Havells India - sylvania lights up; Buy:: Edelweiss

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􀂃 Strong revenue growth; margin declines
Havells India (HAVL) reported Q2FY11 (standalone) results which was in line
with our estimates with revenue growth of 16.5% Y-o-Y, to INR 6.9 bn, led by
strong growth in both consumer durables and lighting businesses (up 30% and
22.8%, Y-o-Y, respectively). The cables & wires segment grew 19.9% and
switchgear 5.4%, during the quarter. Switchgears, forming 25% of the total
revenues (standalone), grew slower due to weak exports revenue. HAVL
reported 130bps Y-o-Y dip in EBITDA margin that stood at 12% during the
quarter. EBITDA during the quarter grew slower at 5.1% Y-o-Y, to INR 838 mn,
as raw material costs climbed 362bps Y-o-Y, to 58.6% of sales. Reduced other
expenses (down 265bps Y-o-Y to 25.9% of sales) helped curb further fall in
EBITDA. PAT grew at a higher rate than EBITDA, at 6.8% Y-o-Y to INR 579 mn,
due to lower tax rate at its new manufacturing units at Baddi and Haridwar. Tax
rate declined 200bps Y-o-Y, to 23.2%.



􀂃 Sylvania turning much faster than expected
Sylvania reported revenue growth of 11.5% Y-o-Y, to EUR 117.7 mn. However,
due to depreciation of EUR versus INR, revenues in INR dipped 3.3% Y-o-Y (to
INR 7 bn). Sylvania reported strong growth in EBITDA margin, to 4.7%, against
0.9% during Q2FY11. Since the takeover of Sylvania, it was for the first time
that it broke even at the PAT level, registering profit of INR 80 mn (Euro 1.3
mn). With Sylvania turning much faster than expected and management
guidance of higher EBITDA margins at Sylvania, we revise our earnings by 3.6%
& 9.7% for FY11E and FY12E respectively.

􀂃 Outlook and valuations: Positive; maintain ‘BUY’
We remain positive on the company’s outlook on the back of its robust domestic
business and positive signs from the international business especially the Latin
American market. We believe impact of the two restructuring projects at
Sylvania have started bearing fruits with the company breaking even at the PAT
level. The stock at our revised EPS of 23.4 & 30.6 on a consolidated basis is
currently trading at 17.6x and 13.5x its FY11E and FY12E earnings, respectively.
We reiterate our ‘BUY’ recommendation on the stock and rate it ‘Sector
Outperformer’ on relative returns.