipped 130bps YoY to 12.4%). The management has budgeted an ad spending of Rs 1.3b for FY13 (of which spending in H1 was Rs 784mn), and indicated a lower ad spending in H2, implying higher expected margins in H2.

- European operations impacted by weaker demand and lower volumes: Impacted by weaker demand, Q2FY13 sales in Europe declined 13% YoY (Sales in Americas up 9% YoY). EBITDA margin in Europe slipped 570bps YoY to 0.8%.

- Upgrade to BUY: In our view, domestic margins are expected to surprise positively in H2FY13 on lower ad spending, while European operation metrics are expected to improve in H2. We believe, risks and rewards are favourably placed at current valuations (P/E of 14x FY14E). Hence, we upgrade to BUY but maintain our estimates and TP at Rs 675.

Source : Equity Bulls

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