Investments In Facilities And Talent Will Expand Future Capacity And Efficiency

Key Takeaways

• Ramp-up of the Tumkur plant and new refrigerator facility supports revenue growth and market expansion in cables and consumer durables.
  
• Operational improvements and strategic investments may enhance margins and efficiency, positively influencing future earnings potential.
  
• Increased competition, pricing pressures, and cost challenges could limit Havells India's ability to grow market share and impact profitability and future earnings.

Catalysts

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

• The commencement and ramp-up of the Tumkur cable plant are expected to ease capacity constraints and boost revenue growth in the power cable segment. This increased production capacity should have a positive impact on future revenues.
  
• The planned ₹480 crore capital expenditure for a new refrigerator manufacturing facility in Ghiloth, Rajasthan, is a strategic move to expand capabilities and market presence in the consumer durables sector, potentially driving higher future earnings.
  
• The anticipated normalization of switchgear margins following plant relocation and a temporary shift towards lower-margin project business indicates potential future improvements in net margins as operations stabilize.
  
• Investments in brand building and talent are expected to stabilize, which could improve operating efficiencies and support net margin enhancement in the future as these costs become more aligned with revenue growth.
  
• Expected restocking in the domestic wire business and a seasonally strong quarter for underground cables are likely to boost sales in the upcoming quarters, positively influencing future revenue and earnings.

Havells India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Havells India's revenue will grow by 14.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 7.4% in 3 years time.
• Analysts expect earnings to reach ₹23.0 billion (and earnings per share of ₹36.75) by about January 2028, up from ₹14.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹19.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 73.9x on those 2028 earnings, up from 68.4x today. This future PE is greater than the current PE for the IN Electrical industry at 41.3x.
• 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 14.23%, as per the Simply Wall St company report.

Havells India Future Earnings Per Share Growth

Risks

• Commodity fluctuations and the resulting impact on domestic wire growth have led to moderate overall revenue growth, which could potentially affect future revenues.
  
• Decline in switchgear margins due to plant relocation and mix shift towards lower-margin project business, impacting net margins.
  
• Continued price erosion in the lighting business due to deflationary trends in LED chips could affect profitability and overall earnings.
  
• Elevated investments in brand building and talent have increased costs, which may pressure net margins if they do not result in proportionate revenue increases.
  
• Increased competition and pricing pressures across various segments could limit the ability to maintain or grow market share, potentially impacting revenues and earnings.

Valuation

• The analysts have a consensus price target of ₹1823.06 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 ₹2090.0, and the most bearish reporting a price target of just ₹1450.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹309.5 billion, earnings will come to ₹23.0 billion, and it would be trading on a PE ratio of 73.9x, assuming you use a discount rate of 14.2%.
• Given the current share price of ₹1528.2, the analyst's price target of ₹1823.06 is 16.2% 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.