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Havells India Ltd (HIL)
PRICE : RS.372
RECOMMENDATION : BUY
TARGET PRICE : RS.450
FY12E: P/E: 12.8X
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.66 bn in FY12E. Within the revenue
streams, we expect domestic sales to grow by 17% 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 the 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, repayment of acquisition loan
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 Stiff 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.
COMPANY OVERVIEW
Havells India Ltd incorporated in 1983, is India's fastest growing player engaged in
manufacturing of electrical products like switchgears (domestic and industrial),
cables & wires and consumer appliances like fans and luminaries. Leveraging on its
strong distribution franchise, efficient R&D base and over twenty five years of
experience in the industry, company is all set to benefit from the spurt in
perceptible consumer product demand in India. Increasing disposable income and
changing lifestyle pattern with a peculiar shift in consumer preference towards
premium products augers well for the company's business. Company has its
manufacturing facilities in Haridwar, Baddi, Noida, Sahibabad, Faridabad, Alwar
and Neemrana along with seven state-of-the-art manufacturing plants located
across Europe, Latin America & Africa
HIL along with its subsidiary Sylvania (100% ownership) is present in 52 countries
mainly across Asia and Europe. In India, the company has an extensive base of over
4000 dealers and enjoys dominant market share in North India.
Historically, company has been earning major part of its revenue from electric wires
and cable division. However, over the past few years, company has been
dedicating its resources for establishing itself in India's fast moving consumer
electrical market. It has established strong brand image; especially in fans market
where it enjoys 17% market share.
INDUSTRY OVERVIEW
Overview of Indian Consumer Electrical Appliances sector; expected
to grow at 18-20% CAGR between FY10-15E.
Indian consumer appliance market is estimated at USD 4.3bn at the end of FY10
and is expected to grow at a CAGR of 18-20% between FY10-15E. The main
reasons for this growth are 1) growing disposable income within Indian households
(urban & rural) 2) evolving lifestyle patterns in India leading to a peculiar shift in
preference for premium products offered by organized players like HIL 3)
shortening of product cycle due to higher rate of technological obsolescence 4)
increasing electricity supply in urban and rural India.
In the past, various industry players have strived to gain market share in the urban
market. Recently, the penetration level of organized sector has started to increase
in semi-urban and rural market. The primary reason for this shift is explained by
the unprecedented market growth of over 25% in these regions as against 7%-
10% for the former. According to CII, rural consumer market is expected to reach
720-790 million customers by 2010-11
The major products that constitute Indian consumer appliances market are mixers,
grinders, irons, water heaters or geysers, electric fans and exhausts. Advanced
technology and increasing competition has incurred price pressure and we
therefore believe that higher volumes driven by deeper penetration has become a
key for any player to establish itself in the industry.
We also believe that consumer behaviour also play a crucial role in building
demand for such products. Therefore from business point of view, it becomes
important to address issues like product superiority in terms of power savings etc
in addition to the overall cost of ownership of these products to the end user.
We opine that with increasing levels of power supply in India by 2012 Industry is
bound to grow especially in Tier II/III cities where power cuts are more chronic.
Competitive landscape
The branded brown goods market that consists of products like fans, geysers etc
has expanded at a significant pace post liberalization and is expected to retain the
growth momentum in the future as well. The market has been transformed by the
entry of numerous new brands- domestic and multinationals bringing newer
technology and variety to the customer. While focus on price competency remains
a key variable to address Indian customer, industry players have also started to
focus on enriching product features and efficiency.
Competition is intense in Lighting and fans market due to the large presence of
small-mid sized players. Lately there has been meaningful increase in competition
from Chinese players who strategize to sweep market by introducing various
energy saving products.
Going ahead, we believe that the share of organized players will increase in the
consumer appliances space. Key players like Bajaj Electricals, Crompton and Phillips
that have pan India presence with effective market reach would benefit from this
transition.
HIL USP lies in the quality of its products and it also charges a slight premium in
pricing over its competitors. Efficient distribution network and reliable delivery
model offers competitive edge to the company.
