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HAVELLS INDIA LTD (HIL)
PRICE: RS.374 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.395 FY13E P/E: 12.9X
q Company has been observing resilient demand in the domestic business
across all verticals driven primarily by tier II cities.
q Our channel checks and interaction with various industry players indicates that there has been a slowdown in demand for higher value consumer goods like Ac's, LED's, refrigerators etc; demand for smaller consumer appliances primarily home appliances remain intact.
q Management has concluded successful restructuring at Sylvania in the
last fiscal and expects to report consistency in performance going ahead.
Management expects to maintain Sylvania's margins in FY12.
q We believe that company's stock is reasonably priced at current levels. In
view of limited upside from current levels we maintain our 'Accumulate'
rating on company's stock with a one year DCF based unchanged price
target of Rs.395.
Price hike across various product categories and higher interest
rates hits Indian consumer market in high value products like
AC's, refrigerators etc; demand for lower value home appliances
products remain intact
n We have interacted with various industry players including Voltas, Blue Star and
Havells in order to get a sense of consumer demand in various product categories. We have also interacted with various dealers operating in different regions
in consumer durable space to understand the ongoing market trend.
n The major products that constitute Indian consumer appliances market are ACs,
TVs, Refrigerators, washing machines, mixers, grinders, irons, water heaters or
geysers, electric fans and exhausts.
n We highlight that there has been a reasonable growth in demand for lower
range product categories like television sets, semi-automatic washing machines,
medium range mobile sets, lighting products etc.
n However demand for higher value consumer goods like Ac's, LED's, refrigerators,
washing machines etc is bleak. This has mainly been on account of successive
price hikes taken by several companies like Voltas, Bluestar etc and overall increase in interest rates.
n Increase in interest rates has been negatively affecting the sales of high value
consumer goods costing over Rs 15000. This is due to the fact that majority of
customers in suburbs and tier II cities prefer availing loans for buying such products.
n Among various product categories, air conditioner market has been experiencing
the highest hold up in demand. We believe that sales have been negatively impacted by lighter summer this year. Successive price hikes taken by several domestic companies like Voltas in order to pass on the raw material pressure and
increase in interest rates have also played role in sluggish demand scenario (refer
to our note on Voltas dated 11/11/11).
n Demand for home appliances has remained more or less intact over 1HFY12. We
believe that this has been mainly on back of 1) growing disposable income
within Indian households (urban & rural) 2) evolving lifestyle patterns in India
leading to a peculiar shift in preference for premium products offered by organized players like HIL 3) shortening of product cycle due to higher rate of technological obsolescence 4) increasing electricity supply in urban and rural India.
n Penetration level of organized players like Havells, Bajaj Electricals etc. has been
consistently increasing in semi-urban and rural market. The primary reason for
this shift is explained by the unprecedented market growth of over 25% in these
regions.
n In 1HFY12, for most of the consumer appliances companies, fan segment reported moderate growth as lower sales are reported due to lighter summer this
year. Industry reported a cumulative growth of just 3% over last year. However,
players like Havells and Bajaj reported higher growth rate. Havells reported
growth of close to 10% in this segment.
n The channel inventory that was built in the current year has started to liquidate
for majority of players. Havells management has stated that the company has
successfully been able to clear the piled up inventory in Q2FY12 itself.
n Competition is more intense in Lighting and luminaries' space due to the presence of no. of small-mid-sized players. Lately there has been meaningful increase in competition from Chinese players also, who strategize to sweep market by introducing various energy saving products.
n Our interaction with one of the consumer durable dealers in Indore reveals that
there has been a gradual shift in the purchasing pattern of rural customer towards branded products.
n However, within those branded products, the preference is towards the lower
cost product. We understand that, the tier ii / rural customers are more cost conscious than their urban counterpart.
n We therefore believe that future revenue growth would be a function of overall
volume growth achieved by the industry in tier ii cities. Therefore extensive distribution network and deeper penetration across these areas would become a key
differentiator for any player.
Conference call Highlights with Havells management
n Company has been observing reasonable demand for its products. It has observed piling up of finished goods inventory in fans and coolers in the end of
Q2FY12 due to lighted summer this year. However management has stated that
it has successfully sold out the piled up inventory.
n Demand in lighting & luminaries space has continued to remain strong. Management expects meaningful pick up in the revenues from tier ii and rural areas.
n Management is confident of maintaining margins in the domestic market going
ahead on account of 1) steady cost management across the board 2) increase in
contribution from new product launches going ahead.
n Company has successfully launched complete range of kitchen appliances last
year. It has also launched Geysers which has been observing reasonable demand. Company sold 45000 units of geysers in FY11 and aims to sell 100000
units in FY12.
n Company is planning to launch switchgears in the international market and expects to maintain margins at the levels of over 20%.
n Growth in Sylvania continues to remain sluggish currently. It has grown by 3% in
the European region in Q1FY12. However, emerging markets including Latin
America has been observing adequate traction.
n Management has concluded successful restructuring of Sylvania in last fiscal and
expects to maintain operating margins at 7-8% in FY12. We highlight that the
management had stated in past that no further investment would be required in
Sylvania (100% subsidiary of Havells India Ltd) from the Havells.
