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HAVELLS INDIA LIMITED
March 14, 2011 Industry: Electrical Equipment
ICRA Online Grading Matrix Valuation Assessment Assessment
Fundamental and Valuation Grades ICRA Online has assigned the Fundamental Grade 4 and the Valuation Grade B to Havells India Limited (Havells). The Fundamental Grade 4 assigned to Havells implies that the company has ―strong fundamentals‖ relative to other listed securities in India. The grade factors in Havells‘ diversified product portfolio with core focus on the fast growing consumer goods sector, its effective marketing and distribution reach that supports premium pricing, and the significant growth potential of its subsidiary, Sylvania. The grade also takes note of the intense competition that Havells faces across the segments it operates in. The Valuation Grade B assigned to Havells implies that the company is ―moderately undervalued‖ on a relative basis (as on the date of the grading assigned). Incorporated in 1971, Havells is one of the leading players in the electrical consumer goods industry in India. The company‘s operations span four broad segments, viz. cables & wires, switchgears, lighting, and electrical consumer durables, in order of their contribution to revenues. Starting primarily as a company dealing in industrial products, the company has gradually shifted its focus onto consumer products over the past one decade and is now considered a well-established brand in the domestic consumer electricals market. Havells has grown both organically and inorganically over the years. Its last major acquisition that of the Frankfurt-based Sylvania in April 2007, has placed Havells on the global map in the lighting industry. Grading Positives Established brand equity along with leading market shares in most areas of operation, diversified product portfolio, presence in consumer products segment with high growth potential and experienced management. The company also has a strong financial profile, characterised by robust profitability and cash generation, with working capital requirements being limited. Potential upsides to our estimates: (1) Higher than expected market share in new product segments; and (2) Better than expected improvement in Sylvania‘s profitability and cash flow generation capacity backed by growth in emerging economies. Grading Sensitivities Key sensitivities to our estimates include: (1) Further increase in competition resulting in loss of market share, particularly in the intensely competitive electrical consumer durables (ECD) division; (2) Slower than expected revival in Sylvania‘s profitability and success in emerging markets, particularly new geographies. Key Financials (Consolidated)
2009-10A 2010-11E 2011-12E 2012-13E Operating Income (Rs. Crore) 5,432 5,928 6,462 7,059 EBITDA Margin (%) 5.73% 8.09% 9.73% 10.03% PAT Margin (%) 1.28% 5.95% Fundamental & Valuation Grades: ICRA 4.35% fundamental grade of assigns 5.45% EPS (Rs.) 20.7 28.2 33.7 ‗?/5‘ and valuation grade of ‗?‘ 5.8 MSL. A fundamental grade of ‗?/5‘ to EPS Growth (%) N/A 258% 36% 19% indicates MSL‘s fundamentals are ‗?‘ relative to the other listed securities 16.8 12.3 10.3 inP/E (x) This grade factors in theN/A India. companies‘ established presence in the P/BV (x) 10.5 7.1 4.7 3.3 seamless and ERW pipes industry and favorable industry prospects over RoE 14% 51% 46% 37% the medium to long term. However, it is constrained by the high RoCE 15% 27% 30% 31% competition from Chinese imports of seamless pipes in 8.4 domestic and the EV/EBITDA 16.9 11.0 7.4
A 5 4 3 2 1
Fundamental Grading of ‗4/5‘ indicates ―strong fundamentals‖ Valuation Grading of ‗B‘ indicates ―moderately undervalued‖ on a relative basis Key Stock Statistics
Current Market Price* (Rs.) Shares Outstanding (crore) Market Cap (Rs. crore) 52-Week High (Rs.) 52-Week Low (Rs.) Free Float (%) Beta P/E on 2011-12 EPS Estimate (x) Bloomberg Stock Code
*As on March 11, 2011
348.25 12.48 4345.28 446.50 257.50 38.4% 1.09 12.3 HAVL IN
381.65 12.48 4762.0 446.50 166.00 35.4% 1.03 17.7 HAVL IN
Havells Shareholding Pattern (December 31, 2010)
Foreign Institutio ns, 2.3% Domestic Institutio ns, 2.4%
Warburg Pincus, 14.0%
NonInstitutio ns, 19.8%
Indian Promoter Group, 61.6%
Havells Share Price Movement (24 months)
900% Havells India Ltd
S&P CNX Nifty BSE Consumer Durables
500% 400% 300% 200% 100% 0%
Middle East market, vulnerability to raw material prices and concentration Source: Company, ICRA Online’s estimates of MSL‘s Growth and PE estimates for 2009-10 are not meaningful grade of ‗?‘ on a Note: EPS sales on the oil and gas sector. A valuation grading scale of ‗A to E‘ indicates that the company is ? valued on sector relative basis and has a ? potential over the next one year from its current market price.
ICRA Equity Research Service
Havells India Limited
Growth fuelled by increasing focus on consumer electricals; considerable scope for future expansion in related products Starting off as a manufacturer of switchgears in 1971, Havells till the late 1990s was largely involved in manufacturing industrial products. Foreseeing strong growth prospects in the consumer goods category, the company later diversified into products such as fans, compact fluorescent lamps (CFLs), modular switches, and power cables and wires. As these products are used mostly during building construction or renovation, the company benefited from the rapid growth in the real estate sector, reporting a robust compounded annual growth rate (CAGR) of around 40% in its revenues in the last ten years. To further capitalise on the growth potential in the consumer goods category, Havells is now expanding its portfolio, including products such as water heaters.
Figure 1: Trend in Havells' Revenue Growth
3,000 2,500 Rs. Crore 2,000 1,500 1,000 500 0
Source: Company’s Annual Reports; ICRA Online’s estimates
Strong growth prospects backed by presence in high-potential consumer goods segment With its main focus being on electrical consumer goods, demand for most of Havells‘ products is driven by consumer spending and power availability. Over the last four years, the top players in domestic electrical consumer goods‘ industry have demonstrated strong revenue growth of 15-18%, driven by rising income levels, increasing urbanisation, and greater rural electrification. Further, with standards of living improving and consumer focus increasing on saving energy, the demand for quality products has been reporting strong growth. The trend is expected to sustain, with the main beneficiaries being companies with established brands and product attributes that stand out in an increasingly cluttered market, high quality standards that neutralise competition from unorganised-sector players, and extensive distribution networks that enable them to reach the high growth centres in Tier-II and Tier-III cities. Given its established track record, Havells is in a favourable position to capitalise on the sector‘s growth potential. We expect Havells to post a net profit CAGR of around 11% between 2009-10 and 2012-13(E) on a standalone basis.
60 50 40 30 20 10 0 -10 -20
Figure 2: IIP Consumer Durables Index Figure 3: Growth in Disposable Incomes in Last Five Years
50 Rs. ('000s) 40 30 20 10 0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Per capita disposable income Growth in per capita disposable income
IIP Consumer Durable Index
Source: Central Statistical Organisation; ICRA Online’s estimates
Intense competition across segments The segments in which Havells operates (except cables) are characterised by limited capital expenditure (capex) requirements and availability of outsourcing or imports to meet demand. Consequently, Havells faces intense competition in most of its business segments. Although there is only one large company - Crompton Greaves - that is into similar areas of operation as Havells, low investment requirements have resulted in significant competition from single-product/segment companies (refer Figure 4) and unorganised players. In this scenario, an established brand name and distribution network become critical, as the same cannot be easily replicated. Havells‘ ability to differentiate products (for instance, introducing additional attributes like low power consumption and electric shock prevention), and its effective brand building initiatives, thus, restricts competition from the unorganised sector to some extent.
ICRA Equity Research Service
Havells India Limited
Figure 4: Havells' Competition Matrix
Category Electrical Consumer Durables Products Havells Crompton Greaves Bajaj Electricals Matsushita Phillips India Osram Surya Roshni Legrand Schneider Finolex Cables KEI Industries Fans Water Heater Irons Kitchen Appliances ICLs FTLs CFLs Lighting LEDs Luminaires Low Voltage Medium Voltage Switchgears High Voltage Switches Motors Copper Cables Aluminium Cables Cables & High Voltage Cables Wires Residential Wires
Havells, Standard, Crabtree
Bajaj Platini, Morphy Richards
National, Panasonic, Anchor-Roma
% of revenues contributed by above-mentioned products
~62% Copper Rods, PVC Pipes & Sheets, etc.
Other Areas of Operation
Power Special Healthcare TV, Music Systems, Projects, High Products, Systems, Home Industrial Masts & Poles Television, Appliances, etc. Systems etc. and Towers etc.
ERW Pipes and HR & CR Coils
Stainless Steel Wires
Source: Companies’ websites and annual reports, ICRA Online Research
Branding and distribution network—the key differentiators With increasing urbanisation, Tier-II and -III towns are expected to be the key growth drivers over the next few years, which makes extensive distribution network and brand presence critical for consumer goods‘ companies. Havells‘ ability to crossleverage its existing distribution network and its established brand presence give it a competitive edge over smaller companies with limited reach. Havells has established a pan-India distribution network over the years, using which it has been able to gain market share rapidly even for its relatively new products like modular switches, CFLs, and electric fans. Its network compares well with that of the largest electric appliance company in India, Bajaj Electricals, which reaches out through 50,000 retail outlets.
