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UBS Investment Research
Havells India
Management meeting reinforces our
c onfidence
Event: appliances launch expected in August 2011
We met Havells management recently. The company intends to launch electric
irons, sandwich makers, induction heaters, rice cookers, ovens & toasters, and
juicer mixer grinders in August 2011—it expects to achieve Rs0.6bn revenue
during the August 2011-March 2012 period. As per the company, this is a Rs45bn
market, which is highly fragmented. Similar to its strategy in fans, the company
plans to focus on high-end products. We believe appliances could accelerate the
company's revenue growth.
Impact: we retain our estimates
We retain our estimates for Havells and reiterate our Buy rating. The stock has
been weak over the past one month due to uncertainties in Europe and we think is
now pricing in the worst-case scenario with regard to Sylvania. We believe the
share price weakness provides an attractive opportunity.
Action: reiterate Buy rating and Rs510 price target
We reiterate our Buy rating and price target of Rs510 for the stock.
Valuation: Buy rating, Rs510 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool (assuming a WACC of
13.19%). 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.
Appliances—an attractive opportunity
Havells is entering the appliances market. It has already launched water heaters;
it now plans to launch electric irons, sandwich makers, induction heaters, rice
cookers, ovens & toasters, and juicer mixer grinders in August 2011. We believe
this is an attractive market for Havells—according to the company, this is a
Rs45bn highly fragmented market with only two dominant players—Philips and
Bajaj Electricals—with a combined market share of about 30%. Hence, we
believe that Havells will have an opportunity to gain market share in this space.
Focus on high-end premium appliances
Havells’ focus will be high-end appliances. This has worked well for Havells in
fans—after its launch in FY04, it gained 14% market share by FY10. Havells is
the only company that has been able to create a national brand in the last 30
years. It intends to adopt a similar strategy for other appliances as well. An
example of this strategy is its approach to the water heater product:
Water Heater: focus on qualities such as safety, energy efficiency and pressure
tolerance in high-end buildings. Traditional water heaters have issues of steam
leakage, which leads to higher energy consumption. Havells has tied up with a
water heater manufacturer in China that supplies modern water heaters that
eliminate leakage and improve energy efficiency.
According to the company, the premium end of the market makes up 30% of the
appliances market and is growing faster than the market itself.
Havells will be able to leverage its existing distribution channel to drive
appliances revenues, in our view. As per Havells, currently 60% of appliances
sales happen through electrical stores (this is up from 30% five years ago). This
provides Havells a ready distribution channel.
To outsource manufacturing
Unlike its past strategy of manufacturing its products, Havells has decided to
outsource manufacturing of its appliances. It has outsourced manufacturing of
water heaters as it believes it needs to scale production beyond 250,000 units to
economically manufacture water heaters. With regard to other appliances,
Havells intends to make mold tools and outsource manufacturing of other
components and assembly. This will allow Havells to scale up production
without investing in manufacturing capacity upfront and incurring fixed costs of
running a factory when the company is achieving scale.
Market is pricing in worst case for Sylvania
We believe that at the current price, the market is pricing in a worst-case
scenario for Sylvania. Even if we assume that European revenue declines 2%
YoY, and EBITDA margins decline from 7.9% in Q4 FY11 to 6.4% in FY12;
and we value Sylvania at 4.5x EV/EBITDA; we get equity value of EUR5
million for Sylvania. Assuming zero value for Sylvania, Havells is still trading
at 14.3x FY12E and 11.8x FY13E EPS (including Standard Electric EPS of
Rs1.6 per share).
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.
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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