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Havells India BUY:: Charged up
Electrical consumer-goods major Havells is a beneficiary of
robust demand growth based on upgrading consumer
preferences and increased construction activity in its key
verticals—switchgears, lighting fixtures, consumer durables
(fans) and cables/wires. Strong brands built through
aggressive advertising strategy and extensive distribution
networks are sustainable growth drivers. Consolidated
leverage is set to decline, with its European lighting-fixtures
acquisition Sylvania looking to breakeven in FY12, post
restructuring. The stock’s current P/E of 11.8 on FY12ii is
reasonable, in our view, and our target price of Rs475
(ascribing zero equity value to Sylvania) indicates 36%
upside. We retain BUY.
Domestic business is a good play on the consumption theme:
Havells’s consumer businesses such as fans, lighting fixtures, and
CFLs (compact fluorescent lamps) are its fastest-growing domestic
businesses (growing at over 30% annually). We assume 14.4%
CAGR in standalone revenues over FY10-13ii, driven by higher
growth rates in consumer businesses. The company spends ~2-4%
of its revenues on advertising, and has about 2,000 distributors in
India who in turn reach out to ~25,000 retail points.
Significant progress at Sylvania: Havells India acquired Sylvania
for an EV of €227m in April 2007 (€200m debt, €27m pension
liability). According to the company, restructuring efforts through
‘Operation Phoenix’ and ‘Parakram’ at an estimated cost of €32m
would generate annual savings of €39m (mainly in manpower costs),
and would be fully visible in FY12, when the company should
breakeven. In our estimate of Sylvania’s turnaround, we do not
assume any growth spurt or gross margin improvement in the entity.
Pricing power helps margin defence, improved financials,
attractive valuations: With medium competitive intensity in all
segments, except cables and wires, price increases to manage rawmaterial
inflation is par for the course. With the breakeven in
Sylvania and strong cash flows of the domestic business, leverage
should reduce to about 1.1x. Our target price of Rs475 is based on
19x FY12ii EPS (standalone). Key risks are a delay in Sylvania’s
breakeven and raw-material inflation.
Domestic business plays strongly into
consumption theme
The company has four main segments in its standalone domestic
business:
electrical consumer durables;
lighting and fixtures;
switchgear; and
cables and wires
In all of these businesses, the proportion of industrial buying is
small, and almost all of them are driven by domestic consumer
demand. As buyers become ever more quality-conscious and the
market becomes more broad-based (thanks to increasing prosperity
of tier-2 and tier-3 cities), the size of opportunity for a player like
Havells, with nationwide distribution and well-known brands, is large.
In the smaller industrial buying business component, the company is
a beneficiary of India’s construction theme and industrial capex,
including power capacity and T&D infrastructure augmentation
Switchgears – highest-value-added segment
Havells is a leading name in circuit protection devices in India. This
market is dominated by big-name multinationals with significant
pricing discipline, which makes the segment very lucrative. It is the
largest manufacturer of MCBs (miniature circuit breakers) in India,
and among the top ten in the world. The company manufactures a
wide range of products, including MCBs, mini MCBs, RCCB (residual
current circuit breaker), RCBO (residual current breaker with
overload protection), switches, sockets, regulators, MCCBs (moulded
case circuit breakers), rewirable switches, off-load changeovers, onload
changeovers and SDFs (switch disconnector fuse).
Havells manufactures these products in Baddi (Himachal Pradesh)
and Faridabad (Haryana). Havells has exclusive rights to market the
Crabtree brand in India and sells modular plate switches under this
brand name. These switches are aimed at the upper end of the
consumer market. In FY10, the brand recorded revenues of about
Rs1.5bn. The brand is number 2 in terms of market share, which has
increased from 5% in 2006 to 15% in FY10 (an estimated Rs10bn
market).
In the Rs20bn industrial switchgear market (based on FY10
revenue), Havells has a market share of about 8%. Switchgears,
given the critical safety they offer against short circuits, have
remained a quality-sensitive category—consumers prefer to pay a
premium for quality rather than cutting corners. This is further
helped by competitors in the segment, such as L&T (largely
industrials focussed business), Siemens and Schneider, who are
value-conscious incumbents and respect the need for pricing
discipline. Contribution margins in the segment have risen
substantially in the last few years (see chart below), reflecting the
market’s quality consciousness
Domestic lighting and fixtures – rapid growth, expanding
margins
Havells’ domestic lighting and fixtures business is positioned at the
higher end of the CFL market. The bottom end of the market faces
significant competition from unorganised players and cheap Chinese
imports. At the totally-commoditised bottom-end of the price
pyramid, manufacturing for almost all players is outsourced to China.