Table 1: Distribution Network of Havells versus Peer Companies Table 2: Havells’ Regional Sales and Distribution Network
Company Havells Bajaj Electricals Legrand
Distributors/ Dealers 4,300 5,000 600
Retail Outlets 35,000 50,000 3,000
Source: Companies’ websites
Region North East West South Total
Havells’ Sales 34% 22% 15% 28% 100%
Havells’ Dealers 26% 18% 27% 29% 100%
At present, Havells has a network of 4,300 wholesalers/dealers and 35,000 retailers. In terms of brand, the company is particularly strong in North and East India, which together account for around 56% of its total sales and 44% of its total dealer base. While South India has been a major contributor to sales because of the sheer market size; Havells has been traditionally weak in West India (which accounts for around 15% of its total sales), being a late entrant there. The company is however making efforts to increase its market share in the region by expanding its dealer base (which is now comparable in size to its dealer bases in North and South India). To further leverage its presence across product segments, Havells has opened exclusive outlets named ―Havells Galaxy‖ in several cities across India. These stores, owned by Havells‘ dealers, display and undertake retail sales for the entire product range of the company. At present, there are 80 Havells Galaxy stores across India and the company plans to raise the number to 200 by March 2012. Havells has also been aggressive in its advertising, with its advertisement expense to sales ratio being significantly higher than that of its close peers. The company‘s advertisements and brand building initiatives have increased its brand visibility among end-consumers. This, together with the acquisition of established brands like Crabtree and Standard over the
Table 3: Advertising Spend of Havells versus Peer Companies
2006-07 Havells Bajaj Electricals Crompton Greaves 1.9% 1.6% 0.4%
2007-08 2.4% 1.5% 0.5%
2008-09 2.1% 1.3% 0.5%
2009-10 3.3% 1.5% 0.4%
Source: Companies’ Annual Reports, ICRA Online’s estimates
With its wider product range and access to the latest technologies such as of light emitting diodes (LEDs).5 million. a large part of which would be reflected in its EBITDA in 2010-11.ICRA Equity Research Service Havells India Limited years. Initially. it may take some time for growth in Sylvania‘s products to pick up in India. Havells would however need to establish a separate distribution channel for Sylvania products as its current network is targeted primarily at retail customers. Launch of Sylvania products in India to enable Havells serve a wider market. the scope for the brand‘s growth in India appears significant. was an estimated Rs. but the 9M. Sylvania is looking at increasing its exposure in fast growing developing markets such as India. accounting for almost 30% of India‘s total lighting market that year. 4 . 2009-10 and net profits from 201011(E) onwards] Havells‘ consolidated EPS is expected to increase significantly over the medium term. We expect Sylvania‘s products to achieve a turnover of around Rs. While bulk of the improvement in Sylvania‘s profits during the current year are attributable to cost savings from restructuring programmes. the likely focus areas for Sylvania in India. in line with other global majors such as Philips and Osram. the company had expected to break even at the net profit level in 2011-12. Sylvania will be positioning its products to access the institutional clients – thereby mitigating the risk of cannibalisation of Havells‘ existing products. With Sylvania turning around [EBITDA positive in Q4. Accordingly. Cables & Wires Switches Domestic Switchgears Source: Company Figure 6: Havells’ International Brands Segment/ Products Complete Lighting Range Brand Havells Sylvania MultiNational Brands Indian Brands Crabtree Concord Lighting Fixtures Lighting fixtures Standard Lumiance Source: Company Sylvania turnaround to improve consolidated profits The economic downturn that happened soon after Havells acquired the Frankfurt-based Sylvania in April 2007 led to Havells reporting losses on a consolidated basis in 2008-09 and 2009-10. 50 crore (translating into a market share of around 2%) in its first full year of operations and thereafter grow in line with the estimated industry growth rate of around 25%. 2. enabling it to command a price premium in several products. Figure 5: Havells’ Brands in India Brand Segment/ Products Lighting. 2010-11 results of Sylvania indicate that the subsidiary would make a nominal net profit of about €1million in 2010-11 itself. Crore) 100 0 -100 -200 -300 -400 -500 2008-09 2009-10 2010-11 2012-13 Sylvania Havells Standalone Consolidated Source: ICRA Online’s estimates Note: Sylvania and Consolidated 2009-10 PAT figures are adjusted for amounts charged by the company to Business Reconstruction Reserve Further. Figure 7: Movement in Net Profits 400 300 200 PAT (Rs. Switchgears. Considering Sylvania‘s track record of operations and the growth potential of the Indian lighting industry. but distribution would be a challenge The size of the market for luminaires and special lamps.100 crore in 2009. has strengthened Havells‘ brand portfolio. This in turn kept Havells‘ consolidated earnings per share (EPS) depressed during the two years ended March 2010. increasing revenue contributions from the emerging markets including Latin America and Asia would drive Sylvania‘s profitability in the long term. China. Havells initiated a restructuring exercise aimed at reducing fixed cost base at Sylvania that is expected to result in annual savings of €33. and Malaysia. ECDs.
ICRA Equity Research Service Havells India Limited Company Snapshot (Standalone) Installed Capacity and Utilization Trend Ckm Per Annum (lakh) 14 70% 12 10 60% 50% 8 6 40% 30% 4 2 0 2005-06 2006-07 2007-08 2008-09 2009-10 Installed Capacity 20% 10% 0% Capacity Utilisation * Companies placed in order of their market position Source: Company’s Annual Reports. ICRA Online’s estimates Capacity Utilization 5 . Company data.
FTLs: Fluorescent Tube Lights The domestic lighting industry reported a CAGR of 12% to around Rs. 22% Others. Lighting—Domestic Domestic lighting segment holds significant growth potential In the lighting segment.000 burning hours consume 75% less energy as compared with ICLs. 24% CFLs. 16% CFLs. Havells. the CFL segment reported a much faster CAGR of 28% over the same period to account for almost one-third of the total domestic lighting market. continuing power deficit and mounting pressure on natural resources are factors contributing to the shift in favour of more energy-efficient products. Government initiatives expected to spur CFL growth 1 Although CFLs are much more energy efficient than ICLs. The objective is to subsidise the more expensive energy-efficient products. CFL penetration is considerably low in the household sector in India (10-15%) largely because of their high price (8-10 times more expensive than ICLs).000-12. 27% 2008-09 2007-08 2006-07 2005-06 ICLs. has successfully garnered a market share of 8% in the CFL segment and of around 10% in the luminaire segment. Moreover. With personal disposable incomes increasing and market preference shifting towards more energy-efficient products. Sylvania‘s premium product-range and its well-established brand name. 25% Luminaires. The luminous efficiency of light emitting diodes (LEDs) is even higher at 100-130 lm/W and they offer around 50. For instance.000 burning hours. continuing power deficit. 72 billion over the five years till 2009-10. Government initiatives to enhance rural electrification in the country while simultaneously promoting use of energy efficient lighting systems by providing subsidies (refer Table 4) is expected to boost demand for lighting products.ICRA Equity Research Service Havells India Limited Lighting Post-acquisition of Sylvania in 2007. Havells is involved in manufacturing CFLs and trading in luminaires. Both the categories hold significant growth potential as the demand for the products is strongly correlated with real estate and construction activities in the country. 6 . Others. thus acting as key drivers of CFL demand. 13% FTLs. The acquisition provided the company an access to international markets. 16% Luminaires. the high share of lighting in domestic power consumption (~20% in India). 10% FTLs. Figure 8: Changing Trend in Lighting Industry Domestic Lighting: Key Drivers and Challenges Growth Drivers Increase in real estate activities backed by strong economic growth High cost of energy. Although profitability in Sylvania‘ international operations was affected because of global recessionary conditions and overall operational inefficiencies in the last two financial years. 27% 20% Source: ELCOMA India. and pressure on natural resources Greater focus on energy-efficient products Government initiatives to subsidise energyefficient products Key Challenges Intense competition Keeping pace with changing technology Environmental threat posed by use of mercury in CFLs Significant warranty returns in CFL business Fragmented nature of luminaire business 2009-10 ICLs. which have a luminous efficiency of 5 to 20 lm/W and offer 750-1000 burning hours. successful 1 CFLs with a luminous efficiency of 50-95 lumens/Watt (lm/W) and offering 6. making them affordable for the target market. The business dynamics of domestic and international lighting operations of consolidated Havells entity continue to be different and hence have been analysed separately in the following sections. domestic lighting segment of Havells continued to be profitable because of favourable market scenario in India and cost-efficient operations. particularly CFLs. ICRA Online’s estimates Note: Above estimates are for calendar years ICLs: Incandescent Lamps. Osram and Bajaj. despite its late entry into the segment (in 2003-04) and the presence of large incumbents such as Philips. lighting has become the major segment for the company accounting for around 60% of its consolidated revenue base.
3-9 per piece. with the growth moderating to 28.499 villages (95%) have already been electrified.775 24% 74 Source: ELCOMA India. In India. Chhattisgarh and Orissa Source: Ministry of Power. Balance cost to be recovered by registering the project under CDM. While till around two years back.510 30% 76 2009-10 2.85 PF Imposition of anti-dumping duty: This has restricted the import of low-cost CFLs from China to an extent Increasing consumer awareness: As the price differential between products offered by organised and unorganised players is not significant. efforts in some developed nations are directed at mandatory replacement of all ICLs with more energy-efficient products.550 28% 1. ICRA Online’s estimates Considering the slow implementation of BLY and the uncertainty over Havells‘ participation in the same.400 40% 1.000 unelectrified villages and giving access to 7.990 42% 1. considering the currently low penetration levels. thus attracting demand from price-sensitive and rural households. While sustaining a high growth rate could be increasingly difficult on a growing base. 2009 onwards. Intensely competitive industry.8 crore uncovered rural households by 2012 BLY Promotes 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 To distribute high quality CFLs at about Rs.213 26% 2. 14 companies have acquired licences to manufacture CFLs with >0.ICRA Equity Research Service Havells India Limited implementation of Bachat Lamp Yojana (BLY) will reduce the price differential between ICLs and CFLs to Rs. their share is now expected to decline significantly on account of the following factors: Introduction of standards for CFLs by Bureau of Indian Standards (BIS): BIS has mandated that CFLs should carry a high power factor (PF) stamp from October 1. Crore % Rs. the potential replacement demand. Table 4: Summary of Key Government Initiatives that could boost Demand for Lighting Products in India Programme Rajiv Gandhi Grameen Vidyutikaran Yojana/ Rural Electrification Policy Brief overview Launched in April 2005 by merging all existing similar schemes Objective Has a target of electrifying 125. Madhya Pradesh.410 27% 75 2011-12(E) 4. Industry volumes for CFLs reported a CAGR of 40% during the last four years.1% in 200910 partly on account of the higher base effect and partly because of the slowdown in the real estate sector. Punjab. and guaranteed hours) 7 . Introduction of similar programmes in India could be a strong demand driver for CFLs. which points to significant demand potential over the next few years Implemented/initiated in Himachal Pradesh. Kerala. The scheme aims to replace 40 crore ICLs in India with CFLs Status Although 118. The growth (CAGR.101 26% 3. consumer preference has moved towards products with better quality parameters (such as power factor. the unorganised sector used to account for almost 40% of the CFL market. Table 5: Estimation of Potential CFL Market for Havells 2007-08 Industry Sales Growth Total Sales Growth Realisation per CFL Lakh pieces % Rs. and the additional demand likely from increased residential and commercial/retail construction activities over the next few years.900 26% 75 2010-11(E) 3. ICRA Online Research While the scope of BLY is limited to replacement of 40 crore ICLs (translating into an additional demand of 2% per annum for CFLs).048 26% 3. we have not factored in any incremental sales that may come from that scheme. four years) in value terms has been relatively low at 28% because of declining realisations.and several unorganised-sector players. 1. Uttar Pradesh. we do not expect any major replacement demand in the short to medium term unless Government implements mandatory phase-out of ICLs while continuing to provide subsidises on CFLs. Havells’ strategy to counter warranty claims to temper market share growth The CFL market in India is intensely competitive.15 per piece to households in the country. Accordingly we expect the CFL market to report a CAGR of 26% over the next five years. the CFL industry is likely to enjoy strong demand prospects. According to ELCOMA.162 40% 83 2008-09 1. given that ICLs account for roughly 65-70% of the total annual sales of lighting products in India (in terms of volumes).036 26% 75 2012-13(E) 5. featuring around 20 organised. in terms of households only 53% of the target has been achieved.
