Switch is on, Sylvania lights up Havells' numbers

The numbers speak for themselves for Havells. Its quarterly figures are out, which seem to have rubbed off on its stock price. The price target has been upwardly revised by Bank of America Merill Lynch to Rs 490 from the earlier level of Rs 465. The stock currently trades at Rs 407. Here is a synopsis of the company’s fourth quarter results and the reasons for the upgrade.

Havells’ strong consolidated profit numbers are mainly on account of a stronger-than-estimated recovery by Sylvania, the global lighting business arm of the company. In FY11, the Indian arm’s revenue grew 21% while its profit rose only 8%, which were all impacted by higher copper prices. This eroded the margins by 110 basis points. Standard Electrical, the 100% subsidiary and which is into the manufacturing of Switchgears, was also not left untouched.

Margins of Havells in FY12 are expected to be in line with those of FY11 as cost pressures may have peaked. Stability may return as the company stands to benefit from a change in the product mix. A stable margin and sales growth of 16% will help the earning per share improve by 16% to Rs 24.3 in 2011-12.

Sylvania, the global lighting business arm of Havells, has essayed a spectacular turnaround at a much stronger pace. The momentum has been given a push by cost reductions in Europe and a new revenue mix in Latin America. The risk of debt repayment of Sylvania has been well taken care of, which is getting into a self-sufficient mode.

Bank of America Merill Lynch expects Havells to be re-rated to a price to earning (PE) ratio of 13.6, hence the change in the price target.