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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
Launch of Sylvania products in India to enable Havells serve a wider market. increasing revenue contributions from the emerging markets including Latin America and Asia would drive Sylvania‘s profitability in the long term. but distribution would be a challenge The size of the market for luminaires and special lamps. While bulk of the improvement in Sylvania‘s profits during the current year are attributable to cost savings from restructuring programmes. enabling it to command a price premium in several products. Sylvania is looking at increasing its exposure in fast growing developing markets such as India. in line with other global majors such as Philips and Osram. the likely focus areas for Sylvania in India.ICRA Equity Research Service Havells India Limited years. was an estimated Rs.5 million. the scope for the brand‘s growth in India appears significant. This in turn kept Havells‘ consolidated earnings per share (EPS) depressed during the two years ended March 2010. 4 . Figure 5: Havells’ Brands in India Brand Segment/ Products Lighting. but the 9M. Switchgears. Sylvania will be positioning its products to access the institutional clients – thereby mitigating the risk of cannibalisation of Havells‘ existing products. 2010-11 results of Sylvania indicate that the subsidiary would make a nominal net profit of about €1million in 2010-11 itself. 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%. ECDs. Considering Sylvania‘s track record of operations and the growth potential of the Indian lighting industry. the company had expected to break even at the net profit level in 2011-12. Havells would however need to establish a separate distribution channel for Sylvania products as its current network is targeted primarily at retail customers. Initially. accounting for almost 30% of India‘s total lighting market that year. With Sylvania turning around [EBITDA positive in Q4. We expect Sylvania‘s products to achieve a turnover of around Rs. it may take some time for growth in Sylvania‘s products to pick up in India. With its wider product range and access to the latest technologies such as of light emitting diodes (LEDs). Havells initiated a restructuring exercise aimed at reducing fixed cost base at Sylvania that is expected to result in annual savings of €33.100 crore in 2009. 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. 2009-10 and net profits from 201011(E) onwards] Havells‘ consolidated EPS is expected to increase significantly over the medium term. 2. China. Figure 7: Movement in Net Profits 400 300 200 PAT (Rs. has strengthened Havells‘ brand portfolio. and Malaysia. Accordingly. a large part of which would be reflected in its EBITDA in 2010-11. 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.
ICRA Online’s estimates Capacity Utilization 5 .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. Company data.
6 . With personal disposable incomes increasing and market preference shifting towards more energy-efficient products. Havells. continuing power deficit. the high share of lighting in domestic power consumption (~20% in India). 16% Luminaires. 27% 20% Source: ELCOMA India. 24% CFLs. thus acting as key drivers of CFL demand. Government initiatives expected to spur CFL growth 1 Although CFLs are much more energy efficient than ICLs.ICRA Equity Research Service Havells India Limited Lighting Post-acquisition of Sylvania in 2007. 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. FTLs: Fluorescent Tube Lights The domestic lighting industry reported a CAGR of 12% to around Rs. despite its late entry into the segment (in 2003-04) and the presence of large incumbents such as Philips. 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). The objective is to subsidise the more expensive energy-efficient products. Others. 22% Others. which have a luminous efficiency of 5 to 20 lm/W and offer 750-1000 burning hours. particularly CFLs. Havells is involved in manufacturing CFLs and trading in luminaires.000 burning hours. The luminous efficiency of light emitting diodes (LEDs) is even higher at 100-130 lm/W and they offer around 50. 72 billion over the five years till 2009-10. 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. making them affordable for the target market. Lighting—Domestic Domestic lighting segment holds significant growth potential In the lighting segment. Sylvania‘s premium product-range and its well-established brand name. Osram and Bajaj.000 burning hours consume 75% less energy as compared with ICLs. Moreover. For instance. 25% Luminaires. successful 1 CFLs with a luminous efficiency of 50-95 lumens/Watt (lm/W) and offering 6. continuing power deficit and mounting pressure on natural resources are factors contributing to the shift in favour of more energy-efficient products. Although profitability in Sylvania‘ international operations was affected because of global recessionary conditions and overall operational inefficiencies in the last two financial years. domestic lighting segment of Havells continued to be profitable because of favourable market scenario in India and cost-efficient operations. 13% FTLs. The acquisition provided the company an access to international markets. 27% 2008-09 2007-08 2006-07 2005-06 ICLs. 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. 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. lighting has become the major segment for the company accounting for around 60% of its consolidated revenue base. 16% CFLs.000-12. 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. has successfully garnered a market share of 8% in the CFL segment and of around 10% in the luminaire segment. ICRA Online’s estimates Note: Above estimates are for calendar years ICLs: Incandescent Lamps. 10% FTLs. 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.
775 24% 74 Source: ELCOMA India. the unorganised sector used to account for almost 40% of the CFL market. 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. 2009 onwards.213 26% 2. 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). we have not factored in any incremental sales that may come from that scheme.990 42% 1. The scheme aims to replace 40 crore ICLs in India with CFLs Status Although 118. with the growth moderating to 28. Introduction of similar programmes in India could be a strong demand driver for CFLs. While till around two years back. the CFL industry is likely to enjoy strong demand prospects.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.101 26% 3. four years) in value terms has been relatively low at 28% because of declining realisations. thus attracting demand from price-sensitive and rural households.162 40% 83 2008-09 1. efforts in some developed nations are directed at mandatory replacement of all ICLs with more energy-efficient products. The growth (CAGR. Madhya Pradesh. In India. consumer preference has moved towards products with better quality parameters (such as power factor. Industry volumes for CFLs reported a CAGR of 40% during the last four years. in terms of households only 53% of the target has been achieved. 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.036 26% 75 2012-13(E) 5.499 villages (95%) have already been electrified. 14 companies have acquired licences to manufacture CFLs with >0.550 28% 1. Chhattisgarh and Orissa Source: Ministry of Power. considering the currently low penetration levels. Table 5: Estimation of Potential CFL Market for Havells 2007-08 Industry Sales Growth Total Sales Growth Realisation per CFL Lakh pieces % Rs. and guaranteed hours) 7 . 1.1% in 200910 partly on account of the higher base effect and partly because of the slowdown in the real estate sector.510 30% 76 2009-10 2.15 per piece to households in the country. Punjab.048 26% 3. Havells’ strategy to counter warranty claims to temper market share growth The CFL market in India is intensely competitive. While sustaining a high growth rate could be increasingly difficult on a growing base. According to ELCOMA. Accordingly we expect the CFL market to report a CAGR of 26% over the next five years. the potential replacement demand. ICRA Online’s estimates Considering the slow implementation of BLY and the uncertainty over Havells‘ participation in the same. featuring around 20 organised. 3-9 per piece.000 unelectrified villages and giving access to 7. given that ICLs account for roughly 65-70% of the total annual sales of lighting products in India (in terms of volumes). and the additional demand likely from increased residential and commercial/retail construction activities over the next few years. Balance cost to be recovered by registering the project under CDM.400 40% 1. which points to significant demand potential over the next few years Implemented/initiated in Himachal Pradesh.and several unorganised-sector players.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. Intensely competitive industry.900 26% 75 2010-11(E) 3. Kerala.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 1.410 27% 75 2011-12(E) 4. Crore % Rs.