which was 1. To rectify the situation. Havells also has a presence in luminaires largely through trading. To ensure that the launch does not lead to cannibalisation of revenues. This has been a major concern for CFL makers in India because market malpractices have led to significant claims for returns. the company withdrew its products from certain States where malpractices were rampant. The launch of Sylvania products would also benefit from a high brand recall. prompting the reintroduction of warranties. it was able to establish a strong presence and the brand is still recognised in the industry. Because of intense competitive pressures from incumbent players such as Philips and Bajaj. with operations in other States stabilising. Subsequently. which was 12. besides the availability of cheaper alternatives from the unorganised sector. which are considered significantly superior in terms of energy efficiency and environment friendliness. 2. retail and commercial construction in India. Table 6: Movement in Havells' Market Share in CFL Segment Units Industry Size Market Share Rs. 2. Although Havells has a single-product offering in the lighting segment (on a stand-alone basis) and a limited presence in LEDs (trading operations).036 8. Havells currently ranks fourth in terms of market position with a share of 10% in a Rs. increasing affordability of solid-state lighting products may affect CFL demand. crore % 2007-08 1. and strong brand presence.5% 2012-13(E) 3. Havells received claims for Rs. Havells is now following a conservative strategy of restricting its presence to a few key markets. efforts are being made across the world to bring down the cost of solid-state lighting products or LEDs.900 8% 2010-11(E) 2.9% of its total CFL sales that year. access to Sylvania’s technology for advanced products may help maintain market share Although critical given their importance in saving electricity. the company‘s market share declined to 6% in 2008-09 from 10% in 2007-08. Havells however is following a cautious approach to contain warranty claims.5% Source: ELCOMA India.2% in market share. In 2007-08. developed nations on the other hand have regulations restricting such content to 1 mg per bulb.000 crore market. given that Sylvania was earlier operational in India through a joint venture named Sylvania Laxman Limited. Havells on the other hand will continue with its own product range. Havells‘ market share reported improvement in 2009-10. and this led to a 30% decline in its sales to Rs. the top five players (including Havells) would gain 2. the luminaire segment is expected to report a healthy growth rate of around 15% per annum over 2010-11(E) to 2012-13(E).410 8. Consequently. cost-efficient operations. While this has adversely impacted sales and market share during the last two years. 84. we expect its market share to stabilise at around 8.5 crore in 2008-09.8% to 3. 2 Warranties are not offered on ICLs and FTLs because of their lower cost and lower guaranteed efficiency 8 . which are largely targeted at institutional clients.775 8. Only new products to be launched under Sylvania brand to avoid cannibalisation of revenues Havells is expected to launch Sylvania‘s products in India this financial year. Its warranty claims declined significantly in 2009-10 to Rs. a major concern for the industry.7% of its CFL sales that year. Assuming a 20% shift in market share from the unorganised to the organised sector over three to five years. ICRA Online’s estimates Environmental threat posed by mercury use in CFLs. which largely serves domestic and retail customers.5% 2011-12(E) 3. Considering the strong prospects for residential. The threat is greater for developing nations such as India as CFLs manufactured here have a higher mercury content (up to 13 mg in lower quality lamps). Havells‘ competitive positioning in the luminaire segment is expected to improve further with the launch of Sylvania products. CFL manufacturers provide a product warranty varying from six months to one year from the date of 2 purchase . Considering Havells‘ conservative approach.62 crore. Although there have been instances of companies withdrawing warranties in the past. the lack of participation from all companies. high-intensity discharge (HID) lamps and various special products for institutional clients.ICRA Equity Research Service Havells India Limited Going forward. its acquisition of Sylvania provides it with access to a much wider product range including fluorescent lamps.5% over 2010-11(E) to 2012-13(E). CFLs face environment related challenges because of the use of mercury in their manufacturing. Sylvania‘s operations in India will be focused solely on institutional customers and its products will be routed through an entirely different distribution channel. given their extensive distribution network. we expect the CFL industry to increasingly consolidate away from the unorganised sector as the shift towards higher quality gains further momentum and the benefits of scale economies accrue to the larger players. Significant scope of growth in luminaire segment Apart from CFLs.86 crore.510 6% 2009-10 1. Given the environmental concerns.162 10% 2008-09 1. 13. Given that warranty related malpractices still exist. it has also helped protect profitability margins. As is the industry norm. including airports and stadiums. Although the joint venture ended in 1993. adversely affected sales.
Out of the amount.ICRA Equity Research Service Havells India Limited Lighting—International (Sylvania) Leveraged buyout.00 16. with smaller and regional players holding around 80% of the market. Although Sylvania‘s market share is relatively low at around 5% as compared with 29% of Philips. 3. 1273. the luminaires industry is highly fragmented. which is expected to report a CAGR of 710% over the next 10 years. Sylvania holds a 2% share of the luminaires market in countries where it operates. Table 8: Future Funding Support to Sylvania In € mn 1. Sylvania: Key Drivers and Challenges Growth & Profitability Drivers Entry into fast-growing emerging markets Ability to access cheaper manufacturing outsourcing options Key Challenges Ability to garner market share in emerging markets Ability to refinance debt in a timely manner Table 7: Cost of Sylvania Acquisition and Funding Pattern Particulars Total cost of acquisition Funding requirement Recourse debt Non-recourse debt Source: Company Amount €234. As against 7% of Philips. Till date. the lamps industry is highly consolidated. This has depressed Havells‘ return on equity (RoE).5 million €200. Out of the total funding requirement of €200 million. 9 . Havells also extended additional financial support to Sylvania via equity infusion. The cost included €34.60 Source: Company Prospects favourable for Sylvania. Havells has invested €114 million in the subsidiary. Havells funded the acquisition cost of Sylvania by taking fresh debt in the latter‘s books.00 1.0 million €80. Following this acquisition. Globally. Canada. the acquisition price that Havells paid appears steep. especially in hindsight. Havells got access to brand rights of Sylvania worldwide with the exception of the USA. Havells acquired the lighting business of SLI Sylvania in April 2007 for €234. Particulars Recourse debt to be repaid over the next one year (by April 2012) Interest to be paid on recourse debt Guaranteed working capital debt TOTAL 10. 2.0 million was pending as on December 31.12 crore at €-INR rate prevalent as on April 30. GE. and Sylvania. going forward To enter international markets. These players together hold around 65% of the total market for lamps. access to latest technologies.60 5. its wide product range with the latest technologies and strong brands have enabled it to compete with the top three brands of the world and sustain its market share in mature markets such as Europe.0 million Remarks ~ Rs. only €10. €80 million was funded by a recourse debt that was backed by a guarantee from Havells while the balance €120 million was funded by non-recourse debt. and high brand recall value. Lumiance and Linolite.0 million €120. expansion into newer markets to provide a boost to revenues over the long term Havells‘ acquisition of Sylvania has given it access to the global lighting industry. featuring a few large players including Philips. Concord. Osram (Siemens). In contrast to the lamps industry. given that Sylvania‘s key markets went into a slowdown post-acquisition. 2010 During the last three years. we estimate Havells‘ incremental financial exposure in Sylvania to be lower at around €16 million. which in turn was used for repayment of recourse debt and to meet cash flow mismatches. Mexico.5 million of pension liabilities that were not to be funded Debt had recourse to Havells in the event of default. Sylvania is the world‘s fourth largest player in the lighting industry and owns reputed brands: Sylvania. Based out of Frankfurt. and 9% of GE. modest funding support expected. Australia and New Zealand where the brand rights are owned by Osram and some other players. 2007. Going forward. given its strong product portfolio. Overall.5 million. 19% of Osram. as the additional investments have not yielded returns till 2009-10. Marlin.
which meant the company‘s margins started recovering only from Q4.6 159. Sylvania however had weaker margins to begin with because of its higher fixed costs and delay in beginning the restructuring exercise (following change in management). Middle East. slowdown impact similar as that on peers After Havells acquired Sylvania in April 2007.6 165. Figure 11: Quarterly Movement in Revenues of Sylvania & Competition Figure 12: Quarterly Movement in Margins of Sylvania & Competition Source: Quarterly reports of companies. Philips and Osram also undertook restructuring. 38% Osram.2 209. African and Asian markets.9 -1. With plans to launch operations in Eastern Europe. 9% Source: Company Others.ICRA Equity Research Service Havells India Limited Figure 9: Estimated Market Shares in International Lighting Market Figure 10: Estimated Market Shares in International Luminaires Market Phillips.6 287. the company launched two restructuring programmes costing a total of €32million: Project Phoenix (Jan 2009-Sep € mn Less: Less: Particulars Sales Variable Costs Contribution (A) Fixed Costs Operating Profits (B) Degree of Operating Leverage (A/B) 2008-09 (A) 508.0 7.5 144.6 21. which subsequently allowed profit margins to recover to the 2008 levels in CY2010.5 19. a fallout of which was a significant decline in the revenues of companies across the lighting industry. 5% GE.8 158. 2009-10. company‘s revenue growth is expected to recover in the next three years. 11% Sylvania. This together with high fixed costs led to several companies reporting operating losses during that period.4 221. ICRA Online’s estimates Source: Quarterly reports of companies.2 2009-10(A) 438. 29% Others.4 - 2010-11 (E) 470. the world economy suffered one of the worst recessions in decades. Sylvania had been focusing primarily on mature markets in Europe.7 11. 2% Phillips. ICRA Online’s estimates Restructuring packages primarily aimed at correcting high operating leverage. To correct this. 2% Zumtobel. the primary reason for losses Table 9: Estimated Change in Operating Leverage Post-Restructuring The primary reason for Sylvania incurring losses following the decline in revenues in 2008-09 was its high operating leverage (refer Table 9).1 304. Like Sylvania. 19% Sylvania. 78% Source: Company Note: The market share is estimated for markets where Sylvania is present Till now.9 Source: ICRA Online’s estimates 10 . 7% GE.4 279. Global economic slowdown along with high fixed costs adveresely affected profitability during last three years.
1 -4.8 13. The cost consisted mainly of severance payments made on account of reduction in manpower at the European facilities.6 67.4 million in 2009-10.6 5.5 mn Funding Source: Company Adverse market conditions together with continued focus of Sylvania on internal restructuring programmes.5 mn in 2009-10 Three manufacturing facilities shut down Reduction in employee base by onethird in two other facilities Reduction in administrative costs and improvement in working capital management Use of retained earnings Release of funds from working capital Prakram Sep 2009-Sep 2010 €20 mn €16 mn ~ 15 months ~ €12 mn by September 2010 Increase outsourcing of products from cheaper manufacturing destinations such as India and China Rationalisation of fixed cost base Increase savings in material costs Value engineering and process optimisation Fresh equity infusion by Havells Use of debt funds by deferring principal repayments Total €32 mn €33.8 11.6% -16.0 57. Table 10: Summary of Restructuring Projects implemented at Sylvania Restructuring Plan Duration of implementation Total cost Estimated annual savings Estimated pay-back period Estimated savings Steps implemented Phoenix Jan 2009-Sep 2009 €12.5 mn ~ 8.4 -0.3 mn €17.0 Source: Company.ICRA Equity Research Service Havells India Limited 2009) and Project Prakram (Sep 2009-Sep 2010).4% 9.5 months €17.7 -13. 2007-08 514 27.2 -2.0 3. Although the fixed costs had been pruned to an extent with the implementation of Project Phoenix in 2009-10. the company has adjusted the amount directly from Business Reconstruction Reserve created out of retained earnings 3 Similar restructuring programmes were launched by some other players including Philips that were aimed at reducing the share of fixed costs in the total cost structure.5 5.8^ -69. resulted in a decline in its net sales to €438 million in 2009-10 from €514 million in 2007-08.8 -43.0 65.1% 3.0 2009-10 438 -14% -1.2 13. The two programmes were primarily aimed at rationalising the company‘s 3 cost structure . Table 11: Sylvania’s Past Financial Performance € million Gross Sales % change EBITDA EBTDA % Depreciation Interest PBT PBT% PAT Exceptional Items PAT after Exceptional Items €/Rs.6 1. ICRA Online’s estimates ^ Note: As per reported numbers.8% -25. This resulted in Sylvania reporting an operating loss of €1.3 2008-09 509 -1% 11. the company‘s profitability continued to decline because of a sharp fall in sales. which also involved closure of certain production units. 11 .3% 8.5 2.4 -30.3% 11.9 -21.6 -47.
