Havells India is today trading at Rs 425 per share. This translates its market cap of Rs 26,537 crore. Are valuations of Havells India are rationale today?

Before heading in to the valuations let us look at its second quarter results. Total income from operations for the quarter had jumped up by 8.77% to Rs 1,559.33 crore on QoQ basis. Earnings before taxes were reported as Rs 203.01 crore reflecting margins of 13.02%. Net Profits jumped up by 21.97% to Rs 145.79 crore.

This is how half yearly report card look of Havells India:

Havells India 1H – 2017 % 1H – 2016 % % Difference
Revenues 3,132.38 100% 2,775.44 100% 12.86%
EBT 405.25 12.94% 317.20 11.43% 27.76%
Net Profits 291.37 9.30% 226.36 8.16% 28.72%

 

So far this financial year, revenues from operations are growing by 13% and profits by 29%. Havells India products are distributed in four different segments. Looking at the table below we can find out its growth drivers for both revenues and profits.

Havells India 1H – 2017 1H – 2016 % Difference
Switch Gear 730.46 654.34 11.63%
Cable 1,232.55 1,199.27 2.78%
Lighting & Fixture 429.81 376.19 14.25%
Electrical consumer Durables 679.26 545.64 24.49%
Others 60.30

 

The biggest contributor segment to its revenues is Cable segment, unfortunately Havells India is not seeing growth in this segment. Electrical consumer durables is seeing fastest growth for this company today. The highest contributor to its profits before taxes and interest is switch gears with margins of 39.42% and after that, it is electrical consumer durables with margins of 25.52%.

Last financial year Havells India reported profits of Rs 1,209 crore reflecting earnings of Rs 19.36 per share. These earnings were extraordinary because of the extra income of Rs 724.02 crore was generated by selling “Havells Malta stake” owned by its subsidiary. We calculated its intrinsic value for 2016 financial year to be Rs 490 per share.

We do not expect same kind of exceptional income to be generated by Havells India every year. Analysts who follow this business are expecting its earnings to drop by 48% from its 2016 earnings and report profits in range of Rs 512 crore – Rs 681 crore. They are also expecting its earnings for 2018 to rise by 16% from its expected 2017 earnings.

So there is a good chance for the shareholders to wait couple of more years for Havells India to report same earnings as it was reported in 2016.

Havells India is today trading at almost 32 times PE for 2018 and 7.5 times to its expected 2018 book value. They will report ROE of 25% if they hit the upper band of expected 2018 earnings (Rs 13.1 per share).

Will you be happy to pay Rs 750 to earn Rs 25 from business by 2018? If your answer is ‘yes’ then buy Havells India.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we tell you to take professional advice before going ahead with our views.