But in the higher price bands, a preference for high quality has
stayed ever since the first incursion of Chinese-built products ten
years ago.
In the Rs12bn CFL market, Havells is the second-largest player (after
Philips), with a market share of 10%. In the Rs20bn luminaires
segment, its market share is again 10%, with Philips and Bajaj
Electricals being other leading players. The company’s Neemrana
facility meets its global demand for CFL units (including Sylvania).
The company’s policy of staying out of the mass market is reflected
in the contribution margins it earns in the segment. With Sylvania’s
products likely to be introduced in this segment in India soon, we
expect acceleration in revenue growth and margin expansion in the
medium term (on an annual basis), as the cross-sold products are
likely to be at the top-end of the price pyramid.
Consumer durables – expanding from single product presence
Havells’s presence in the consumer-durables segment has so far
been confined to fans. The company’s fan factory in Haridwar is the
largest such facility in India. In fans, the table-top and portable fans
segments are overwhelmingly dominated by Chinese imports, and
even the lower-value ceiling–fan segment is intensely pricecompetitive.
Havells has chosen to be present in only the Rs1,000+
price category, thereby maintaining healthy margins. Outlook for this
business remains strong, given broad-based consumption growth in
India. The company is now moving into other parts of the consumerdurables
business, with new categories such as water storage
geysers and other home implements.
The fans market in India is estimated at Rs20bn, and Havells
currently has about 18% market share—a rapid scale-up from its
FY06 market share of 6%. The leading players are Crompton
Greaves and Orient Fans, followed by Bajaj Electricals. Smaller
players such as Polar and Khaitan are also forces to reckon with in
their own geographies.
Cables and wires – lowest-margin business
The company manufactures a complete range of low- and highvoltage
PVC and XLPE cables, besides domestic FR/FRLS wires, coaxial
TV and telephone cables. The manufacturing unit is in Alwar,
Rajasthan, and is equipped to handle cables up to voltages of 66KV.
This business accounts for 43% of Havells’s standalone revenues,
but only 17% of its contribution profit. The key competition in this
segment is from Finolex Cables, Polycab, and KEI Industries. Torrent
Cables also has a significant presence, but mostly in the higher-value
high-voltage segment. Havells has about 9% market share in a
Rs120bn annual revenue pie.
Cables and wires is the least profitable business for Havells India.
Prices of cables track those of copper, although with some lag.
Contribution margins are a modest 5-10%, and can turn negative for
short periods in case of sudden inventory pile-up due to sudden
demand slowdown. There is little value addition in this business, and
it is not a major focus area for future growth. Nevertheless, the
company does advertise this business on national television, mainly
to build the Havells brand rather than to build revenue momentum in
the category. Furthermore, the consumer end of the business is
more profitable and less working-capital-intensive (no credit), and is
a preferred sub-segment for Havells. In FY11, much of the revenue
growth in the segment will come from hardening copper prices that
are being passed through; Havells has been singularly aggressive in
this respect.
High branding spend appropriate for a consumer business
Havells spends 2-4% of its annual revenues on advertising, which
compares favourably with other consumer companies. Through
branding initiatives, the company has been able to create high
visibility for a number of its brands.
Wide distribution network – a pillar of Havells’s business model
Advertising helps build visibility, but an even bigger growth driver in
the domestic market is Havells’s distribution network. Havells has
about 2,000 distributors in India, and each of these reaches out to
about 25,000 retail points of sale. Havells’s success in distribution
can be attributed to the following factors:
Distributors prefer to stock brands that maximise churn of their
own capital. This translates to a preference for fast-moving
categories, as it is difficult for manufacturers to differentiate
much on commissions and credit terms. Havells’s portfolio of
fast-moving brands makes it a favourite among distributors, as
these products generate higher RoIs for dealers.
Havells straddles a significant portion of the electrical-goods
value chain, and for the dealer, a single relationship helps with
multiple SKUs.
Dealers are often short on organised credit and are sometimes
stuck with inventories in downturns. In such times, small
adjustments from manufacturers help dealers (price discounts,
etc) and builds long-term relationships and credibility.
A dealer’s reputation is also linked to the final quality of the
product, an area where Havells has delivered.