Based on growth trends observed.2 Q3. has led to an increase in LATAM‘s share in the total sales to 31% in Q2.3% 2. 12 .8 -5.0 2.8 -8. 2009-10.1 -3.7% 2.1 0% 4. 2009-10 onwards.6 0. Figure 13: Market-wise Revenue Break-up for Sylvania Figure 14: Market-wise Revenue Break-up for Philips 100% 80% Developed 60%markets.1 4.6 0. 70% 40% 40% 20% Emerging markets.0 0. the share is expected to increase further over 2010-11(E) to 201213(E). 30% Emerging markets. 72% Developed markets. Already.7% 2. have grown consistently since Q2.2 -13. 36% 0% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 Source: Company’s Quarterly reports 0% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 Source: Philips’ Quarterly reports Future growth to be driven by emerging markets.7 1.7 9% 5.8 -8% 0.6 1.6 -1% 0.5 4.9 Q4. profitability vulnerable to adverse movements in foreign exchange With Sylvania planning to launch operations in other emerging markets such as Malaysia and China. The established global players in the lighting industry are increasingly focusing on emerging markets for future growth.3 -11.09 116.5 0.8 2.6^ 5.5 0.1 -4.9 1.5 3. 2010-11 125.2 -1 -10.6 -22.6 Q2.4 5. 2009-10 114.3 -11. 2010-11.9 -11. Sylvania‘s sales in Asian markets increased by 69% in 9M.7% 2. Sylvania‘s operating profitability started improving in 2009-10.2 0. 2008. 2010-11 117.2 3. 2010-11 from 26% in Q1.3 0.6 -22. 64% 60%markets.1 3.ICRA Equity Research Service Havells India Limited Following successful implementation of Project Phoenix and Project Prakram and with the market reviving.2 2. Philips and Sylvania‘s share of revenues from emerging markets has increased to ~40% now from around 30% in the quarter ended March 2009.5 0.9 -6% 1. 2009-10 107.7 Q1.9 1.2 1.1 -33. which together with the decline in sales from Europe.3 Gradual improvement in profitability Source: Company’s quarterly reports ^ Normalised EBITDA excludes tax payment made in Brazil for previous years for € 2. growth in its top line is expected to be higher in the next few quarters. In 9M. growth in the region has been healthy. although part of it can be attributed to favourable currency movements.8 4.4 25.4 million and treated as other income/ expenditure Apart from the successful completion of the restructuring programmes and the sales revival in key regions.1 0.7 9% -5.0 2. 2010-11 108.4 Q1. Sales from Latin America (LATAM). 2009-10 106. 64% 100% 80% Developed Developed markets. 2010-11 over the corresponding previous to €11.5% 2. which account for 5% of its total sales.8 1.0 -0.4 18.5 1.9 6.1 -8.35 million. 28% Emerging markets. sales from the LATAM region reported an increase of 35% over the corresponding previous.7 -0.3 6% 6.2 -9% 2.3 Q3. While Sylvania as of now has a limited presence in Asian markets.1 0. 2009-10. the launch of operations in emerging markets also contributed to the improvement in Sylvania‘s margins from Q4.4% 2. Launch of Project Phoenix (Jan ‘09) Conclusion of Project Prakram (Sep ‘10) Table 12: Quarterly Performance of Sylvania During and Post-Restructuring € million Revenue Growth (%) EBITDA EBITDA margin (%) Depreciation Interest PBT before Exceptional Items Exceptional items PBT Tax PAT Q4.4 -33. 36% 20% Emerging markets. 2009-10 105.6% 2.1 2.4 0.1 2.1 3.4 -5.4% 3.4 Q2.4 -4.2 5. another developing region.
Further.46 -9% Q1.33 18% 27. is exposed to the risk of adverse fluctuations in foreign exchange (forex).59 115.74 95. 2009-10 76.83 -1% 29.01 2% Q1. given Sylvania‘s increasing exposure to emerging markets – both in terms of outsourcing of manufacturing as well as sales.5%) in 2010-11. 2009-10 65. 2009-10 77. we expect Sylvania‘s sales to report a CAGR of 10% in the LATAM region and of 31% in the Asian region (as a result of entry into newer markets).95 -15% 32.63 -9% 24. To reduce this risk. 2010-11 64. Further.91 6% Source: Company’s Quarterly Reports Going by the current trends.82 104.56 15% 5.04 5% 4. the company is also increasingly focusing at localising outsourcing and borrowings in countries like India and China – that are the key outsourcing destinations for the company.75 108. the company‘s earnings would continue to be susceptible to the forex risk.21 -4% Q2.85 5% Q3.04 40% -1. The EBITDA margin. Thus.95 4% 2. the company is focusing at localising sales and procurements in key markets such as LATAM.ICRA Equity Research Service Havells India Limited Table 13: Quarterly Revenue Growth in Sylvania's Markets €million Europe Growth (%) LATAM & US Growth (%) Asia Growth (%) Other Total Growth (%) Q4.60 -5% 04. 13 .53 6% 2. 2008-09 77.47 35% 0. Although this reduces the adverse impact of foreign currency movements to an extent.72 28. taking into account the cost savings from the restructuring programmes.48 -7% 25.88 7% 0.89 -13% 3.93 -19% 1.10 13% 35.28 -10% Q2.35 109.58 109. 2009-10 70.75 3.59 1% 37.62 -3% -1. we expect the company‘s sales in the European region to decline marginally in 2010-11 and stabilise at that level over the next three years.88 -2% -1. thereby providing benefit of natural hedge. a strong appreciation in currencies of countries from where the products are imported or depreciation in currencies of countries of major export can adversely affect the company‘s earnings.62 -21% 1. we expect Sylvania to report an EBITDA of ~ €21 million (EBITDA margin ~4. 2010-11 65.74 -1.88 -1% Q3.65 12% 5.27 106. however. 2010-11 74.69 11% Q4.6 97. given the increasing percentage of sales in new geographies.
having increased its market share to about 20% in Source: Company data. 5. for Havells. but Havells enjoys robust profit margins here because of its leadership position and targeted customer segment. The domestic/retail segment is a small portion of the total switchgear market (about 15%). 37% lakh.wise Break-up of Proposed Housing Units Domestic switchgear and modular switches are expected to benefit from the current demand for premium urban housing and rising disposable incomes. starters and panels (Rs. which would sustain demand for domestic switchgear and switches.340 cr) Switchgear (Rs. MCCBs.790 cr) Source: Company.ICRA Equity Research Service Havells India Limited Switchgears Most profitable segment for company In the switchgears segment. 22% Source: Industry research 4 lakh. ICRA Online Research Note: Havells also includes capacitors and motors to calculate revenues from Switchgears segment About 70% of the revenues in the switchgears segment come from domestic switchgears and modular switches. Havells‘ product range includes domestic 4 switchgears. helped by Crabtree‘s premium image and easy availability. modular switches. Table 14: Product-wise Break-up of Havells’ Switchgear Revenues % of total Industrial Domestic Modular Switches Others (Capacitors & Motors) Total 23% 49% 20% 9% 100% Currently.200cr) ACBs. 5 Report of the Technical Group constituted by the Ministry of Urban Housing 14 . The company currently faces limited competition in modular switches. 25% The switchgears industry can be broadly classified in two segments: domestic/ commercial (low voltage) and industrial switchgears (medium and high voltage). around 40% of the total housing units would be worth Rs. the total requirement of urban housing during the XI lakh. According to the Ministry of Urban < Rs.130 crore low-voltage industrial products category. Havells has a wider distribution reach than its close competitors.000 cr) Control gears.130 cr) Modular Switches (Rs. Although sales from industrial switchgears are limited (~30% of total segment sales) at present.15 5 th > Rs. ICRA Online’s estimates 2009-10 from 15% in 2005-06. Rs. 1.200 crore domestic switchgears market.200 cr) LV Industrial (Rs. which enables it to capitalise on the growth happening in Tier-II and Tier-III cities. Changeovers etc. Figure 15: LV Switchgears Market in India Switchgears: Key Drivers and Challenges Growth Drivers Real estate activities in metros. the potential market considered is just the low-voltage segment because of its product focus. Havells is the market leader in the Rs 1. Its market share in modular switches has also improved significantly to 15% from just 5% in 2005-06. Switchgears and Electrical Switches Domestic/ Commercial (Rs. Future growth expected to be driven by construction of new houses and increasing disposable incomes Figure 16: Price. Tier-I and Tier-II cities Increasing personal disposable incomes Increasing consumer awareness Changing lifestyles leading to greater preference for modular switches Key Challenge Establishing market share in new products to be launched in low voltage industrial switchgears.15-25 Rs. 1. 7. 1. 25 lakh and more—the target segment for switchgears and switches. as the only premium brands available are Legrand. Havells is making efforts to expand its presence in the Rs. and low-voltage industrial switchgears . However. Although a large proportion of this shortage involves low-end housing. 7. Switch fuse unit. (Rs. ABB and Siemens. 2. 50 Housing . 25-50 lakh. 16% Plan period (2007-2012) works out to 2.65 crore dwelling units (combining the housing shortage at the beginning of the Plan period). where Havells is able to price its products at par with international brands such as Legrand and Schneider Electric. Moreover. Schneider and Anchor Roma. given presence of large players such as L&T.
ICRA Online’s estimates Company plans to diversify into high-growth industrial switchgears. Table 15: Expected Movement in Havells' Market Share 2009-10 Domestic Switchgear Industry Sales Growth Havells‘ Market Share Modular Switches Industry Sales Growth Havells‘ Market Share Rs. the expenditure on domestic switchgear being a one-time outlay (about Rs. consisting of industrial switchgears.1% of the total cost of a house. we expect the growth to be faster for modular switches.521 15% 16% Source: Company.200 crore. While the electrical switches market is expected to grow at an annual rate of 9-11% over the next five years. we expect the growth in the industrial switchgears segment to be modest in the next two to three years. but significantly reduces the risk of damage from short circuits and electric current leakages.323 15% 16% 2012-13(E) 1. Crore % % Rs. While the size of the domestic market for electrical switches is estimated at Rs. and just around 10% of households use them because of their higher prices.ICRA Equity Research Service Havells India Limited The domestic switchgear segment is also expected to benefit from rising consumer awareness. exposes them to the cyclicality inherent in the sector. Crore % % 1. 2.200 22% 1. only 46% of this is accounted for by modular switches. Although Havells started off as an industrial switchgear company. but benefits would accrue only over long term Havells. which currently caters to only a small part of the total switchgears market. Nevertheless. Havells is currently a marginal player in this segment as compared with established companies like Larsen and Toubro (L&T) and Siemens.825 15% 22% 1. especially premium housing.000 2010-11(E) 1. and a repetition of the same cannot be ruled out in case GDP growth falters. given the rising disposable incomes. 15 .587 15% 22% 1. The industrial switchgears segment is expected to report strong growth during the next few years on the back of the significant expenditure planned in the power sector and in industrial construction. Havells‘ revenue growth in this segment slowed down to 7% in 2008-09 because of the economic slowdown. Moreover.380 15% 22% 1.150 15% 16% 2011-12(E) 1. Given strong competition from players like L&T.000 for a three bedroom-hall-kitchen house). 2. However. the high dependence of switchgears and switches on real estate growth. plans to expand its product portfolio so as to be able to address the larger market. we believe switchgears would be affordable for a large part of the targeted population. it reduced the focus on this business over the years to target the high potential consumer electrical market. as the expenditure on miniature circuit breakers (MCBs) generally accounts for less than 0. The company is now building up its product portfolio to re-enter this segment.
