Feb 09, Research report on havells. Must buy

1. FAIRWEALTH SECURITIES PVT. LTD.
January 30, 2009
Havells India
India
CMP: Rs.115 Target: Rs. 280
Electrical Equipment
Target price of Rs 280 based on— We initiate a BUY with a one year target of 280. Stock
is trading at trailing P/E ratio of 4.11, trailing P/BV of 1, forward P/E Ratio of 4.26 (FY10E)
and 2.6 (FY11E). We expect FY09E of P/E at 44.
HVEL.BO
Reuters
FY09 is marked by a lot of exceptions including one time severance cost, Forex
HAVL:IN
Bloomberg
Fluctuations, Inventory Price Fluctuations and severe Global economic recession.
517354
BSE Code Share prices for Havells have corrected 40% from 3 month high of 187.50 and 80% from 1
yr. high of 570.
Wide product portfolio and huge distribution network across 50 countries will be key growth
Priced on January 30, 2009
drivers for the company.
±% potential +143%
Result Round up:
2ND Feb 2009
Target set on
Company has come out with its Q3 results and as expected company’s profitability and
sales have taken a hit, sales for company(standalone) have fallen by 9% ( 2% in volume
Market Data
terms and 7% in value terms), Company’s net Income has fallen by 70%, to 114 million.
We consider these results are better than expected as company has maintained profitability
12M hi/lo 570/110
while other players in the industry have reported huge losses. On a consolidated basis
Shares in issue (mn.) 57.9
Sylvania’s depreciation and interests’ costs continue to pull down the consolidated results
6410
Market cap, INR Millions:
resulting in Rs. 862 million losses for Q3 and Rs.560 million losses for YTD (9 months
Beta 1.34 consolidated results). Sylvania’s EBITDA margins have been near nil for Q2 and Q3 FY09.
We expect Company should return to black in next quarter on a consolidated basis as raw
material costs (metal and PVC polymers) have fallen by more than 40% since July highs.
New products to lead growth
Share Holding Pattern
With consolidation of the Company with its subsidiary, a lot of new products are expected to
hit the market. We expect Indian Company’s revenues to rise even in tough times, as newer
Major shareholders
products in both consumer and Industrial sector will hit the markets and the Company
Promoters 62.5%
increasing its presence in other markets. Though, we believe that strong advertising
FIIs 16.9%
expenses may have some impact on EBITDA margins in short run, but strong brand value
Foreign Corporate: 7.5% that the Company has established will help them in times of tough economic conditions.
Others 9.0%
Industry Potential
4.1%
MF’S
As Global Economy prepares itself for worst recession in years and Real Estate and
Sovid Gupta construction industry being worst hit, going will not be smooth for Electrical Equipment
Equity Analyst: Fairwealth Securities Pvt. manufacturers of India. Expanding to other economies will be more difficult as global
Ltd. demand slackens and governments turn protectionists and implement trade barriers..
Though most of the large players shall have difficulty, Havells having established an
excellent brand value, higher margins and lower Debt (Standalone), should be able to pass
such tough times quite easily and register earnings growth 20% for FY10E to FY12E.
Fairwealth Securities Page 1

2. Havells India - Buy
Company description
Havells is India’s leading consumer electrical player with a diversified portfolio, was
incorporated in 1983.
Havells India is in four segments namely: Switchgears, Cable & Wireless, Lighting and
Fixtures and Electrical Consumer Durables.
It is amongst the top three players inmost of its products and is fast increasing its
market share through aggressive brand building.
In 2006, the Company acquired European Electrical Equipment manufacturer Sylvania’s
Lighting business in Europe at 300 million dollars whose sales were more than double
than its own. SLI Sylvania, which is headquartered in Frankfurt, is a leading global
Source: Company Report designer and provider of the lighting systems for lamps and fixtures.
Consumer products account for 85% of Company’s consolidated revenues and has
Sylvania contributed 59% to the groups
become a global player with presence in more than 50 countries.
consolidated revenue for the year FY08.
International operations contribute 68 percent of Company’s revenues. It has a strong
dealer network of 4000 dealers and 94 branches which offer wide range of products.
Sylvania:
Sylvania is world’s fourth largest lighting and fixtures brand. Company has deep
penetration in European and Latin American markets and is rapidly increasing its
Sylvania Standalone Expected Results
presence in Asian markets. Sylvania is one of the most globally recognized brands for
2008 2009E 2010E 2011E over a century in the electrical industry. SLI Sylvania has 10 manufacturing plants
Revenues located across Europe, Latin America and Africa with employee strength of more than
517 495 570 620
(mn €)
4,000.
