1884806234_Havells India Ltd - 09042013

April 9, 2014

Havells India Ltd.

… brand building through acquisitions

SKP Securities Ltd www.skpmoneywise.com of 20

CMP ` 893 Target: ` 1092 Initiating Coverage – BUY

Source: BSE

Company Profile Havells India Ltd (Havells) is largely a consumer focused electrical goods company, with an extensive portfolio of quality and premium products. Havells’ businesses can be divided in to four broad categories namely switchgears, cables, lighting & fixtures and electrical consumer durables. The company has emerged as one of the top four Indian brands in Indian electrical industry with 20,000 distribution networks across the globe. Largely, Havells uses B2C model to push its products through its distribution network.

Investment Rationale

Topline to grow with the moderate CAGR of 12% during the next three years: Havells’ consolidated revenue has grown with a CAGR of 11% between FY10‐13

with switchgears, cables, lighting & fixtures, and electrical consumer durables contributed 15%, 23%, 51% and 11% respectively.

Consolidated topline posted by the company for FY13 was ` 72.5 bn, which we expect to touch ` 94.5 bn by the end of FY16E with the CAGR growth rate of 12%.

We expect switchgears business to grow with a CAGR of 15% and cables business to grow with a CAGR of 11% during FY13‐16E with the demand is expected to pick post general elections.

Consolidated lighting & fixtures segment has seen a CAGR of 6% between FY10‐13. The segment has grown by 8% during 9MFY14 to ` 5.2 bn. We expect the business to maintain the CAGR of 7% in the coming three years on the back pick up of the construction activities post general elections.

Net revenue from Sylvania was more or less stable at Euro 325.1 mn during 9MFY14 and we expect it to grow with a CAGR of 1.5% between FY13‐16E with the indication of Europe coming out of recession.

With consumer centric product portfolio, electric consumer durables business has grown by 38% in FY13. We expect the segment to grow with the CAGR of 10% during FY13‐16E.

Expansion in Margins: Standalone EBIDTA margins of the company expanded of 120 bps y‐o‐y to

13.9% during 9MFY14 on the back of better operating cost management, good quality premium products and high brand recall among the consumers.

The better operating cost management has led to improvement in the standalone margins of switchgears and electrical consumer durable segment 110 bps and 230 bps respectively, y‐o‐y during 9MFY14.

We expect standalone EBIDTA margins of Havells to cross 14% by FY16E, with further improvement in the margins of consumer durables.

Margins from Sylvania have started showing the signs of improvement and stability, with it enjoying the EBIDTA margin of 5.3% in FY13 and 4.5% in 9mFY14. With the signs of Europe coming out of recession, we expect Sylvania to maintain its margin at about 5% in the next 2‐3 years.

Sylvania is scheduled to repay its term loans going forward further improving its debt‐equity to 0.1 x from present 0.6 x. D/E of Havells reached as high as 2.6x after acquiring Sylvania.

Outlook & Recommendation

Since, Havells is the case of strong brand recall, we have valued the stock on the basis of EV to sales ‐ of 1.4x of FY16E revenues – method of relative valuation.

We recommend BUY rating on the stock with a target price of ` 1092/‐ (23% upside) in 18 months.

Key Share DataFace Value (`) 5.0Equity Capital (` mn) 623.9M.Cap (` mn) 110928.452‐wk High/Low (`) 943/586Avg. Daily Vol 54589BSE Code 517354NSE Code HAVELLSReuters Code HVEL.NSBloomberg Code HAVL IN

Shareholding Pattern (as on Mar 31, 2014)

62%

31%

0% 7%

Promoters

FII

DII

Public & Others

Consolidated Financials (` mn)Particulars FY13 FY14E FY15E FY16ENet Sales 72478.9 80886.5 87320.5 94527.2Sales Gr. 11.2% 11.6% 8.0% 8.3%EBIDTA 6688.9 8023.8 8790.1 9733.0PAT 5814.3 4798.8 5305.3 6035.7PAT Gr. 57.2% ‐17.5% 10.6% 13.8%EPS (`) 46.6 38.5 42.5 48.4CEPS (`) 55.4 48.2 54.0 59.1

Key Ratios

Particulars FY13 FY14E FY15E FY16EInt Cover (x) 4.5 9.6 13.6 21.8P/E (x) 19.1 23.1 20.9 18.4P/BV (x) 7.7 6.1 5.0 4.1P/Cash EPS (x) 16.1 18.4 16.5 15.0M.Cap/Sales (x) 1.5 1.4 1.3 1.2EV/EBIDTA (x) 17.1 14.4 12.8 11.0ROCE (%) 24.6% 24.7% 24.9% 27.7%ROE (%) 40.3% 26.5% 23.7% 22.1%EBIDTM (%) 9.2% 9.9% 10.1% 10.3%NPM (%) 8.0% 5.9% 6.1% 6.4%Debt‐Equity (x) 0.6 0.5 0.3 0.1

Price Performance Havells vs S&P BSE 200

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60%Havells

S&P BSE 200

Analyst: Vineet P. Agrawal Tel No: +91 22 4922 6006; Mobile: +91 98195 10575 e‐mail: [email protected]

Havells India Ltd.

SKP Securities Ltd. www.skpmoneywise.com of 20

Business Classification

• Havells India Ltd (Havells) started its journey in 1958 as an electrical goods trading company in Delhi, promoted by Mr Qimat Rai Gupta. The Company got its name with the acquisition of Havells brand in 1971, at about ` 700,000.

• Today, Havells has become a USD 1.3 bn organization having presence in electrical and power distribution equipments with products ranging from industrial and domestic circuit protection switchgears, cables, lighting and fixtures and small fast moving electrical goods.

• The Company has emerged as one of the top four Indian brands in Indian Electrical Industry with 91 offices and 20,000 distribution network across the globe. Havells largely uses B2C model to push its products through its distributor network.