Thereafter. Electrical Consumer Durables: Key Drivers and Challenges Growth Drivers Increased penetration of electricity in rural areas New product launches Changing lifestyles and disposable incomes Key Challenges Loss of market share in electric fans Intensifying competition in the electrical appliances market Moreover. Havells can benefit from increased power supply and rising rural incomes in Uttar Pradesh. Although Punjab and Haryana are well-penetrated. Havells was also able to capitalise on one of the fastest growth periods of the domestic electric fans industry. benefiting from rapid growth in electric fans demand and increase in market share The revenues of the ECD division reported a sharp increase till 200910 on the strength of high growth in the electric fans industry and the substantial increase in Havells‘ market share during 2006-09. the growth can be attributed to rising incomes and quality consciousness of Indian consumers. The importance of distribution network in the case of home electronics and kitchen appliances is highlighted by the findings of Technopak (a market research company). Havells has been able to overtake established. fan ownership ranks higher than ownership of manual water pumps and steel cupboards among rural households. In raising its market share at a brisk pace over the period 2006-10. 16 . especially in States where disposable incomes are high. the Electrical Consumer Durables (ECD) division of Havells had just one product—electric fans. we expect the growth rate to moderate to less than 15% because of the base effect. Crore 2. the ownership of fans is closely linked to power availability.ICRA Equity Research Service Havells India Limited Electrical Consumer Durables Till 2009-10. Moreover. and a unique energy saving proposition offered in the form of 50W fans.200 800 400 0 35% Annual Growth rate 30% 25% 20% 15% 10% 5% 0% Source: CMIE. the uptrend is already reflecting in the half-yearly numbers of the major fan manufacturers like Havells and Crompton Greaves. the revenues of the key players in the electric fans industry increased by a substantial 30% or so. but see the industry as continuing to benefit from two additional upsides: increasing availability of power and shorter lifespan of newer generation fans. Rajasthan and Bihar. The electric fan industry is now worth about Rs 3000 crore. which reported a CAGR of 18% between 2003-04 and 2009-10E. with Havells controlling around 12% of the market. Also. Although the key beneficiaries of this trend would be companies that manufacture lower-priced fans.400 Rs. During 2009-10. we expect Havells to capture the affluent households in these regions. with the recent launch of electric water heaters. since older generation fans generally had a long life span extending up to 20 years. Despite being a relatively late entrant (the ECD division was started only in 2004). Now it has two. As per the findings of a survey conducted by Max New York Life and NCAER. Beyond 2010-11. as replacement demand for fans has historically been limited. as Havells‘ fans cater to the premium segment. while the product was offered at prices almost similar to that of the market leader (Crompton Greaves). we estimate a growth rate of 18-20% over the next two years. Havells‘ also supported its strategy by aggressive advertising. Figure 17: Growth in Indian Electric Fan Industry 2. the company has managed to place itself among the top five players in the industry that control about 80% of the market. which indicates that ~79-85% of customers are willing to travel only up to 2km for the intended purchase. on the strength of its extensive distribution network. The company has been able to grow its market share from 6% in 2006 to 12% in 2010 largely on account of its marketing strategy wherein a number of additional product features were offered. The growth was largely driven by the real estate boom and the increase in disposable incomes.000 1. but the spike may partly be attributed to pent-up demand. a ceiling fan is almost a necessity in the hotter regions of India. In rural India. where higher incomes have not yet fully translated into fan purchases because of power shortages.600 1. One of the fastest growing segments for Havells. ICRA Online’s estimates Healthy growth prospects for domestic electric fans industry The domestic electric fans industry is expected to grow at about 30% in 2010-11 with real estate activities picking up once again.800 2. but single-product companies.
which makes it the second-most profitable segment for the company.0 258.202 1. which limited the impact of the benefit on the EPS.7 2009-10 357. resulting in a lower share in the domestic market.6% on a consolidated basis). which would help it introduce newer models. but full impact on EPS would be felt only after new product launches The profit margins of Havells‘ ECD division are robust because of premium pricing.5 62.6 764. with ample spare capacity to service volume growth of 15-20% over the medium term.000 each. has a tie-up with China-based Midea (world‘s largest fan company). we expect the share of high-end fans to increase gradually. With the size of the Indian middle class growing.3 384. The latter. with growth supported by adequate spare capacities Havells‘ competitive strength in electric fans is indicated by the pricing premium that its fans are able to command in the market. 1.ICRA Equity Research Service Havells India Limited Figure 18: Region-wise Power Availability and Fan Penetration 100% % of households 80% 60% 40% 20% 0% Figure 19: Ownership of Household Goods in Rural India as per Survey 70% 60% % of households 50% 40% 30% 20% 10% Power availability % of households earning above Rs 2000 pm Ceiling fan ownership 0% Ceiling fan Time clock Torch In-house toilet Water Steel Sewing pump cupboard machine Source: The Max-NCAER Financial Protection Survey Source: The Max-NCAER Financial Protection Survey Havells’ market position in fans expected to remain strong.4 296. Havells only sells fans priced above Rs. which allows it to have a cost advantage over other players that outsource production to other smaller units in India.229 1. Incremental growth in market share is not expected to be substantial because of intense competition from Crompton Greaves and Bajaj Electricals. Moreover. The company‘s facility at Haridwar (Uttarakhand) is the largest integrated fan manufacturing factory in India.0 Revenue Growth 2008-09 14% 20% 13% 21% -16% -20% 2009-10 30% 22% 37% 28% 36% 32% Incremental Revenues 2009-10 82.8 88.3 Realisation 2008-09 1. For calculating incremental revenues in 2009-10. adjustment for export sales has been made Source: Companies’ Annual Reports. ICRA Online Units sold Utilisation The growth in Havells‘ electric fan sales is expected to mirror the growth of the industry over 2010-11(E) to 201213(E). the division‘s overall contribution to the company‘s 2009-10 standalone revenues was just around 15% (about 6. even against the products of other established players like Crompton Greaves and Bajaj Electricals. which shields it from the intense competition from cheaper Chinese products in the lower end of the market.004 943 903 927 Note: Orient Paper exported fans worth Rs. Table 16: Electrical Fans—Peer Comparison Amounts in Rs.068 988 933 914 945 2009-10 1.5 291.5 495.8 82. Crore Company Havells Crompton Greaves Usha International Bajaj Electricals Orient Paper & Industries Khaitan Electricals Revenue 2008-09 275. As the ECD division is expected to demonstrate the highest revenue growth (CAGR of 22%) among all segments during 2010-11 to 2012-13(E) 17 .0 195. However. Havells however does benefit from having the third largest fan manufacturing capacity in India. ECD division displays strong profitability.3 357.2 137.2 379. 48 crore out of the revenues mentioned. ICRA Online’s estimates Figure 20: Capacity Utilisation across Major Fan Manufacturers 80 Units in lakhs 60 40 40% 20 0 20% 0% 100% 80% 60% Installed capacity Source: Capitaline. for instance.3 166.3 598.176 1.
driven by rising disposable incomes. Figure 21: Movement in EBITDA Margin for Havells’ ECD Division Table 17: EBITDA Margin Comparison for ECD Segment Company Havells Crompton Greaves Bajaj Electricals Orient Paper & industries Khaitan Electricals TTK Prestige 13. The various listed players present in the electric appliances industry have reported strong profit growth during the past five years.ICRA Equity Research Service Havells India Limited because of new product launches while sustaining EBITDA margins close to 22%. which allows it to earn adequate profits on the same.7% 9.8% 14. such as prevention of electric shocks and highest power efficiency (five-star rated).6% 9. Nonetheless. 800 crore. ICRA Online’s estimates Source: Company’s Annual Reports. Future growth to be driven by new products such as water heaters.7 crore households own water heaters as of 2009-10).8% 13. we believe this improvement largely reflects the softening of raw material prices over the last one year (reduction in raw material prices was not reflected in lower MRPs). and since this business is driven by rising disposable incomes and availability of power.4% 10.7% 12. Usha and Inalsa. but company would face intense competition in new categories We expect future profit growth of Havells‘ ECD division to be driven by new product launches such as water heaters. which are priced much lower.2% % EBITDA margin EBITDA margin 2008-09 2009-10 30% 25% 20% 15% 10% 5% 0% Sudden spurt because of favourable raw material price movement Note: For Havells. Even retail chain owners like the Future Group have launched their in-house brands (Onkyo). the electric appliances industry is already cluttered. Table 18: Product Portfolio and Growth Trend for Domestic ECD Companies Electric Appliances Kitchen Appliances Havells Crompton Greaves Bajaj Electricals Khaitan Electricals Usha International TTK Prestige Philips Panasonic Inalsa Sunflame Electric Fans Water Heaters Irons Mixer Grinders Toasters EBITDA CAGR of ECD Business 2005-06 to 2009-10 13% 39% -24% 114% 32% NA NA NA NA Revenue CAGR of ECD Business 2005-06 to 2009-10 15% 23% 43% 18% NA NA NA NA Source: Companies’ Annual Reports and websites. featuring both premium MNC brands like Philips. the margins would be supported by increasing capacity utilisation and scale benefits when new products are introduced using a common distribution network. The size of the water heaters market is estimated at Rs. currently low penetration levels (only about 1. it is expected to be the key contributor to Havells‘ future EBITDA growth (on a standalone basis).9% 19. which should sustain growth of the ECD division. Prestige. which is achievable considering the unique product attributes offered by the company. However. 50-60 crore from water heaters from next year onwards.4% 11. Panasonic and Morphy Richards (owned by Bajaj Electricals) and relatively inexpensive brands like Sunflame.5% 6. Havells has targeted the premium consumer segment and expects to capture a market share of 5% by 2011-12. and it is expected to grow at about 20% per annum over the medium term.4% 16. We expect additional revenues of Rs. Havells‘ water heaters are catering to the premium segment. we expect the electric appliances industry to grow at a healthy pace over the medium term. Moreover.8% 3. EBITDA margin has been calculated by adjusting the contribution for unallocated expenses that have been apportioned among the four segments on the basis of sales Source: Companies’ Annual Reports. over the medium term. ICRA Online Research 18 . ICRA Online’s estimates While the contribution margins in Havells‘ ECD division improved to 28% in 2009-10 from about 21% in the previous two years.
which make the appliance electric shock proof. we believe Havells is well poised to capitalise on the high growth potential of the electric appliances industry. such as 5-star rated appliances that appeal to energy conscious customers. and targeting of unexplored niches like Residual Current Circuit Breakers (RCCBs) in the case of water heaters. and even in water heaters. which command a significant price premium over competing products of existing players. 19 . and ability to command price premium on the strength of differentiated products. as seen in fans and switchgear. given the company‘s: established brand image and distribution network. established brand and distribution reach. launch of products in less cluttered categories.ICRA Equity Research Service Havells India Limited Despite intense competition.