Significant progress at Sylvania
Sylvania acquisition was a strategic deal
Havells India acquired Sylvania from a private equity player in April
2007, for a total consideration of €227m. Sylvania is a global major,
with a 100-year history. The deal was financed entirely through debt
of €200m, out of which €80m was with recourse to Havells. There
was €27m worth of pension liabilities on Sylvania’s books.
Sylvania has a strong presence in Europe and Latin America, with
some presence in select Asian geographies. It is one of the top three
or four brands in each country in which it has a presence. The
acquisition of Sylvania gave Havells an entry into potentially
lucrative overseas markets. Furthermore, Sylvania’s international
expertise added significantly to Havells’s product development
capabilities and design bank.
Recession hit Sylvania hard – obligations reworked
In the FY ended 2008, Sylvania’s EBITDA was at €27m. This pegged
the entry valuation at an EV/EBITDA of 8.4x on FY08—not cheap, but
not unreasonably high in the context of long-term strategy. But FY09
was a very bad year, with losses mounting to €47m, as a slowdown
in consumption and construction severely hit revenues in key
geographies. This made bankers nervous, and compelled Havells to
restructure its debt obligations. Sylvania breached the covenants of
the funding agreement with its banking consortium, and a new
agreement was reached in August 2009, wherein repayment was
deferred to April 2013. Havells infused equity of €12m into the
business as per the new agreement. On 26 November 2007, Havells
India Limited had issued 4,160,000 equity shares to Seacrest
Investment Ltd (a Warburg Pincus Group company) at an issue price
of Rs625 per share, aggregating Rs2.6bn. The proceeds received
were used to repay the €50m bridge loan taken to fund the
acquisition of Sylvania.
Business operations restructured extensively
After the acquisition, Havells had retained most of the incumbent
management. In FY09, post the new agreement with lenders, the
company decided to remove the CEO and three other top executives.
With plants running at close to 50% capacity utilisation, layoffs in
the developed markets were central to sustainable health of the
entity. Havells divided the entire process into two phases, ‘Operation
Phoenix’ and ‘Operation Parakram’. The former is over, with a onetime
cost of €12.23m, and the latter is almost complete, with the
one-time cost estimated at €20m. Annual savings targeted through
these two restructuring initiatives amount to about €17m and €22m,
respectively.
Sylvania – zero equity value ascribed, but upside possible
We estimate Sylvania’s FY12ii EBITDA at €30m. Ascribing a 5x
EV/EBITDA multiple to this profit estimate gives an EV of €150m,
which is close to the debt that Sylvania carries on its books. As such,
we ascribe zero equity value to Sylvania.
If Sylvania’s revenues actually grow at about 10% annually post
FY12 (we have assumed ~3.5%), its revenue will be €500m in
FY13—which is possible, given the extensions into growth
geographies such as Asia and Latin America. With about the
resultant €50m in EBITDA, the valuation multiple we have used
would value Sylvania at €250m. With the debt almost paid back by
then, almost the entire amount could be treated as value of equity
adjusted for pension liabilities. This potential boost equates to 25-
30% of current market capitalisation.
Target price of Rs475
The standalone business is poised to deliver an EPS CAGR of 17.2%
over FY10-13ii (starting off on a high base in FY10, owing to higherthan-
usual gross margins in 1HFY10, a legacy of low-cost rawmaterial
inventory) and a medium-term sustainable EPS CAGR of 18-
19%. As the domestic standalone business is driven mainly by
consumer spending, a PEG multiple of 1x is not unreasonable, in our
view. Accordingly, our target of Rs475 is based on 19x FY12ii EPS
(standalone), which is 16.4x FY12ii on a consolidated basis. This
indicates an upside of 36% on a 12-month basis.
Key risks
Sylvania turnaround issues: A prolonged recession in the EU will
severely restrict the company’s chances to grow its business. While
we do not build in much revenue traction, any significant decline in
revenues post-FY12 might necessitate further restructuring. Also,
gains of the restructuring are yet to flow through fully, and delays
will further push back an eventual breakeven. Finally, the company
needs to generate significant cash by FY13 to avoid any further
breaches of debt covenants. On balance, though, we believe the
worst is over for Sylvania, and we expect a breakeven by FY12.
Raw-material price risks: Raw-material prices pose a short-term
risk to margins, especially in the cables & wires business, which
accounts for 43% of Havells’s revenues, but only 17% of its
standalone profits.