Like appliances market, domestic wires and cables market is also fragmented.
While unorganized sector caters to nearly 50% of annual demand, organized
players like Finolex cables, Kei Industries along with Havells have reasonable
presence in the organized market. Havells has managed to increase its market
share in past few years on account of effective pricing and aggressive distribution
franchise.
Switchgear market is broadly divided into three categories: low capacity (upto 1.1
KVA), medium capacity (upto 6KVA) and high capacity (6KVA+). Havells is present
in low capacity market and offers products for domestic as well as Industrial
applications.
Company faces fierce competition from European players like Siemens, ABB and
Schneider in addition to the aggressive domestic players like Crompton Greaves
and L&T.
KEY INVESTMENT ARGUMENTS
Diversified Product Portfolio
Havells has diversified its business into three verticals viz. Consumer appliances,
cables & wires and switchgears. Within the revenue streams it has been observing
highest growth in consumer appliances segment and has established market share
in key product categories especially Fans and luminaries.
From the historical perspective, company used to earn its major revenues from the
cables & wires segment whereas now it has increased contribution from other
segments especially consumer appliances division which forms 14% of the revenue
pie currently vis-à-vis 10% in FY08. Company is planning to venture into the
electric geyser market by the end of FY11.
Strong revenue growth expected on back of sustainable demand
for consumer electrical products, switchgears and cables and wire
segment
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 a shift in preference for premium products catered by the organized
players like HIL.
The consumer appliances market witnessed tremendous growth in last few years
on back of significant investments in the real estate market that grew by over 20%
in the last few years. We believe that the growth momentum would remain strong
going ahead, leading to a robust 35% CAGR growth between FY10-12E for the
segment.
On the back of the sanguine power industry outlook, we expect revenues of HIL's
wires and cables business to grow with a CAGR of 13.5% between FY10-12E from
Rs11 bn in FY09 to Rs15bn in FY12E.
Company is reasonably placed in the low-voltage switchgears segment in both
domestic and industrial switchgears. It derives 20% of its revenue from this
segment earning 33% contribution margins.
Extensive Distribution Network.
We believe that efficient distribution network is the key to success in the highly
competitive fast moving consumer appliances space.
HIL has a robust network of over 4000 dealers spread across all the four zones of
India: North, South, East and West. While company has strong franchise in North
India that contributes to nearly 35% of its revenues, it has been dedicating
resource to strengthen the revenue flows from Western India which currently
contributes to nearly 15% to the overall revenue pie. Company is seeking to
increase its reach in western India which is dominated by its competitors: Compton
Greaves and Bajaj Electricals.
Setting up of “Galaxy” showrooms: Havells is setting up retail showrooms,
called “Havells Galaxy”, to increase the reach of its products to the end user.
Company has been adding 3-4 showrooms on monthly basis and currently
operates 47 such showrooms.
Sylvania restructuring
n HIL has acquired European company 'Sylvania', world's fourth largest player
with over 100 years of existence in manufacturing lighting products. Sylvania's
revenues currently stands at EUR 406 mn and was acquired through Havell's
Dutch subsidiary - Havells Netherlands BV in FY07. Sylvania is a leading global
designer and provider of lighting systems having leading presence in selected
markets across Europe and Latin America with a focus on growth in Latin
America, Asia and Middle East.
n The acquisition was aimed at increasing Havell’s global footprint and expanding
Sylvania’s brand in Asian region in addition to the existing European market.