• Havells 20 state‐of‐the‐art manufacturing facilities are situated across the globe including India. The Company has 14 plants in Haridwar, Uttrakhand; Noida, Uttar Pradesh; Baddi, Himachal Pradesh; Alwar, Rajasthan; Sahibabad, Uttar Pradesh; and Neemrana, Rajasthan in India and other 6 are located across Europe, Latin America, and Africa.

• Havells made one of its most remarkable acquisitions, by acquiring Germany based lighting and fixtures maker Sylvania, from investment banking firm called N M Rothschild, for Euro 227.5 mn. Sylvania is among the top four lighting companies in the European market and Latin America.

• Business classification of Havells is as follows:

Source: Company & SKP Research; Revenue Contribution are based on consolidated figures of FY13

Elect Consumer Durables (Revenue Contribution: 11%)

Cables (Revenue Contribution: 23%)

Regular & Premium Fans (Ceiling Fans, Pedestal Fans,

Table Fans, Wall Mounted Fans, Air Circulator fans etc)

Appliances (Electric irons, kettles, tea/coffee

makers, pop‐up toasters, sandwich maker, OTG, Induction cookers, geysers & heaters etc.

Industrial & Domestic Switchgears

(Switches, MCBs, capacitors, industrial motors)

Lighting & Fixtures (Revenue Contribution: 51%)

Lightings (CFL & LED) Fixtures

(Consumer lighting, LED lighting, Industrial lighting, road lighting,

speciality lamps, home décor lightings, commercial lightings,

Area lighting etc.)

Switchgears (Revenue Contribution: 15%)

Industrial Underground Cables

(Electric substation to houses, small factories)

Domestic Cables for buildings

(Commercial & Housing wires)

Domestic MCB Market Size: ` 17,000 mn

Market Share: 29% Mkt Position: Market Leader

Peers: Legrand, Schneider

Modular Switches Market Size: ` 15,000 mn

Market Share: 16% Mkt Position: 2nd Largest Player

Peers: Panasonic, Legrand, Schneider

Domestic CableMarket Size: ` 65,000 mn

Market Share: 14% Mkt Position: 3rd Largest Player

Peers: Polycab, Finolex

Industrial CableMarket Size: ` 100,000 mn

Market Share: 9% Mkt Position: 3rd Largest Player Peers: Polycab, KEI Industries

Lighting ‐ CFLMarket Size: ` 23,000 mn

Market Share: 12% Mkt Position: 2nd Largest Player Peers: Philips, Osram, Bajaj Elec.

FixturesMarket Size: ` 29,000 mn

Market Share: 13% Mkt Position: 2nd Largest Player

Peers: Philips, Bajaj Elec, Crompton

Regular & Premium FansMarket Size: ` 45,000 mn

Market Share: 15% Target: 25‐30% in next 3 years

Peers: Crompton, Bajaj Elec

AppliancesMarket Size: ` 50,000 mn

Market Share: New Entrant Peers: Bajaj Elec, Philips

Havells India Ltd.


1. Switchgears Business: • The Company manufactures products such as modular & non‐modular switches, domestic and

low voltage industrial switchgears, motors and capacitors.

• Switches and switchgears: Havells offers switchgears under three brands namely Crabtree, REO and Standard. Under Crabtree brand, Havells offers high‐end premium modular switches.

• Crabtree: Havells offers this brand mainly to hospitality sector, offices, retail outlets, shopping malls, multiplexes, museums and galleries. The brand targets Metropolitan Cities.

• Recently, the company has extended the brand by launching Crabtree XPRO which offers premium range of switchgears under its brand Crabtree. The products include MCBs, RCCBs, DBs, isolators and time switches.

• Crabtree is a known global brand of electrical accessories. Crabtree India was formed as 50:50

joint venture between Crabtree, UK and Havells India in 1996, dealing in modular switches and premium bathroom fittings. Havells acquired the brand rights of Crabtree for the Asian market, from Crabtree UK, the parent company, in 2006.

• REO: Havells launched REO switches in 2013. REO is a premium range non‐modular conventional switches (including sockets and fan regulators) brand targeting towns with the population of 50,000‐100,000 (Tier –II & Tier – III cities) people. Havells have also made inroads in rural market with the launch of REO switches.

• The total market for conventional switches is estimated to be around ` 20 bn in India, growing

15% year‐on‐year.

• REO switches are manufactured in Havells’ Baddi plant which can manufacture up to 500,000 REO switches.

• Standard: Havells acquired Standard Electricals, in 2000, for about ` 1.2 bn. The brand caters

to South Indian market with strong brand recall.

• Infrastructure: Havells has state‐of‐the‐art switchgear manufacturing facilities at Baddi, Himachal Pradesh and Sahibabad, Uttar Pradesh.

• The Company manufactures domestic switchgears, with the annual capacity of about 50 mn switchgears and 70 mn switches, such as distribution boards, Residual Current Circuit Breaker (RCCB), Miniature Circuit Breaker (MCB), Isolators, changeover switch and premium Crabtree and Havells modular and non‐modular switches in Baddi.

• Low voltage industrial switchgears namely MCCBs, control gears, power distribution board

(DBs), changeover switches, automatic transfer switch and air circuit breakers (ACBs) etc are manufactured at Sahibabad.

• Time switches guarantee the opening & closing of electrical circuits according to the scheduled

programme. The product finds application in programmed switching of lights of car parking, advertising sign boards; heating equipments at houses and work place; and motors for pumps and fans.

• MCB is an automatically operated electrical switch designed to protect an electrical

circuit from damage caused by overload or short circuit. Its basic function is to detect a fault

Havells India Ltd.


condition and interrupt current flow. Unlike a fuse, which operates once and then must be replaced, a circuit breaker can be reset (either manually or automatically) to resume normal operation.

