Higher ad expenses hit margins… • Havells India :: ICICI Securities,

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Higher ad expenses hit margins…
• Havells India (HIL) reported 16.3% YoY growth in standalone
revenues to | 1365 crore in Q2FY15 on strong growth in the cables &
electronic consumer durables (ECD) segment. The segment recorded
revenue growth of ~21% and ~25% YoY, respectively, largely
driven by strong growth in housing wire segment and festive
demand. Revenue from switchgear & lighting segments increased
~8% YoY each
• EBITDA margins declined 100 bps YoY to 13.4% due to a sharp
increase in employee cost and advertisement expenses in Q2FY15
• Lower margin, higher depreciation charges and higher tax rate hit the
bottomline as it recorded a decline of ~5% YoY during Q2FY15
• On the operational front, Sylvania’s performance remained
satisfactory in Q2FY15 as revenues increased ~5% YoY to €112.5
million with operating margins increasing 120 bps YoY to 4.1% after
the €0.9 million provisioned for pension liabilities. Losses narrowed
down to €1.1 million during Q2FY15 vs. €1.6 million in Q2FY14
Focus on tapping rural markets in switchgear segment
HIL is a leading FMEG player in the switchgear segment with a presence
in three product categories, namely domestic, modular and LV industrial
switchgear. HIL’s switchgear segment is largely dominated by the
domestic MCB segment that contributes ~26% to standalone revenues.
HIL recorded revenue CAGR of 17% in FY12-14 largely on account of a
new product launch, a gradual shift in branded product categories and
sustained demand from rural markets. Havells has a leadership position in
the domestic switchgear market and increased its market share
aggressively from 15% in 2006 to 29% in FY14.
Expansion in new geographies to help drive revenue
HIL has focused on de-risking the Sylvania business by shifting the target
market towards emerging economies like LatAm and Asia from
developed European markets. Sylvania’s performance has remained
muted due to bleak macroeconomic conditions in the European region.
Lower operating leverage in the absence of flattish volume growth across
the European region hit operating margins significantly. The company
managed to reduce its total debt notably from €151 million in FY11 to
€86.5 million in FY14 after infusion of equity by Havells India and
settlement with Osram.
Consistent brand building through advertisement expenses
The company has created a strong brand in electrical consumer products
in India, which was traditionally a low involvement product category.
HIL’s advertisement expenses have grown (CAGR ~18%) faster than its
standalone net sales growth (CAGR ~17%) during FY08-14. The
company’s advertisement expenditure always remained at ~2-3% of net
sales to build the brand image and awareness in Tier I and Tier II cities.
Fairly valued
At the CMP, the stock is trading at a PE multiple of 34x FY15E and 27x
FY16E. We have rolled over valuation on FY17E and used sum of the
parts (SOTP) method to value HIL. We have valued the standalone
business at 22x FY17 EPS and Sylvania’s business at 6x FY17 EV/EBITDA
and arrived at a target price of | 275. We expect Sylvania to continue to
remain profitable at the operating level in FY15E-17E.

LINK
http://content.icicidirect.com/mailimages/IDirect_HavellsIndia_Q2FY15.pdf