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Havells India Ltd
Initiation
Overweight
HVEL.NS, HAVL IN
Switch it on
• Initiate with Overweight, PT of Rs480: Our PT implies upside potential
of 26% from current levels. HAVL is a leading producer of branded
electrical products in India with strong presence in areas like switchgears,
cables & wires, lighting products & fixtures and in consumer durables. It
acquired Sylvania’s European, Latin American and Asian operations in
2007.
• Sustainable, long-term multiple growth drivers: Rising electrification,
real estate growth and a shift to energy-efficient lighting are driving strong
growth for the product segments in which HAVL operates. Over the last
five years, these segments have grown at a CAGR of 8%-30% and we
expect similar growth to continue going forward. HAVL’s market
leadership in most of these segments makes it well-positioned to benefit
from rising demand.
• Brand investments, distribution and portfolio enhancement driving
market share gains: HAVL has strong brand equity, created over the last
few years through aggressive advertising. It has a pan-India network of
4000 dealers which it continues to enhance. As a result, it has steadily
gained market share across most of its product segments and we expect this
to sustain going forward. Additionally, its brand equity and distribution will
aid roll-out of its new consumer durable products.
• Sylvania turnaround to drive stock re-rating: Sylvania’s earnings
(negative in FY10 to 8% contribution in 1HFY11) have turned around on
the back of restructuring, which bodes well for valuations. A sustained
pickup in Sylvania margins is likely to drive a re-rating for HAVL stock, in
our view.
• Price target, valuation, key risks: Our Sep-11 price target is based on 16x
FY12P/E, a 25% discount to its historical trading average and a c.20%
premium to global peers. We believe this premium is justified, given large
exposure to the fast-growing Indian market and rising contributions from
other emerging markets. Key risks include delay in restructuring of
Sylvania, a rise in raw material prices, inability to scale up new products,
rising competitive intensity, and F/X fluctuations.
PT and valuation analysis
Our price target of Rs480 is based on 16x FY12E P/E, a 25%
discount to historical average and a 20% premium to the
global peer group.
HAVL is currently trading at a discount of 8% on FY12E P/E
and a discount of 28% on FY13E P/E relative to Indian peers.
It is currently trading at a discount of 4% on FY12E P/E and
a discount of 18% on FY13E P/E relative to global peers.
Key risks to our rating and PT are a delay in Sylvania
restructuring, an increase in raw material prices, an inability
to scale up new products, increase in competitive intensity,
and F/X fluctuations.
Investment thesis
We initiate coverage on HAVL with an Overweight rating and a price target of
Rs480. Our price target is based on 16x FY12E P/E. HAVL is a leading player in the
branded electrical segments in India and has strong presence in segments like
switchgears, cables & wires, lighting products & fixtures and in consumer durables
like fans. We believe HAVL is well-positioned to benefit from increasing
electrification, rising housing demand in India, and a shift toward energy-saving
lighting products – sustainable long-term growth themes in our view. Demand
electrical product segments in which HAVL operates has increased rapidly over the
past few years – ranging between 8% and 30% CAGR over the past five years, and
we expect this trend to continue going forward.
Over the last few years, HAVL has increased its focus on the household consumer
segment and has transformed into a strong branded player by scaling up its branding
investments – its advertising budgets are highest amongst its peer group. As a result,
HAVL has been able to increase its market share given its high brand visibility.
Going forward, we believe HAVL will be well-positioned to leverage off its strong
brand equity as it rolls out new products in the consumer durables segment. HAVL
also has a strong distribution network comprising of more than 4000 dealers in India.
HAVL is looking to add 500 new dealers each year to expand its reach. In addition, it
is rolling out exclusive brand outlets under the name of “Havells Galaxy.” Exclusive
stores improve visibility of the Havells brand in addition to widening the distribution
network. It currently has about 50 outlets which are likely to expand to over 100 by
FY13E.
Havells acquired Sylvania global business (except for brand rights to North America,
Mexico, Australia and New Zealand) in for an enterprise value of €227MM. HAVL’s
stock de-rated following the acquisition on account of concerns pertaining to losses
in Sylvania. HAVL put a restructuring program in place to turn around Sylvania’s
operations. As a result, Sylvania has recently broke even and we expect margins to
improve going forward. We believe that a sustained improvement in Sylvania’s
profitability will bode well for HAVL valuations and will drive a stock re-rating. We
estimate Sylvania’s contribution to consolidated profits to increase to 26% by FY13E
from a negative (242%) in FY10.