This in turn would gradually reduce the division‘s contribution to the company‘s EPS in the long term. The company has stayed away from the high-voltage (HV) cables used in transmission because of its continued focus on consumer products. Havells however attempts to keep the impact of commodity price fluctuations on margins under control by minimising inventory. but revenues remained flat due to a fall in copper prices. helped by their established track record and experience in this domain. which is normally passed onto customers with a time lag (the 9% decline in sales during 2008-09 was because of the softening of copper prices). 15.2% NA Note: Contribution margin mentioned in the case of Havells Source: Companies’ Annual Reports.6% 9. the industry reported a CAGR of 8% over the period 2000-08. which are also used by retail customers. Table 19: Cables & Wires—Peer Comparison Company Havells Finolex Cables KEI Industries Polycab EBITDA Margin 2008-09 2009-10 6. with the expected capacity addition being much higher than the 42.4%* 8. of which about Rs.000 crore.97 65.60 NA Capacity Utilisation 2009-10 45. About 43% of Havells‘ revenues in this segment come from wires. However. a concentrated customer base. and intense competition in a fragmented market that has several small players. this segment suffers from relatively low and volatile contribution margins (less than 10%) on account of low value addition. The realisation is therefore dependent on the underlying raw material cost.452 MW of capacity added during the last eight years.ICRA Equity Research Service Havells India Limited Cables and Wires Although a major contributor to Havells’ revenues.0% 6. 20 . however.150. Havells‘ presence in the wires business is strategic in nature. this division displays the weakest profitability The cables and wires segment is the largest business segment for Havells in terms of revenues. 10. distribution of power. as the business complements its efforts to offer the entire range of products that a customer would require while setting up the electrical system of a new or upgraded house. The industry‘s future growth would be supported by the significant increase in power generation capacity over 2011-12(E) to 2016-17(E).135.8%* 0. Demand outlook favourable. and the growth rate is expected to sustain. the commodity nature of the product. Havells not planning to focus on this segment Havells‘ volume sales of cables and wires reported a CAGR of 12% from 2005-06 to 2009-10. Profit growth in Havells‘ cables and wires division is likely to remain muted as compared with that in its other divisions. and in electrical systems within premises.5% 16. During 2009-10 Havells‘ volumes in this segment increased by 25%. and are therefore less exposed to business cycles and margin pressures. given the generation and transmission and distribution (T&D) capacity proposed over th the XI Plan period. Cables and Wires: Key Drivers and Challenges Growth Drivers Large investments planned in power sector Foray into new segments in cables business Key Challenges Increasing copper prices.3% NA NA Installed Capacity ’000 km 1. ICRA Online’s estimates The size of the cables and wires industry was estimated at ~ Rs.9% 65. Also. which can exert pressure on margins Competition from larger players Revenues in cables and wires are largely driven by the prices of copper and aluminium – which typically account for 72-75% of the total cost. Driven by the investments in the power sector and growth in real estate. given the large capex planned in the power sector. and accounted for 41% of its 2009-10 standalone sales. which are used mainly in power generation plants.000 crore would be cables and the rest wires. Havells operates primarily in the segment consisting of lowmedium voltage cables and domestic wires. The business however continues to be dependent on real estate activity.00 2. players like KEI and Polycab.0% 53. are better placed to capitalise on the growth in the HV cables business.
5:1 in India.000 MW (60%) 20.0% 957.ICRA Equity Research Service Havells India Limited Table 20: Demand Estimation for Power Cables Generation capacity planned over 2012-17 Expected achievement of the target Estimated backlog from XIth Five Year Plan Expected capex on generation at Rs. distribution lines witnessed a CAGR of 2. 400. Between 2000-01 and 2006-07. aided by a number of new governmental initiatives. as against the ratio of 0. We believe the Cable industry would continue to face pressure on margins because of rising raw material costs and competition from China.000 MW Rs.000 crore Rs. As China accounts for 67% of Asia‘s total cable consumption.000 crore 3. the expenditure on distribution can far exceed the intended target over the long term. 250.5% in volume terms.302 cable kilometres Rs. ICRA Online Research 100.000 MW 60. Till now however. 5 crore per MW Percentage spend on cables Demand for cables from new generation Capex on Distribution Percentage spend on cables Demand for distribution Demand for cables from distribution Source: Central Electricity Authority. but a higher growth rate would be contingent on T&D expenditure catching up with the global norm.0% Rs.000 crore 10. 12. China cable demand has been fairly robust. overcapacities or slowdown in demand in China could possibly result in Chinese cable companies diverting their products to India. and was up 15% in 2009-10 as against a demand growth of around 5% in India. 21 . Being a relatively commoditised product segment. the expenditure on T&D and generation has been equal in proportion. Hence. The growth is expected to be sustained over the medium term. 25. Chinese companies enjoy significant economies of scale.000 crore Globally.
2010 from 2. the EBITDA margins of Sylvania reported significant improvement to 5. the company posted a margin contraction of 141 basis points (y-o-y) because of input cost pressures. Going forward. However. Sylvania‘s margins are expected to improve further. The company has indicated that it would maintain its Dividend Per Share (DPS) going forward. Havells is expected to benefit from economies of scale. 2010-11. 3 per share in 2009-10. and Havells‘ entry into newer markets with the Sylvania brand. increasing consumer awareness. but also from the additional net profit growth of Sylvania. which would improve to around 11. Going forward.7% by 2012-13(E). the EBITDA margins are expected to improve from 5. cross-leveraging of its brand and extensive distribution network. Although Sylvania‘s overall debt is expected to remain high on account of increasing working capital requirements. 2010-11 from 0. Sylvania‘s profits would increase at a CAGR of 260% during 2011-13(E). going forward. Consolidated profit margins to improve from 2010-11 onwards on account of successful implementation of restructuring programmes at Sylvania.63% in the corresponding previous.1% in 2010-11(E) and thereafter gradually to 10% in 2012-13(E). given its approach of diversifying its offerings within consumer product categories. On a consolidated basis. its performance track record.ICRA Equity Research Service Havells India Limited Financial Outlook Sales volume growth expected to be healthy over the medium term Havells‘ operating income reported a healthy CAGR of 23% over the period 2005-06 to 2009-10. and a healthy increase in consumer demand following the rise in personal disposable incomes.7% in 2009-10 to 8. we would expect rapid improvement in the capital structure of the consolidated entity. however refinancing risk persists Erosion of Sylvania‘s net worth because of accumulated losses together with the larger debt taken for the purpose of acquisition and restructuring resulted in Havells‘ consolidated gearing increasing to 2. Havells‘ standalone operating profit margins (OPM) were at a five-year high of 12. Havells‘ revenue growth is expected to be driven by sustained demand for consumer durables. at the current market price.4% in 2010-11(E). While the standalone profits are expected to report a moderate CAGR of about 11% during 2010-13 (E). However. On a consolidated basis. and to 7. which till recently was a drag on the EPS. and declared a dividend of Rs. Given the decreasing proportion of revenues from the cables segment. supported by benign raw material prices. This apart. 22 .5% in 2010-11(E). Hence. maintaining its historical payout ratio of about 11%. we expect Havells‘ standalone revenues to report a CAGR of 14-15% between 2009-10 and 2012-13(E) and its consolidated revenues to grow at 11-12% during the same period. The inorganic growth by way of acquisition of Sylvania has contributed significantly to Havells‘ scale of operations. 2009. Sylvania‘s operating income accounted for 54% of Havells‘ total operating income in 2009-10. Havells has a consistent track record of paying dividend. launch of new products (such as electric water heaters). As Sylvania starts posting net profits from 2010-11(E) onwards. which should improve further to 7.86%. which appears feasible. we believe the company‘s stock should command a higher valuation than the stocks of similar players in electric appliances and switchgears. which are expected to be adequate for growth over the next three years. the dividend yield on Havells‘ stock is negligible at about 0. an improved net worth would allow the consolidated gearing to be at a comfortable level of less than one time by 2012-13. the impact of margin fluctuations on Havells‘ profitability is likely to decline over time. and the perceptible shift in preference for quality products. Robust EPS growth expected over medium term. With increase in capacity utilisation. largely in its cables division. Havells‘ distribution reach and established brand should help the company sustain its market share in most segments and fetch business in new ones. We expect Sylvania to report an EBITDA margin of 4. We expect Havells to report operating margins of 11.35%. which should reflect favourably in its operating margins. as Havells would benefit not only from domestic growth. Following the completion of restructuring programmes in September 2010. the company has surplus capacities across all segments. backed by the company‘s entry into newer segments. largely driven by Sylvania’s turnaround and healthy growth in ECD division We expect Havells‘ consolidated EPS to post a CAGR of 80% over the period 2009-10 to 2012-13(E). Capital structure to improve on a consolidated basis. adverse fluctuations in raw material prices and entry into new segments to put minor pressure on standalone margins in 2010-11 In 2009-10. backed by established brand and distribution network.66 times as on March 31.6% in 201213(E). considering the sharp increase in profits during 2010-11. In our opinion.00 times as on March 31. Overall. with the contribution from emerging markets increasing. in 9M.4% in 2011-12(E). becoming the key growth driver of consolidated EPS.3% in H1.
on the other hand. However.50% 15.12% 2011-12(E) 24.56% 30. Adjusting for the equity investment in Sylvania. with consolidated Debt/EBITDA falling below 2 times. Havells‘ standalone ROCE was significantly higher at 34. As of now.00 € Million (times) 1. the incremental funding requirements of Havells (on a standalone basis) are expected to be low.79% 32.50 1.28% Havells‘ Return on Equity (RoE) would also improve substantially from 13.4% in 2012-13(E) following Sylvania‘s turnaround.ICRA Equity Research Service Havells India Limited The debt coverage indicators of Havells are also expected to improve significantly from 2011-12(E) onwards.43% 31. Overall.400 1. Havells has adequate surplus capacities available to meet the expected sales. The company has limited capex requirements in the near future.600 1.50 10 0 2010-11(E) Cash accruals Source: ICRA Online’s estimates 2011-12(E) 2012-13(E) 1.00 3. Sylvania‘s debt obligations of around € 40million that are due for repayment in 2012-13 would need to be refinanced.36% 34.00 2.15% 26.28% in 2009-10 largely because the investment in Sylvania did not yield any returns till last year.71% in 2009-10 to 37.5% in 2009-10. and later set up a facility in case it is able to elicit a favourable market response.000 2.45% 2012-13(E) 24. Havells‘ expansion plans in the other segments.50 Figure 23: Sylvania’s Debt Repayments vs.14% 32. Table 21: Estimated RoCE for Havells—Standalone and Consolidated 2009-10 Standalone ROCE ROCE adjusted for Sylvania Investment Consolidated ROCE Source: ICRA Online’s estimates 2010-11(E) 23.) Capitalisation Indicators 1. given the limited capex and working capital requirements. The standalone Return on Capital Employed (RoCE) of the company stood at a moderate 15.57% 27. Figure 22: Movement in Havells’ (Consol. would be contingent on the growth that these segments achieve. 23 .200 Rs crore 800 600 400 200 0 2009-10 2010-11(E) 2011-12(E) Debt 2012-13(E) Gearing Net Worth Source: ICRA Online’s estimates 0.68% 31. For new products such as water heaters. other than a possible expansion of capacity in electric fans to meet increasing demand. Cash Accruals 60 50 40 30 20 Principal repayments Return ratios expected to improve considerably as investments in Sylvania start yielding returns Havells‘ return ratios have remained subdued during the past two years because of the substantial investments in Sylvania that are yet to yield returns. the company initially plans to test the market by outsourcing production.