• RCCB is an electrical wiring device that disconnects a circuit whenever it detects that the electric current is not balanced between the energized conductor and the return neutral conductor.

• Changeover switches finds wide application in industries as well as domestic sphere for use in

low voltage distribution circuits, wherever continuity of power supply is necessary, for switching to an alternate source of supply (such as generator or inverter) from the main supply and vice‐versa.

• Industry: The switchgear and control gear industry in India is estimated at ` 135 bn in FY13. The industry is growing with a CAGR of 15% for the last three years. It is expected, that the industry will cross ` 200 bn mark, by 2017.

• Industry can be broadly divided in to low voltage switchgears and high voltage switchgears.

More than 55% of the low voltage switchgear industry is dominated by unorganized players which are expected to increase in the coming years. The unorganized segment includes regional players and low quality imports.

• Motors: Havells manufactures three types of motors viz. special motors, standard motors and

smoke extraction motors at its Neemrana facility, ranging from 0.12 HP to 470 HP.

• Havells manufactures motors with technical collaboration with Lafert, which is one of the largest manufacturers of motors in Europe.

• Special Motors: Havells manufacture inverter duty motors and crane duty motors which are

specially designed for operations requiring wide speed variation through variable speed drives.

• Standard Motors: Standard motors find applications in pumps, conveyors, fans, compressors, cranes, blowers, hoists and vibrators.

• Smoke Extraction Motors: As the name suggests smoke extraction motors of Havells finds

applications in automatic smoke and heat extraction units. These motors are mainly designed for driving smoke extraction fans. These are mainly used in buildings or structures in which smoke control is necessary, due to their shape and arrangement.

• Capacitors: Havells set up a manufacturing facility for capacitors with the capacity of 600,000

KVAr per month, in 2007, at Sahibabad UP.

• Capacitor is a device used to store an electric charge, consisting of one or more pairs of conductors separated by an insulator. Capacitors are often used when relatively small amounts of energy are needed.

• Havells capacitors find applications where normal duty capacitors are not adequate such as rectifiers, welders,

induction furnaces, rolling mills etc (Heavy duty extended life capacitor); in large industrial plants with non linear loads (Super heavy duty long life

capacitor); and in farming for pumping water (Agricultural capacitor).

Havells India Ltd.


• Havells sell these products through its dealer distribution network. Currently the Company has the dealer network of 20,000 distribution network.

2. Cables Business:

• Havells is the second largest manufacturer of cables in India. It manufactures domestic and industrial cables at its state‐of‐the‐art manufacturing plant at Alwar, Rajasthan. It is the largest integrated cable plant in India.

• Types of cables manufactured by the Company and its applications are given below:

Type Applications

Industrial Underground Cables Electrical substations to houses, small factories

Domestic Cables for Buildings Internal wiring for commercial and industrial buildings Source: Company & SKP Research Desk

• Havells manufactures HT & LT flame retardant cables. It is one of few companies who does PVC

compounding in‐house. This improves flame retardant quality of the cables.

• This segment is the second largest contributor to the consolidated revenues of Havells, with 23% contribution, after Lighting & Fixture business.

• Havells is the third largest player in India with the market share of 14% & 9% in domestic and industrial cables segment, respectively, after Polycab and Finolex Cables.

3. Lighting and Fixtures Business: • The lighting and fixtures business of Havells can be divided into manufacturing of light sources

and fixtures. Havells manufactures wide range of light sources such as compact fluorescent lamps (CFL) and LED Lamps.

• Havells forayed into the business in 2003. Following are the sub‐segments and categories in which Havells have dominant presence:

Sub‐Segments Categories Applications

Lighting Source CFL Retrofit, Non retrofit, Decorative lamps ranging from 5W to 85W

LED LED Lamps in various shapes and wattages

Fixtures Lighting Fixtures

Consumer Lighting, LED Lighting, Industrial Lighting, Road Lighting, Speciality Lamps, HID Lamps, Home Décor Lighting, Commercial Lighting, Landscape‐bunker lighting, Area Lighting

Specialty & HID Lamps Finds applications in Bill boards, showrooms, marriage halls, small area lightings

Source: Company & SKP Research Desk • Infrastructure: The Company has its manufacturing facility at Neemrana, Rajasthan for the

manufacturing of its lighting sources and fixtures, spread at 40 acres of land. The total capacity of the plant is 4 mn pieces per month.

• The plant has the installed capacity of 500,000 CFLs per annum. The plant has been setup with the focus on international market. 20% of the products manufactured here are exported to

Havells India Ltd.


American and European markets, through the network of Sylvania with the balance catering to the domestic market.

• Revenues from the segment are derived from two sources viz. Havells standalone entity and Havells Sylvania (Sylvania). Revenues from the segment have grown with a CAGR of 21% between FY10‐13 and are the highest contributor to the consolidated revenues of the company.

Havells Sylvania: • SLI Sylvania, one of the dominant players of global lamp market was acquired by Havells, in

2007, from investment banking firm called N M Rothschild, for Euro 227.5 mn and was renamed as Havells Sylvania, with the right to offer its products in Europe, Latin & South America, and Asia. Sylvania was almost 1.5 times that of Havells in size at the time of the acquisition.

• Lighting Sources: Sylvania manufactures energy efficient light sources such as CFL lamps, LED

lamps, HID lamps, halogen lamps and various special products tailor made for the professionals. Sylvania outsources 50% of lamps especially from China and rest is manufactured in‐house.

• Fixture Brands: It also manufactures luminaries under strong lighting brands viz. Concord,

Luminance and Sylvania, having dominance in Europe, Latin America and other geographies.

• Concord is renowned for its design, high technical performance and aesthetic looks. The brand offers its products mainly to high‐end corporate end‐users and professionals, such as architects, interior designers and lighting designers/engineers.

