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Havells India (HAVL)
Others
Recovery some time away. Our channel checks indicate continuing (refer our note
dated June 13, 2011) weak consumer sentiment in fans. Demand in other consumer
appliances has also started to slow down. We see the following risks incrementally:
(1) High inventory levels leading to pricing pressure, (2) postponement of replacement
demand, (3) consumer down trading, and (4) potential margin pressure in appliances
due to inability of the firms to increase prices to pass on higher sourcing costs (from
China) and rupee depreciation. Retain REDUCE.
Margins could be affected in the coming quarters
There could be pricing pressure in appliances on account of the following factors:
Companies are cutting prices to clear high inventories. The fact that inventories in the sales
channel are high is well known and was evident in 1QFY12. In the case of Havells, inventory
increased to Rs5.8 bn in 1QFY12 from Rs4.7 bn in 4QFY11. Companies have started cutting
prices directly or indirectly through dealer incentives in a bid to clear inventory, particularly in
the fans segment. As per one of the dealers, Crompton has reduced prices of fans by ~Rs60-70
per unit after increasing it by ~Rs120 per unit in March. The situation in terms of volume
growth would have been worse had the companies not taken price cuts.
Chinese contract manufacturers have increased prices; would be difficult to pass on.
According to one dealer, Chinese contract manufacturers have increased prices for almost all
the consumer appliances. It would be difficult for the companies to pass on higher sourcing
price in an environment of weak demand. The impact of these price increases on margins
would be felt in the next few quarters when the companies start selling freshly ordered
products as they run through high inventories currently in the system.
Depreciating rupee would also exert pressure on margins as almost the entire sourcing
is done in US dollars.
In our view, margins in the consumer appliances (also ROCE) business are very high currently. Even
if the margins were to come down a bit, it would still remain a very profitable business.
Weak consumer sentiment is leading to postponement of replacement demand
According to one of the dealers, consumer sentiment has been weakened by high interest rates
and persistent high inflation. Hence, replacement demand is getting postponed even if the
purchase is not financed (and hence not directly affected by higher interest rates). Consumer
appliances have a typical life of 8-10 years and thus replacement demand is low and can be
postponed in an environment of weak sentiment.
Sylvania – sales growth from emerging markets could slow down; weak
European market is already priced in
For global lighting majors like Philips, sales growth in the lighting business in growth
markets is slowing down from growth rates of 30-40% witnessed earlier (also aided by low
base) to growth rate of 5% witnessed in the last quarter (2QCY11). We would like to
highlight two points:
Composition of growth markets for Philips is very different from Havells. Growth market
revenues for Philips are dominated by Asia Pacific (China being the largest market within
the region) with 32% of the total sales coming from the region. Latam forms only 6% of
the total sales in the lighting business. Whereas for Sylvania, Latam represents ~35% of
total sales.
Also, in the post results (2QCY11) conference, Philips mentioned that adjusting for the
impact on account of sales in the lumileds division (which are primarily done to OEM
clients), sales growth in the consumer part of the business is actually 12% yoy. In our
view, even assuming a yoy growth of 12% doesn’t inspire much confidence.
For Sylvania, growth in Euro terms for the Latam market slowed down to 8% in 1QFY12
even though in dollar terms the sales growth was healthy at 25%. In our view, the macro
factors (rising interest rates and high inflation) leading to slowing growth rates in consumer
demand in India and China are prevalent in other (Latam) emerging markets also. Growth in
emerging markets for Sylvania could slow down further. This could mean a negative surprise
on the consensus estimates hovering above revenue growth of 5-6% yoy in Sylvania,
primarily on the back of 15-20% sales growth (yoy) in Latam revenues.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Havells India (HAVL)
Others
Recovery some time away. Our channel checks indicate continuing (refer our note
dated June 13, 2011) weak consumer sentiment in fans. Demand in other consumer
appliances has also started to slow down. We see the following risks incrementally:
(1) High inventory levels leading to pricing pressure, (2) postponement of replacement
demand, (3) consumer down trading, and (4) potential margin pressure in appliances
due to inability of the firms to increase prices to pass on higher sourcing costs (from
China) and rupee depreciation. Retain REDUCE.
Margins could be affected in the coming quarters
There could be pricing pressure in appliances on account of the following factors:
Companies are cutting prices to clear high inventories. The fact that inventories in the sales
channel are high is well known and was evident in 1QFY12. In the case of Havells, inventory
increased to Rs5.8 bn in 1QFY12 from Rs4.7 bn in 4QFY11. Companies have started cutting
prices directly or indirectly through dealer incentives in a bid to clear inventory, particularly in
the fans segment. As per one of the dealers, Crompton has reduced prices of fans by ~Rs60-70
per unit after increasing it by ~Rs120 per unit in March. The situation in terms of volume
growth would have been worse had the companies not taken price cuts.
Chinese contract manufacturers have increased prices; would be difficult to pass on.
According to one dealer, Chinese contract manufacturers have increased prices for almost all
the consumer appliances. It would be difficult for the companies to pass on higher sourcing
price in an environment of weak demand. The impact of these price increases on margins
would be felt in the next few quarters when the companies start selling freshly ordered
products as they run through high inventories currently in the system.
Depreciating rupee would also exert pressure on margins as almost the entire sourcing
is done in US dollars.
In our view, margins in the consumer appliances (also ROCE) business are very high currently. Even
if the margins were to come down a bit, it would still remain a very profitable business.
Weak consumer sentiment is leading to postponement of replacement demand
According to one of the dealers, consumer sentiment has been weakened by high interest rates
and persistent high inflation. Hence, replacement demand is getting postponed even if the
purchase is not financed (and hence not directly affected by higher interest rates). Consumer
appliances have a typical life of 8-10 years and thus replacement demand is low and can be
postponed in an environment of weak sentiment.
Sylvania – sales growth from emerging markets could slow down; weak
European market is already priced in
For global lighting majors like Philips, sales growth in the lighting business in growth
markets is slowing down from growth rates of 30-40% witnessed earlier (also aided by low
base) to growth rate of 5% witnessed in the last quarter (2QCY11). We would like to
highlight two points:
Composition of growth markets for Philips is very different from Havells. Growth market
revenues for Philips are dominated by Asia Pacific (China being the largest market within
the region) with 32% of the total sales coming from the region. Latam forms only 6% of
the total sales in the lighting business. Whereas for Sylvania, Latam represents ~35% of
total sales.
Also, in the post results (2QCY11) conference, Philips mentioned that adjusting for the
impact on account of sales in the lumileds division (which are primarily done to OEM
clients), sales growth in the consumer part of the business is actually 12% yoy. In our
view, even assuming a yoy growth of 12% doesn’t inspire much confidence.
For Sylvania, growth in Euro terms for the Latam market slowed down to 8% in 1QFY12
even though in dollar terms the sales growth was healthy at 25%. In our view, the macro
factors (rising interest rates and high inflation) leading to slowing growth rates in consumer
demand in India and China are prevalent in other (Latam) emerging markets also. Growth in
emerging markets for Sylvania could slow down further. This could mean a negative surprise
on the consensus estimates hovering above revenue growth of 5-6% yoy in Sylvania,
primarily on the back of 15-20% sales growth (yoy) in Latam revenues.
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