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UBS Investment Research
Havells India
Sylvania to light up growth in India
„ Launch of Sylvania’s lighting products in India could provide upside
We spoke with management about Havells’ plans for Sylvania lighting products in
India. We believe that sale of Sylvania’s lighting products in India will provide
Havells a significant opportunity to enrich its product portfolio in the Rs23bn
market for luminaires. We think this could provide upside to our and consensus
estimates.
„ Investor concerns misplaced
Some investors are concerned that the company’s cable and wire business is a
commodity-like business. Our analysis shows that Havells has historically
generated very attractive ROIC in this business. Additionally, some investors are
worried about muted growth in Switchgear in H1 FY11. Our analysis shows that
after adjusting for contract manufacturing contracts that are being terminated by
Havells, Havells grew its switchgear revenue 22% YoY in H1 FY11.
„ Robust consumption environment to drive growth
Our checks indicate the consumption environment should stay robust, and we think
this will drive December 2010 and March 2011 quarterly growth. Monthly auto
sales numbers have been robust for the past three months.
„ Valuation: trading at 14x FY12E PE, with forecast 20% EPS CAGR
We maintain our Buy rating and price target of Rs465.00. We derive our price
target from a DCF-based methodology and explicitly forecast long-term valuation
drives using UBS’s VCAM tool. The stock is trading at 14x FY12E PE. We
believe this is very attractive for a high quality business: for FY11-15 we forecast
30%+ ROE and 20%+ EPS growth. Our price target is 28% above the current
level.
Sylvania products provide attractive growth
opportunity in India
Havells is launching Sylvania’s lighting luminaires products in India. We
believe this will provide a significant growth opportunity over the next two
years.
Lighting is a Rs70bn market in India, of this, luminaires is a Rs23bn market.
The luminaires market is highly fragmented.
Havells has historically focused on middle-market luminaires products. This is
the result of its limited history in the lighting business, which it entered in FY05.
Havells has now launched Sylvania’s luminaires in India. The products are
targeted at end markets such as hotels, high-end malls, department stores, car
showrooms, large corporate offices and airports. The high-end luminaires
market is growing at a 40-50% CAGR from a small base as per the company,
and Havells management indicates it intends to achieve market leadership in this
space. Havells is embarking on several key initiatives to gain market leadership
in the luminaires space:
Q Tying up with leading architects and lighting consultants: Havells has
identified leading architects and lighting consultants, who are key in
influencing purchase decisions of end customers. Havells has identified over
150 such consultants and architects in north, east, west and south India. The
company is educating these consultants in the luminaire products it can
provide.
Q Creating an 8,000 sq ft ‘experience room’ in the corporate headquarters in
Noida: This room (scheduled to be operational in February 2011) will
provide lighting consultants and architects a first-hand demonstration of the
luminaire product portfolio.
We believe that a superior product portfolio, consultant and architect
relationships and state-of-the-art ‘experience room’ will provide Havells with
significant growth potential in lighting business. Havells grew its lighting
business in India 24% YoY in FY10 and 30% YoY in H1 FY11. We believe our
estimates of 24% YoY growth over FY11-FY13 are conservative.
Cable and wire generates attractive return on
capital
Some investors are worried that the cable and wire segment is a commodity-like
business, and that cable and wires generates 45% of revenue for Havells and
hence Havells should have a lower multiple. Our analysis shows that Havells
has generated EBIT ROIC in the range of 35%-45% from the cables and wire
business over the past four years. This includes the period of extreme volatility
in copper and aluminium prices and Q408, when Havells reimbursed distributors
for inventory losses the distributors suffered.
High ROIC in the cable and wire business should address investor concerns that
cable and wire is a commodity-like business.
Switchgear grew attractively in H1 FY11
Havells reported 9% YoY growth in the switchgear business in H1 FY11.
During this period its switchgear exports declined from Rs600m to Rs300m.
Part of this was driven by Havells decision to launch its own branded switchgear
in the UK market—it was manufacturing switchgear for an international vendor
but decided to stop so it could launch its own switchgear product in the UK.
The company estimates it will launch its product in the UK in Q112.
After adjusting for the drop in exports, Havells’ switchgear business grew at
22% YoY in H1 FY11. We believe Havells will continue to grow its switchgear
business at an industry-leading pace and maintain its leadership position in the
domestic switchgear business.
Our conversations with some industry participants indicate two key aspects of
the switchgear market:
Q The leading switchgear manufacturers exercise pricing discipline and have
chosen not to compete on prices. Additionally, Havells has historically sold
at a discount to MNC brands and this discount has been narrowing. We
estimate Havells can raise prices by up to 10% over the next two years and
still be at a slight discount to MNC competitors.
Q There continues to be a shift from unorganised to organised companies in the
switch segment. Switch/wire accessories is an Rs12bn market.
We believe this segment provides an attractive growth opportunity for Havells:
— Our conversations with industry participants indicate that 40-50% of the
market is unorganised. There is a continued shift from unorganised to
organized companies as consumers seek branded products.
— Havells has the number two market position in switches/wire accessories.
The leading brand in switches, Anchor was acquired by Panasonic in
2007. Panasonic has not been as effective in managing the channel
relationships Anchor had established and has been losing incremental
market share. We think Havells can benefit in this segment.
Consumption environment stays robust, as indicated by auto volumes
Our checks indicate a very robust consumption environment. We expect this to
continue. Auto sales volumes were very robust in December 2010 and have been
YTD in 2011.
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