410 8. Havells also has a presence in luminaires largely through trading. Given that warranty related malpractices still exist. which are largely targeted at institutional clients.5% over 2010-11(E) to 2012-13(E). 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.000 crore market. Subsequently. To rectify the situation. ICRA Online’s estimates Environmental threat posed by mercury use in CFLs. we expect its market share to stabilise at around 8. the lack of participation from all companies. Although there have been instances of companies withdrawing warranties in the past.162 10% 2008-09 1. besides the availability of cheaper alternatives from the unorganised sector. and strong brand presence. efforts are being made across the world to bring down the cost of solid-state lighting products or LEDs. Havells on the other hand will continue with its own product range. which was 12. Havells‘ market share reported improvement in 2009-10.5 crore in 2008-09. the company withdrew its products from certain States where malpractices were rampant.ICRA Equity Research Service Havells India Limited Going forward. developed nations on the other hand have regulations restricting such content to 1 mg per bulb. Significant scope of growth in luminaire segment Apart from CFLs. its acquisition of Sylvania provides it with access to a much wider product range including fluorescent lamps. Because of intense competitive pressures from incumbent players such as Philips and Bajaj.036 8. Assuming a 20% shift in market share from the unorganised to the organised sector over three to five years. 2. Sylvania‘s operations in India will be focused solely on institutional customers and its products will be routed through an entirely different distribution channel. it was able to establish a strong presence and the brand is still recognised in the industry. access to Sylvania’s technology for advanced products may help maintain market share Although critical given their importance in saving electricity. In 2007-08.62 crore. increasing affordability of solid-state lighting products may affect CFL demand. 2 Warranties are not offered on ICLs and FTLs because of their lower cost and lower guaranteed efficiency 8 . it has also helped protect profitability margins. 13. This has been a major concern for CFL makers in India because market malpractices have led to significant claims for returns. given their extensive distribution network. the company‘s market share declined to 6% in 2008-09 from 10% in 2007-08. crore % 2007-08 1. a major concern for the industry.5% Source: ELCOMA India. which was 1. including airports and stadiums.9% of its total CFL sales that year. cost-efficient operations.86 crore.5% 2012-13(E) 3. Given the environmental concerns. 2.5% 2011-12(E) 3. which largely serves domestic and retail customers. While this has adversely impacted sales and market share during the last two years. CFLs face environment related challenges because of the use of mercury in their manufacturing. Although Havells has a single-product offering in the lighting segment (on a stand-alone basis) and a limited presence in LEDs (trading operations). the top five players (including Havells) would gain 2. Havells however is following a cautious approach to contain warranty claims. CFL manufacturers provide a product warranty varying from six months to one year from the date of 2 purchase . Havells currently ranks fourth in terms of market position with a share of 10% in a Rs.775 8. Considering Havells‘ conservative approach. Havells‘ competitive positioning in the luminaire segment is expected to improve further with the launch of Sylvania products. retail and commercial construction in India. which are considered significantly superior in terms of energy efficiency and environment friendliness. given that Sylvania was earlier operational in India through a joint venture named Sylvania Laxman Limited. 84. To ensure that the launch does not lead to cannibalisation of revenues. Consequently. Considering the strong prospects for residential. with operations in other States stabilising.8% to 3. adversely affected sales.2% in market share.7% of its CFL sales that year.900 8% 2010-11(E) 2. 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. Havells is now following a conservative strategy of restricting its presence to a few key markets. the luminaire segment is expected to report a healthy growth rate of around 15% per annum over 2010-11(E) to 2012-13(E). Havells received claims for Rs. As is the industry norm. prompting the reintroduction of warranties. 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).510 6% 2009-10 1. and this led to a 30% decline in its sales to Rs. Table 6: Movement in Havells' Market Share in CFL Segment Units Industry Size Market Share Rs. Its warranty claims declined significantly in 2009-10 to Rs. high-intensity discharge (HID) lamps and various special products for institutional clients. The launch of Sylvania products would also benefit from a high brand recall. Although the joint venture ended in 1993.
Havells got access to brand rights of Sylvania worldwide with the exception of the USA. 1273. with smaller and regional players holding around 80% of the market. Table 8: Future Funding Support to Sylvania In € mn 1. Havells also extended additional financial support to Sylvania via equity infusion.00 1.60 5. Osram (Siemens). as the additional investments have not yielded returns till 2009-10. The cost included €34. 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. we estimate Havells‘ incremental financial exposure in Sylvania to be lower at around €16 million. 2.0 million Remarks ~ Rs. and Sylvania. Overall. Canada. €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. access to latest technologies. 2007. 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. and high brand recall value. Globally. Based out of Frankfurt.ICRA Equity Research Service Havells India Limited Lighting—International (Sylvania) Leveraged buyout. Havells acquired the lighting business of SLI Sylvania in April 2007 for €234. the acquisition price that Havells paid appears steep. given its strong product portfolio. 19% of Osram.12 crore at €-INR rate prevalent as on April 30. Havells funded the acquisition cost of Sylvania by taking fresh debt in the latter‘s books. which in turn was used for repayment of recourse debt and to meet cash flow mismatches. Lumiance and Linolite. Marlin. 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. modest funding support expected. Sylvania holds a 2% share of the luminaires market in countries where it operates.0 million €80. In contrast to the lamps industry. Till date. 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. which is expected to report a CAGR of 710% over the next 10 years. Although Sylvania‘s market share is relatively low at around 5% as compared with 29% of Philips.5 million €200. featuring a few large players including Philips. given that Sylvania‘s key markets went into a slowdown post-acquisition. Mexico. the lamps industry is highly consolidated. As against 7% of Philips. especially in hindsight.60 Source: Company Prospects favourable for Sylvania. Havells has invested €114 million in the subsidiary. Australia and New Zealand where the brand rights are owned by Osram and some other players. 9 .5 million of pension liabilities that were not to be funded Debt had recourse to Havells in the event of default.0 million €120. GE. the luminaires industry is highly fragmented. and 9% of GE. Following this acquisition. This has depressed Havells‘ return on equity (RoE). Out of the amount.00 16.5 million. Going forward. 3. only €10.0 million was pending as on December 31. Sylvania is the world‘s fourth largest player in the lighting industry and owns reputed brands: Sylvania. going forward To enter international markets. These players together hold around 65% of the total market for lamps. Out of the total funding requirement of €200 million. Concord. 2010 During the last three years.
5 144. 7% GE. Philips and Osram also undertook restructuring.7 11. This together with high fixed costs led to several companies reporting operating losses during that period. a fallout of which was a significant decline in the revenues of companies across the lighting industry. 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).5 19.4 279. 2% Zumtobel. Sylvania had been focusing primarily on mature markets in Europe. 29% Others.6 165.9 Source: ICRA Online’s estimates 10 .4 - 2010-11 (E) 470.1 304. slowdown impact similar as that on peers After Havells acquired Sylvania in April 2007.6 159. Figure 11: Quarterly Movement in Revenues of Sylvania & Competition Figure 12: Quarterly Movement in Margins of Sylvania & Competition Source: Quarterly reports of companies. With plans to launch operations in Eastern Europe. the world economy suffered one of the worst recessions in decades.9 -1. Global economic slowdown along with high fixed costs adveresely affected profitability during last three years. 2% Phillips. ICRA Online’s estimates Restructuring packages primarily aimed at correcting high operating leverage. 5% GE. Middle East.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. 38% Osram. To correct this. company‘s revenue growth is expected to recover in the next three years.2 2009-10(A) 438. which meant the company‘s margins started recovering only from Q4. 2009-10. African and Asian markets.8 158.4 221.6 21.0 7. 9% Source: Company Others. 19% Sylvania. which subsequently allowed profit margins to recover to the 2008 levels in CY2010. ICRA Online’s estimates Source: Quarterly reports of companies. 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) 508.2 209. 11% Sylvania.6 287. Like Sylvania. 78% Source: Company Note: The market share is estimated for markets where Sylvania is present Till now. 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).
