Buy Havells India ::Strong domestic demand to drive growth; :: Motilal Oswal

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Strong domestic demand to drive growth; guidance upgraded
 The company is confident of maintaining growth momentum in FY13. It expects
FY13 standalone sales to grow 18-20% and EBITDA margin to be 13-13.5%.
 Despite slower sales outlook, Sylvania is on track to improve margins in FY13.
Repayment of EUR40m of debt due in April 2012 would be met through borrowings.
 We raise our EPS estimates by 3% for FY12 and by 9% for FY13. Maintain Buy, with
a revised target price of INR656.
We met Mr Anil Gupta, Joint MD of Havells India. Key takeaways:
No visible slowdown; guidance upgraded
 Improved outlook for growth and profitability: The company is confident
of maintaining growth momentum across product ranges and does not
see any signs of slowdown. The management has upgraded its outlook
and now expects FY13 standalone sales to grow by 18-20% (v/s 15-20%
earlier) and EBITDA margin to be 13-13.5% (v/s 12.5-13% earlier).
Improvement in the macro environment can further improve outlook.
 Sylvania to post moderate growth; profitability improvement sustainable:
Sylvania is likely to register a growth of 5% in EUR terms in FY13. The
management mentioned that like India, other emerging markets are also
going through challenging times impacting growth in countries like Brazil
in recent quarters. EBITDA margin is likely to improve to 8.5-9%.
Group strategies well on track
 Focus on brand building and geographical/product expansion: Havells has adopted a strategy of aggressive
brand building and expansion of its product ranges and geographical reach. It has been spending 2.5-3.5% of
its annual revenue on advertising, much ahead of peers. Havells is looking at expanding its consumer durables
portfolio beyond its highly successful fans range, which it had launched in 2005.
 Restructuring of Sylvania yielding results: The company remains committed to profitability improvement in
Sylvania. The two successful restructuring programs "Phoenix" and "Prakram" on which it spent INR3.8b over
FY09-10 have resulted in turnaround of Sylvania in FY11 and the management is confident of further
improvement in EBITDA margin to 8.5-9%.
 Reduction of financial leverage: The company is committed to reduce its financial leverage.
Upgrading estimates in light of improved outlook for profit margins
 We believe that Havells will continue to be a key beneficiary of strong demand for consumer electrical goods
in India, backed by impressive brand equity and wide distribution network. In light of the improved sales and
margin outlook, we raise our EPS estimates by 3% for FY12 and by 9% for FY13.
 Buy with a revised target price of INR656 (16x FY13E standalone EPS and 10x FY13E EBITDA for Sylvania).
Maintain Buy with a revised target price of INR656
Havells India has emerged as a leading player in the Indian consumer electrical goods
industry and is a play on the booming consumer market in India and restructuring of
overseas business. After acquiring Sylvania, the company has strongly set its footprint
in the lucrative European and Latin American markets. We believe that improvement
in profitability post Sylvania's turnaround in FY11 and entry into new segments in
India will drive Havells' growth in the next few years. We maintain Buy with a revised
target price of INR656 (16x FY13E EPS for standalone business and 10x FY13E EBITDA
for Sylvania).
Target price
Standalone
Target FY13 PE (x) 16
Implied Value (INR m) 63,681
Value/sh (INR) 510
Sylvania
Target FY13 EV/EBITDA (x) 10
Impied Value (INR m) 18,153
Value/sh (INR) 145
Total Value /sh (INR) 656