• Brand Sylvania offers competitively priced luminaries for industrial and commercial

applications, such as offices, education, residential, leisure and industrial plant lighting where as Lumiance offers a wide range of luminaries, intended for lighting medium‐to‐large projects, such as retail & display, offices, hotels, and restaurants.

• World’s fourth largest lighting and fixture company: Brand – Sylvania has enabled Havells to

have a global presence, exposure and opportunity. Sylvania is the fourth largest lighting and fixture company in the world after, Philips, Osram and GE.

• Concord and Lumiance are lighting some of the most prestigious installations in the world like

Madame Tussauds Wax Museum, London; National Museum, Delhi; French Tunnel; House of Guru Rabindranath Tagore, Kolkata; Renault showrooms worldwide and many others.

• In‐house Manufacturing of Fixtures: These Fixtures are tailor‐made by Sylvania as per the

tastes and preferences of the consumers in different countries.

• Infrastructure: Sylvania has its state‐of‐the‐art manufacturing facilities in Europe (Germany, Belgium, Tunisia, UK and France) and Latin America (Columbia and Costa Rica). Sylvania has 94 branches and representative office worldwide, in more than 50 countries.

Havells India Ltd.


• Region wise Revenue Contribution: Majority of the revenues of Sylvania is contributed from European region, followed by Latin & South America and Asia. Region wise revenue contribution at a glance:

Source: Company & SKP Research Desk

4. Consumer Durable Business: Consumer durable business of Havells can be broadly divided in to Fans and domestic appliances. Fans: • Havells entered in fans business in the mid of 2003. Today it has emerged as one of the fastest

growing fans brands in the Indian market. It offers a complete range of fans including ceiling fans, portable fans (pedestal fans, table fans, wall fans, ceiling mounting fans), and domestic & industrial exhaust fans to meet the requirements of varied individual in domestic market.

• Presence in regular and premium fan segments: Havells has presence in regular and premium fan segments available in various shapes, sizes, colors and is uniquely designed keeping in mind the requirements of today’s luxurious lifestyle. Havells sells fans in premium segment with a price ranging from ` 2,000 a unit to as high as ` 30,000 a unit.

• Infrastructure: Havells’ manufacturing facility is situated at Haridwar, Uttarakhand. The plant is

equipped with state‐of‐the‐art technology including automated CNC machines for motor winding and end covers machining, advanced conveyorised assembly lines complete with computerized testing facilities.

• Industry: The Overall Fan industry is pegged at ` 50 bn wherein the regular and premium fan

segments, which put together has a market size of around ` 32 bn. The economy fans segment, which is cheaper than regular and premium fans, has the market size of around ` 18 bn.

• Revenue Contribution: Fan business contributes about 80% of the total consumer durable

business revenues. Havells enjoys about 15% market share in the segment. We expect it to increase to 25‐30% in the next three years. Havells is third largest player in India after Crompton Greaves and Usha.

69.3

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FY09 FY10 FY11 FY12 FY13 9MFY14

Others

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Havells India Ltd.


Domestic Appliances: • Havells has diversified into domestic appliances segment in 2012. Products offered by Havells

includes the following:

Source: Company & SKP Research Desk; Entered electric water heater business in 2010

• Product Sourcing: Presently, the company outsources all its domestic appliances from local

vendors in India and China.

• Havells is targeting premium appliance market like its other product segments.

• Industry: Domestic appliance market is pegged at around ` 50 bn with premium segment contributing around ` 10 bn, dominated by players like Bajaj Electricals and Philips. There are also local brands which have powerful equity in certain product‐lines.

Track record of Successful Acquisitions

Havells had a track record of five successful acquisitions since 1972. Acquisitions made by the Company at a glance:

Source: Company & SKP Research Desk; Havells exited from premium bath fittings and energy meter segments

Category ProductsGarment Care Electric Iron (both steam and non‐steam)Brewing Coffee Maker

Food Preparation Juicer, mixer grinder, blender, chopper, juicer mixer grinderHome Comfort Room Heater and Oil Filled RadiatorWater heaters Electric storage water heater and instant water heater

Pop‐up toaster, sandwich maker, OTG, Insta Cook Induction Cooker,Max Cook Rice Cooker, Air Fryer

Cooking

Year Entity Brand Product Acquisition Value1971 ‐‐ Havells Electrical Goods Trading ` 700,0001983 Towers & Transformers Ltd ‐‐ Energy meters ‐‐1997 Electric Controls & Switchboards ‐‐ Provides customised solutions ‐‐

Duke Arnics Electronics (P) Ltd ‐‐ Electronic Meters ‐‐Standard Electricals Ltd Standard Switchgears, electric cables, CFLs ` 1.2 bn

2000

Concord Lumiance Sylvania

Lighting business of SLI Sylvania2007 Lighting & Luminaries Euro 227.5 mn

Havells India Ltd.


Havells Galaxy – Leveraging Distribution Channel • Havells is a distribution led business with strong distribution network, across India.

• Havells came up with the unique concept of Havells Galaxy, with a view to enhance its brand

identity. Havells Galaxy is the one‐stop‐shop for the entire range of Havells products to meet the various electrical goods needs of the end customer.

• Havells Galaxy showcases entire range of Havells products from switchgears to ceiling fans,

switches, cables and lighting products.

• These stores are run by the dealers of Havells as franchisees, enabling them to offer better shopping experience to consumers with the ambiance and convenience of modern retail.

• There are 200 Havells Galaxy stores across the country by the end of FY13 which contributed

about 14% of the non‐cables business of the Company.

• Havells is expanding its Havells Galaxy network and plans to double it to 400 stores across India.

Raw Materials

• The key raw materials for the products manufactured by Havells are ferrous and non‐ferrous metals. Metals which contains appreciable amount of Iron or its alloys such as steel, is called ferrous metal and vice versa. Aluminium and copper are non‐ferrous metals used in the products by Havells.