for CFLs at Faridabad (Haryana). ICRA Online 24 . through the organic as well as inorganic route. Haryana .for Control Gear Products 2005: Set up fan manufacturing plant at Haridwar (Uttarakhand) 2007: Set up capacitor manufactur ing plant at Noida (UP) 1990: Set up a manufacturi ng plant at Sahibabad (UP). 3. switchgears.000 500 0 2578. ICRA Online PAT Figure 26: Major Greenfield Expansions undertaken by Havells since Incorporation 1987: Started manufacturing MCBs at Badli.000 1. for changeover switches 2004: Set up manufacturing plant for domestic switchgear at Baddi. and cables & wires.500 1.ICRA Equity Research Service Havells India Limited Company Profile Incorporated in 1971. Havells is a manufacturer of electrical consumer goods. ICRA Online Figure 25: Trend in Havells' Revenues and Profits Rs. electrical consumer durables (ECDs). Some details on the major manufacturing facilities that have been set up by the company since incorporation are summarised in Figure 26. Germany 1993: Set up manufacturing plant at Faridabad. Delhi.500 2.000 2. At present. in joint venture with Geyer. The company‘s operations can be broadly clubbed under four heads: lighting. Commercial & Industrial Applications Switchgears • Domestic Switchgears • Modular Switches • Industrial Switchgears • Motors • Capacitors ECDs • Fans (Ceiling and Pedestal) Cables & Wires • Low-tension Cables • Wires Source: Company.29 228. Each of the product categories is recognised as a separate vertical and is led by an independent head. and for fans at Noida (UP) 2006: Added CFL manufacturing unit at Haridwar (Uttarakhand) 2009: Set up second switchgear manufacturing unit at Baddi (Himachal Pradesh) Source: Company. Figure 24: Segment-wise Product Profile Lighting • CFLs • Luminaires for Domestic.16 Turnover Source: Company. it has 11 manufacturing locations across India. Crore Havells has grown at an annualised rate of around 40% over the past one decade.
99 238.064. Although the purchase was funded largely by debt. Table 23: Segment-wise Trend in Revenues Segment Switchgears Cables & Wires Lighting & Fixtures ECDs Others Total 2006-07 Rs.44 1. ICRA Online The Sylvania acquisition is the largest by Havells so far.71 % of total 25% 47% 13% 11% 4% 100% 2008-09 Rs. primarily on account of the increase in the revenue shares of the switchgears and ECD divisions that have registered a much higher CAGR during the last four years. which got eroded on account of losses Part of €80 million recourse debt 2. Cr 568. the segment‘s share declined from around 46% in 2006-07 to 42% in 2009-10.78 2. funded by equity infusion received from Warburg Pincus in 2007-08.05 2.00 8.87 777.341.00 Source: Company. Cr 428. 2010 85. and turned it into a 1983 profitably manufactu ring Energy Meters Company 1997 Acquired Electric Control & Switchb oards Acquired controlling stake in Duke Arnics Electronics (P) Limited and 2000 controlling interest in an industry major a Standard Electricals Ltd. ICRA Online’s estimates 25 .4 6.106. Havells made several acquisitions in its areas of operations to expand its capacities as well as to augment its distribution network and brand portfolio. ICRA Online’s estimates Segment Overview On a stand-alone basis.37 1.38 % of total 27% 47% 12% 12% 2% 100% 2009-10 Rs. Non-fund based exposure Additional working capital guaranteed by Havells TOTAL (Non-Fund-based) debt 5.593. MCCB of Crabtree 2007 Acquired lighting business of Frankfurt based Sylvania 2010 Acquir ed Standa rd Electric als Limited Source: Company.00 Remarks Includes €50 million infused initially at the time of acquisition. Cr 724.48 % of total 25% 46% 14% 10% 4% 100% 2007-08 Rs.88 2.02 83. the cables and wires segment accounts for a major proportion of Havells‘ total revenues.44 240.88 71. However.686. Recourse debt repaid Estimated interest paid TOTAL (Fund-based) 20.01 1. Table 22: Havells' exposure in Sylvania In €mn 1. Funds have been used for: Repayment of recourse debt Partial funding of restructuring plans Improvement in net worth.18 1. Havells has also extended financial support to the entity over the last three years (refer Table 22).58 280.02 % of total 28% 42% 14% 14% 1% 100% CAGR 19% 12% 16% 29% -20% Source: Company’s Annual Reports.48 36.29 289.46 276.34 362.88 374.92 54. Particulars Fund-based exposure Equity invested As on Dec 31.094. 3.ICRA Equity Research Service Havells India Limited Apart from the new manufacturing setups.245.40 113. 2001 Acquired business of Havells Industries Limited. Figure 27: Major Acquisitions by Havells over the Years Acquired Towers and Transform ers Ltd. Cr 623.73 169.00 5.
Table 25: Havells' Performance in 9M. the share of the lighting division in the total revenues of Havells on a consolidated basis is much higher at around 60% as compared with the 14% on a standalone basis. 2010-11 as compared to 9M. 2009-10 1773.4 211.4 242.6 224. The ECDs (or fans) segment has been the fastest growing segment for Havells (registering a CAGR of 29% over 2007-10).4 226. 2010-11 2129.4 9M. followed by ECDs with 28%. ICRA Online’s estimates Havells‘ financial performance during the first nine months of the current financial year as compared to corresponding previous is summarised in Table 25. lighting & fixtures with 19%.ICRA Equity Research Service Havells India Limited With the acquisition of Sylvania. the switchgears segment has the highest contribution margins of 36%.6 51. backed by rising sales volumes. In terms of profitability. 2009-10 Particulars Net Revenue EBITDA PBT Tax PAT 9M. Table 24: Segment-wise Trend in Contribution Margins Segment Switchgears Cables & Wires Lighting & Fixtures ECDs 2006-07 30% 12% 11% 15% 2007-08 31% 9% 13% 22% 2008-09 33% 6% 19% 21% 2009-10 36% 8% 19% 28% Source: Company Annual Reports.4 49 162.6 173 Change 20% 7% 6% 7% Source: Company’s Quarterly Reports 26 . and cables with 8%.
7% Decline on account of increase in outsourcing work for Sylvania 445 ECDs Revenue Contribution Contribution margin (%) Others Revenue 240. While the promoter group holds 61. 2010-11 9M.2 26.ICRA Equity Research Service Havells India Limited Havells‘ segment-wise performance and ICRA‘s estimates for 2010-11 are summarised in Table 26. Qimat Rai Gupta. who manage the operations independently under the broad guidance of the top management and the Board. 2009-10 Switchgears Revenue Contribution Contribution margin (%) Cables & Wires Revenue Contribution Contribution margin (%) 733.56% equity stake in the company. the company has an experienced management team.9% Remarks 2010-11(E) 765 892.0 28.2 190.3 36. Mr.6 59.2 88.2 19.4 17. the Chairman and Managing Director (CMD) of Havells. Table 26: Segment-wise Performance in 9M.1 51.7% 334.3% Decline on account of adverse movements in raw material prices 1. The disclosures by the company through its Annual Reports and Quarterly Results are adequate.5% 515. 27 . While the promoters—the CMD and Mr. 2010--11 562.3% 338.2 73.6 69.2 35.7 Source: Company’s Quarterly Reports. The accounting policies followed by Havells are in line with standard practices and there has been no material auditor-qualification in recent periods. Anil Gupta (the second generation)—are hands-on in the business.6 9.2 1.7 8. Each of its four business segments is headed by experienced professionals. ICRA Online’s estimates Governance and Management Structure Havells is managed by an 11-member Board.3 68.1% 463 25. is a first-generation entrepreneur.231 Lighting & Fixtures Revenue Contribution Contribution margin (%) 259. the rest is widely held and includes institutional investors. which includes six Independent Directors.7 202.9% 9M.
7 5.8 11.989. its ability to generate free cash flows.2 9. the historical price volatility exhibited by the stock.1 12.1 2011-12 E 6.6 Asian Paints (India)# 24.9 2010-11 2011-12 E E 18.7 15.6 8.8 3.4 14. The valuation premium that Havells commands over Finolex Cables can be attributed to latter‘s presence only in the cables business where valuations are lower because of the low profitability and earnings volatility in the sector.1 10. Crompton Greaves and TTK Prestige).6 2010-11 2011-12 E E 15.1 0.2 227. The valuation is also benchmarked against an appropriate peer set or index.9 12. ICRA Online’s estimates * ICRA estimates based on share price as on 11 March 2011 on NSE.9 25.7 2.4 0. 28 .7 4. # Bloomberg Consensus estimates as on 11 March 2011 For valuation.6 2. Table 28: Havells India Limited—Relative Valuations (vis-a-vis peer companies) Havells India Limited* Market Cap (Rs. The extent of overvaluation or undervaluation is adjusted for the relative volatility displayed by the stock.5 Crompton Greaves Limited# 16.4 3.9 Bajaj Electricals Limited# 2.1 12.4 22.Crompton Greaves.3 14.4 0.7 NA Price/ Earnings EV/ EBITDA Price / Sales Price / Book Value Price/ Cash Flow Source: Bloomberg.249.9 2. Asian Paints (which has similar demand drivers viz. besides its liquidity.1 14.1 10.2 17.) 4.0 8.2 NA 21.8 1959. the high valuations are partly driven by a jump in profits caused by robust growth in sales and fall in input costs in 2009-10 (net profits more than doubled). Asian Paints‘ premium valuations are partly explained by its strong brand name and market position.1 16.9 TTK Prestige Ltd# Finolex Cables Limited# 728.9 264.1 18.7 7.6 19.4 0.6 7. and its capacity to generate returns from the capital invested.5 4.8 47.4 0. various parameters are looked at including the company's earnings and growth prospects.7 2010-11 2011-12 E E 27.6 1.6 2. Havells‘ current valuations are at a discount to its closest peer .1 2010-11 2011-12 E E 27. we have compared Havells with other consumer durable companies (Bajaj Electricals.ICRA Equity Research Service Havells India Limited Valuation Grading In assessing a company's valuation. The opinion on a company's relative valuation is expressed using the following five-point scale as follows: Table 27: ICRA Equity Research Service—Valuation Grades Valuation Grade A B C D E Grade Implication Significantly undervalued Moderately undervalued Fairly valued Moderately overvalued Significantly overvalued While assessing a company's relative valuation.6 3. is also taken into account.28 348.3 1.9 3.3 2010-11 2011-12 E E 16.0 0.7 2010-11 E 7.8 5. For TTK Prestige. well-known brand and presence in the high-growth power systems business (although the segment posted weak results in Q3 2010-11).4 1. We believe Havells‘ valuations have been impacted by the significant loss reported by Sylvania till 2009-10.6 0.217.0 11.4 8.251. urbanisation and investments in housing) and Finolex Industries (cables and wires segment). Havells is currently trading at a slight premium to Bajaj Electricals on 2011-12 forward P/E basis. However.8 2529. The premium that Crompton Greaves enjoys can be explained by the company‘s large size.3 8.7 12.7 9.2 16.0 5.345. crore) CMP (Rs.8 12.