8^ -69. This resulted in Sylvania reporting an operating loss of €1.ICRA Equity Research Service Havells India Limited 2009) and Project Prakram (Sep 2009-Sep 2010).3% 11. 2007-08 514 27.0 65.4 -0.1% 3.5 2.5 5. the company‘s profitability continued to decline because of a sharp fall in sales. which also involved closure of certain production units. The cost consisted mainly of severance payments made on account of reduction in manpower at the European facilities. The two programmes were primarily aimed at rationalising the company‘s 3 cost structure .5 months €17.4 -30.6 -47. 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 €12.0 Source: Company.2 -2.3 mn €17.6 5.0 2009-10 438 -14% -1. ICRA Online’s estimates ^ Note: As per reported numbers.6 67.4% 9.3 2008-09 509 -1% 11.5 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. resulted in a decline in its net sales to €438 million in 2009-10 from €514 million in 2007-08.0 57.2 13.8 11.9 -21.4 million in 2009-10.8% -25.6% -16. 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. Although the fixed costs had been pruned to an extent with the implementation of Project Phoenix in 2009-10.5 mn Funding Source: Company Adverse market conditions together with continued focus of Sylvania on internal restructuring programmes.6 1.0 3.5 mn ~ 8.3% 8.7 -13.1 -4. 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.8 13. 11 .8 -43.
6 -1% 0.8 4. 2008. which account for 5% of its total sales.8 -5.8 -8% 0.1 3.4 Q2.5 0. Sylvania‘s operating profitability started improving in 2009-10.ICRA Equity Research Service Havells India Limited Following successful implementation of Project Phoenix and Project Prakram and with the market reviving. 2009-10. Philips and Sylvania‘s share of revenues from emerging markets has increased to ~40% now from around 30% in the quarter ended March 2009.4 25.1 4.7% 2.9 1. The established global players in the lighting industry are increasingly focusing on emerging markets for future growth. growth in the region has been healthy. 70% 40% 40% 20% Emerging markets.0 2.4% 3.3 -11.9 -11. has led to an increase in LATAM‘s share in the total sales to 31% in Q2. Based on growth trends observed.7% 2.7% 2.7 -0.5% 2.4 Q1.5 4.4 -33.1 2. 30% Emerging markets.6 1. another developing region.8 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. In 9M. Sales from Latin America (LATAM).1 -33.6 Q2.5 3. although part of it can be attributed to favourable currency movements. profitability vulnerable to adverse movements in foreign exchange With Sylvania planning to launch operations in other emerging markets such as Malaysia and China.1 3. 28% Emerging markets.3 -11. 2009-10 onwards.2 0. 2010-11 from 26% in Q1.2 3.2 1. have grown consistently since Q2.4% 2.4 5.6^ 5.7 9% 5. Already.1 0% 4.2 -1 -10.3 0.6 0. 64% 100% 80% Developed Developed markets. 64% 60%markets. 36% 20% Emerging markets. 2010-11.3 6% 6. the share is expected to increase further over 2010-11(E) to 201213(E).4 18.7 1.6 -22.1 0.8 1.8 -8.6% 2. 2010-11 117.3 Q3.2 5.1 -8.9 Q4.4 0.35 million. 2009-10 106.9 -6% 1.1 0.9 1. 12 .5 0.2 2.4 -5.9 6.0 2. the launch of operations in emerging markets also contributed to the improvement in Sylvania‘s margins from Q4. Sylvania‘s sales in Asian markets increased by 69% in 9M.5 1. 2009-10 107. 2009-10.5 0. 2010-11 125.7 Q1.09 116. 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. sales from the LATAM region reported an increase of 35% over the corresponding previous. 2009-10 114.0 -0.7 9% -5.2 -9% 2.3% 2. growth in its top line is expected to be higher in the next few quarters.2 Q3.1 2.3 Gradual improvement in profitability Source: Company’s quarterly reports ^ Normalised EBITDA excludes tax payment made in Brazil for previous years for € 2.2 -13. 72% Developed markets.4 million and treated as other income/ expenditure Apart from the successful completion of the restructuring programmes and the sales revival in key regions. Figure 13: Market-wise Revenue Break-up for Sylvania Figure 14: Market-wise Revenue Break-up for Philips 100% 80% Developed 60%markets.6 -22.1 -4. 2010-11 over the corresponding previous to €11. 2009-10 105.6 0.4 -4. While Sylvania as of now has a limited presence in Asian markets. which together with the decline in sales from Europe.1 -3. 2010-11 108.0 0.
89 -13% 3. 2010-11 65. Further.69 11% Q4.59 115.27 106.75 3.58 109. 2009-10 70. Further. 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. the company‘s earnings would continue to be susceptible to the forex risk.88 -2% -1.88 -1% Q3.63 -9% 24.75 108. we expect Sylvania to report an EBITDA of ~ €21 million (EBITDA margin ~4. 2010-11 64.21 -4% Q2.04 40% -1.91 6% Source: Company’s Quarterly Reports Going by the current trends. given Sylvania‘s increasing exposure to emerging markets – both in terms of outsourcing of manufacturing as well as sales.65 12% 5.95 4% 2.48 -7% 25. The EBITDA margin.83 -1% 29.46 -9% Q1. however.85 5% Q3. is exposed to the risk of adverse fluctuations in foreign exchange (forex).62 -3% -1.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. 2009-10 76.74 -1. the company is focusing at localising sales and procurements in key markets such as LATAM.6 97.93 -19% 1. 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). 2008-09 77.88 7% 0.47 35% 0.33 18% 27. thereby providing benefit of natural hedge. taking into account the cost savings from the restructuring programmes.35 109.5%) in 2010-11. 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. 13 . given the increasing percentage of sales in new geographies. 2010-11 74. Although this reduces the adverse impact of foreign currency movements to an extent.10 13% 35. To reduce this risk.04 5% 4.53 6% 2. 2009-10 65.28 -10% Q2.59 1% 37. 2009-10 77.56 15% 5.95 -15% 32.74 95.60 -5% 04.82 104.72 28.62 -21% 1. Thus. 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.01 2% Q1.
