Slow pick-up in demand hits performance… • Havells India :: ICICI Securities, report

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Slow pick-up in demand hits performance… • Havells India’s (HIL) standalone revenues increased ~5% YoY to | 1247 crore in Q3FY15 supported by ~12% YoY growth in electronic consumer durables (ECD) segment. However, slackness in industrial activities hit revenue growth of cable & switchgear segments that grew 4% YoY and 6% YoY, respectively. Lighting segment recorded a flat performance due to de-growth in non-LED segment • Change in product mix coupled with saving in raw material cost and advertisement & promotion expenses (A&P) helped an improvement in EBITDA margins by 11 bps YoY to 14.5% • Decline in other income, along with higher depreciation charges and tax rate hit the bottomline as it recorded a decline of ~4% YoY during Q3FY15 • The performance of Sylvania remained under pressure in Q3FY15 as revenues declined ~1% YoY to €110.8 million while it reported an operating loss of €0.5 million after the €6.1 million provisioned for pension liabilities and one-time expenses of €2.9 million. It recorded a loss of €10.7 million against net profit of €1.7 million during Q3FY14 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, viz. 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%) in 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 29x FY16E and 24x FY17E. We have valued the stock using sum of the part method and value the standalone business at 22x FY17 EPS and Sylvania’s business at 5x FY17 EV/EBITDA and arrived at a target price of | 253. We expect Havells to record revenue, earning CAGR of 10%, 6% for FY14-17E, respectively.

LINK
http://content.icicidirect.com/mailimages/IDirect_HavellsIndia_Q3FY15.pdf