This Company had FY08 revenues of 517 million Euros, and EBITDA margins of 5.3%.
Growth(%) 4.10% 10.30% 8.80%
Revenues
29470 30690 35340 38440
Company has witnessed 10% fall in its Q3 FY09 revenue in Euro terms vis-à-vis Q3
(Rs. Mn.)
FY08. Most of the fall in revenues was in European region which forms 70% of total
EBITDA 1562 700 2100 2821
revenues, However Latin America which contributes 23%, showed better growth
EBITDA
numbers. On a quarterly basis revenues were up 1% in Euro terms
5.30% 2.28% 5.94% 7.34%
mar. (%)
PAT 173 -900 460 910 Company’s EBITDA margins fell from 6.1% in Q3FY08 into a negative territory due to
exchange fluctuations, integrations costs, drop in sales, and changed product mix.
Source: Fairwealth Securities Estimates
Company’s PAT decreased from a 75 million INR profit in Q3 FY08 to a staggering INR
Sylvania has lower EBITDA margins of 5% 976 million loss (including one time cost of 607 million).
(FY08) than Havells India which stands at Although, it is the fourth largest Company but it has only 5 percent market share in
10%, and lower Net Profit margins at around European markets and with tough Economic conditions we expect next few quarters
1%-2%, we expect these margins to reach very crucial as the Company has only 6% EBITDA margins (previous years) compare
levels. with 10% for Indian parent and Interest and Depreciation costs are 4.5-5% of current
sales.
We expect weak revenue and EBITDA numbers to continue for next few quarters till
global consumer spending on Infrastructure and Construction sector revives.
Company is most likely to increase its penetration in Asian, African and Latin American
markets; also we expect more new product launches from its Indian parent Havells
especially in Latin American markets. EBITDA margins are expected to rise back to
previous levels of 6% by H2 FY10E and to 7% by FY11E. Sharp fall in polymer and
plastics prices will show effect in Q4 FY09E numbers.
Fairwealth Securities Page 2

3. Havells India - Buy
Havells India:
Indian Operations of the Company are divided into 4 key segments:
Switchgear:
Havells is the largest manufacturers of MCBs, RCCBs, and distribution boards in India
with the market share of around 25% in the market for MCBs. In FY08, switchgear
contributed 25% at Rs. 5420 million to its overall revenue. This segment is the most
profitable one with operating margins to the tune of 33% in the FY08. The Company
currently exports MCBs to over----- countries, including the quality conscious European
countries. The Company is the number one player in domestic switchboards with more
th
than 20% market share and is the 4 largest in Industrial switch boards.
Havells is the leading player in domestic
With continued investment in power sector we expect Company to grow at 15% CAGR
switchgear manufacturer in India with 22%
over FY08-FY12.
market share and among top 5 Industrial
Switchgear manufacturers with 7% market
Switch Gear division had EBIT margins of 32% for Q3FY09. We expect margins in this
share. This business contributed less than
business will remain stable above 30% over long term.
30% revenues of Havells India.
Cable and Wires:
The cable & wire segment generated Rs 2133 million in the Q3FY09 registering y-o-y
de-growth of 14% EBIT margins fell from 9.5% 9M YTD FY08 to 5.4% in FY09. Fall in
revenues was registered due to drop in prices of cables and wires and huge margin
drop in was due adjustment in inventory due to massive reduction in prices of Copper in
this Quarter.
Company had negative EBIT of Rs. -76 million on revenues of Rs. 2133 million for Q3.
The Company is recognized as quality manufacturers of cable & wires and offers a
complete range of low and high voltage PVC and XLPE cables, besides, domestic
FR/FRLS wires, Co-Axial TV and telephone cables. During the FY08, the Company had
almost doubled its capacity.
We expect Havells’ strong brand value and aggressive marketing to help it grow its top
line for its cables and wires segment at a CAGR of 12% over FY09E-FY11E.
Cable and Wire segment saw margin de-
growth from 9.5% in Q3FY08 to 5.6% in
Key factors for future Growth:
Q3FY09.
Since Construction and real Estate sector has slowed down, we expect
•
demand to go down in near future and will pick up slowly.
Although investments in power sector will continue to rise but Havells will not
•
be able to take complete advantage as it does not manufacture some range of
High Tension cables. Having said that it is also a fact that Havells registered
revenue growth of 64% CAGR over FY04-FY07.