Havells has a wider distribution reach than its close competitors. The domestic/retail segment is a small portion of the total switchgear market (about 15%). where Havells is able to price its products at par with international brands such as Legrand and Schneider Electric. the total requirement of urban housing during the XI lakh. ABB and Siemens. 25 lakh and more—the target segment for switchgears and switches. 25% The switchgears industry can be broadly classified in two segments: domestic/ commercial (low voltage) and industrial switchgears (medium and high voltage). (Rs. 7.790 cr) Source: Company. starters and panels (Rs. However. 2.15-25 Rs. Although a large proportion of this shortage involves low-end housing.000 cr) Control gears. ICRA Online’s estimates 2009-10 from 15% in 2005-06. Rs. 22% Source: Industry research 4 lakh. 5. Schneider and Anchor Roma. Figure 15: LV Switchgears Market in India Switchgears: Key Drivers and Challenges Growth Drivers Real estate activities in metros. 50 Housing .130 cr) Modular Switches (Rs. 7. Changeovers etc. having increased its market share to about 20% in Source: Company data. Havells is making efforts to expand its presence in the Rs. Future growth expected to be driven by construction of new houses and increasing disposable incomes Figure 16: Price. modular switches.200cr) ACBs. Its market share in modular switches has also improved significantly to 15% from just 5% in 2005-06. around 40% of the total housing units would be worth Rs. The company currently faces limited competition in modular switches. According to the Ministry of Urban < Rs. 1.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. 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. Switchgears and Electrical Switches Domestic/ Commercial (Rs.200 cr) LV Industrial (Rs. Moreover. 5 Report of the Technical Group constituted by the Ministry of Urban Housing 14 . 25-50 lakh. and low-voltage industrial switchgears . given presence of large players such as L&T.130 crore low-voltage industrial products category. which enables it to capitalise on the growth happening in Tier-II and Tier-III cities. the potential market considered is just the low-voltage segment because of its product focus.340 cr) Switchgear (Rs. 37% lakh. helped by Crabtree‘s premium image and easy availability. Havells is the market leader in the Rs 1.ICRA Equity Research Service Havells India Limited Switchgears Most profitable segment for company In the switchgears segment.200 crore domestic switchgears market. 1.15 5 th > Rs. Although sales from industrial switchgears are limited (~30% of total segment sales) at present. 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. but Havells enjoys robust profit margins here because of its leadership position and targeted customer segment. Havells‘ product range includes domestic 4 switchgears. which would sustain demand for domestic switchgear and switches.65 crore dwelling units (combining the housing shortage at the beginning of the Plan period). 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. for Havells. 16% Plan period (2007-2012) works out to 2. as the only premium brands available are Legrand. Switch fuse unit. MCCBs. 1.
and a repetition of the same cannot be ruled out in case GDP growth falters. but benefits would accrue only over long term Havells.150 15% 16% 2011-12(E) 1. we believe switchgears would be affordable for a large part of the targeted population. 15 .380 15% 22% 1. as the expenditure on miniature circuit breakers (MCBs) generally accounts for less than 0.323 15% 16% 2012-13(E) 1. only 46% of this is accounted for by modular switches. Given strong competition from players like L&T. The company is now building up its product portfolio to re-enter this segment. Crore % % 1. plans to expand its product portfolio so as to be able to address the larger market. consisting of industrial switchgears.521 15% 16% Source: Company. ICRA Online’s estimates Company plans to diversify into high-growth industrial switchgears.1% of the total cost of a house. 2. which currently caters to only a small part of the total switchgears market.000 2010-11(E) 1. However. given the rising disposable incomes.200 22% 1. Although Havells started off as an industrial switchgear company. we expect the growth to be faster for modular switches. Nevertheless.ICRA Equity Research Service Havells India Limited The domestic switchgear segment is also expected to benefit from rising consumer awareness. 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. and just around 10% of households use them because of their higher prices. Havells is currently a marginal player in this segment as compared with established companies like Larsen and Toubro (L&T) and Siemens. Havells‘ revenue growth in this segment slowed down to 7% in 2008-09 because of the economic slowdown. we expect the growth in the industrial switchgears segment to be modest in the next two to three years.200 crore. the expenditure on domestic switchgear being a one-time outlay (about Rs. While the electrical switches market is expected to grow at an annual rate of 9-11% over the next five years.825 15% 22% 1. the high dependence of switchgears and switches on real estate growth.587 15% 22% 1. exposes them to the cyclicality inherent in the sector. it reduced the focus on this business over the years to target the high potential consumer electrical market.000 for a three bedroom-hall-kitchen house). Crore % % Rs. 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. especially premium housing. Moreover. but significantly reduces the risk of damage from short circuits and electric current leakages. 2. While the size of the domestic market for electrical switches is estimated at Rs.
the company has managed to place itself among the top five players in the industry that control about 80% of the market. the ownership of fans is closely linked to power availability. 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 revenues of the key players in the electric fans industry increased by a substantial 30% or so. with Havells controlling around 12% of the market. Havells has been able to overtake established. but see the industry as continuing to benefit from two additional upsides: increasing availability of power and shorter lifespan of newer generation fans. Also. Beyond 2010-11.400 Rs. In raising its market share at a brisk pace over the period 2006-10. Although the key beneficiaries of this trend would be companies that manufacture lower-priced fans. Havells was also able to capitalise on one of the fastest growth periods of the domestic electric fans industry. a ceiling fan is almost a necessity in the hotter regions of India. The growth was largely driven by the real estate boom and the increase in disposable incomes. Thereafter. Crore 2. 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. 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). fan ownership ranks higher than ownership of manual water pumps and steel cupboards among rural households.800 2.200 800 400 0 35% Annual Growth rate 30% 25% 20% 15% 10% 5% 0% Source: CMIE. but single-product companies.600 1. Havells‘ also supported its strategy by aggressive advertising. the uptrend is already reflecting in the half-yearly numbers of the major fan manufacturers like Havells and Crompton Greaves. which indicates that ~79-85% of customers are willing to travel only up to 2km for the intended purchase.000 1. Rajasthan and Bihar. One of the fastest growing segments for Havells. the growth can be attributed to rising incomes and quality consciousness of Indian consumers. Although Punjab and Haryana are well-penetrated. on the strength of its extensive distribution network. where higher incomes have not yet fully translated into fan purchases because of power shortages. as Havells‘ fans cater to the premium segment. In rural India. we estimate a growth rate of 18-20% over the next two years. 16 . as replacement demand for fans has historically been limited. Now it has two. the Electrical Consumer Durables (ECD) division of Havells had just one product—electric fans. 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 electric fan industry is now worth about Rs 3000 crore. Figure 17: Growth in Indian Electric Fan Industry 2. and a unique energy saving proposition offered in the form of 50W fans. Havells can benefit from increased power supply and rising rural incomes in Uttar Pradesh. 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. with the recent launch of electric water heaters. 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). especially in States where disposable incomes are high. we expect Havells to capture the affluent households in these regions. but the spike may partly be attributed to pent-up demand.ICRA Equity Research Service Havells India Limited Electrical Consumer Durables Till 2009-10. while the product was offered at prices almost similar to that of the market leader (Crompton Greaves). which reported a CAGR of 18% between 2003-04 and 2009-10E. we expect the growth rate to moderate to less than 15% because of the base effect. As per the findings of a survey conducted by Max New York Life and NCAER. Moreover. During 2009-10.
068 988 933 914 945 2009-10 1.0 258.7 2009-10 357.5 62. which makes it the second-most profitable segment for the company. which limited the impact of the benefit on the EPS.004 943 903 927 Note: Orient Paper exported fans worth Rs.3 357. 48 crore out of the revenues mentioned.0 Revenue Growth 2008-09 14% 20% 13% 21% -16% -20% 2009-10 30% 22% 37% 28% 36% 32% Incremental Revenues 2009-10 82.3 Realisation 2008-09 1. 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). has a tie-up with China-based Midea (world‘s largest fan company).4 296. However. For calculating incremental revenues in 2009-10. with ample spare capacity to service volume growth of 15-20% over the medium term. adjustment for export sales has been made Source: Companies’ Annual Reports.8 88.229 1.2 137.6 764. Incremental growth in market share is not expected to be substantial because of intense competition from Crompton Greaves and Bajaj Electricals.202 1. 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. The company‘s facility at Haridwar (Uttarakhand) is the largest integrated fan manufacturing factory in India. Havells however does benefit from having the third largest fan manufacturing capacity in India. 1.000 each. With the size of the Indian middle class growing. Havells only sells fans priced above Rs.0 195. even against the products of other established players like Crompton Greaves and Bajaj Electricals.2 379.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. 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.5 495. ECD division displays strong profitability. resulting in a lower share in the domestic market. Moreover. which would help it introduce newer models. which allows it to have a cost advantage over other players that outsource production to other smaller units in India. which shields it from the intense competition from cheaper Chinese products in the lower end of the market.3 384. 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 .3 598. Table 16: Electrical Fans—Peer Comparison Amounts in Rs.176 1. 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.5 291. the division‘s overall contribution to the company‘s 2009-10 standalone revenues was just around 15% (about 6. Crore Company Havells Crompton Greaves Usha International Bajaj Electricals Orient Paper & Industries Khaitan Electricals Revenue 2008-09 275. we expect the share of high-end fans to increase gradually.6% on a consolidated basis).3 166. The latter.8 82. for instance.
