HAVELLS INDIA LTD (HIL) : REDUCE TARGET PRICE: RS.500 :: Kotak Securities PDF link

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HAVELLS INDIA LTD (HIL)
PRICE: RS.563 RECOMMENDATION: REDUCE
TARGET  PRICE: RS.500 FY13E P/E: 14.6X
 Company has been observing resilient demand in the domestic business
across all verticals driven primarily by tier II cities.
 HIL's management has also recognized improving demand outlook in the
European region. We project margin expansion in Sylvania in FY13 aided
by 1) higher operating leverage 2) continued cost rationalizing across
verticals and 3) pick-up in demand in new geographies.
 We are positive on the company's strong brand franchise and robust distribution network. However in view of limited upside from the current
levels, we downgrade our rating to 'Reduce' from 'Accumulate' earlier.
We tweak FY13 earnings estimate and arrive at a DCF based revised price
target of Rs 500 (Rs 480 earlier) on company's stock.
Conference call Highlights
We have recently spoken with the management of HIL to get a perspective on the
overall business environment unfolding in domestic and overseas markets. Below are
the key highlights of our interaction.
 Company has been observing reasonable demand for its products in domestic
market. With summer season picking up, we expect meaningful sales growth in
fans segment for next two quarters.
 We highlight that the industry had observed piling up of finished goods inventory
in fans and coolers due to lighter summer in last year. The situation has improved substantially now and company is well positioned to benefit from the continued growth in domestic consumer appliances segment.
 Demand in lighting & luminaries space has continued to remain strong. Management expects meaningful pick up in the revenues from tier II cities and rural areas.
 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.
 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.
 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 FY12 and aims to sell 100000
units in FY13.
 Competition has intensified in Lighting and luminaries' space due to the presence of number 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.
 Our interaction with various dealers has revealed that there has been a gradual
shift in the purchasing pattern of rural customer towards branded products. 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 his urban counterpart.