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UBS Investment Research
Havells India
Philips’ warning to be an overhang
„ Philips issues profit warning
Philips has issued a profit warning. It guided for a 530bps decline in the lighting
division’s EBITDA margins, while guiding for low-single-digit growth in lighting
revenue. Philips has blamed the margin compression on difficult conditions in the
European construction market. It has also attributed only 15% of the margin drop
(80bps) to pricing mix.
„ Takeaways for Sylvania
We have already assumed that FY12 EBITDA margins in Sylvania will be 30bps
below the Q4 FY11 level. Europe is only 65% of revenue for Sylvania. While we
anticipate potential downside to our EBITDA margins, we retain our estimate of a
7.6% EBITDA margin.
„ Warning and continued weakness in Europe could be an overhang
While Sylvania only contributes 12.7% to our sum-of-the-parts value for Havells,
we believe the sentimental overhang may continue. Any continued weakness in the
European macro environment could lead to further weakness in the stock, in our
view.
„ Valuation: Buy rating, Rs510 price target
We maintain our Buy rating and price target of Rs510. We derive our price target
from a DCF-based methodology and explicitly forecast long-term valuation drivers
using UBS’s VCAM tool. The stock is trading at 12.5x 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 34% above the current level.
Philips profit warning—how to read it
Philips has said that the profit margins will decline from 10.1% in Q111 to 4.8%
in Q211. The margin decline is attributable to:
Q Lower-than-expected capacity utilisation in the lamps division (70% of
margin decline—370bps margin decline);
Q Price mix (15% of margin decline—80bps margin decline);
Q Incremental investment in R&D and margins (15% of margin decline—
80bps margin decline).
We believe that only the price mix related margin decline can be relevant for
Sylvania. However, since Philips’ product portfolio is far more diverse than
Sylvania’s, it is difficult to draw a direct conclusion for Sylvania.
We spoke to Havells’ management who are confident that Sylvania can maintain
margins within a 750-800bps range and maintain flat revenue in Europe and 10-
15% growth in Latin America. Europe is 67% of Sylvania’s revenue in FY11.
What does this mean for the stock
Havells stock has declined 5.5% post Philips’ warning. Given continued
macroeconomic worries in Europe, we believe there could be continued
weakness in the Havells stock price.
Q Havells India
Havells India (Havells), a leading Indian electrical consumer durables
manufacturer, is focussed on markets including switchgear, fans, lighting and
fixtures, and cables and wires. In April 2007, it acquired Sylvania's European,
Latin American, and Asian operations for 227m. Havells was incorporated in
1983.
Q Statement of Risk
HVEL is present in market segments that may face increased competition from
competitors, which may hurt our revenue growth as well as margin assumptions.
HVEL derives 30% of its consolidated revenue from Europe. Severe slowdown
in Europe can hurt HVEL consolidated revenue and profits.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Havells India
Philips’ warning to be an overhang
„ Philips issues profit warning
Philips has issued a profit warning. It guided for a 530bps decline in the lighting
division’s EBITDA margins, while guiding for low-single-digit growth in lighting
revenue. Philips has blamed the margin compression on difficult conditions in the
European construction market. It has also attributed only 15% of the margin drop
(80bps) to pricing mix.
„ Takeaways for Sylvania
We have already assumed that FY12 EBITDA margins in Sylvania will be 30bps
below the Q4 FY11 level. Europe is only 65% of revenue for Sylvania. While we
anticipate potential downside to our EBITDA margins, we retain our estimate of a
7.6% EBITDA margin.
„ Warning and continued weakness in Europe could be an overhang
While Sylvania only contributes 12.7% to our sum-of-the-parts value for Havells,
we believe the sentimental overhang may continue. Any continued weakness in the
European macro environment could lead to further weakness in the stock, in our
view.
„ Valuation: Buy rating, Rs510 price target
We maintain our Buy rating and price target of Rs510. We derive our price target
from a DCF-based methodology and explicitly forecast long-term valuation drivers
using UBS’s VCAM tool. The stock is trading at 12.5x 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 34% above the current level.
Philips profit warning—how to read it
Philips has said that the profit margins will decline from 10.1% in Q111 to 4.8%
in Q211. The margin decline is attributable to:
Q Lower-than-expected capacity utilisation in the lamps division (70% of
margin decline—370bps margin decline);
Q Price mix (15% of margin decline—80bps margin decline);
Q Incremental investment in R&D and margins (15% of margin decline—
80bps margin decline).
We believe that only the price mix related margin decline can be relevant for
Sylvania. However, since Philips’ product portfolio is far more diverse than
Sylvania’s, it is difficult to draw a direct conclusion for Sylvania.
We spoke to Havells’ management who are confident that Sylvania can maintain
margins within a 750-800bps range and maintain flat revenue in Europe and 10-
15% growth in Latin America. Europe is 67% of Sylvania’s revenue in FY11.
What does this mean for the stock
Havells stock has declined 5.5% post Philips’ warning. Given continued
macroeconomic worries in Europe, we believe there could be continued
weakness in the Havells stock price.
Q Havells India
Havells India (Havells), a leading Indian electrical consumer durables
manufacturer, is focussed on markets including switchgear, fans, lighting and
fixtures, and cables and wires. In April 2007, it acquired Sylvania's European,
Latin American, and Asian operations for 227m. Havells was incorporated in
1983.
Q Statement of Risk
HVEL is present in market segments that may face increased competition from
competitors, which may hurt our revenue growth as well as margin assumptions.
HVEL derives 30% of its consolidated revenue from Europe. Severe slowdown
in Europe can hurt HVEL consolidated revenue and profits.
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