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Havells India Limited
All lit up and ready to shine
Investment rationale
Comprehensive product profile
HIL’s product profile in the electricals space spans the entire value chain from
cables and wires to switchgears. Over the years, it has kept adding products
to its portfolio while maintaining strong focus on quality. These factors have
contributed to HIL becoming a ‘One-Stop-Shop’ for customers, enabling it to
capture a larger chunk of the Indian consumer spend on household electricals.
Strong brand recall and distribution
Its marketing strategy is centered around brand recall. Its ad spends are on
par with multinational peers and designed to showcase individual products.
It has backed this up with a formidable distribution network in Tier 1-2 cities
and is now focusing on increasing its penetration in the rural hinterland.
Sylvania bogey exorcised
HIL had acquired the global operations of Sylvania in Apr’07 for Euro227m.
After losses incurred during the slowdown of FY09, HIL restructured Sylvania’s
operations and headcount. As a result, the latter is now profitable at the PAT
level and its operations and cash flows are expected to improve going forward.
Robust operational cash flows to boost valuations
With steady cash generation from Indian operations and operational
profitability achieved in Sylvania, we estimate cash flows to improve
substantially from FY11e onwards. Consequently, debt retirement over the
next few years should reflect in an improved EV on the consolidated level.
Valuation and outlook
While new product launches and improved penetration into foreign markets
will serve as kickers for earnings, the successful monetisation of its two strong
brands are crucial to improved financial metrics. Given its ability to successfully
negotiate challenging situations, we are confident that HIL will accomplish
the same. We recommend a BUY on the stock with a target price of INR495.
Investment rationale
Havells India Limited (HIL), incorporated in 1983, is promoted by Mr. Q.R. Gupta
and one of India’s premier electrical equipment companies. With a comprehensive
product profile that encompasses cables and wires, switchgears and electrical durables
like CFLs, fans, water geysers, switches, etc., it is one of the most preferred brands in
these product segments.
The company has an international presence through Sylvania, which it acquired in
Apr’07 for a consideration of Euro227m. The primary driver for the same was access
to markets like Europe, L. America and some parts of Asia, where Sylvania’s brand
was well established.
Operational overview
Indian operations
HIL is a dominant player in the domestic electrical durables and lighting and fixtures
segments. Over the years, it has regularly expanded its product profile, with hot water
geysers being the latest addition. Its contemporary product repertoire, coupled with a
strong focus on quality through in-house manufacturing (except lighting fixtures) have
stood the company in good stead. Simultaneously, HIL has consistently marketed its
products as ‘Value-for-Money’ propositions, backing the same with one of the most
extensive distribution networks in the industry. Consequently, HIL is amongst the ‘Top
Five’ consumer electricals brands in India. The same is evident from the growth in HIL’s
operating metrics, wherein revenues and operating profits have registered a CAGR of
17% and 29% over the past four years (FY07-10).
Sylvania
HIL’s Euro227m acquisition of Sylvania was effected with the intention to access markets
in Europe, Latin America and Asia with the help of the latter’s brands viz. Sylvania,
Concord:Marlin, Lumiance, SLI Lighting, Zenith and Linolite. However, things turned
sour when Sylvania started bleeding operationally during the economic downturn of
FY09. HIL infused Euro12m as equity and restructured operations by shutting down
some production lines in Europe, outsourcing products from China and India, right
sizing the workforce and renegotiating the terms of credit from suppliers. Consequently,
Sylvania posted an PAT of Euro1.3m (v/s loss of Euro10.2m) in 2QFY11.
Valuation and outlook
HIL’s Indian operations have always been on a firm footing, with the company clocking
consistent improvement in revenues over the past four years. Backed by an aggressive
advertising campaign and new product launches, HIL’s monthly revenues currently
hover between INR2-2.5bn. The increase in volumes and tight controls over costs have
ensured a steady increase in HIL’s OPM from 9% in FY07 to 12.6% in FY10.
Till recently, Sylvania’s operations and financials were proving to be a drag on overall
valuations for HIL. The efficacy of measures like higher focus on sales in emerging
markets in L. America, outsourcing of production and right-sizing of the workforce is
evident from last quarter’s results and we expect these to continue to contribute towards
an improvement in operating metrics going forward. Additionally, we feel that Sylvania’s
brands have yet to be monetised to the fullest and that the foray into L. America and
the Far East will help fetch richer realisations and margins.
Going forward, we expect the HIL’s consolidated revenues at INR60bn, with an EBIDTA
of 10.3% and PAT of INR3.1bn. The crucial factor is the generation of sustainable
cash flows with which HIL will retire Sylvania’s debt. In FY12, we expect the company
to maintain its growth trajectory, with revenues of INR66bn, OPM of 11.7% and PAT
of INR4bn.
At the CMP of INR393, HIL trading at a PER and EV/EBIDTA multiple of 12.3x and
6.5x respectively, discounting its FY12e numbers. We have valued the company using
the ‘Sum-of-Parts’ method and assigning EBIDTA multiples to HIL’s and Sylvania’s profits.
We are optimistic about the overall operations of HIL and believe that the gradual
reduction in Sylvania’s debt over the next few years coupled with the buoyancy in
Indian operations will trigger a re-rating in the stock. We recommend a BUY with a
price target of INR495, which reflects an upside of 26% from current levels.
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