• Metals used in appliances, fans, lighting and cables and wires are aluminium and copper. Plastic is also used for making these products as well as switchgears whereas cold‐rolled steel is used for manufacturing water heaters and geysers. Havells procure steel domestically.

• The above metals are highly price sensitive. Havells do not have the hedging policy in place.

The company keeps checks on its inventory levels by not keeping raw material for more than 10 days. Havells successfully passes on any price rice in its raw materials to its customers, without any lag effect.

• Paint, multi metal chemicals and PVC are other raw materials of the company. Havells does the

compounding of PVC in‐house which is used for insulating wires and cables.

Havells India Ltd.


Investment Rationale

1. Sylvania, no more a drag on Havells – Improving Financials – display of strong management character:

When Sylvania was a drag: • As mentioned earlier, SLI Sylvania, one of the dominant players of global lamp market was

acquired by Havells, in 2007, for Euro 227.5 mn.

• After the acquisition, Sylvania went through a financial and operational restructuring by its new owner, as it had turned loss‐making post the 2008 economic crisis in India. As the meltdown rocked European markets, Sylvania's sales fell from Euro 515 mn in FY08 to Euro 430 mn in FY10. EBIDTA fall from positive Euro 27.9 mn to a loss of Euro 2.8 in FY10.

• In such a scenario, in September 2008, Sylvania's bankers, led by Barclays Capital, hit the panic button as the company breached its covenants. Covenants are a set of financial ratios that the borrower must maintain, put in place by lenders.

• Sylvania's acquisition was funded by debt ‐ a Euro 120 mn loan based on operating cash flows and a Euro 80 mn loan taken out by a Havells subsidiary. (Havells repaid Euro 80 mn by raising money from the sale of a stake to Warburg Pincus). The bankers asked Havells to repay the loan or hand over Sylvania to them.

• From here onwards Havells took on the reins of Sylvania and undertook the restructuring of the Company to cut down the losses. It shut down the factories in Europe (UK) and Americas (Brazil, Costa Rica); it reduced strength of certain facilities, brought few of the products on India & China to leverage on cost benefits, cutting inventory levels, etc.

• Sylvania turned profitable at the net level since FY11 (5.9% at EBIDTA Level) and has reported higher EBIDTA margin every year since FY10 (loss of 0.7%).

Sylvania – no more a drag

• Sylvania clocked revenue of around ` 30,229 mn (Euro 439.9 mn), 42 per cent of Havells' global revenues, in FY13 and ended up EBIDTA Margins of 5.3% and 4.9% during FY13 and 9MFY14.

• After nearly five years of near‐zero growth, Europe is showing the signs of revival, with all major countries expected to report positive economic growth this year. Havells is best placed to take advantage of the European growth story through its subsidiary, Havells Sylvania. We expect Sylvania’s topline to grow with a CAGR of 1% during FY14‐FY16E and EBIDTA margin to remain stable at about 5%.

• Sylvania, before and after restructuring, at a glance:

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Revenues (mn Euro)

Growth (%)

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‐3

27 37 23 20 22 22

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EBIDTA (mn Euro)

EBIDTAM (%)

Source: Company & SKP Research

Havells India Ltd.


• Improving Debt Equity: Havells was virtually a debt‐ free company before the acquisition of Sylvania, with D/E ratio of about 0.2x, which crossed 2.6x after acquisition, in FY10.

• With the cost cutting drives undertaken by the management Sylvania started generating cash and margins. Thus, the company started paying its debts bringing it down to 0.6x in FY13.

• As there is no capex plan to be implemented (as of now) with the further repayment of debts scheduled and stabilization in margins we further expect D/E to improve to about 0.1x by FY16E.

• Consolidated Debt Equity of Havells at a glance:

Source: Company & SKP Research Desk

2. Topline to grow with the moderate CAGR of 12% during the next three years: Havells’ topline has seen CAGR growth of 11% between FY10‐13 with switchgears, cables, lighting & fixtures and electrical consumer durables contributed about 15%, 23%, 51% and 11% respectively, during FY13. Consolidated topline posted by the company for FY13 was ` 72.5 bn, which we expect to touch ` 94.5 bn by the end of FY16 with the CAGR growth rate of 12%.

• Switchgear segment grew by 20% to ` 10.8 bn in FY13 from ` 9 bn in FY12. The segment grew by 17% during 9MFY14 to ` 9 bn from ` 7.7 bn in 9MFY13. The growth was lead by spurt in domestic switchgears demand. Sluggish demand from industrial switchgears was compensated by the demand in domestic switchgears. The Company has widened its product range in MCB used in households. Havells enjoys close to 29% market

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FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14EFY15EFY16E

Debt (Rs mn) Equity (Rs mn) D/E (x)

Before Sylvania

Before Restructuring

AfterRestructuring


8552

.6

8961

.5

1078

0.6

1228

9.9

1413

3.4

1625

3.411%

5%

20%

14%15% 15%

0%

5%

10%

15%

20%

25%

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

14000.0

16000.0

18000.0

FY11 FY12 FY13 FY14E FY15E FY16E

Revenues from Switchgear (Rs mn) Growth (%)

Havells India Ltd.


share in this product. We further expect the segment to grow with a CAGR of 15% during FY13‐FY16E.

• Recently launched REO switches contributed ` 540 mn to the switchgear revenue during 9MFY14. We expect it to touch ` 800 mn by the end of FY14.

• Cables segment of the company grew by 6% during FY13 to ` 16.9 bn from ` 15.9 bn in FY12. The segment posted revenues of ` 13.7 bn during 9MFY14 as against ` 12.3 bn in corresponding period last year. The growth is the result of the low base last year due to negative consumer sentiments.

• Cables contributed about 40% to the standalone revenues of Havells.