Revenues to grow on back of robust domestic demand; successful
restructuring at Sylvania to result in value accretion
n We project consolidated revenues to grow at 10% CAGR between FY11-13E Rs.
56 bn in FY11 to Rs. 68 bn in FY13E. Within the revenue streams, we expect
domestic sales to grow at 17% CAGR in the same period driven by all the segments-switchgears, wires & cables and consumer appliances.
n We expect exports demand to remain flat in FY12E on account of the current
hold up in the European region. However we are positive on the growth outlook
in the Latin America, Africa and Asia region.
n We opine that the company would continue to prudently manage its overheads
in Havells and Sylvania. Sylvania restructuring is likely to have a positive impact
on company's operating margins.
n However in view of the increasing input prices and sluggish demand outlook in
European region we believe that the Sylvania would continue to face margin
pressure.
n We also highlight that Sylvania has a higher fixed cost base vis-à-vis Havells domestic business. Therefore any shrinkage in demand for company's products is
likely to have a diminishing effect on the EBITDA margins due to higher operating leverage. Therefore, in our projected financials we build 6% EBITDA margins
for Sylvania in FY12E.
n In our projected financials we build 9.4% EBITDA margins at consolidated level
for FY12E. We expect EBITDA to grow by 8.8% YoY to Rs 5.8 bn vis-à-vis normalized EBITDA of Rs 5.35 bn in FY11. We highlight that Sylvania reported an
exceptional gain of EUR 5.4 mn against revaluation of pension liability in
Q4FY11.
n Company has planned for a capex of Rs 1.9 bn in FY12. This mainly comprises of
Rs.250 mn in switchgears, Rs.300 mn in cables & wires, Rs.300 mn in consumer
appliances, and Rs 500 mn in lighting.
Valuation and recommendation
n At current price of Rs.383, stock is trading at 12.9x P/E and 8.5x EV/EBITDA on
FY13E earnings.
n In view of limited upside from the current levels, we maintain 'ACCUMULATE'
rating with a one year DCF based unchanged price target of Rs 395 on
company's stoc
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HAVELLS INDIA LTD (HIL)
PRICE: RS.374 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.395 FY13E P/E: 12.9X
q Company has been observing resilient demand in the domestic business
across all verticals driven primarily by tier II cities.
q Our channel checks and interaction with various industry players indicates that there has been a slowdown in demand for higher value consumer goods like Ac's, LED's, refrigerators etc; demand for smaller consumer appliances primarily home appliances remain intact.
q Management has concluded successful restructuring at Sylvania in the
last fiscal and expects to report consistency in performance going ahead.
Management expects to maintain Sylvania's margins in FY12.
q We believe that company's stock is reasonably priced at current levels. In
view of limited upside from current levels we maintain our 'Accumulate'
rating on company's stock with a one year DCF based unchanged price
target of Rs.395.
Price hike across various product categories and higher interest
rates hits Indian consumer market in high value products like
AC's, refrigerators etc; demand for lower value home appliances
products remain intact
n We have interacted with various industry players including Voltas, Blue Star and
Havells in order to get a sense of consumer demand in various product categories. We have also interacted with various dealers operating in different regions
in consumer durable space to understand the ongoing market trend.
n The major products that constitute Indian consumer appliances market are ACs,
TVs, Refrigerators, washing machines, mixers, grinders, irons, water heaters or
geysers, electric fans and exhausts.
n We highlight that there has been a reasonable growth in demand for lower
range product categories like television sets, semi-automatic washing machines,
medium range mobile sets, lighting products etc.
n However demand for higher value consumer goods like Ac's, LED's, refrigerators,
washing machines etc is bleak. This has mainly been on account of successive
price hikes taken by several companies like Voltas, Bluestar etc and overall increase in interest rates.
n Increase in interest rates has been negatively affecting the sales of high value
consumer goods costing over Rs 15000. This is due to the fact that majority of
customers in suburbs and tier II cities prefer availing loans for buying such products.
n Among various product categories, air conditioner market has been experiencing
the highest hold up in demand. We believe that sales have been negatively impacted by lighter summer this year. Successive price hikes taken by several domestic companies like Voltas in order to pass on the raw material pressure and
increase in interest rates have also played role in sluggish demand scenario (refer
to our note on Voltas dated 11/11/11).