Company acquired the later at the valuation of 7xEV/EBITDA implying an Enterprise
value of EUR 227 mn for the company.
n Sylvania earns nearly 70% of its revenues from the European region and thus it
has been susceptible to the economic health of the region. European crisis has
taken toll on the demand for company's products which has eroded 25% of
company's revenues in past three years. Company has been accumulating
losses at EBITDA levels since acquisition.
n As a counter measure, company has undertaken aggressive restructuring plan
aimed at reducing fixed cost through rationalizing personnel headcount. Company
has split this program into two phases Phoenix and Parakram at the combined
cost of EUR 32mn.
l Phoenix was initiated in Sept’09 with a cost of EUR 12 mn aiming at rationalizing
personnel cost in Latin America and Europe. Company successfully executed
this plan and is expected to attain annual savings of EUR 17.5 mn by
downsizing its workforce by 1300.
l Parakram was commenced in FY10 and is currently under way. This plan is
budgeted for EUR 20 mn and should result in the annual savings of EUR 16 mn
by employee rationalization
n To a large extent company has substituted the overseas higher fixed cost base
by outsourcing non critical functions to India. Company has not reduced its
sales team or removed any of its key officials under the restructuring plans.
n We believe that the company shall successfully execute the Parakram plan by
the end of FY11E and thus the profitability at Sylvania would improve on a sustainable
basis.
n We also opine that the revenues from Latin America and Asian regions is likely
to grow going ahead and revival in European region would be a key variable to
monitor.
n In our projected financials while we build a revenue CAGR of 3% between
FY10-12E for Sylvania on constant currency basis. We expect EBITDA to grow
to EUR 24 mn by FY12E from current loss levels of EUR 3 mn.
Invariable emphasis on Research & Development
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. Moreover, various R&D efforts
become extremely important in the highly competitive consumer appliances
segment where profitability is determined by the product’s cost effectiveness and
power savings.
International footprint offers geographical diversification to take
advantage of the upsurge in consumer appliances market in Asian
and African markets
n Company (including Sylvania) is present in nearly 50 countries across Europe
and Asia. Moreover it has been witnessing enormous potential in the emerging
markets like Africa where housing and real estate market is picking up.
n With an aim to establish itself as a prominent player in these markets, company
is planning to strengthen its dealer franchise in these regions. It would be offering
its diverse range of products within the parent brand Havells and the acquired
brand Sylvania to the overseas customers.
n Going ahead, the company expects substantial amount of revenues through
exports on account of revival of the European economy giving a boost to the
legacy market of Sylvania coupled with new market development in Asia and
Africa regions.
Financials to improve; consistent growth in domestic market, export
growth in new geographies and successful restructuring of
Sylvania would result in value accretion
n We project 10% CAGR growth 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 mainly
driven by switchgears, wires & cables and consumer appliances segment.
n We also expect exports demand to improve by FY12E on account of expected
recovery in European region, growth in Latin America and new geography additions
in African and Asian region.
n We opine that the company would continue to prudently manage its
overheads and Sylvania restructuring would boost company’s margins. In our
projected financials we build 5% EBITDA margins for Sylvania in FY11E.
n We believe that the higher operating leverage would obviate any increase in
input price. In our projected financials we build 8.8% EBITDA margins at consolidated
level for FY11E.
n We opine that working capital would slightly increase from current 5% of sales
to 5.5% in FY11E and 6% in FY12E to sustain company’s expanding dealer
franchise in new regions.
n Managment has stated that the company is well equipped to support its future
growth and would not incur major capex in next two years. We expect the
ROCE% of 17.3% and ROE of 32% in FY11E.
n We expect that the company would significantly de-leverage its balance sheet
and expect D/E to moderate from current 1.9 levels to 0.8 in FY12E mainly on
back of 1) higher EBITDA contribution from Sylvania post restructuring 2)
higher free cash flow generation in the domestic business.
Havells Standalone Financials; revenues likely to grow at 19% CAGR
between FY10-12E on back of favourable macro environment with
deeper brand penetration in TierII/Tier III cities
n We project revenue growth of 17% and 19% YoY in FY11E and FY12E respectively
from current levels of Rs 24.7 bn on back of meaningful growth across all
the segments.
n Within the revenue stream we expect 35% CAGR growth between FY10-12E
in consumer appliances segment and 18%CAGR growth in switchgear division
in the same period.
n We expect EBITDA% to increase from current 12% levels going ahead on back
of volume pick up across the segments and proportionate increase in contribution
by the switchgear division to the overall revenue pie. Company enjoys margins
to the tune of 37% in the switchgears business.
n While HIL has a strong debt free balance sheet at standalone level, efficient
working capital management ensures positive free cash flows for the company
going ahead.