4% 16. 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. Havells‘ water heaters are catering to the premium segment.7% 12. 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). The various listed players present in the electric appliances industry have reported strong profit growth during the past five years. We expect additional revenues of Rs. which is achievable considering the unique product attributes offered by the company. the electric appliances industry is already cluttered. Even retail chain owners like the Future Group have launched their in-house brands (Onkyo).7% 9. it is expected to be the key contributor to Havells‘ future EBITDA growth (on a standalone basis). Nonetheless.8% 3.4% 11.ICRA Equity Research Service Havells India Limited because of new product launches while sustaining EBITDA margins close to 22%.7 crore households own water heaters as of 2009-10).8% 14. which should sustain growth of the ECD division. 50-60 crore from water heaters from next year onwards. Usha and Inalsa. featuring both premium MNC brands like Philips. which allows it to earn adequate profits on the same. we expect the electric appliances industry to grow at a healthy pace over the medium term. over the medium term. Moreover.6% 9. the margins would be supported by increasing capacity utilisation and scale benefits when new products are introduced using a common distribution network.4% 10.5% 6. which are priced much lower. currently low penetration levels (only about 1. Havells has targeted the premium consumer segment and expects to capture a market share of 5% by 2011-12. 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 13.2% % 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. such as prevention of electric shocks and highest power efficiency (five-star rated). 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. 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. Panasonic and Morphy Richards (owned by Bajaj Electricals) and relatively inexpensive brands like Sunflame. However. 800 crore. and since this business is driven by rising disposable incomes and availability of power. Prestige. The size of the water heaters market is estimated at Rs. Future growth to be driven by new products such as water heaters. 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. and it is expected to grow at about 20% per annum over the medium term. ICRA Online’s estimates Source: Company’s Annual Reports.8% 13. driven by rising disposable incomes. ICRA Online Research 18 .9% 19.
as seen in fans and switchgear. launch of products in less cluttered categories. established brand and distribution reach. given the company‘s: established brand image and distribution network. we believe Havells is well poised to capitalise on the high growth potential of the electric appliances industry. and targeting of unexplored niches like Residual Current Circuit Breakers (RCCBs) in the case of water heaters. which make the appliance electric shock proof. such as 5-star rated appliances that appeal to energy conscious customers. and ability to command price premium on the strength of differentiated products. which command a significant price premium over competing products of existing players.ICRA Equity Research Service Havells India Limited Despite intense competition. 19 . and even in water heaters.
15. of which about Rs. given the large capex planned in the power sector.2% NA Note: Contribution margin mentioned in the case of Havells Source: Companies’ Annual Reports.60 NA Capacity Utilisation 2009-10 45.8%* 0. Havells‘ presence in the wires business is strategic in nature. The realisation is therefore dependent on the underlying raw material cost.0% 53. this division displays the weakest profitability The cables and wires segment is the largest business segment for Havells in terms of revenues. 10. which are also used by retail customers. players like KEI and Polycab. Demand outlook favourable. During 2009-10 Havells‘ volumes in this segment increased by 25%. a concentrated customer base. Table 19: Cables & Wires—Peer Comparison Company Havells Finolex Cables KEI Industries Polycab EBITDA Margin 2008-09 2009-10 6.0% 6. The industry‘s future growth would be supported by the significant increase in power generation capacity over 2011-12(E) to 2016-17(E).000 crore. however. This in turn would gradually reduce the division‘s contribution to the company‘s EPS in the long term. About 43% of Havells‘ revenues in this segment come from wires. the industry reported a CAGR of 8% over the period 2000-08.135.000 crore would be cables and the rest wires.150. Also. 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.3% NA NA Installed Capacity ’000 km 1. and in electrical systems within premises. Driven by the investments in the power sector and growth in real estate.97 65. the commodity nature of the product.6% 9. 20 . with the expected capacity addition being much higher than the 42.452 MW of capacity added during the last eight years. Havells however attempts to keep the impact of commodity price fluctuations on margins under control by minimising inventory. this segment suffers from relatively low and volatile contribution margins (less than 10%) on account of low value addition. helped by their established track record and experience in this domain. However. Havells not planning to focus on this segment Havells‘ volume sales of cables and wires reported a CAGR of 12% from 2005-06 to 2009-10.9% 65. 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).4%* 8. Havells operates primarily in the segment consisting of lowmedium voltage cables and domestic wires. The company has stayed away from the high-voltage (HV) cables used in transmission because of its continued focus on consumer products.ICRA Equity Research Service Havells India Limited Cables and Wires Although a major contributor to Havells’ revenues. and are therefore less exposed to business cycles and margin pressures. but revenues remained flat due to a fall in copper prices. The business however continues to be dependent on real estate activity. and accounted for 41% of its 2009-10 standalone sales.5% 16. 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. given the generation and transmission and distribution (T&D) capacity proposed over th the XI Plan period. Profit growth in Havells‘ cables and wires division is likely to remain muted as compared with that in its other divisions. 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. are better placed to capitalise on the growth in the HV cables business. and the growth rate is expected to sustain. ICRA Online’s estimates The size of the cables and wires industry was estimated at ~ Rs.00 2. which are used mainly in power generation plants. and intense competition in a fragmented market that has several small players. distribution of power.
000 MW 60. the expenditure on T&D and generation has been equal in proportion. The growth is expected to be sustained over the medium term. the expenditure on distribution can far exceed the intended target over the long term.000 MW Rs.0% 957. 400. 21 . We believe the Cable industry would continue to face pressure on margins because of rising raw material costs and competition from China. distribution lines witnessed a CAGR of 2.000 crore 3.5:1 in India.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. but a higher growth rate would be contingent on T&D expenditure catching up with the global norm. 25. Between 2000-01 and 2006-07. 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.000 MW (60%) 20. and was up 15% in 2009-10 as against a demand growth of around 5% in India. ICRA Online Research 100. As China accounts for 67% of Asia‘s total cable consumption. China cable demand has been fairly robust. Hence.302 cable kilometres Rs. 250.0% Rs. 12. as against the ratio of 0. Being a relatively commoditised product segment.5% in volume terms. Chinese companies enjoy significant economies of scale. overcapacities or slowdown in demand in China could possibly result in Chinese cable companies diverting their products to India.000 crore Globally. Till now however.000 crore Rs. aided by a number of new governmental initiatives.000 crore 10.