• We expect the segment to grow with a CAGR of 11% during FY13‐16E with the demand is

stabilizing now and further expected to pick, post general elections. The Company has 14% and 9% market share in domestic and industrial cables segment which we expect to be maintained.

• Lighting & Fixtures segment has seen a CAGR of 6% between FY10‐13 at consolidated levels.

The segment has grown by 8% during 9MFY14 to ` 5.2 bn. The low growth rate is the result of sluggish construction activities in India. We expect the business to maintain the CAGR of 7% in the coming three years on the back pick up of the construction activities post general elections.

• Net consolidated revenue from Sylvania was more or less stable at Euro 325.1 mn during

9MFY14 and we expect it to grow with a CAGR of 1% between FY13‐16E with the indication of Europe coming out of recession. About 57% of Sylvania’s revenue comes from Europe and rest from Americas (36%) and Asia & other region (7%), during 9MFY14.

• CFL contributes 35% to the lighting revenues whereas LED 15% (FY13) and 25% (FY14). We

expect LEDs to cross 50% mark by the end of FY16. Havells is the second largest player with 12% market share in CFL.

4446

.7

5543

.9

6651

.8

7183

.9

8046

.0

9011

.5

19%

25%

20%

8%

12% 12%

0%

5%

10%

15%

20%

25%

30%

0.0

2000.0

4000.0

6000.0

8000.0

10000.0


Revenues from Lighting & Fixtures (Standalone) (Rs mn) Growth (%)

449.

4

448.

2

439.

9

433.

5

440.

0

446.

6

4.5%

‐0.3%

‐1.9%‐1.5%

1.5% 1.5%

‐3.0%

‐2.0%

‐1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

425.0

430.0

435.0

440.0

445.0

450.0

455.0


Revenues from Sylvania (Euro mn) Growth (%)



1361

9.6

1592

9.9

1692

4.8

1844

8.0

2066

1.8

2314

1.2

‐3%

27%

17%

6%9%

12%

‐5%

0%

5%

10%

15%

20%

25%

30%

0.0

5000.0

10000.0

15000.0

20000.0

25000.0


Revenues from Cables (Rs mn) Growth (%)

Havells India Ltd.


• With consumer centric product portfolio, electrical consumer durables business has grown by 38% in FY13 to ` 7.89 bn from ` 5.7 bn in FY12. The segment grew by moderate 8% during 9MFY14 on the due to weak festive season. We expect the segment to grow with the CAGR of 10% during FY13‐16.

• The segment contributed 15% to the total consolidated revenues of Havells which we expect to touch 19% by FY16E.

• As mentioned earlier the segment’s revenue is dominated by Fans which contributes about

80% to the segment. Havells is expanding its brand by offering Fans under ‘Standard Brand’ with the focus at Southern India such as Tamil Nadu and Karnataka. Recently, Standard launched 12 new fan models in a regular and premium category.

3. Expansion in Margins: • Standalone EBIDTA margins of the company expanded of 120 bps y‐o‐y to 13.9% during

9MFY14 on the back of better operating cost management, good quality premium products and high brand recall among the consumers.

• The better operating cost management has led to improvement in the standalone margins of switchgears and consumer durable segment 110 bps and 230 bps respectively, y‐o‐y during 9MFY14.

• Operating margins of cables and wires segment and standalone lighting and luminaires

segment remained stable.

• We expect standalone EBIDTA margins of Havells to cross 14% by FY16E, with further improvement in the margins of consumer durables.

3405

.5

4556

.9

5331

.2

6376

.9

7297

.2

8349

.8

11.8%

12.6% 12.6%

13.8%14.0%

14.2%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

7000.0

8000.0

9000.0


EBIDTA Rs mn

EBIDTAM (%)



4724

.3

5720

.8

7892

.7

8287

.3

9281

.8

1039

5.6

40.1%

21.1%

38.0%

5.0%

12.0% 12.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0


Revenues from Electrical Consumer Durables (Rs mn) Growth (%)

Havells India Ltd.


• Margins from Sylvania have started showing the signs of improvement and stability with it enjoying the EBIDTA margin of 5.3% in FY13 and 4.5% in 9MFY14. Sylvania ended up with a loss of 0.7% at EBIDTA level in FY10. With the signs of Europe coming out of recession, we expect Sylvania to maintain its margin at about 5% in the next 2‐3 years.

• With the stability of revenues & margins, Sylvania is scheduled to repay its term loans going forward. Havells standalone entity is also repaying its only long‐term debt (principal amount of USD 20 mn) in 12 equal instilments, thus, bringing down the interest coverage and further improving margins at standalone as well as consolidated level.

• The point here to be noted is that the time period for facilities which are enjoying tax benefits are slowly getting exhausted, thus, nullifying the low interest payment benefit. We expect the effective tax rate for Havells for FY14, FY15 and FY16 to be 20%, 26% and 28% respectively.

• Profitability of Havells at consolidated levels at a glance:

Standalone Interest Coverage (x) Consolidated Interest Coverage (x)

Standalone PAT Consolidated PAT

28 12

‐3

27 37 23 20 22 22

5.4%

2.3%

‐0.7%

5.9%

8.3%

5.3%4.7% 4.9% 4.9%

‐2.0%

‐1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

‐5

0

5

10

15

20

25

30

35

40


EBIDTA (mn Euro)

EBIDTAM (%)19

1.1

443.

9

285.

5

271.

4

181.

0

90.5

16.39.3

16.621.0

36.4

84.6

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0


Interest Cost (Rs mn) Interest Coverage (x)

901.

6

1281

.0

1232

.2

711.

6

539.

2

385.