Efficient working capital management; bank limit assistance to
dealers strengthens distribution network and reduces working capital
requirements of the company
Company provides assistance to its dealers in getting bank limits and receives
payments directly from banks. In turn, company extends upfront discounts to the
dealers, compensating for accrued interests on the transaction amount.
Sylvania Financials; likely sharp improvement in EBITDA on back of
aggressive restructuring plans related to operating cost rationalization;
muted revenue growth expected in FY11E
n In our projections we build 3% CAGR revenue growth between FY10-12E for
Sylvania (on constant currency basis) on back of continuing economic concerns
in its key markets. Early recovery in these geographies poses an upside risk to
our earning estimates.
n While we believe that the Sylvania would maintain muted revenue growth in
FY11E, EBITDA margins would increase on back of substantial cost savings
achieved through successful accomplishment of on going restructuring plans.
n In our estimates we build EBITDA margins of 5% and 5.5% in FY11E and
FY12E respectively.
VALUATION AND RECOMMENDATION
n At current price of Rs.372, stock is trading at 17.4x and 12.8x P/E and 9.6x and
8.8x and 7.3x EV/EBITDA multiples for FY11E and FY12E respectively. We believe
that the improved visibility in Sylvania financials implied by 1HYFY11 nos.
has led to the recent re-rating in the stock.
n At our target price of Rs 450, stock would trade at 6x FY11E and 4.4x FY12E
book value respectively. Due to the inconsistent profit growth of the company
in the past, we highlight the P/BV trend below that reflects the valuation trend
from the historical perspective.
n In our earning projections we build meaningful margin expansion in FY11-12E
on account of cost restructuring at Sylvania. We also believe that post FY12;
the company would expand its operations in other emerging markets leveraging
on favourable synergies between Havells and Sylvania. This is likely to result
in substantial revenue growth in future.
n We value the company using DCF valuation methodology that derives a price
target of Rs.450 per share, implying an upside of 22% over a 12- month horizon.
Our DCF model employs a WACC of 11.85%, beta of 0.86 and terminal
growth of 3%. At our target price of Rs450, the stock will trade at 21.1x and
15.4x FY11E and FY12E EPS respectively.
n We initiate coverage on the HIL stock with a BUY rating and a target price of
Rs.450, over a 12-month horizon.
Business review 1HYFY11; while revenue growth remained muted
at 3% YoY given muted revenue growth in overseas markets; operating
profits grew by 44% due to successful cost restructuring at
Sylvania
n Company's consolidated revenues for 1HYFY11 remained flat at Rs 27.7 bn a
growth of 6% YoY. EBITDA grew at 44% YoY at Rs.2346mn as EBITDA margins
expanded to 8% vis-à-vis 6% on account of ongoing restructuring of
Sylvania operations.
n While domestic revenues grew by 19% in 1HYFY11 at Rs 14 bn, EBITDA stood
at Rs 1.4 mn up 6% YoY. Increase in raw material prices impacted the margins
of wires and cables division to an extent.
n Management expects margin restoration in wires and cables division in 3QFY11
with continued growth momentum across the divisions.
n While the lighting division recorded a 30% YoY growth in revenues at Rs 2155
mn, cables and wires division grew by 20% and accounted for 41% of total
revenues of the company in 1HYFY11.
n Sylvania restructuring has been successful so far and this is getting reflected in
last few quarters. Management has been guiding of operational turnaround at
Sylvania and expects it to become value accretive by FY12 at PAT levels.
n Sylvania reported strong growth of 31% YoY in Latin American region in
1HYFY11 and Europe continued to dominate the revenue pie with 66% contribution.
n Management is confident of managing 5% margins for remaining part of FY11
and would launch Sylvania in India over next two quarters.
KEY CONCERNS
Delays in Sylvania restructuring
While we expect meaningful earning contributions from Sylvania post
restructuring, repayment of acquisition loan 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.
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.
Stiff 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.
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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