Sylvania drags Havells India's overall growth

MUMBAI: While Havells India's domestic business is in formidable shape, subdued performance of its overseas business has been a drag on the company's overall performance. The company has scaled back its European subsidiary -- Sylvania's earnings guidance twice in the last two quarters. Unless there are signs of revival in its European business, the company's stock is unlikely to perform well.

Though Havells India is doing quite in well in the domestic market, the sheer size of its European subisidiary impacts the company's consolidated numbers and influences the investor sentiments. Sylvania, which is mainly in lighting business contributes almost half of the company's total sales. The company has given sales growth guidance of 2-3% for the year and EBIDTA margin guidance of 6%. It mainly operates in Europe and Latin America. Meeting the guidance will be a challenge, given the company's performance in the first half of the current fiscal. Its sales in Europe have been declining for the last two quarters. In the June 2012 quarter, its European sales declined by 4.5% year on year and in the September 2012 quarter it declined by 13%. In comparison to Sylvania, other European light manufacturers - Philips and Zumtobel have shown better performance.

Beisdes this, the weak euro and strong chinese yuan also impacted the company's profitability. It outsources significant part of its manufacturing in China. In the latest September quarter and the EBIDTA margin for European business declined to 0.8% against an expectation of 5%, reducing Sylvania's overall EBIDTA margin to 3.2%. As a result, Sylvania incurred a loss of Rs 11.1 crore in the latest September quarter.

However, it expects its domestic sales to grow at 17-18% with EBIDTA margin of 12.5%. Given 20% growth in the last four quarters, this is achievable.

Because of the poor show in the September quarter, the company's stock has corrected by 18% from its peak. At the current market price of Rs 577, the company's stock is valued at a price to earning multiple of 20. At this price the company is fairly valued and an upside is possible if the company manages to achieve the given guidance and this looks a little difficult as of now.