Havells India : Sylvania turnaround to drive re-rating :: HSBC

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Havells India Ltd (HAVL IN)
N(V): Sylvania turnaround to drive re-rating


 Havells’ standalone came in below forecasts but Sylvania
turned profitable; this warrants re-rating in our opinion
 We raise our consolidated earnings estimates by 6%/17% for
FY11/12 based on higher operating margin for Sylvania
 We maintain Neutral (V) but raise our target price to INR460
(from INR287) on a higher target PE multiple; lower EBITDA
margin is the key risk


2QFY11 results update: Havells India 2QFY11 stand-alone sales grew c16% y-o-y,
however EBITDA margin declined by c130bp due to high raw material cost particularly in the
cables and wires division. The net profit increased 7% y-o-y driven largely by high sales
growth. The sales and operating profit were in line with our estimates; however net profit was
lower than our estimate by 8% due to a higher tax rate.

Sylvania turns profitable in 2QFY11; restructuring process concluded: Sylvania reported
sales of EUR118m in 2QFY11. The organic growth of c12% y-o-y was largely offset by euro
depreciation, thus resulting in a flat sales growth in INR. Importantly, Sylvania reported net
profit of INR81m for the first time since 1QFY09 which we believe is a key positive for the
stock. The EBITDA margin stood at 4.7% benefiting from the past restructuring.

Raise EPS estimates by 6%/17% to INR22.4/INR30.5: We have increased our EPS
estimates by 6%/17% for FY11/12 as we estimate Sylvania to report higher profits going
forward as the restructuring benefits feed through the EBITDA margins. We have kept our
estimates for Havells stand-alone business unchanged at this stage.

Maintain Neutral (V), raise target to INR460 (from INR287 previously): The stock has rerated
due to strong stand-alone performance of the stand-alone business. We expect the rerating
to sustain as markets now start factoring in Sylvania’s contribution to FY12 earnings
and beyond. Thus, we increase our target PE multiple to 15x from 12x earlier. Based on a
target multiple of 15x and Mar-12 earnings (roll over from Sept-11) we raise our target price to
INR460 from INR287 earlier. The stock is trading at c13.5x PE on FY12e estimates.