6

5.3 4.4 4.5

9.6

13.6

21.8

0

5

10

15

20

25

0

200

400

600

800

1000

1200

1400


Interest Cost Interest Coverage



4841

.0

3054

.3

3713

.9

4584

.3

4983

.5

5713

.9

16.8%

8.4% 8.8%9.9% 9.6% 9.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

FY11 FY12 FY13 FY14E FY15E FY16

PAT ̀ mn PATM (%)

3039

.3

3699

.2

5814

.3

4798

.8

5305

.3

6035

.7

5.4% 5.7%

8.0%

5.9% 6.1% 6.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

7000.0

FY11 FY12 FY13 FY14E FY15E FY16

PAT Rs mn PATM (%)

Havells India Ltd.


4. Well diversified business portfolio‐ provides cushion to the topline of the company: The standalone revenues of the company are almost evenly divided among its different business portfolio. Revenue mix of the company at a glance:

High growth consumer durables segment contributed 19% in FY13 whereas lighting & luminaries, and switchgears contributed 16% and 26% each. This ensures well diversified revenue streams driven from high growth sectors. This also ensures that any slowdown in particular sector will not adversely affect the revenues of the company.

5. Leveraging Strong Distribution Network:

• Havells push products through its extensive dealer network: Havells is a distribution led business with strong distribution network.

• Its products are sold through its distribution network and new products are launched leveraging its brand value and strength of dealership network. It uses the distribution network of Sylvania to push Havells brand in Europe.

• The distribution network of Havells’, with its strong brand name (Havells, Crabtree, and

Standard) have helped it to expand, pan India, rapidly. Havells garners majority of its revenues through its strong distribution network.

• Havells is now focusing in Tier –II and Tier – III towns with the population between 50,000 – 100,000 people.

• Havells Galaxy – Leveraging Dealer Network: As mentioned earlier Havells has gone one step ahead by coing up with a unique idea of reaching its customers directly through one‐stop‐shop ‐ Havells Galaxy. It’s a one stop brand center for all consumer appliances, lighting and electrical needs. These brand centres provide the customers with the complete range of consumer durable products manufactured by Havells and facilitate them with personalized services and support.

25%

25%

26%

27%

27%

28%

43%

44%

40%

40%

40%

39%

15%

15%

16%

16%

15%

15%

16%

16%

19%

18%

18%

18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Consumer Durables

Lighting & Luminaries

Cables & Wires

Switchgears


Havells India Ltd.


• Currently, Havells have more than 200 such Galaxies across the country including one galaxy opened outside India i.e. in Kenya. Company has plans to open another 200 such galaxies in the coming years, thus covering 250 towns (earlier 130 towns).

• These galaxy’s are run by the existing dealers of the Company. Benefit of the Havells Galaxy is

that the Company gets an outlet for its premium products without incurring extra cost and they also earn the loyalty of new generation of dealers, hence retaining them.

6. Government’s energy conservation drives undertaken every now and then provides opportunity for lighting industry: • Lighting accounts for about 20% of electricity consumption in India and majority of lighting

needs of households are met by incandescent bulbs which are not energy efficient as only 5% of electricity is used for lighting and rest is converted in to heat resulting in the wastage of energy.

• As mentioned CFLs and LED,s provide that energy‐efficient alternative to the incandescent

lamp to provide the same level of illumination.

• Government’s efforts for promotion of CFLs have the desired impact on the market with the sales of CFLs in India having grown from about 20 mn pieces in 2003 to around 304 mn pieces in 2010.

• Initially the penetration of CFLs in household remain low largely due to the high price of the

CFLs, which was 10‐12 times the cost of incandescent bulbs, whereas, combined penetration share of incandescent lamps for lighting in the commercial and residential sectors was nearly 80%. Now, people have started accepting CFLs due to prolonged life and low electricity consumption.

• Bachat Lamp Yojana: For, Instance, the Bachat Lamp Yojana was launched by the Government

in February 2009, which focused on the cost barrier to reduce the cost of CFLs to that of incandescent bulbs.

• The scheme promoted replacement of inefficient bulbs with CFLs by leveraging the sale of

Certified Emission Rights (CERs) under the Clean Development Mechanism (CDM) of the Kyoto Protocol. Under the scheme 60 Watt and 100 Watt incandescent Lamps was to be replaced with 11‐15 Watt and 20‐25 Watt CFLs respectively.

• It was estimated that, once achieved, this would save the country 6,000 MW of power, or

around ` 250 bn.

• The scheme provided a unique platform for a robust public‐private partnership between the Government of India, private sector CFL suppliers and State level Electricity Distribution Companies (DISCOMs).

• The companies that sell these bulbs at subsidized rates was allowed to recover the remaining

amount through the sale of carbon credits under CDM of the Kyoto Protocol.

• Bachat Lamp Yojana has failed due to crashing of carbon market.

Havells India Ltd.


• Replacing CFL with LEDs on the streets: Since 2009, the BEE has been providing grants to Indian municipalities to

undertake pilot trials of LED street lamps.

Public lighting on connected roads, in India, requires almost 4,400 MW of connected load. Replacement by LED saves 50‐70% reduction in energy consumption.

Till 2011, 13 LED projects have been completed in cities in Arunachal Pradesh,

Assam, Maharashtra and Nagaland. Anecdotal evidence suggests that results of these pilots have been mixed, largely because of lack of knowledge about how to go about procuring quality LED products at the municipal level.

The BEE has also provided grants of USD 100,000 each to Kolkata and Thane for

one‐year trials, to be matched with local funds.

Results to date have been encouraging. The LED luminaires are also providing more illuminance than the baseline HPS luminaires, while achieving nominal savings ranging from 40% to 59% for replacement of the two HPS wattage types.

Such efforts made by the Government provide huge opportunities for lighting industry, especially when the penetration level of the product is low.

Key Concerns

1. Highly Competitive Industry: All the segments of Havells are highly competitive putting pressure on the topline and margins of the company. The Company is mitigating the risk by continuous introduction of new products and optimizing the utilization of its extensive distribution system of urban and rural areas.