We forecast a consolidated earnings CAGR of 91% over FY10-FY13E. HAVL stock
currently trades at 12.6x FY12E P/E, a 40% discount to its historical trading average
and an 8% discount to domestic peers. We believe that sustained market share gains,
roll-out of the consumer durables portfolio, and a pick-up on Sylvania’s profitability
will drive a stock re-rating. Our target multiple of 16x is a 22% premium to the
global peer group, but is at a 24% discount to its historical trading average. While we
do not see HAVL trading up to its pre-Sylvania valuations, we believe it can trade at
a premium to global peers given its strong presence in high-growth emerging
markets.
Positive drivers
Benefiting from rising electrification, real estate demand, and shift toward
energy-saving lighting
HAVL, a leading producer of branded electrical products, is well-positioned to
benefit from increasing electrification, rising housing demand in India, and a shift
toward energy-saving lighting products – sustainable long-term growth themes in our
view. HAVL has a strong presence in segments like switchgears, cables & wires,
lighting products & fixtures and in consumer durables like fans. Demand for these
products is increasing rapidly (8%-30%growth over the past 5 years) and we expect
this trend to continue going forward.
We enumerate below our outlook on growth for HAVL’s key product segements.
1. Wires & Cables: India is currently a power deficient country with peak power
deficit (Apr-Aug'10) running at 13.8% of demand, while per capita consumption
of electricity is 566KW vs. a global average of 2782KW.
Government of India has announced significant investments in building power
infrastructure. During the 11th five-year plan (FY08-FY12E) the government targets
an investment of Rs2892 billion on power transmission and distribution. Cables &
conductors typically account for about 22.5% of the total spending. Thus, for the
11th five-year plan, the addressable market for power conductors and cables is
almost Rs630bn. While the capacity expansion is lagging behind plans, the scale is
still large enough to provide large growth opportunity.
Wires & Cables account for 20% of HAVL’s domestic revenues. HAVL is
largely present in low voltage cables which are used for power distribution. The
cable industry in India is highly fragmented, with un-organized players
accounting for almost 40% of the market. Amongst the organized players,
Sterlite Technologies, Finolex and Polycab are strong players. The industry has
grown at a 25% CAGR in terms of revenues over the last 5 years, while HAVL’s
cable business has grown at a 29% CAGR over the same period. Over the last
few years, HAVL has gained market share, driven by its strong brand
investments and shift of consumer preference toward branded products. Going
forward, we estimate 15% revenue CAGR over FY10-FY13E for HAVL’s cable
business.
2. Switchgears: HAVL caters to the low-voltage switchgear market, both for
domestic and industrial consumers. The market for switchgears is highly
concentrated with a top few players controlling a large portion of the market.
HAVL leads the market for the domestic switchgear business estimated at
Rs12B with market share of 20% in FY10. It is a number #4 player in industrial
switchgears with a market share of 8%. We expect demand for switchgears to
remain strong on the back of rising construction activity, improving supply of
electricity and preference for branded products. We estimate revenue CAGR of
7% for HAVL’s switchgear business over FY10-FY13E.
3. Lighting & Fixtures: Havells has a strong presence in the Luminaries and CFL
segments with the second-largest market share in CFL and the fourth-largest
share in luminaries. CFL market size in India is currently estimated at Rs12B
and is growing at over 20% per annum, driven by a shift toward power-saving
lighting products. (CFL products typically consume 70%-80% less power
compared to general lighting products). HAVL has a 10% market share of CFL
products and we expect its growth to remain strong going forward as shift
toward energy-saving products intensifies. In luminaries, HAVL’s market share
has increased from 3% in FY06 to 10% in FY10 driven by strong brand building
and distribution network. We estimate sales CAGR of 24% for HAVL’s lighting
and fixtures segment over FY10-FY13E.
4. Electrical Durables: HAVL ventured into electric durables with electric fans
and is now looking to expand its product portfolio. It has recently introduced
electric motors and has announced plans to launch geysers and irons going
forward. Havells is the third-largest player in the Rs20B domestic fans market
with a market share of 18%. Its market share has increased from 6% in FY06 to
18% on the back of consumer preference shifting from unbranded to branded
players. We estimate sales CAGR of 27% over FY10-FY13 for HAVL.
