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Havells India: Consumer play

India Infoline News Service | Mumbai |

Havells sound business profile coupled with healthy financials allows it to command premium valuation over capital goods space. Initiate coverage on Havells with BUY rating and 9-month target price of Rs459.

Havells, with its presence in Switchgears, Cables & Wires, Lighting and Electrical consumer durable segment, is more of a proxy play on domestic consumption than industrial capex.  Robust growth in domestic consumption and access to wide distribution network is expected to bring in strong revenue growth over FY11-13E. Being among the Top 4 across segments with focus on high-end market provides assurance of healthy OPM. Moreover, successful acceptance of recent products launched in the electrical consumer durable segment would be a key trigger for the stock. European subsidiary Sylvania which was impacted by the global slowdown has recovered faster with successful implementation of cost cutting initiatives. Havells sound business profile coupled with healthy financials allows it to command premium valuation over capital goods space. Initiate coverage on Havells with BUY rating and 9-month target price of Rs459. 

 
Domestic business; proxy to consumption
Domestic business has witnessed revenue CAGR of 16.8% over the last four years on the back of strong brand and efficient distribution network. We see robust growth over the next two years led by higher contribution from the new electrical consumer business. Premium positioning of its products coupled with being the Top 4 across segments would ensure healthy OPM. We expect standalone business revenue CAGR of 13% and a PAT CAGR of 19.1% over FY11-13.
 
Sylvania: Attuned for a turn-around
Havells acquired Sylvania, a leading player in lighting and fixtures across Latin America and Europe, in 2007 for 227mn, funded mostly through debt. Successful cost restructuring initiatives implemented over the last one year helped the company to turn operationally positive after being impacted by the global slowdown in FY09-10. Over the next two years, we estimate muted revenue growth in constant currency and stable OPM as the effect of cost restructuring kicks-in.  

Healthy financials deserves premium valuations
Sound fundamentals justify assigning of 14x P/E to FY13E EPS to arrive at a fair value of Rs385 for the parent. We value Sylvania at 6x EV/EBIDTA to reach a fair value of Rs50. We initiate coverage on Havells with a BUY recommendation and a 9-month target price of Rs459.
 
Valuation summary
Y/e 31 Mar (Rs m)
FY10
FY11
FY12E
FY13E
Revenues
51,626
56,126
63,572
70,150
yoy growth (%)
(5.7)
8.7
13.3
10.3
Operating profit
3,222
5,571
6,722
7,600
OPM (%)
6.2
9.9
10.6
10.8
Reported PAT
695
3,036
3,862
4,589
yoy growth (%)
(143.4)
336.6
27.2
18.8
 
 
 
 
 
EPS (Rs)
11.1
24.6
31.0
36.8
P/E (x)
33.3
15.1
12.0
10.1
Price/Book (x)
5.8
7.1
4.6
3.3
EV/EBITDA (x)
10.0
10.0
8.1
6.9
Debt/Equity (x)
2.7
1.7
1.0
0.6
RoE (%)
13.7
58.2
46.8
38.2
RoCE (%)
15.7
30.1
31.6
32.4
Source: Company, India Infoline Research

Premium positioning ensures healthy OPM across segments 

The company enjoys top 4 positions across all the segments in terms of market share. Under Switch Gear segment, the company is market leader in domestic switchgears and has 2nd position in modular switches. Company had launched fans domestically in FY04. Since then it has become the 3rd largest player. In the lighting and luminaries segment, Havells ranks third in the CFL market. Intensity of competition is across all but cables and wires segment. In addition, the competition is mainly in the form of large MNCs, which ensure significant pricing discipline. That apart, premium positioning of the companys products restricts it from price competition at the lower end of the market. All the three factors, viz. high market share, moderate competition and premium product positioning, aid in healthy OPM for the company.

Standalone business profile

Particulars
Switch Gears
Cables and Wires
Lighting
Consumer Durables
Market size (Rs bn)
56
160
40
35
Market Share (%)
13%
9%
11%
14%
Key Competitors
L&T, Schneider, Legrand, Anchor, ABB and Siemens
Finolex, Polycab, KEI
Phillips, Bajaj, Crompton, Philips, Surya
Crompton, Usha, Orient
Contribution to revenue (%)*
25.2
44.4
14.9
15.4
Contribution to Margin (%)*
47.4
15.7
14.3
22.6
EBIT margin (%)*
35.3
6.6
18.0
27.4
Source: Company, India Infoline Research
* based on FY11 results
 
Switch-Gears: Leadership & disciplined pricing yields high returns
The segment includes industrial switchgear and circuit protection equipment and domestic switchgear. While the category of products in the segment is wide from low voltage switch gears to medium voltage switchgears and very high voltage switchgears, Havells caters mainly to low voltage switch gear market. It is the largest manufacturer of MCBs (miniature circuit breakers) in India, and among the top ten in the world. Furthermore, the company also has the right to market Crabtree switches, a reputed brand globally, in India.
 