Margins should improve by Q4 FY09 as prices of metals and Petroleum
•
Polymers have corrected sharply, and Company should be able to charge
premium over competitors.
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4. Havells India - Buy
Lightning and Fixtures
Company is in process of setting up a new
During FY08, the turnover of the division grew at 25% y-o-y to Rs 2900 million, first
plant for Electrical motors I Rajasthan.
quarter revenues stood at 650 million, 11% up from same period of previous year. The
Company generated operating profit of Rs.190 million with 26.7% margins as against
12.3% margin last year. In this division, the Company expanded its CFL capacity to
become the largest CFL manufacturer in the country.
We expect Company to aggressively pitch this segment by launching a range of
Currently only 60% of the domestic CFL is
products in lightings and fixtures as it brings products from the stable of Sylvania into
manufactured in India and remaining 40% is
the Indian markets.
Chinese. Indian players are expanding their
capacity to takeover from Chinese player. Currently 60% of the CFL and only 30% of the fixtures market is organized.
With Sylvania acquisition, a lot of new Our estimates put Lightings and Fixtures business growth at 25% CAGR FY10E –
products in CFL, Luminaries and Fixtures
FY12E as industrial growth is likely to pick up.
are expected.
Electrical Consumer Deliverables & Others
Segmental Revenues-Stand Alone(Rs. Million)
Q3 FY09 Q3 FY08 Growth (%))
Havells also offers products like electric fans, meters and ‘Crabtree’ brand bath-
1,367 1,405 -3%
Switchgears
fittings which are largely consumer products and add diversity to Havells product
2,133 2,414 -12%
Cable & Wire
profile. With strong brand image among domestic consumers, Havells may launch
751 875 -14% new products like Geysers in this segment.
Lighting & Fixture
Electrical Cons. 496 499 -1% We believe the electric fan segment, which contributes 10% to consolidated
Durables
revenues, and generates operating margins in excess of 20%, is the key focus
113 172 -34%
Others segment.
4,860 5,365 -9%
Total The Company has increased its share form 3% to 13% in the organized fan market of
INR 17 bn. from FY05 to FY08.
Source: Company Report
We expect Company’s top line to grow at CAGR of 25% as industry growth likely to pick
up and organised players increase their share in the market.
Profit before Interest and Tax
Results Roundup:
Q3 FY09 Q3 FY08 FY08
Switchgears 43.5 48.0 172.8
Margins for all segments except Cable and Wireless Segment went up
Cable & Wire -7.7 19.7 87.5
significantly.(Refer table) Cable and wireless segment is bulk sale market and less retail
Lighting & Fixtures 12.8 16.0 34.9 customer focussed. Strong price competition led to drop in sales prices. For all other
Electric consumer divisions Company has successfully maintained its prices and could demand price
Durables 10.9 10.4 49.1 premium.
Others 0.0 0.7 5.5
Revenues from Consumer Deliverables have increased sharply as Company’s new
Total 59.6 94.9 349.8
designs in fans have found customers’ fancy. Also significant higher sales have led to
Source: Company Report
higher margins.
Fairwealth Securities Page 4

5. Havells India - Buy
Financial Estimates:
Income Statement(Rs. Million)
Year FY07 FY08 FY09E FY10E FY11E
Revenue 15,472 50,022 55,200 59,450 69,500
EBIDTA 1,457 3,469 1,871 3,560 4865
Depreciation 97 695 770 832.3 973
EBIT 1,360 2,777 1,101 2,728 3,892
Our estimates put FY09 numbers as flat, Interest 161 1,033 1104 1189 1290
sales growth is on account of higher Euro
Other Income 54 250 190 190 190
rates,
We estimate Company to have 12% CAGR Pre Tax Profits 1,253 1986 187 1,729 2,792
from FY09E-FY11E. We estimate domestic
Tax 184 376 37 344 555
and International markets to stabilise only by
H2 FY10. Net 1,021 1,610 150 1,560 2,530
Shares 54 58 58 58 58
EPS 19 28 2.6 27 44
We have put Company’s Net Income
Estimates at 150 million; however it could be P/E 6 4 43 4.3 2.6
revised downwards if economic conditions
Source: Fairwealth Research Estimates
worsen.