Slowdown in domestic consumption: Any slowdown in domestic
consumption—unlikely as it is—will adversely affect the revenue
traction of the standalone business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Havells India BUY:: Charged up
Electrical consumer-goods major Havells is a beneficiary of
robust demand growth based on upgrading consumer
preferences and increased construction activity in its key
verticals—switchgears, lighting fixtures, consumer durables
(fans) and cables/wires. Strong brands built through
aggressive advertising strategy and extensive distribution
networks are sustainable growth drivers. Consolidated
leverage is set to decline, with its European lighting-fixtures
acquisition Sylvania looking to breakeven in FY12, post
restructuring. The stock’s current P/E of 11.8 on FY12ii is
reasonable, in our view, and our target price of Rs475
(ascribing zero equity value to Sylvania) indicates 36%
upside. We retain BUY.
Domestic business is a good play on the consumption theme:
Havells’s consumer businesses such as fans, lighting fixtures, and
CFLs (compact fluorescent lamps) are its fastest-growing domestic
businesses (growing at over 30% annually). We assume 14.4%
CAGR in standalone revenues over FY10-13ii, driven by higher
growth rates in consumer businesses. The company spends ~2-4%
of its revenues on advertising, and has about 2,000 distributors in
Significant progress at Sylvania: Havells India acquired Sylvania
for an EV of €227m in April 2007 (€200m debt, €27m pension
liability). According to the company, restructuring efforts through
‘Operation Phoenix’ and ‘Parakram’ at an estimated cost of €32m
would generate annual savings of €39m (mainly in manpower costs),
and would be fully visible in FY12, when the company should
breakeven. In our estimate of Sylvania’s turnaround, we do not
assume any growth spurt or gross margin improvement in the entity.
Pricing power helps margin defence, improved financials,
attractive valuations: With medium competitive intensity in all
segments, except cables and wires, price increases to manage rawmaterial
inflation is par for the course. With the breakeven in
Sylvania and strong cash flows of the domestic business, leverage
should reduce to about 1.1x. Our target price of Rs475 is based on
19x FY12ii EPS (standalone). Key risks are a delay in Sylvania’s
breakeven and raw-material inflation.
Domestic business plays strongly into
consumption theme
The company has four main segments in its standalone domestic
business:
electrical consumer durables;
lighting and fixtures;
switchgear; and
cables and wires
In all of these businesses, the proportion of industrial buying is
small, and almost all of them are driven by domestic consumer
demand. As buyers become ever more quality-conscious and the
market becomes more broad-based (thanks to increasing prosperity
of tier-2 and tier-3 cities), the size of opportunity for a player like
Havells, with nationwide distribution and well-known brands, is large.
In the smaller industrial buying business component, the company is
a beneficiary of India’s construction theme and industrial capex,
including power capacity and T&D infrastructure augmentation
Switchgears – highest-value-added segment
Havells is a leading name in circuit protection devices in India. This
market is dominated by big-name multinationals with significant
pricing discipline, which makes the segment very lucrative. It is the
largest manufacturer of MCBs (miniature circuit breakers) in India,
and among the top ten in the world. The company manufactures a
wide range of products, including MCBs, mini MCBs, RCCB (residual
current circuit breaker), RCBO (residual current breaker with
overload protection), switches, sockets, regulators, MCCBs (moulded
case circuit breakers), rewirable switches, off-load changeovers, onload
changeovers and SDFs (switch disconnector fuse).
Havells manufactures these products in Baddi (Himachal Pradesh)
and Faridabad (Haryana). Havells has exclusive rights to market the
Crabtree brand in India and sells modular plate switches under this
brand name. These switches are aimed at the upper end of the
consumer market. In FY10, the brand recorded revenues of about
Rs1.5bn. The brand is number 2 in terms of market share, which has
increased from 5% in 2006 to 15% in FY10 (an estimated Rs10bn
market).
In the Rs20bn industrial switchgear market (based on FY10
revenue), Havells has a market share of about 8%. Switchgears,
given the critical safety they offer against short circuits, have
remained a quality-sensitive category—consumers prefer to pay a
premium for quality rather than cutting corners. This is further
helped by competitors in the segment, such as L&T (largely
industrials focussed business), Siemens and Schneider, who are
value-conscious incumbents and respect the need for pricing
discipline. Contribution margins in the segment have risen
substantially in the last few years (see chart below), reflecting the
market’s quality consciousness
Domestic lighting and fixtures – rapid growth, expanding
margins
Havells’ domestic lighting and fixtures business is positioned at the
higher end of the CFL market. The bottom end of the market faces
significant competition from unorganised players and cheap Chinese
imports. At the totally-commoditised bottom-end of the price
pyramid, manufacturing for almost all players is outsourced to China.