With increase in capacity utilisation. The inorganic growth by way of acquisition of Sylvania has contributed significantly to Havells‘ scale of operations. in 9M.4% in 2011-12(E).86%. 22 . and declared a dividend of Rs. On a consolidated basis. becoming the key growth driver of consolidated EPS.00 times as on March 31. 2009. with the contribution from emerging markets increasing.4% in 2010-11(E). the dividend yield on Havells‘ stock is negligible at about 0. the company has surplus capacities across all segments. increasing consumer awareness. 2010 from 2. and Havells‘ entry into newer markets with the Sylvania brand. which appears feasible. Havells has a consistent track record of paying dividend. its performance track record. This apart. Havells is expected to benefit from economies of scale. given its approach of diversifying its offerings within consumer product categories. the EBITDA margins are expected to improve from 5. the impact of margin fluctuations on Havells‘ profitability is likely to decline over time. supported by benign raw material prices. 2010-11. which should reflect favourably in its operating margins. Going forward. We expect Havells to report operating margins of 11.5% in 2010-11(E).7% by 2012-13(E). as Havells would benefit not only from domestic growth. Havells‘ standalone operating profit margins (OPM) were at a five-year high of 12. 2010-11 from 0. but also from the additional net profit growth of Sylvania.7% in 2009-10 to 8. backed by the company‘s entry into newer segments. 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. an improved net worth would allow the consolidated gearing to be at a comfortable level of less than one time by 2012-13. As Sylvania starts posting net profits from 2010-11(E) onwards. While the standalone profits are expected to report a moderate CAGR of about 11% during 2010-13 (E). going forward. we believe the company‘s stock should command a higher valuation than the stocks of similar players in electric appliances and switchgears. Sylvania‘s profits would increase at a CAGR of 260% during 2011-13(E). launch of new products (such as electric water heaters).66 times as on March 31. maintaining its historical payout ratio of about 11%. However. which would improve to around 11. Hence. Overall. Havells‘ revenue growth is expected to be driven by sustained demand for consumer durables. Robust EPS growth expected over medium term. Consolidated profit margins to improve from 2010-11 onwards on account of successful implementation of restructuring programmes at Sylvania. cross-leveraging of its brand and extensive distribution network. 3 per share in 2009-10.1% in 2010-11(E) and thereafter gradually to 10% in 2012-13(E). On a consolidated basis. largely in its cables division. which are expected to be adequate for growth over the next three years. and to 7. The company has indicated that it would maintain its Dividend Per Share (DPS) going forward. Capital structure to improve on a consolidated basis.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. adverse fluctuations in raw material prices and entry into new segments to put minor pressure on standalone margins in 2010-11 In 2009-10. we would expect rapid improvement in the capital structure of the consolidated entity. which should improve further to 7. at the current market price. 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. In our opinion. the EBITDA margins of Sylvania reported significant improvement to 5. which till recently was a drag on the EPS. Havells‘ distribution reach and established brand should help the company sustain its market share in most segments and fetch business in new ones. However. Sylvania‘s margins are expected to improve further. and a healthy increase in consumer demand following the rise in personal disposable incomes. the company posted a margin contraction of 141 basis points (y-o-y) because of input cost pressures.35%. 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).6% in 201213(E). Although Sylvania‘s overall debt is expected to remain high on account of increasing working capital requirements.63% in the corresponding previous. and the perceptible shift in preference for quality products. considering the sharp increase in profits during 2010-11. Sylvania‘s operating income accounted for 54% of Havells‘ total operating income in 2009-10. Going forward. Given the decreasing proportion of revenues from the cables segment. backed by established brand and distribution network. We expect Sylvania to report an EBITDA margin of 4.3% in H1. Following the completion of restructuring programmes in September 2010.
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 0.600 1.000 2.50% 15. As of now.57% 27. with consolidated Debt/EBITDA falling below 2 times. would be contingent on the growth that these segments achieve.00 2. other than a possible expansion of capacity in electric fans to meet increasing demand. on the other hand.ICRA Equity Research Service Havells India Limited The debt coverage indicators of Havells are also expected to improve significantly from 2011-12(E) onwards.68% 31. 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. Overall. Figure 22: Movement in Havells’ (Consol. Havells has adequate surplus capacities available to meet the expected sales.28% Havells‘ Return on Equity (RoE) would also improve substantially from 13.00 3.36% 34. Adjusting for the equity investment in Sylvania. 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. the incremental funding requirements of Havells (on a standalone basis) are expected to be low.71% in 2009-10 to 37.) Capitalisation Indicators 1.43% 31.50 10 0 2010-11(E) Cash accruals Source: ICRA Online’s estimates 2011-12(E) 2012-13(E) 1. The standalone Return on Capital Employed (RoCE) of the company stood at a moderate 15. given the limited capex and working capital requirements.4% in 2012-13(E) following Sylvania‘s turnaround.400 1.5% in 2009-10. Sylvania‘s debt obligations of around € 40million that are due for repayment in 2012-13 would need to be refinanced.79% 32. Havells‘ expansion plans in the other segments. the company initially plans to test the market by outsourcing production.45% 2012-13(E) 24.00 € Million (times) 1.56% 30.50 Figure 23: Sylvania’s Debt Repayments vs. and later set up a facility in case it is able to elicit a favourable market response. 23 .15% 26. For new products such as water heaters.50 1.14% 32.28% in 2009-10 largely because the investment in Sylvania did not yield any returns till last year. The company has limited capex requirements in the near future.12% 2011-12(E) 24. Havells‘ standalone ROCE was significantly higher at 34. However.
ICRA Online 24 . Figure 24: Segment-wise Product Profile Lighting • CFLs • Luminaires for Domestic. The company‘s operations can be broadly clubbed under four heads: lighting. switchgears.29 228. ICRA Online PAT Figure 26: Major Greenfield Expansions undertaken by Havells since Incorporation 1987: Started manufacturing MCBs at Badli. and cables & wires.000 2. Havells is a manufacturer of electrical consumer goods. 3. Each of the product categories is recognised as a separate vertical and is led by an independent head. Germany 1993: Set up manufacturing plant at Faridabad. in joint venture with Geyer.500 2. it has 11 manufacturing locations across India. for CFLs at Faridabad (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). Some details on the major manufacturing facilities that have been set up by the company since incorporation are summarised in Figure 26.500 1. ICRA Online Figure 25: Trend in Havells' Revenues and Profits Rs. Crore Havells has grown at an annualised rate of around 40% over the past one decade. At present. Delhi. electrical consumer durables (ECDs).000 500 0 2578. 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.ICRA Equity Research Service Havells India Limited Company Profile Incorporated in 1971. 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.000 1. Haryana .16 Turnover Source: Company. through the organic as well as inorganic route. for changeover switches 2004: Set up manufacturing plant for domestic switchgear at Baddi.
99 238.106. Non-fund based exposure Additional working capital guaranteed by Havells TOTAL (Non-Fund-based) debt 5. ICRA Online The Sylvania acquisition is the largest by Havells so far. Havells has also extended financial support to the entity over the last three years (refer Table 22). Havells made several acquisitions in its areas of operations to expand its capacities as well as to augment its distribution network and brand portfolio.02 % of total 28% 42% 14% 14% 1% 100% CAGR 19% 12% 16% 29% -20% Source: Company’s Annual Reports.73 169. Table 22: Havells' exposure in Sylvania In €mn 1. 2010 85.00 Remarks Includes €50 million infused initially at the time of acquisition.686.00 5. Cr 568. ICRA Online’s estimates Segment Overview On a stand-alone basis. Cr 428.37 1.71 % 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.87 777.38 % of total 27% 47% 12% 12% 2% 100% 2009-10 Rs. 3.88 71.ICRA Equity Research Service Havells India Limited Apart from the new manufacturing setups. However. Cr 724.01 1.44 240. Table 23: Segment-wise Trend in Revenues Segment Switchgears Cables & Wires Lighting & Fixtures ECDs Others Total 2006-07 Rs. ICRA Online’s estimates 25 . Although the purchase was funded largely by debt.00 8.46 276.48 36.05 2. MCCB of Crabtree 2007 Acquired lighting business of Frankfurt based Sylvania 2010 Acquir ed Standa rd Electric als Limited Source: Company. the cables and wires segment accounts for a major proportion of Havells‘ total revenues. Cr 623.29 289.18 1.92 54.58 280.02 83. the segment‘s share declined from around 46% in 2006-07 to 42% in 2009-10.00 Source: Company.40 113.094. 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. Funds have been used for: Repayment of recourse debt Partial funding of restructuring plans Improvement in net worth. 2001 Acquired business of Havells Industries Limited. which got eroded on account of losses Part of €80 million recourse debt 2.34 362. funded by equity infusion received from Warburg Pincus in 2007-08.341.245.4 6. Particulars Fund-based exposure Equity invested As on Dec 31.064.44 1.593.78 2.48 % of total 25% 46% 14% 10% 4% 100% 2007-08 Rs. Figure 27: Major Acquisitions by Havells over the Years Acquired Towers and Transform ers Ltd.88 2.88 374. Recourse debt repaid Estimated interest paid TOTAL (Fund-based) 20.
