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HAVELLS INDIA LTD
PRICE: RS.372 RECOMMENDATION: BUY
TARGET PRICE: RS.450 FY12E: P/E: 12.7X
Havells India Ltd (HIL) is one of the prominent electrical and power
distribution equipment manufacturing companies in India. Its products
range from Industrial & Domestic Circuit Protection Switchgear, Cables &
Wires to fans, CFL Lamps and luminaries for domestic & industrial
applications. The company enjoys healthy market share across all product
offerings translating into domestic business operating margins of 12%.
With its strong global distribution network in more than 50 countries,
competent manufacturing capability and successful restructuring of overseas
subsidiary Sylvania, company is well poised for 35% CAGR growth in
operating profits between FY10-12E.
In our estimates, we project a 9% CAGR in consolidated revenues over FY10-
12E from Rs.55 bn in FY10 to Rs. 65.6 bn in FY12E. Within the revenue
streams, we expect domestic sales to grow by 18% in FY11E and by 17% in
FY12E mainly driven by robust growth in power and construction space. We
expect exports demand to remain muted in FY11E followed by a moderate
growth in FY12E due to European crisis where company has substantial
exposure.
At current price the stock looks attractively valued on a discounted cash
flow basis. We initiate coverage on the HIL stock with a BUY rating and a
DCF based target price of Rs.450, over a 12-month horizon.
Key Investment Rationale
q Strong sustainable demand for consumer electrical products. Indian consumer appliances market is estimated at USD 4.3 bn at present. We expect it to
grow by 18% CAGR between 2010-15E on back of 1) growing disposable income with Indian households 2) evolving lifestyle patterns in India leading to shift
in preference for premium products
q Diversified Product Portfolio. Havells has diversified its business into three
verticals viz. Consumer appliances, cables & wires and switchgears. Company
derives major revenues from wires and cable division but lately it has been successful in expanding product offerings in the consumer appliances segment. It
commendably established market share in key product categories especially Fans
and Luminaries.
q Extensive Distribution Network. We believe that efficient distribution is the
key to success in the highly competitive consumer appliances market. Industry is
highly fragmented and there exist stiff competition from national as well as regional players. HIL has a robust network of over 4000 dealers spread across India
in all the four zones: North, South, East and West.
q Sylvania restructuring. HIL acquired world's fourth largest lighting company
'Sylvania' with revenues of EUR 406 mn through its Dutch subsidiary - Havells
Netherlands BV in FY07. The acquisition was made at the valuation of 7xEV/
EBITDA implying an Enterprise value of EUR 227 mn for the company.
Since acquisition, its revenues have fallen by 25% and company has been making losses at EBITDA level due to global recession and continuing economic crisis
in European region. As a counter measure, company has undertaken aggressive
restructuring plan aimed at reducing fixed cost through rationalizing personnel
headcount. We believe that this would result in substantial savings of nearly EUR
33 mn per annum for the company,
q Invariable emphasis on R&D efforts. HIL constantly ventures into new initiative related to technological advancement. It consistently deploys resources for
adding and modifying current product specifications, making it valuable to the
end users.
q Financials & Valuations. We project 10% CAGR in consolidated revenues between FY10-12E from Rs. 55 bn in FY10 to Rs. 66 bn in FY12E. Within the revenue streams, we expect domestic sales to grow by 17% in FY11E and by 19%
in FY12E driven by switchgears, wires & cables and consumer appliances segment. We also build 35% CAGR growth in EBITDA in the same period on account of substantial savings from Sylvania post restructuring.
At current price of Rs.370, stock is trading at 17.4x and 12.7x P/E and 8.8x and
7.3x EV/EBITDA multiples for FY11E and FY12E respectively. We believe that at
the current price stock is attractively valued on a discounted cash flow basis. We
initiate coverage on the HIL stock with a BUY rating and a DCF based target
price of Rs.450, over a 12-month horizon.
Key Concerns
q Delays in Sylvania restructuring. While we expect meaningful earning contributions from Sylvania post restructuring, acquisition borrowing repayment would
take a longer time. Therefore any delays in Sylvania restructuring would not only
drag company profits but would also worsen the financial health of the company.
q Sharp increase in raw material prices. Sharp increase in raw material prices
would negatively affect the profitability of the company. In our estimates, we
build a moderate increase in key raw material costs which is likely to get absorbed by company achieving economies of scale going ahead.
q Increasing competition. Consumer electrical business is highly fragmented and
there exists tremendous competition from the unorganized players having regional presence along with large organized players like HIL, Crompton, Bajaj
electric etc incurring pricing pressure.
q Slowdown in real estate activity. Consumer appliances market growth is
highly correlated with the activity in real estate/housing construction sector. Any
slowdown in this space would mean lower off take of company's products.
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