But in the higher price bands, a preference for high quality has
stayed ever since the first incursion of Chinese-built products ten
years ago.
In the Rs12bn CFL market, Havells is the second-largest player (after
Philips), with a market share of 10%. In the Rs20bn luminaires
segment, its market share is again 10%, with Philips and Bajaj
Electricals being other leading players. The company’s Neemrana
facility meets its global demand for CFL units (including Sylvania).
The company’s policy of staying out of the mass market is reflected
in the contribution margins it earns in the segment. With Sylvania’s
products likely to be introduced in this segment in India soon, we
expect acceleration in revenue growth and margin expansion in the
medium term (on an annual basis), as the cross-sold products are
likely to be at the top-end of the price pyramid.
Consumer durables – expanding from single product presence
Havells’s presence in the consumer-durables segment has so far
been confined to fans. The company’s fan factory in Haridwar is the
largest such facility in India. In fans, the table-top and portable fans
segments are overwhelmingly dominated by Chinese imports, and
even the lower-value ceiling–fan segment is intensely pricecompetitive.
Havells has chosen to be present in only the Rs1,000+
price category, thereby maintaining healthy margins. Outlook for this
business remains strong, given broad-based consumption growth in
India. The company is now moving into other parts of the consumerdurables
business, with new categories such as water storage
geysers and other home implements.
The fans market in India is estimated at Rs20bn, and Havells
currently has about 18% market share—a rapid scale-up from its
FY06 market share of 6%. The leading players are Crompton
Greaves and Orient Fans, followed by Bajaj Electricals. Smaller
players such as Polar and Khaitan are also forces to reckon with in
their own geographies.
Cables and wires – lowest-margin business
The company manufactures a complete range of low- and highvoltage
PVC and XLPE cables, besides domestic FR/FRLS wires, coaxial
TV and telephone cables. The manufacturing unit is in Alwar,
Rajasthan, and is equipped to handle cables up to voltages of 66KV.
This business accounts for 43% of Havells’s standalone revenues,
but only 17% of its contribution profit. The key competition in this
segment is from Finolex Cables, Polycab, and KEI Industries. Torrent
Cables also has a significant presence, but mostly in the higher-value
high-voltage segment. Havells has about 9% market share in a
Rs120bn annual revenue pie.
Cables and wires is the least profitable business for Havells India.
Prices of cables track those of copper, although with some lag.
Contribution margins are a modest 5-10%, and can turn negative for
short periods in case of sudden inventory pile-up due to sudden
demand slowdown. There is little value addition in this business, and
it is not a major focus area for future growth. Nevertheless, the
company does advertise this business on national television, mainly
to build the Havells brand rather than to build revenue momentum in
the category. Furthermore, the consumer end of the business is
more profitable and less working-capital-intensive (no credit), and is
a preferred sub-segment for Havells. In FY11, much of the revenue
growth in the segment will come from hardening copper prices that
are being passed through; Havells has been singularly aggressive in
this respect.
High branding spend appropriate for a consumer business
Havells spends 2-4% of its annual revenues on advertising, which
compares favourably with other consumer companies. Through
branding initiatives, the company has been able to create high
visibility for a number of its brands.
Wide distribution network – a pillar of Havells’s business model
Advertising helps build visibility, but an even bigger growth driver in
the domestic market is Havells’s distribution network. Havells has
about 2,000 distributors in India, and each of these reaches out to
about 25,000 retail points of sale. Havells’s success in distribution
can be attributed to the following factors:
Distributors prefer to stock brands that maximise churn of their
own capital. This translates to a preference for fast-moving
categories, as it is difficult for manufacturers to differentiate
much on commissions and credit terms. Havells’s portfolio of
fast-moving brands makes it a favourite among distributors, as
these products generate higher RoIs for dealers.
Havells straddles a significant portion of the electrical-goods
value chain, and for the dealer, a single relationship helps with
multiple SKUs.
Dealers are often short on organised credit and are sometimes
stuck with inventories in downturns. In such times, small
adjustments from manufacturers help dealers (price discounts,
etc) and builds long-term relationships and credibility.
A dealer’s reputation is also linked to the final quality of the
product, an area where Havells has delivered.