Strong market positioning accentuated by brand investments and distribution
HAVL has market leadership in domestic switch gears and is a top 3-4 player in the
other segments. It has a widespread distribution network constituting 91 branches
and representative offices across 50 countries around the world. In recent years,
Havells has gradually shifted its product mix toward retail consumers and its sales to
industrial users have gradually declined. Domestic consumers now constitute almost
70% of its sales.
Over the last few years, HAVL has transformed into a strong branded player by
investing in brand building through increased advertising – its advertising budgets
are highest amongst its peer group. As a result, HAVL has been able to increase its
market share, given its high brand visibility. Going forward, we believe that this
bodes well for HAVL as it rolls out new products in the electrical durables segment.
HAVL also established a strong pan India distribution network, which it is looking to
enhance further. It currently has more than 4000 dealers in India, which it is looking
to increase by about 500 each year in order to expand its reach. In addition, it is
rolling out exclusive brand outlets under the name of “Havells Galaxy.” Exclusive
stores improve visibility of the Havells brand in addition to widening the distribution
network. HAVL’s investment in these stores is limited only to display products and
these stores are owned by the dealers. It currently has about 50 outlets which are
likely to expand to over 100 by FY13E.
Turnaround of Sylvania to drive re-rating
HAVL’s stock de-rated following its acquisition of Sylvania in 2007 on account of
concerns pertaining to losses in Sylvania and its ability to service debt that was raised
to acquire Sylvania. HAVL put a restructuring program in place to turn around
Sylvania’s operations. As a result of the restructuring, Sylvania has recently broken
even on the net profit level and we expect margins to improve going forward. We
believe that a sustained improvement in Sylvania’s profitability will bode well for
HAVL valuations and will drive a stock re-rating.
Havells acquired Sylvania’s global business (except for brand rights to North
America, Mexico, Australia and New Zealand) in 2007 from private equity players
for an enterprise value of €227MM. Sylvania is a 100-year old company and the No.
4 global player in lighting and fixtures. The rationale behind the acquisition was to
acquire Sylvania’s presence and distribution network in Europe and leverage
Sylvania’s brand to enter other emerging markets. The implied valuation paid for
Sylvania was about 7.5x EV/EBITDA. However, post the acquisition, Sylvania’s
financial performance deteriorated owing to a global economic slowdown. As a
result, HAVL’s stock had a sharp de-rating in its valuation. HAVL put together a
restructuring program to turn Sylvania around. The restructuring was carried out in
two phases:
1. Phase-I (Phoenix): This plan entailed rationalizing high fixed-cost structure
by reducing manpower and closing plants in high-cost countries in Europe
and Latin America. This plan was implemented between Jan-09 and Sep-09
with one-time cost of €12MM and estimated annual savings from this plan
(already being seen) are to the tune of €17MM.
2. Phase-II (Prakram): This plan, being implemented between Sep-09 and
Dec-10, focuses on a reduction in personnel cost in Europe by outsourcing
the production of non-core components to low-cost manufacturing locations
like China and India. One-time cost of this restructuring plan is expected to
be €20MM and potential annual savings (achieved partly in FY10) are
expected to be €16MM.
Focus on manpower reduction has been limited to production areas. HAVL has not
cut down on the distribution structure of Sylvania; with a view to benefit from a
recovery in the European market demand. Additionally, HAVL has been
aggressively expanding Sylvania’s operations into Latin America, South East Asia,
Middle East and China, with a view to reduce dependence on the European markets.
We estimate Europe to decline from current levels of about 70% to about 59% by
FY13E. HAVL management has indicated that they are looking to reduce the
contribution from the European markets to 50% over the next few years.
As a result of the restructuring, Sylvania has broken even on the PAT level in
2QFY11 and we expect margins to improve going forward. We forecast EBITDA
margin for Sylvania to improve from -0.2% to 9% by FY13E. We estimate Sylvania
to contribute 26% to the consolidated profits for HAVL by FY13E.
Key risks to our rating and price target
Delay in restructuring of Sylvania
We expect Sylvania restructuring to be complete by this year and annual savings to
flow in from this year onwards. Our assumptions for Sylvania are based on flat
growth in Europe and significant growth in Latin America and Asia. Any delay in
restructuring of Sylvania or slowdown in Europe and Latin America (implying
negative growth in these regions) could have a significant impact on our estimates
and adversely affect our valuations.