6 173 Change 20% 7% 6% 7% Source: Company’s Quarterly Reports 26 . 2009-10 1773. backed by rising sales volumes.4 49 162. and cables with 8%.6 51. The ECDs (or fans) segment has been the fastest growing segment for Havells (registering a CAGR of 29% over 2007-10). 2009-10 Particulars Net Revenue EBITDA PBT Tax PAT 9M. In terms of profitability.4 9M.4 226. 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. 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. Table 25: Havells' Performance in 9M. 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. the switchgears segment has the highest contribution margins of 36%. followed by ECDs with 28%. lighting & fixtures with 19%. 2010-11 as compared to 9M.4 242.ICRA Equity Research Service Havells India Limited With the acquisition of Sylvania. 2010-11 2129.4 211.6 224.
56% equity stake in the company.3 68.1 51. which includes six Independent Directors.6 59. Mr.4 17. who manage the operations independently under the broad guidance of the top management and the Board.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. the rest is widely held and includes institutional investors.2 88. the company has an experienced management team.2 190.7 8.2 35.6 69. The accounting policies followed by Havells are in line with standard practices and there has been no material auditor-qualification in recent periods. Table 26: Segment-wise Performance in 9M.6 9.7 202. Each of its four business segments is headed by experienced professionals.5% 515.3% Decline on account of adverse movements in raw material prices 1.231 Lighting & Fixtures Revenue Contribution Contribution margin (%) 259.2 1. Qimat Rai Gupta. is a first-generation entrepreneur. the Chairman and Managing Director (CMD) of Havells.9% Remarks 2010-11(E) 765 892. The disclosures by the company through its Annual Reports and Quarterly Results are adequate.3 36.0 28.9% 9M. Anil Gupta (the second generation)—are hands-on in the business. ICRA Online’s estimates Governance and Management Structure Havells is managed by an 11-member Board. 2009-10 Switchgears Revenue Contribution Contribution margin (%) Cables & Wires Revenue Contribution Contribution margin (%) 733.1% 463 25.2 19.7% Decline on account of increase in outsourcing work for Sylvania 445 ECDs Revenue Contribution Contribution margin (%) Others Revenue 240. While the promoters—the CMD and Mr. While the promoter group holds 61.3% 338.2 73. 2010--11 562.7 Source: Company’s Quarterly Reports.7% 334. 27 . 2010-11 9M.
we have compared Havells with other consumer durable companies (Bajaj Electricals. 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).4 3.6 2010-11 2011-12 E E 15. well-known brand and presence in the high-growth power systems business (although the segment posted weak results in Q3 2010-11).8 5.28 348.4 0.4 8.7 2010-11 E 7.7 15.7 2.4 22.6 3.251.4 14.6 0.4 0.7 2010-11 2011-12 E E 27.4 0.2 9.9 12. various parameters are looked at including the company's earnings and growth prospects.7 5.ICRA Equity Research Service Havells India Limited Valuation Grading In assessing a company's valuation.6 1. 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. 28 .6 2.Crompton Greaves.7 4.3 8.6 8.) 4. urbanisation and investments in housing) and Finolex Industries (cables and wires segment).1 14.9 25.6 Asian Paints (India)# 24.8 1959. However. crore) CMP (Rs.2 16.8 47.217. The valuation is also benchmarked against an appropriate peer set or index.8 12.1 2011-12 E 6.7 9. Crompton Greaves and TTK Prestige).3 1.9 3. ICRA Online’s estimates * ICRA estimates based on share price as on 11 March 2011 on NSE.1 10. Asian Paints (which has similar demand drivers viz.2 NA 21.6 7.5 4. The premium that Crompton Greaves enjoys can be explained by the company‘s large size.9 Bajaj Electricals Limited# 2.1 16.2 227.249.1 0.2 17.989.5 Crompton Greaves Limited# 16.9 TTK Prestige Ltd# Finolex Cables Limited# 728. Havells‘ current valuations are at a discount to its closest peer . We believe Havells‘ valuations have been impacted by the significant loss reported by Sylvania till 2009-10.0 5.7 NA Price/ Earnings EV/ EBITDA Price / Sales Price / Book Value Price/ Cash Flow Source: Bloomberg.9 2010-11 2011-12 E E 18. For TTK Prestige.1 12.6 19.0 0.3 14.8 3.3 2010-11 2011-12 E E 16. and its capacity to generate returns from the capital invested. is also taken into account. Table 28: Havells India Limited—Relative Valuations (vis-a-vis peer companies) Havells India Limited* Market Cap (Rs.1 10. 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. # Bloomberg Consensus estimates as on 11 March 2011 For valuation.345. The extent of overvaluation or undervaluation is adjusted for the relative volatility displayed by the stock.8 2529.7 12.4 1.9 264.4 0.0 8.1 2010-11 2011-12 E E 27.7 7.8 11.1 18.0 11. its ability to generate free cash flows. the historical price volatility exhibited by the stock.1 12.6 2. Asian Paints‘ premium valuations are partly explained by its strong brand name and market position. besides its liquidity. Havells is currently trading at a slight premium to Bajaj Electricals on 2011-12 forward P/E basis.9 2.
7 4. though it is quoting at a premium to the BSE Midcap Index. .) Price/Earnings EV/EBITDA Price /Sales Price /Book Value Price/Cash Flow 16. Of the total funding requirement of €200 million.1 Historical Avg.1 11.5 12.0 28.7 11.0 2010-11E 2011-12E 13.8 times.7 7.8 S&P CNX 100# 5. 2007-08 and 2008-09: Havells had to extend additional financial support to the subsidiary by way of equity infusion.3 10.1 1.8 4.604.51 0.791. with Havells outperforming the CNX100 index until Mar ‘08.1 32.9 4.7 8.1 2010-11E 2011-12E 12.3 7.8 1. # 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.4 14. Havells‘ EBITDA is expected to grow at a robust CAGR of 21.9 0.ICRA Equity Research Service Havells India Limited Table 29: Havells India Limited—Relative Valuations (vis-a-vis indices) Havells India Limited* Market Cap (Rs. Till date.5 1.8 11.1 20.8 17.426.1 5. the world‘s fourth largest player in the lighting industry. crore) CMP (Rs.6 2.7 2010-11E 2011-12E 9.4 0. ICRA Online’s estimates Havells CNX100 Index Mar ’07–Mar ’08: Havells‘ acquired the lighting business of the Frankfurt-based Sylvania. €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.7 0. which is modest considering the estimated EPS growth of 36% and 19% in 2011-12(E) and 2012-13(E) respectively.07 - Source: Bloomberg.4 2010-11E 2011-12E 16.5 million.5 BSE Midcap# 6.1 12. which was used for repayment of recourse debt and to meet cash flow mismatches during the slowdown beginning mid-2008.8 346.0 0. The P/E of the company on estimated 2010-11 earnings is currently about 16.5% during 2011-13 period.3 6.0 0.9 1.7 9.3 8. The initial impact of the acquisition on the stock price was positive. for €234.3 BSE Consumer Durables# 5. Havells (5-Yrs) 13.5 8.7 9.15 8.317. ICRA Online’s estimates * ICRA estimates based on share price as on 11 March 2011 on NSE.47 4. Havells India Limited: Stock Performance over last three years Figure 28: Havells versus CNX 100 600% CY2008: Slowdown in world economy.8 1. 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.8 2.9 16.
