Cables Expansion And Product Diversification To Drive Growth Amid Market Challenges

Key Takeaways

• Infrastructure investments in new cable plant expansion could boost revenue and margins through increased capacity and efficiencies.
  
• Product diversification and enhanced distribution channels suggest potential for long-term revenue and margin growth.
  
• Competitive pressures and cost volatility pose risks to margins and short-term earnings, with uncertain returns from investments in emerging categories and industrial demand.

Catalysts

A fast-moving electrical goods company, manufactures, trades in, and sells various consumer electrical and electronic products in India and internationally.

• The commissioning of a new Cables plant in Tumkur and additional planned CapEx of ₹450 crores for expansion are poised to meet the long-term demand for higher-size cables. This infrastructure investment could lead to increased revenue and improved margins as capacity and production efficiencies rise.
  
• Investments in diversifying and expanding product categories, especially in emerging segments like personal grooming, air coolers, and water purifiers, indicate growth potential. This diversification could result in revenue growth and potential margin expansion as these products scale.
  
• Increased advertising and marketing investments, particularly during the festive period, are intended to boost short-term sales growth, which may translate into higher revenues and normalize margins over the subsequent quarters.
  
• Enhancing manpower and fortifying newer channels, especially in rural and model format retail areas, signal Havells' commitment to scaling distribution and reach, impacting long-term sales growth and eventually leading to higher margin realization as these investments begin to pay off.
  
• Continued growth in the non-air conditioner segments of Lloyd's portfolio, coupled with efforts to improve cost efficiencies within the category, suggests potential margin improvement and revenue growth, contributing positively to overall earnings in the mid to long term.

Havells India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Havells India's revenue will grow by 12.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.0% today to 8.2% in 3 years time.
• Analysts expect earnings to reach ₹23.5 billion (and earnings per share of ₹37.46) by about November 2027, up from ₹14.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹26.6 billion in earnings, and the most bearish expecting ₹20.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 76.3x on those 2027 earnings, up from 71.7x today. This future PE is greater than the current PE for the IN Electrical industry at 24.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.1%, as per the Simply Wall St company report.

Havells India Future Earnings Per Share Growth

Risks

• Steep volatility in commodity prices, particularly affecting the Cables margin due to high-cost inventory absorption, poses risks to normalized margins and could lower net margins going forward.
  
• Increased advertising spend due to the early festive season has moderated margins, indicating potential risks to short-term earnings as cost pressures might not immediately translate into higher revenues.
  
• Industrial switchgear business experienced a decline, and fluctuations in government spending could impact future growth, potentially affecting revenue if industrial demand does not recover as anticipated.
  
• The investment phase in emerging categories and channels is leading to higher employee and operational costs, which could pressure net earnings in the short term if these investments do not yield immediate returns.
  
• Competitive pressures, such as pricing deflation in the lighting segment and increased competition from premium players entering mid-premium product categories, could impact revenue growth and margin sustainability across key business segments.

Valuation

• The analysts have a consensus price target of ₹1924.94 for Havells India based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2370.0, and the most bearish reporting a price target of just ₹1429.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹287.2 billion, earnings will come to ₹23.5 billion, and it would be trading on a PE ratio of 76.3x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of ₹1614.1, the analyst's price target of ₹1924.94 is 16.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.