Increase in raw material prices
Havells earnings are vulnerable to raw material price volatilities. Although, HAVL
has pricing power for most of its products, any sudden jump in key input prices for
its wire business (copper and aluminum) is likely to lead to near-term margin
compression and could adversely impact our estimates.
Rising competitive intensity
Entry of new global players like Legrand and Schnider in the electrical market in
India has increased the competitive intensity. We believe that HAVL would be able
to maintain its market share despite rising competitive intensity. However, any sharp
decline in the market share or larger-than-expected spend on selling & promotion
expenses to maintain market share could adversely impact our earnings estimates.
Inability to scale up new electric durable products
HAVL is looking to expand its presence in the consumer durables segment by rolling
out geysers, irons and electric motors. These segments are highly competitive and
have well established players with strong balance sheets. If HAVL is unable to scale
up its new products, it is likely to have an adverse impact on our earnings estimates
as well as on stock valuations.
Adverse movements in F/X
Over the last couple of years, HAVL has increased the outsourcing of components of
Sylvania from emerging markets like India and China. Strong appreciation in
currencies of such countries vs. euro could impact earnings estimates for Sylvania.
Further, strong revenue growth expected in Latin America could be adversely
impacted by a strengthening euro.
Valuation and share price analysis
Havells is currently trading at 12.6x FY12E P/E, a 40% discount to its historical
average and a 4% discount to the global peer group. Over the last five years, Havells'
has been trading at a premium of 25%-30% relative to MSCI’s one-year forward P/E.
However, over the last 12 months, it has been trading at a discount of 5%-15%.
We base our valuations for Havells using global peer group multiples. Our target
price of Rs480 is based on 16x FY12E P/E, at a 24% discount to its historical trading
average and about a 20% premium to the global peer group. We attribute a discount
to its historic valuations on account of Sylvania, which has exposed HAVL to slow
growing European market. We believe the premium to global peer group is justified
given the large exposure to the fast-growing Indian market and increasing
contribution from other emerging markets.
Peer comparables
Havells is engaged mostly in the business of consumer electronics with over twothirds of products distributed to retail consumer. Hence, we compare to consumer
durables manufacturers, who address similar end markets across various geographies.
Compared to its domestic peers, HAVL is trading at a discount of 8% on FY12E P/E
and at discount of 28% on FY13E P/E. Relative to global peers, Havells' is trading at
a discount of 4% on FY12E P/E and at a discount of 18% on FY13E P/E.
Company description
Havells India Ltd. is one of the largest electrical and power distribution equipment
manufacturers in India. Its products include industrial and domestic circuit protection
devices, cables and wires, motors, fans, power capacitors, compact fluorescent lamps
(CFLs), luminaries for domestic, commercial and industrial applications and modular
switches. Its brands include Havells, Crabtree, Sylvania, Concord, Luminance,
Linolite and SLI Lighting.
In April 2007, Havells acquired the lightning business of Sylvania worldwide
excluding brand rights in North America and Oceania. Sylvania is the world’s fourthlargest lighting and fixture brand having strong presence across Europe and Latin
America. The rationale behind the acquisition was to acquire Sylvania’s presence and
distribution network in Europe and leverage Sylvania’s brand to enter the emerging
markets.
Along with Sylvania’s distribution network, Havells has a well spread presence with
91 branches/representative offices and over 8000 professionals in over 50 countries
across the globe. The company’s manufacturing plants are located in Haridwar,
Baddi, Noida, Sahibabad, Alwar, Neemrana and Faridabad. In addition, eight plants
(acquired through Sylvania) are located across Europe, Latin America & Africa.
Havells operates through four business divisions: switchgears, cables and wires,
lighting and fixtures, and electrical consumer durables
Switchgears: The switchgears division offers circuit protection devices for retail and
industrial consumers. The division's products include various types of circuit
breakers, switches, sockets, regulators, on/off load changeover and switch
disconnector fuse. The switchgear manufacturing unit is located in Baddi, Himachal
Pradesh and Faridabad. For FY10, Switchgears comprised 20% of group revenues
and 8% of group EBITDA.