n Demand for home appliances has remained more or less intact over 1HFY12. We
believe that this has been mainly on back of 1) growing disposable income
within Indian households (urban & rural) 2) evolving lifestyle patterns in India
leading to a peculiar shift in preference for premium products offered by organized players like HIL 3) shortening of product cycle due to higher rate of technological obsolescence 4) increasing electricity supply in urban and rural India.
n Penetration level of organized players like Havells, Bajaj Electricals etc. has been
consistently increasing in semi-urban and rural market. The primary reason for
this shift is explained by the unprecedented market growth of over 25% in these
regions.
n In 1HFY12, for most of the consumer appliances companies, fan segment reported moderate growth as lower sales are reported due to lighter summer this
year. Industry reported a cumulative growth of just 3% over last year. However,
players like Havells and Bajaj reported higher growth rate. Havells reported
growth of close to 10% in this segment.
n The channel inventory that was built in the current year has started to liquidate
for majority of players. Havells management has stated that the company has
successfully been able to clear the piled up inventory in Q2FY12 itself.
n Competition is more intense in Lighting and luminaries' space due to the presence of no. of small-mid-sized players. Lately there has been meaningful increase in competition from Chinese players also, who strategize to sweep market by introducing various energy saving products.
n Our interaction with one of the consumer durable dealers in Indore reveals that
there has been a gradual shift in the purchasing pattern of rural customer towards branded products.
n However, within those branded products, the preference is towards the lower
cost product. We understand that, the tier ii / rural customers are more cost conscious than their urban counterpart.
n We therefore believe that future revenue growth would be a function of overall
volume growth achieved by the industry in tier ii cities. Therefore extensive distribution network and deeper penetration across these areas would become a key
differentiator for any player.
Conference call Highlights with Havells management
n Company has been observing reasonable demand for its products. It has observed piling up of finished goods inventory in fans and coolers in the end of
Q2FY12 due to lighted summer this year. However management has stated that
it has successfully sold out the piled up inventory.
n Demand in lighting & luminaries space has continued to remain strong. Management expects meaningful pick up in the revenues from tier ii and rural areas.
n Management is confident of maintaining margins in the domestic market going
ahead on account of 1) steady cost management across the board 2) increase in
contribution from new product launches going ahead.
n Company has successfully launched complete range of kitchen appliances last
year. It has also launched Geysers which has been observing reasonable demand. Company sold 45000 units of geysers in FY11 and aims to sell 100000
units in FY12.
n Company is planning to launch switchgears in the international market and expects to maintain margins at the levels of over 20%.
n Growth in Sylvania continues to remain sluggish currently. It has grown by 3% in
the European region in Q1FY12. However, emerging markets including Latin
America has been observing adequate traction.
n Management has concluded successful restructuring of Sylvania in last fiscal and
expects to maintain operating margins at 7-8% in FY12. We highlight that the
management had stated in past that no further investment would be required in
Sylvania (100% subsidiary of Havells India Ltd) from the Havells.
Revenues to grow on back of robust domestic demand; successful
restructuring at Sylvania to result in value accretion
n We project consolidated revenues to grow at 10% CAGR between FY11-13E Rs.
56 bn in FY11 to Rs. 68 bn in FY13E. Within the revenue streams, we expect
domestic sales to grow at 17% CAGR in the same period driven by all the segments-switchgears, wires & cables and consumer appliances.
n We expect exports demand to remain flat in FY12E on account of the current
hold up in the European region. However we are positive on the growth outlook
in the Latin America, Africa and Asia region.
n We opine that the company would continue to prudently manage its overheads
in Havells and Sylvania. Sylvania restructuring is likely to have a positive impact
on company's operating margins.
n However in view of the increasing input prices and sluggish demand outlook in
European region we believe that the Sylvania would continue to face margin
pressure.
n We also highlight that Sylvania has a higher fixed cost base vis-à-vis Havells domestic business. Therefore any shrinkage in demand for company's products is
likely to have a diminishing effect on the EBITDA margins due to higher operating leverage. Therefore, in our projected financials we build 6% EBITDA margins
for Sylvania in FY12E.
n In our projected financials we build 9.4% EBITDA margins at consolidated level
for FY12E. We expect EBITDA to grow by 8.8% YoY to Rs 5.8 bn vis-à-vis normalized EBITDA of Rs 5.35 bn in FY11. We highlight that Sylvania reported an
exceptional gain of EUR 5.4 mn against revaluation of pension liability in
Q4FY11.
n Company has planned for a capex of Rs 1.9 bn in FY12. This mainly comprises of
Rs.250 mn in switchgears, Rs.300 mn in cables & wires, Rs.300 mn in consumer
appliances, and Rs 500 mn in lighting.
Valuation and recommendation
n At current price of Rs.383, stock is trading at 12.9x P/E and 8.5x EV/EBITDA on
FY13E earnings.
n In view of limited upside from the current levels, we maintain 'ACCUMULATE'
rating with a one year DCF based unchanged price target of Rs 395 on
company's stoc
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