Havells India Limited (NSE:HAVELLS)’s outlook is one of buoyant sentiment as it continues to post exciting top-line revenue growth. I’ve written a brief commentary on the key things you’d need to believe in order to be long HAVELLS.
Havells India Limited manufactures and sells industrial and consumer electrical products in India and internationally. Since starting in 1958 in India, the company has now grown to a market cap of ₹402.43b.
The company is growing incredibly fast, with a year-on-year revenue growth of 32.34% over the past financial year , and a bottom line growth of 39.85%. Over the past five years, sales has risen 3.39%, congruent with larger capital expenditure, which most recently reached ₹15.97b. With continual reinvestment into business operations, a return on investment of 22.96% is forecasted for the upcoming three years, according to the consensus of broker analysts covering the stock. Net income is expected to increase to ₹8.63b over the next year, and over the next five years, earnings are expected to grow at an annual rate of 19.28% on average. These figures illustrate HAVELLS’s strong track record of producing profit to its investors, with an efficient approach to reinvesting into the business, and a buoyant future compared to peers in the sector.
Minimizing the downside is arguably more important than maximizing the upside. Generally the first check to meet is financial health – a strong indicator of an investment’s risk. Havells India’s balance sheet is robust, with high levels of cash generated from its core operating activities (9.53x debt) able to service its borrowings. Furthermore, HAVELLS’s debt level is at an appropriate 3.09% of equity and has been declining over the past five years from 68.06%. HAVELLS also generates income from lending its cash which, in turn, is able to cover its annual interest payment to its debtors. The company shows the ability to manage its capital requirements well, increasing my conviction of the sustainability of the business going forward. HAVELLS has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. HAVELLS has managed its cash well at a current level of ₹15.07b. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.
HAVELLS currently trades at ₹643 per share. At 625.43 million shares, that’s a ₹402.43b market cap – which is too high for a company that has a 5-year cumulative average growth rate (CAGR) of -1.35% (source: analyst consensus). With an upcoming 2018 free cash flow figure of -₹1.77b, the target price for HAVELLS is ₹134 is below than the current share price. Therefore, the stock is trading at a premium. Also, comparing HAVELLS’s current share price to its peers based on its industry and earnings level, it’s overvalued by 198.36%, with a PE ratio of 59.6x vs. the industry average of 19.98x.
HAVELLS’s investment thesis is a positive one. The stock is appealing because of its strong fundamentals – financial health, future outlook and track record. However, at its current share price, right now may not be the best time to invest. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.
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The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.