Cables: The cables and wires division offers aluminum power cables, copper control
cables and copper flexible cables. Havells' cable plant is located in Alwar, Rajasthan.
For FY10, Cables comprised 14% of group revenues and 24% of group EBITDA.
Lighting & Fixtures: This is the largest division of Havells and includes Sylvania.
The lighting and fixtures division manufactures compact fluorescent lamps (CFLs),
light-emitting-diode (LED) lighting, consumer/commercial/industrial lighting,
specialty lamps and other lighting fixtures. Most of capacities under this division are
located in Europe and Latin America under Sylvania. In India, capacitor plant is
located in Noida. For FY10, Lighting & Fixtures comprised 58% of group revenues
and 59% of group EBITDA.
Electrical consumable durables: Under this division, the company manufactures
different kinds of fans such as ceiling fan, table fan, wall mounting fan, pedestal fan
and ventilating fans. The company's fan manufacturing plant is located at Haridwar.
For FY10, Electrical consumable durables comprised 7% of group revenues and 8%
of group EBITDA
Management background
Havells brand was bought over in 1971 by the current chairman and MD, Mr. Qimat
Rai Gupta. Day-to-day management is handled by Mr. Anil Gupta, Joint MD, who
looks after Sylvania, marketing and brand-building; Mr. Surjit Gupta, DirectorOperations and Mr. Rajesh Gupta, Director-Finance. Havells’ board currently
comprises 10 directors, of which five are independent. The board also has one nonindependent nominee of Warbug Pincus as an investor.
Shareholding trend
At end of Sep-2010, promoter holding in the company was 61.6%, while FIIs
shareholding was 16.8%. Shareholding trends are enumerated below:
Financial Analysis
Consolidate earnings CAGR of 91% over FY10-FY13E
We estimate consolidated earnings CAGR of 91% over FY10-FY13E. We expect
earnings growth to be driven by revenue CAGR of 8% over FY10-FY13E and
EBITDA margin expansion of 530bps over FY10-FY13E.
Sales CAGR of 8% over FY10-FY13E, 530bps EBITDA margin expansion
We forecast sales CAGR of 8% over FY10-FY13E. We estimate domestic sales to
grow at a CAGR of 15% over FY10-FY13E driven by strong growth in lighting
(mostly CFL) and electrical durables (through introduction of new products such as
electric motors, geysers and irons). We expect Sylvania revenues to grow modestly at
1% CAGR over the same period estimating sales growth to remain flat in Europe.
We forecast EBITDA margins to expand 530bps over FY10-FY13E as Sylvania
turns around and operational efficiencies from new domestic capacities start kicking
in.
Earnings sensitive to copper and aluminum prices
Copper and aluminum are key raw materials used in manufacturing of cables and
wires. In FY10, copper accounted for 26% of total domestic business raw material
costs and aluminum accounted for 17% of the domestic raw material costs. Copper
prices have been rising steadily over the past year and our outlook on copper prices
remains bullish. We are assuming a 20% average increase in copper prices in FY11E
and a further 10% increase in FY12E. According to the HAVL management, they are
likely to pass on any raw material cost increases.
We enumerate below sensitivities to our FY12 consolidated earnings estimates to a
1% increase in copper and aluminum prices over our assumptions. Every 1% change
in copper prices impacts FY12E earnings by 1.3%, while every 1% change in
aluminum prices impacts earnings by 0.7%.
Gearing to decline as free cash flow picks up
We expect HAVL will incur cumulative capital expenditures of Rs3.8B over FY10-
FY13E mainly on domestic capacity expansion. We do not expect any further
investments in Sylvania except maintenance capex of €2-3MM per year. We believe
HAVL should generate sufficient cash flows (Rs14B Operating cash flow over
FY10-FY13E) to fund these capex plans as well as to reduce its gearing levels. We
expect HAVL’s net gearing to decline from 2.3x in FY10 to 0.4x by FY13E. Interest
cover ratio should improve from 3.3x in FY10 to 14.2x by FY13E.
Capital Efficiency to improve with Sylvania turnaround
We expect capital efficiency ratios to improve going forward with an improvement in
Sylvania earnings. We expect ROCE to improve from 7.6% in FY10 to 26.8% in
FY13E and ROE to improve from 17.4% in FY10 to 45.7% in FY13E.
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