Significant progress at Sylvania
Sylvania acquisition was a strategic deal
Havells India acquired Sylvania from a private equity player in April
2007, for a total consideration of €227m. Sylvania is a global major,
with a 100-year history. The deal was financed entirely through debt
of €200m, out of which €80m was with recourse to Havells. There
was €27m worth of pension liabilities on Sylvania’s books.
Sylvania has a strong presence in Europe and Latin America, with
some presence in select Asian geographies. It is one of the top three
or four brands in each country in which it has a presence. The
acquisition of Sylvania gave Havells an entry into potentially
lucrative overseas markets. Furthermore, Sylvania’s international
expertise added significantly to Havells’s product development
capabilities and design bank.
Recession hit Sylvania hard – obligations reworked
In the FY ended 2008, Sylvania’s EBITDA was at €27m. This pegged
the entry valuation at an EV/EBITDA of 8.4x on FY08—not cheap, but
not unreasonably high in the context of long-term strategy. But FY09
was a very bad year, with losses mounting to €47m, as a slowdown
in consumption and construction severely hit revenues in key
geographies. This made bankers nervous, and compelled Havells to
restructure its debt obligations. Sylvania breached the covenants of
the funding agreement with its banking consortium, and a new
agreement was reached in August 2009, wherein repayment was
deferred to April 2013. Havells infused equity of €12m into the
business as per the new agreement. On 26 November 2007, Havells
India Limited had issued 4,160,000 equity shares to Seacrest
Investment Ltd (a Warburg Pincus Group company) at an issue price
of Rs625 per share, aggregating Rs2.6bn. The proceeds received
were used to repay the €50m bridge loan taken to fund the
acquisition of Sylvania.
Business operations restructured extensively
After the acquisition, Havells had retained most of the incumbent
management. In FY09, post the new agreement with lenders, the
company decided to remove the CEO and three other top executives.
With plants running at close to 50% capacity utilisation, layoffs in
the developed markets were central to sustainable health of the
entity. Havells divided the entire process into two phases, ‘Operation
Phoenix’ and ‘Operation Parakram’. The former is over, with a onetime
cost of €12.23m, and the latter is almost complete, with the
one-time cost estimated at €20m. Annual savings targeted through
these two restructuring initiatives amount to about €17m and €22m,
respectively.
Sylvania – zero equity value ascribed, but upside possible
We estimate Sylvania’s FY12ii EBITDA at €30m. Ascribing a 5x
EV/EBITDA multiple to this profit estimate gives an EV of €150m,
which is close to the debt that Sylvania carries on its books. As such,
we ascribe zero equity value to Sylvania.
If Sylvania’s revenues actually grow at about 10% annually post
FY12 (we have assumed ~3.5%), its revenue will be €500m in
FY13—which is possible, given the extensions into growth
geographies such as Asia and Latin America. With about the
resultant €50m in EBITDA, the valuation multiple we have used
would value Sylvania at €250m. With the debt almost paid back by
then, almost the entire amount could be treated as value of equity
adjusted for pension liabilities. This potential boost equates to 25-
30% of current market capitalisation.
Target price of Rs475
The standalone business is poised to deliver an EPS CAGR of 17.2%
over FY10-13ii (starting off on a high base in FY10, owing to higherthan-
usual gross margins in 1HFY10, a legacy of low-cost rawmaterial
inventory) and a medium-term sustainable EPS CAGR of 18-
19%. As the domestic standalone business is driven mainly by
consumer spending, a PEG multiple of 1x is not unreasonable, in our
view. Accordingly, our target of Rs475 is based on 19x FY12ii EPS
(standalone), which is 16.4x FY12ii on a consolidated basis. This
indicates an upside of 36% on a 12-month basis.
Key risks
Sylvania turnaround issues: A prolonged recession in the EU will
severely restrict the company’s chances to grow its business. While
we do not build in much revenue traction, any significant decline in
revenues post-FY12 might necessitate further restructuring. Also,
gains of the restructuring are yet to flow through fully, and delays
will further push back an eventual breakeven. Finally, the company
needs to generate significant cash by FY13 to avoid any further
breaches of debt covenants. On balance, though, we believe the
worst is over for Sylvania, and we expect a breakeven by FY12.
Raw-material price risks: Raw-material prices pose a short-term
risk to margins, especially in the cables & wires business, which
accounts for 43% of Havells’s revenues, but only 17% of its
standalone profits.
Slowdown in domestic consumption: Any slowdown in domestic
consumption—unlikely as it is—will adversely affect the revenue
traction of the standalone business.
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