Key Ratios:
Margins as % of Revenues(Cons)
FY07 FY08 FY09E FY10E FY11E
OPM (%) 9.4% 6.7% 4.3% 6.0% 7.0%
GPM (%) 9.7% 7.2% 4.6% 6.3% 7.3%
NPM (%) 6.8% 3.2% 0.3% 2.6% 3.6%
Dep./Sales 0.6% 0.6% 1.4% 1.4% 1.4%
Interest/ sales(%) 1.1% 2.0% 1.9% 2.0% 1.8%
Interest Coverage Ratio 8.0 2.7 1.0 2.3 3.0
25% 2% 20% 26%
ROAE 40%
24% 5% 13% 17%
ROACE 40%
Source: Fairwealth Research Estimates
Valuation Ratios:
2007 2008 2009E 2010E 2011E
Company’s Debt Equity Ratio is rising
Debt/Equity 0.2 1.88 1.91 1.53 1.21
alarmingly, company’s Debt Equity Ratio has
risen to a level of 2.4 (YTD 2009). EPS 20.0 28.00 2.60 27.00 44.00
P/E 5.8 4.11 44.23 4.26 2.61
P/BV 2.4 0.97 0.95 0.77 0.60
EV/EBITDA 4.63 4.91 10.02 5.37 3.76
EV/Sales 0.44 0.34 0.34 0.32 0.26
Source: Fairwealth Research Estimates
Fairwealth Securities Page 5

6. Havells India - Buy
Quarterly Margins for Havells and Sylvania for FY09
On segmented basis Interest and
Depreciation costs for Sylvania are 4.4% for Havells Sylvania Cons. Havells Sylvania Cons.
Q1 and 5.1% for Q2, while same figures for Q2 Q2 Q2 Q1 Q1 Q1
Havells are 1.7% and 1.6% for consecutive EBITDA 10.3% -0.6% 3.8% 10.0% 6.1% 7.7%
quarters. Dep. /Sales (%) 0.8% 2.1% 1.5% 0.7% 2.1% 1.5%
Thus in tough times EBITDA margins falls,
Interest/Sales (%) 0.9% 3.0% 2.1% 0.9% 2.3% 1.7%
profitability for Sylvania (FY08 contribution
PBT(Exc. Other
60% of revenues) will fall drastically, putting
Items) 8.7% -5.7% 0.2% 8.5% 1.8% 4.4%
pressure on the parent Company.
Note: These numbers exclude other income and one time extraordinary expenses to have a better clarity.
Source: Company Report
Key Risks:
Havells: India Operations
Company will step into lots of untested water Entry of low cost electrical products from China could stunt the growth of Havells and
as it forays into newer markets. could also affect the product portfolio, especially the new products which are
finding their feet in the market.
Slowdown in domestic business: Slowdown of Real Estate and property market is
hampering revenues and margins in the domestic business.
The demand for industrial products is dependent on investments in the power and
Industrial sector. We believe delays in the execution of new power projects can
potentially impact demand growth for industrial products (namely power cables,
industrial switchgear, motors and capacitors)
Sylvania:
Interest cost impact on profits: As already shown in Table Interests and Depreciation
forms 5% of Sylvania’s Sales. This remains a reason for concern as International
business is likely to remain weak under tough macro economic conditions over next two
to three quarters. Debt/Equity Ratio has risen to an alarming level of 2.4. Further losses
will be a double whammy as Equity will recede and company will need more cash for
Working Capital Requirement.
Sylvania integration and cost rationalization are the key challenges.
Havells plans to rapidly rationalize costs and close down some operations of
Sylvania’s European operation and also start outsourcing few products from India. We
believe Company will go have to slow down with these plans.
Issues relating to retrenchment and plant closures and cultural differences have to be
settled carefully to ensure smooth integration of operations.
HIL could be affected by currency fluctuations and with Sylvania expected to be one of
the major growth driver for HIL in future, any volatility in currency could adversely affect
the revenue and earnings of Havells.
Sylvania has only 5% market share in European markets and competition from larger
players and entry of Chinese products can impact the revenue growth and margin
expansion at Sylvania.
.
Fairwealth Securities Page 6

7. Havells India - Buy
Investment Rational
We believe strong all-round demand for electrical products, coupled with capacity addition
Shareholding pattern: Havells India across segments, will drive broad-based revenue growth for Havells. Company will leverage
the distribution channels of Sylvania to have better access to European and Latin America.
Havells is the market leader in domestic power distribution products. The Company has
strong brand value and will continue to increase its market share across all segments.
We believe that most of the downside has already been captured in this stock. Strong
fundamentals and good management will easily be able to ride the tough times.
We initiate a buy on the Company on basis of:
1. Strong fundamentals and high net worth, Company trades at P/BV of just less
than 1.