This segment contributes ~25% to the sales and ~47% to the EBIT for the company at standalone level. The switchgear industry enjoys healthy margins (EBIT margins of ~30-35%). Two key factors that aids in robust margin for the segment are: a) buyers preference for brand and quality rather than price as mediocre quality switchgears can result in a large damage in case of fault, b) Competition is mainly from big multinationals ensuring strong pricing discipline and c) Chunk (80%) of the revenues is generated by domestic consumer segment, where Havells is the price leader with focus on high-end consumers.
 
Revenues for the switchgear segment witnessed 18.5% CAGR over FY06-11. Management has guided for growth in the range of 10-12% over the next two years. However, we are building in lower growth estimate of 8-9% in the next two years taking account of the slowdown in the new housing space. Company reported 38.1% OPM in H1 FY12; which we expect to shrink gradually over the next 18 months. For FY13, we remain conservative and expect margins to decline to 35.5% for the segment.
Switchgears business segments
Particulars
Domestic
Modular
Industrial
Market Size (Rs bn)
14
12
30
Market Share (%)
2006 - 15%  June'11 - 26%
2006 - 5%  June'11 - 15%
2006 - 7%  June'11 - 6%
Position
Market leader
2nd
5th
Competition
Legrand, Schneider
Matsushita/ Anchor, Legrand
L&T, Siemens, Schneider, ABB
Source: Company, India Infoline Research
 
Cables and Wires segment Competition eats up profitability
The domestic cable and wires industry grew at a 19% CAGR in FY05-FY10 and the market size currently is ~Rs160bn. Investment in power transmission and distribution coupled with real estate spending in India are major drivers for the demand in cables and wires.
Typically, 36-45% of the total expenditure in the power sector goes into the wires and cables segment. Under the Twelfth five year plan, spending on infrastructure has been doubled to US$1tn and chunk of it has to come from power sector. Power sector is allocated ~US$250bn (~Rs13tn) of the total spend. Therefore, industry estimates the demand for cables to witness 9-10% CAGR over the next 5-6 years. Similarly, the management expects wires industry revenue CAGR of 10-12% during the same period.

The domestic cable and wires market is highly fragmented and competitive, however, top 5 players (including Havells) contribute ~40% market share, while 40% comes from the unorganized players. Havells is the 2nd largest player and has managed to increase its market by 200-300bps over 5 years to 9% because of its strong product offering and preference for branded products among consumers. In the organized market it competes with players like Polycab, Finolex and KEI. 
 
The segment is characterized by lower margins (EBIT margin ~7-8%) owing to large dependency on the fluctuation in commodity prices and inability to pass on the same with fierce competition from unorganized players. Within the Cables and Wires market, cables constitute ~55% and wires ~45%. Havells is largely present in low-voltage cables and wires (upto 3.3kVA) segment which is largely consumer/dealership driven does not participate in government/institutional bids. We believe that the segment growth would be lower than the management guidance due to the slowdown in the real estate sector. We expect revenue growth to decline from 24-25% in FY11 & H1 FY12 to 9.4% in FY13. On the margin front, we believe, the company would continue to register 8% EBIT over the next two years.
 
Electrical Consumer durables; product launches to drive growth
Havells launched fans domestically (Rs35bn market currently) in FY04 and since then it has become the third largest player with 14% market share after Crompton Greaves and Bajaj Electricals. The market share for the company has more than doubled over last 4-5 years. The growth is largely led by its strategy of catering to premium segment of the market coupled with strong focus on brand development. Havells primarily focuses on the mid-market (Rs1,000-1,200) and premium (Rs1,400) segments. Revenues for the electrical consume durable segment has clocked an impressive 29% CAGR over FY07-11. 
Growth in this business remains strong, given the broad-based consumption growth in India. The company is now moving into other parts of the consumer-durables business, with new categories such as water storage geysers and consumer appliance business. The company has recently entered the Rs8bn water heater market. In addition to this, Havells has also launched products such as steam iron, toasters, ovens and juicer mixer grinders etc in the small appliances segment which has market size of Rs20bn. The company expects the new product launches to generate revenues of Rs500mn in FY12 and Rs1bn in FY13.

The growth in the segment for Q1 FY12 was paltry 7% yoy compared to average growth rate of 34% for the past 8 quarters. Management attributed early onset of the monsoon and accumulated dealer inventory before the season as a key factor behind the sluggish performance for the segment. However in Q2 FY12, revenues surged 18% yoy as demand picked up. Company reported healthy EBIT margins to the tune of 29.5% for the H1 FY12. Management has guided the existing business to grow 15% over the next three years. We believe, the segment would witness revenue CAGR of 17.7% over FY11-13 on the back of strong contribution from the new product launches. Additionally, we expect margins to expand by 160bps and 150bps in FY12 and FY13 respectively.

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