and TTK Prestige). Asian Paints. Havells significantly underperformed the CNX100 index during this period. Havells‘ current valuations are at a discount to most of its domestic competitors (Crompton Greaves. ICRA has assigned a Valuation Grade of ‘B’ on a grading scale of ‗A to E‘ to Havells. which indicates that the company is ‘moderately undervalued’ on a relative basis.ICRA Equity Research Service Havells India Limited the company has invested €101. 30 .4million (~Rs. Considering the expected upside from Sylvania and increasing share of profits expected from the high-margin consumer electrical business. as well as the S&P CNX 100 on 2011-12 PE basis. This suppressed the RoE of Havells. The company is also trading at marginal discount to its own fiveyear-average historical multiples. 9M. as additional investments have not yielded returns till 2009-10. 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. 2010-11: Sylvania reports profits at the standalone levels for the first time since its acquisition by Havells.636 crore) in the subsidiary.
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. 10% discount in comparison to CNX100 which currently has a Forward P/E of 13. and compared the forward P/E estimates of the stock and the index. Havells 1-year Fwd P/E is at a premium of 32% at 12. CNX 100: Forward P/E Ratios 15 14 13 12 11 10 CNX100 Index Havells India Ltd CNX100 Index Source: Bloomberg. ICRA Online’s estimates We have compared the performance of Havells‘ stock with the CNX100 index since November 2005.3x. against 9. 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.7x. 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. BSE Mid-Cap Index Figure 31: Havells vs. However. This premium can be explained by the higher earnings growth expectations for Havells as compared to the broader BSE Mid-Cap Index constituents.3x for the index. ICRA Online’s estimates In comparison to BSE Mid-Cap Index.ICRA Equity Research Service Havells India Limited Annexure I: Index Comparison CNX100 Index Figure 29: Havells vs. it is currently trading at a forward P/E of 12.3x. ICRA Online’s estimates Figure 30: Havells vs. 31 . ICRA Online’s estimates Source: Bloomberg. While Havells has outperformed the index over the last five years. Havells can be expected to register a stronger earnings growth over the next three years.
of shares* (Cr.066. 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 1.0 3.1 698.76 Source: Company’s Annual Reports.5 46.2 35.9 708.0 352.1 3.9 2009-10A 1.7 249.7 85.2 827.241.529.0 12.1 88.5 623.0 863.4 165.2 40.342.2 420.9 1.282.9 12.4 471.2 3.8 1.9 146. ICRA Online’s estimates 32 .6 649.5 33.5 3.5 2.1 247.5 4.4 26.0 612.0 1.5 0.4 1.6 33.9 4.2 10.3 30.8 -9.9 87.4 83.2 123.5 3.275.5 28.2 824.768.058.0 790. ICRA Online’s estimates * Adjusted Annexure III: Havells (Consolidated)–Balance Sheet Estimates Table 31: Key Financial Indicators – Balance Sheet Estimates (Consolidated) Amounts in Rs.928.768.7 61.136.2 0.7 622.9 3.0 155.477.6 -198.169.5 311.) DPS EPS CEPS 2008-09A 5.2 50.8 69.2 80.8 1.0 5.081.392.0 350.0 730.314.1 817.5 271.09 2012-13E 7.3 1.6 80.046.8 108.431.3 614.6 1. Crore Operating Income EBITDA Depreciation EBIT Interest Expenses Other Income Extraordinary Items PBT PAT No.2 52.5 3.ICRA Equity Research Service Havells India Limited Annexure II: Havells (Consolidated)–P&L Estimates Table 30: Key Financial Indicators – P&L Estimates (Consolidated) Rs.208.081.4 75.3 628.0 3.0 2010-11E 1.014.7 1.2 12.5 1.5 799.3 -160.0 162.242.0 2.4 117.7 90.023.7 838.9 400.227.2 479.1 82.1 257.462.5 2.006.046.7 -117.2 148.9 -1.5 20.6 106.6 1.282.211.288.0 0.242.9 541.3 794.8 3.2 12.1 57.5 - 2009-10A 5.4 938.2 27.2 146.8 1.7 433.9 2011-12E 1.4 8.0 1.5 189.5 2.4 990.74 2010-11E 5.316.6 120.368.0 566.7 27.3 Source: Company’s Annual Reports.6 12.529.8 81.450.1 22.0 1.8 12.3 2012-13E 1.1 27.2 3.7 120.3 757.0 772.9 35.7 40.6 1.22 2011-12E 6.2 1.3 27.9 930.
9 0.9 247.3 -155.5 4.7% 15.0 0.0 34.0 36.8% 14.7% 8.7 0.5 0.2 75.9 -156.2 2.2 369.5 -13.4 1.8 1.9 90.4% 31.1 2.7 8.6 12.4% 2012-13E 9.2 -165.4 0.2 0.0 119.5 2.9 -104.0% 31. 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 -117.3% 4.5 32.0 2011-12E 471.3% 2010-11E 9.0 -83.5 0.1% 257.1 85.5 240.8 6.6 3.0% 3.2% 2009-10A -0.3 79. ICRA Online’s estimates 33 .8 0.0 394.8 7.1 117.3 148.4 71.2 81.4 0.5 137.0% 8.8 19.6 242.6 170.ICRA Equity Research Service Havells India Limited Annexure IV: Havells (Consolidated)–Cash Flow Estimates Table 32: Key Financial Indicators – Cash Flow Estimates (Consolidated) Rs.6 0.0 2.6% 19.3 3.5 -74.8 10.2 83.9 -38.7 386.1 0.8 2.1 45.1 43.6 146.5 16.4% 16.0 23.0% 37.1 7.6 97.5 2012-13E 566.3 7.1 117.9 5.3 44.0 0.1 2010-11E 350.4 0.5 -112.5 -139.3% 13.4 1.0 36.3 0.3 146.9 3.9% 27.1% 2011-12E 9.1 11.1% 7.2% 12.3 4.0 -112.8 0.1 -0. 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 9.0 -137.7 Source: Company’s Annual Reports.4% 45.6% 113.2% 10.4% 50.7 -137.5% 28.4 26.2 9.7% 4.4 Source: Company’s Annual Reports.2 123.1 92.8 -83.6% 1.7 3.1% 54.6% 5.4 148.5% -22.2 146.4 1.7 333.0 -11.0 88.0 -37.1 46.7 -307.6 10.2 0.8% 6.6% 30.7 -162.1 0.9% 9.5% -2.2% 5.7 0.4% 5.2 0.0 123.3 42.0% 36.7 12.8 93.6% 8.5 146.3 2009-10A 162.7 241.7 16.6 0.0 47.2 247.2 101.9% - 49.3 0.4 106.
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