2. Strong management and management experience to handle tough conditions.
3. Manageable levels of debt at Rs. 12962 millions and cost of debt remains at
less than 8%, most of the debt is raised for Sylvania (around 75%).
Source: Company Reports, NSE 4. Growth opportunities unlimited as Company will continue to harness
opportunities in India and abroad through use of products and distribution
channels of Sylvania.
Share holding patters has not changed much 5. Strong brand image and product innovation will help company to grow India
since Dec’07, Warburg Pincus took a stake operations 10% CAGR over FY09E-FY12E.
by buying 41.6 lack shares at Rs. 625 a
share and 26 lack convertible warrants that
can be converted into equal number of
We initiate a BUY with a one year target of 280 , which is approximately 143% up from
shares, by March’09 at 690,
current market price. Stock is trading at trailing P/E ratio of 4.11 and forward P/E Ratio
of 4.26(FY10E) and 2.6(FY11E). We expect FY09E of P/E at 44. The stock at a current
market price of Rs 115 is expected to outperform the broader indices in medium to long
term.
Havells India( Red Line) stock price has fallen 80%
over last one year, while the benchmark capital goods
index has fallen by almost 60 percent over 1 year
period.
Fairwealth Securities Page 7

8. Havells India - Buy
Annexure:
1. Income Statement:
PROGRESS AT A GLANCE OF LAST 5 YEARS(Rs. Millions)
Consolidated Standalone
2008(Cons.) 2008 2007 2006 2005
Turnover 50022.1 20540 15450 10036.9 5820
PBDIT 3464 1910 1450 1020 610
Depreciation 694.3 130.6 97.4 65.4 40.892
EBIT 2769.7 1779.4 1352.6 954.6 569.108
Interest 1033.3 254.2 209.4 226 165.2
Other Income 250 132 31 57 27
PBT 1986.4 1657.2 1174.2 785.6 430.908
Tax 376.5 227.1 183.9 152.8 127.006
PAT 1609.6 1435.4 1021.5 632.7 305.264
Source: Company Report
2. Cash Flow Statement:
Cash Flow Statement( Standalone)-Rs. millions
Mar '08 Mar '07 Mar '06 Mar '05
Net Profit Before Tax 1662.5 1205.4 785.1 432.4
Net Cash From Operating Activities 1290.2 2020.1 1426.3 -71.4
Net Cash (used in)/from Investing Activities -3150 -991 -625.8 -497
Net Cash (used in)/from Financing Activities 2235.9 -767.8 -799.5 570.7
Net (decrease)/increase In Cash and Cash
376.1 261.3 1.1 2.4
Equivalents
Opening Cash & Cash Equivalents 266.1 4.7 3.5 1.1
Source: Company Report
Fairwealth Securities Page 8

9. Havells India - Buy
3. Balance Sheet:
Fund Flow Statement(Rs. Millions)
Mar '08 Mar '07 Mar '06
Total Share Capital 289.6 268.8 124.5
Equity Share Capital 289.6 268.8 124.5
Share Application Money 179.4 0 9.9
Reserves 6200.7 2355.6 1625.7
Networth 6669.7 2624.4 1760.1
Secured Loans 314.8 560.6 1085.4
Unsecured Loans 43.2 0 13
Total Debt 358 560.6 1098.4
Total Liabilities 7027.7 3185 2858.5
Gross Block 3445.2 2443.5 1688.8
Accum. Depreciation 426.3 313.6 224.5
Net Block 3018.9 2129.9 1464.3
Capital Work in Progress 833.6 292.6 67.7
Investments 1647.9 34.7 31.7
Inventories 4302.9 2395 1906.2
Sundry Debtors 660.7 309.6 1281.7
Cash and Bank Balance 645.8 267.9 5.6
Total Current Assets 5609.4 2972.5 3193.5
Loans and Advances 860.5 664.1 472.4
Fixed Deposits 3.3 63.8 77.7
Total CA, Loans & Advances 6473.2 3700.4 3743.6
Total CL & Provisions 4946.9 2974 2449.2
Net Current Assets 1526.3 726.4 1294.4
Total Assets 7027.7 3185 2858.5
Source: Company Report
Disclaimer
This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While
the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making
any investments. Fairwealth Sec Pvt. Ltd. does not bear any responsibility for the authentication of the information contained in the reports and
consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide information updates and
analysis. As per SEBI requirements it is stated that, Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein
and may make purchases or sale while this report is in circulation.
Fairwealth Securities Page 9