with Havells outperforming the CNX100 index until Mar ‘08. for €234.317.791. €80 million was funded by a recourse debt that was backed by a guarantee from Havells while the balance €120 million was funded by non-recourse debt. though it is quoting at a premium to the BSE Midcap Index.1 1.5 8.8 S&P CNX 100# 5. ICRA Online’s estimates Havells CNX100 Index Mar ’07–Mar ’08: Havells‘ acquired the lighting business of the Frankfurt-based Sylvania.5 million. the world‘s fourth largest player in the lighting industry.604. Havells (5-Yrs) 13.4 2010-11E 2011-12E 16.1 2010-11E 2011-12E 12.5 12. 2007-08 and 2008-09: Havells had to extend additional financial support to the subsidiary by way of equity infusion.7 11.3 7.7 0.07 - Source: Bloomberg.4 0.1 12.8 4.3 10.5 1.51 0.1 20.8 1.3 6.8 17.9 1.9 16.ICRA Equity Research Service Havells India Limited Table 29: Havells India Limited—Relative Valuations (vis-a-vis indices) Havells India Limited* Market Cap (Rs. The P/E of the company on estimated 2010-11 earnings is currently about 16.0 0. The initial impact of the acquisition on the stock price was positive.1 32. ICRA Online’s estimates * ICRA estimates based on share price as on 11 March 2011 on NSE.1 Historical Avg. Sylvania business reports losses 100 90 Restructuring measures undertaken at Sylvania to reduce operating leverage Jun 10: Sylvania turns around postrestructuring 500% % Change (Price/ Points) Apr ‘07: Acquisition of Sylvania’s lighting business 80 70 60 50 40 Volume (Mn) 29 400% Havells reports loss at consolidated level in 2008-09 300% 200% 30 20 10 100% 0% 0 Volume in Mn Source: Bloomberg. which is modest considering the estimated EPS growth of 36% and 19% in 2011-12(E) and 2012-13(E) respectively.15 8.7 8.426.1 5.1 11.5 BSE Midcap# 6.7 9.0 2010-11E 2011-12E 13.0 28.8 11.8 times.7 2010-11E 2011-12E 9.3 BSE Consumer Durables# 5.8 1.47 4.4 14. which was used for repayment of recourse debt and to meet cash flow mismatches during the slowdown beginning mid-2008. Till date. Havells‘ EBITDA is expected to grow at a robust CAGR of 21. Havells India Limited: Stock Performance over last three years Figure 28: Havells versus CNX 100 600% CY2008: Slowdown in world economy.) Price/Earnings EV/EBITDA Price /Sales Price /Book Value Price/Cash Flow 16.7 9.5% during 2011-13 period.0 0.8 2.8 346. . # Bloomberg Consensus estimates as on 11 March 2011 Havells‘ current valuations are at a discount to broader index– S&P CNX 100 and BSE Consumer Durables Index.7 7.3 8.6 2. Of the total funding requirement of €200 million.7 4.9 0.9 4. crore) CMP (Rs.
Havells‘ current valuations are at a discount to most of its domestic competitors (Crompton Greaves. 2010-11: Sylvania reports profits at the standalone levels for the first time since its acquisition by Havells. Considering the expected upside from Sylvania and increasing share of profits expected from the high-margin consumer electrical business. Mar ’09 Onwards: Havells identified high operating leverage as the key cause of losses and has undertaken various measures to reduce manpower at the European facilities. Asian Paints. Havells significantly underperformed the CNX100 index during this period. and TTK Prestige). as well as the S&P CNX 100 on 2011-12 PE basis.ICRA Equity Research Service Havells India Limited the company has invested €101.636 crore) in the subsidiary. ICRA has assigned a Valuation Grade of ‘B’ on a grading scale of ‗A to E‘ to Havells. 9M.4million (~Rs. The company is also trading at marginal discount to its own fiveyear-average historical multiples. as additional investments have not yielded returns till 2009-10. 30 . which indicates that the company is ‘moderately undervalued’ on a relative basis. This suppressed the RoE of Havells.
7x. BSE Mid-Cap Index: 1-Yr Fwd P/E Ratios 18 16 14 12 10 8 6 4 2 0 Havells India Ltd BSE Mid-Cap Index Source: Bloomberg. ICRA Online’s estimates In comparison to BSE Mid-Cap Index. against 9.ICRA Equity Research Service Havells India Limited Annexure I: Index Comparison CNX100 Index Figure 29: Havells vs. Havells 1-year Fwd P/E is at a premium of 32% at 12. This premium can be explained by the higher earnings growth expectations for Havells as compared to the broader BSE Mid-Cap Index constituents. ICRA Online’s estimates We have compared the performance of Havells‘ stock with the CNX100 index since November 2005. CNX 100: Price Movements % change (Price/ Points) 500% 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% 17 16 Forward P/E Havells Source: Bloomberg. BSE Mid-Cap Index Figure 31: Havells vs. ICRA Online’s estimates Source: Bloomberg. and compared the forward P/E estimates of the stock and the index. While Havells has outperformed the index over the last five years. However. BSE Mid-Cap Index: Price Movements % Change (Price/ Points) 600% 500% 400% 300% 200% 100% 0% 1 Year Forward P/E Havells BSE Mid-Cap Index Figure 32: Havells vs. ICRA Online’s estimates Figure 30: Havells vs.3x. it is currently trading at a forward P/E of 12.3x for the index. 31 .3x. 10% discount in comparison to CNX100 which currently has a Forward P/E of 13. Havells can be expected to register a stronger earnings growth over the next three years. CNX 100: Forward P/E Ratios 15 14 13 12 11 10 CNX100 Index Havells India Ltd CNX100 Index Source: Bloomberg.
9 708.2 3.0 2.1 3.2 50.7 622.5 271.0 772.5 46.4 990.2 3.8 69.7 85.768.081.3 -160.4 165.5 - 2009-10A 5.2 52.314.0 5.3 30.9 2011-12E 1. Crore Assets Net Fixed Assets Capital Work-in-progress Total Net Fixed Assets Cash and Bank Balances Receivables Inventories Loans & Advances Other Current Assets Total Assets Liabilities Net Worth Total Debt Deferred Tax Liability Trade Creditors Other Current Liabilities and Provisions Total Liabilities 2008-09A 220.127.116.11 623.5 1.5 3.0 350.8 1.1 22. of shares* (Cr.282.768.342.1 27.5 799. ICRA Online’s estimates 32 .046.7 249.9 146.5 20.2 10.136.2 0.4 117.6 120.2 824.282.2 827.1 698.3 Source: Company’s Annual Reports.2 27.928.3 628.8 -9.9 35.368.241.6 -198.462.9 2009-10A 1.0 790.227.6 12.3 1.431.1 82. ICRA Online’s estimates * Adjusted Annexure III: Havells (Consolidated)–Balance Sheet Estimates Table 31: Key Financial Indicators – Balance Sheet Estimates (Consolidated) Amounts in Rs.1 247.09 2012-13E 7.7 1.7 433.169.529.5 2.9 1.0 566.3 2012-13E 1.4 26.1 57.0 3.058.0 2010-11E 1.1 257.7 -117.2 35.7 27.7 61.2 420.4 83.046.5 2.081.9 400.275.8 81.8 108.0 0.9 4.76 Source: Company’s Annual Reports.529.6 33.5 189.2 1.014.1 817.9 12.2 12.0 352.7 120.477.9 541.0 612.5 0.6 1.0 1.0 863.8 3.392.8 1.4 471.5 3.74 2010-11E 5.1 88.0 730.5 3.2 479.023.0 155.242.3 27.6 80.8 12.6 1. Crore Operating Income EBITDA Depreciation EBIT Interest Expenses Other Income Extraordinary Items PBT PAT No.0 1.316.22 2011-12E 6.2 12.5 28.208.2 80.9 -1.3 757.6 1.7 838.2 148.4 938.2 123.5 2.) DPS EPS CEPS 2008-09A 5.006.0 12.9 3.288.6 106.9 930.450.5 33.7 40.8 1.6 649.ICRA Equity Research Service Havells India Limited Annexure II: Havells (Consolidated)–P&L Estimates Table 30: Key Financial Indicators – P&L Estimates (Consolidated) Rs.4 8.7 90.9 87.3 614.2 40.3 794.4 1.0 3.4 75.0 1.066.2 146.0 162.5 311.5 4.
2 2.9 -156.7% 15.0 23.7% 4.0 -112.2 83.7 0.ICRA Equity Research Service Havells India Limited Annexure IV: Havells (Consolidated)–Cash Flow Estimates Table 32: Key Financial Indicators – Cash Flow Estimates (Consolidated) Rs.7 8.7 16.1 117.6% 5.2 247.3% 13.4 1.2 101.5% 28.7% 8.0% 37.1 45.0 0.5 -139.6 0.9 0.6 146.0% 8.8% 14.4 0.1 0.5 -13.0 123.6 170.8 0.4 0.5 2012-13E 566.0 2011-12E 471.0 88.2 146.9 247.8 -83.5 16.6% 8.6 0.6% 19.3 3.7 3.7 -137.3 0.2% 5.0 34.4% 31.3 79.7 386.2 9.7 12.6 10.0 47.9 3.0 2.2 0.1% 257.2 123.0 -37. ICRA Online’s estimates Annexure V: Havells (Consolidated)–Key Financial Ratios Table 33: Key Financial Ratios (Consolidated) 2008-09A Profitability Indicators Sales Growth EBITDA Growth EPS Growth Cash EPS Growth EBITDA Margin EBIT Margin PAT margin RoE ROCE Liquidity Ratios Debtor Days Inventory Days Net Working Capital/ Sales Capitalization Ratios Total Debt/ Equity Interest Coverage Total Debt/ EBITDA Valuation Ratios Price/ Sales Price/ Earnings Price/ Book Value EV/ EBITDA 9.5 2.3% 2010-11E 9.7 -307.3 148.5 137.0 -11.9% - 49.5 32.4 0.7 241.9 90.1% 2011-12E 9.6 3.4% 5.1 92.1 2010-11E 350.8% 6.0 119.6% 30.4 148.0% 36.4 71.6 97.4% 2012-13E 9.2 369.2% 12.3 0.1 85.4% 16.8 93.2% 10.2 75.8 10.1 43.3 146.1 0.1 -0.4% 50.3 -155.6 242.3 7.7 Source: Company’s Annual Reports.6% 113.8 19.0 -137.1 7.4 1.5 146.8 6.8 7.0 0.2 -165.5 0.7 0.1% 54.6% 1.4 26.4 Source: Company’s Annual Reports.5 -112.5% -22.4 106.1 46.3% 4.1 117.6 12.3 4.1% 7.1 11.2% 2009-10A -0.0 -83.0 36.9 5.3 42.0 36.0% 3.7 333.5 0.5 240.9 -104.3 44. ICRA Online’s estimates 33 .2 81.2 0.5% -2.9% 9.9% 27.3 2009-10A 162.4 1.4% 45.0% 31.8 2. Crore PBT Taxes Paid Depreciation Change in Net Working Capital Cash Flow from Operating Activities Investments Capital Expenditure Cash Flow from Investing Activities Equity Raised/ (Buyback) Loans Raised/ (Repaid) Others (including Extra-ordinaries) Dividend Cash Flow from Financing Activities Opening Cash Balance Closing Cash Balance 2008-09A -117.2 0.8 1.7 -162.8 0.9 -38.5 -74.1 2.0 394.5 4.
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