2. Price volatility of metals: Metals (both ferrous and non ferrous) are the key raw material for the company, which is highly price volatile. Any adverse movement in the prices may put negative impact on the margins of the company.

3. Macroeconomic Scenario of Europe: About 60% revenues of Sylvania come from European region. Any further surprises in the negative side in Europe may change the consumer perceptions resulting into deferring of purchases, finally hamper the financials of the company.

4. Forex Fluctuations: Since, Havells have good exposure in Latin Americas and Europe, any negative fluctuation in the value of Rupee vis‐à‐vis USD and Euro, may negatively impact the business of the company.

Havells India Ltd.


Valuation

Havells has balanced consumer centric business portfolio. The strong distribution network, a powerful brand, wide product portfolio, excellent vendor base along with excellent channel partners continue to be the major strengths of the company. Since, Havells is the case of strong brand recall, we have valued the stock on the basis of enterprise value to sales ‐ of 1.4x of FY16E revenues – method of relative valuation. We recommend BUY rating on the stock with a target price of ` 1092/‐ (23% upside) in 18 months.

EV/Sales FY16E Sales (` mn) 94527.2 EV/Sales (x) 1.4 EV (` mn) 132338.1 Debt (` mn) 2985.0 Cash (` mn) 6879.6 Shareholders' Value (` mn) 136232.7 O/s Shares (mn Shares) 124.8 Fair Value (` per share) 1091.8 CMP (`) 893.0 Return (%) 22.3%

Source: SKP Research Desk

Havells India Ltd.


CONSOLIDATED FINANCIALS(All data are in ` mn unless specified, Y/e March)

Income Statement FY13 FY14E FY15E FY16E Balance Sheet FY13 FY14E FY15E FY16E

Net Operating Income 72478.9 80886.5 87320.5 94527.2 Equity Capital 623.9 623.9 623.9 623.9

Sales Growth (%) 11.2% 11.6% 8.0% 8.3% Reserves 13796.5 17504.2 21718.4 26662.9

Operating Expenditure 65790.0 72862.8 78530.3 84794.2 Net Worth 14420.4 18128.1 22342.3 27286.8

EBIDTA 6688.9 8023.8 8790.1 9733.0 Minority Interest 0.9 0.9 0.9 0.9

EBIDTA Growth (%) 1.8% 20.0% 9.6% 10.7% Other LT Liab 488.9 541.9 585.0 633.3

Depreciation 1096.6 1216.2 1430.9 1342.6 Deferred Tax Liab 619.0 619.0 619.0 619.0

EBIT 5592.3 6807.6 7359.2 8390.4 Loan Funds 8342.0 9487.7 7189.0 2985.0

Interest 1232.2 711.6 539.2 385.6 Total Liabilities 23871.2 28777.6 30736.2 31525.1

Other Income 333.7 323.5 349.3 378.1 Goodwill 3694.4 3694.4 3694.4 3694.4

EBT 4693.8 6419.5 7169.4 8382.9 Net Fixed Assets 10892.8 14398.8 14717.9 14375.3

Exceptional Item 1944.1 ‐421.0 0.0 0.0 Capital WIP 662.5 250.0 0.0 0.0

Tax 823.6 1199.7 1864.0 2347.2 Net Current Assets 8482.8 10295.7 12185.2 13316.7

PAT 5814.3 4798.8 5305.3 6035.7 Defferred Tax Assets 138.7 138.7 138.7 138.7EPS (`) 46.6 38.5 42.5 48.4 Total Assets 23871.2 28777.6 30736.2 31525.1

Cash Flow Statement FY13 FY14E FY15E FY16E Ratios FY13 FY14E FY15E FY16E

PBT 6637.9 5998.5 7169.4 8382.9 Valuation ratios (x)

P/E 19.2 23.2 21.0 18.5

P/Cash EPS 16.1 18.5 16.5 15.1

Net change in WC, Tax, Int ‐2644.2 ‐2668.7 ‐3096.7 ‐2329.7 P/BV 7.7 6.1 5.0 4.1

EV/EBIDTA 17.2 14.4 12.8 11.0

EV/Sales 1.6 1.4 1.3 1.1

Capital Expenditure ‐1750.1 ‐4309.7 ‐1500.0 ‐1000.0 Earning Ratios (%)

EBIDTAM 9.2% 9.9% 10.1% 10.3%

OPM 7.7% 8.4% 8.4% 8.9%

NPM 8.0% 5.9% 6.1% 6.4%

ROE 40.3% 26.5% 23.7% 22.1%

ROCE 24.6% 24.7% 24.9% 27.7%

B/S Ratios

Current ratio (x) 1.4 1.4 1.5 1.5

D/E (x) 0.6 0.5 0.3 0.1

Opening Cash Balance 2304.7 4729.9 5073.9 5730.6 Debtor Days 44.1 44.1 45.6 43.9

Creditor Days 50.4 50.2 49.9 49.4Inventory Days 180.1 179.0 180.8 181.6

Closing Cash Balance 4729.9 5073.9 5730.6 6879.6 FA/Turnover (x) 6.7 5.6 5.9 6.6

‐5680.7

1149.0

0.0

Cash flow investing Activities ‐1395.1 ‐4256.7 ‐1456.9

1728.2

7781.4

48.3

‐951.7

Net Increase/Decrease in Cash & Cash equivalents 2429.0 344.0 656.7

Cash Flow from Operating Activities 6345.1 5257.7 6042.7

Cash balance of acquired subsidiaries 0.0 0.0 0.0

53.0 43.1

Add: Depreciation, Interest & Other Exppenditure 2351.4 1927.8 1970.1

Cash flow from Financing Activities ‐2521.0 ‐657.0 ‐3929.1

Investments, Sales of FA, Dividend received and others 355.0

Financials (` mn)


Havells India Ltd.

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Notes:

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