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Company report

Havells India Ltd. 29th March 2010 BUY

CMP Rs 571.55
Company Snapshot
Target Price Rs 700.00
Havells India Ltd. is a billion-dollar-plus organization, and is one of the larg-
est & India's fastest growing electrical and power distribution equipment
manufacturer with products ranging from Industrial & Domestic Circuit Pro-
BSE Code 517354 tection Switchgear, Cables & Wires, Motors, Fans, Power Capacitors, CFL
NSE Code HAVELLS
Lamps, Luminaires for Domestic, Commercial & Industrial applications,
Modular Switches, & Bathfittings covering the entire gamut of household,
Market Cap (Rs Mn) 34389.25 commercial and industrial electrical needs. Havells owns some of the prestig-
52 Week High/Low 633.90/140.00 ious global brands like Crabtree, Sylvania, Concord, Luminance, Linolite, &
SLI Lighting. The company has acquired a number of International certifica-
Industry Electrical Equipment tions, like BASEC, CSA, KEMA, CB, CE, ASTA, CPA, SEMKO, SIRIUM
Face Value Rs 5.00 (Malaysia), SPRING (Singapore), TSE (Turkey), SNI (Indonesia) and EDD
(Bahrain) for various products. Today, Havells and its brands have emerged
Shares O/S 6,01,68,406
as the preferred choice of electrical products for discerning individuals and
industrial consumers both in India and abroad. With 91 branches / representa-
EPS(TTM) 35.12 tive offices and over 8000 professionals in over 50 countries across the globe,
the group has achieved rapid success in the past few years. Its 20000 strong
CEPS(TTM) 38.75 global distribution network is prompt to service customers.
Book Value 101.78
Recent Updates
P/E 16.27 Acquisitions: In line to its market penetration, Havells India has purchased
Standard Electricals for about Rs. 120 crore. However, Standard Electricals
P/B 5.62
will operate as a separate subsidiary of Havells India to maintain its brand
identity. This acquisition is done to generate efficiency and is EPS accretive.
Further, The Company has acquired 100% equity stake in privately owned --
Shareholding Pattern Seven Wonders Holidays. The said company has now become a wholly-
FIIs Others owned subsidiary of Havells India. It will carry on the electrical business pro-
owned owned posed to be acquired from Standard Electricals.
19% 14%
Selling of Rajasthan unit: Hindustan Sanitary ware & Industries Ltd (HSIL)
inked pact with Havells India to acquire Havells` business undertaking, en-
gaged in the business of manufacturing and dealing in chrome plated brass
bathroom fittings and accessories (faucet business), situated at Bhiwadi, Ra-
jasthan for cash consideration.
Promote
Public
r owned
owned Strong export order: Havells India has secured USD 200 million export or-
60%
7% der to supply motors and compact fluorescent lamps (CFLs) over a period of
5 years from the West European countries. The company plans to export half
of the total produce of CFLs, motors and switchgears to Europe in the near
term and aims to source them from its plant based in Neemrana, Rajasthan.

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Quarterly Financial Highlights

Rs Million
Particulars Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10
Sales 4860.60 5770.30 5898.50 5980.00 5913.30
Expenditures 4640.80 5111.40 5174.10 5183.10 5112.70
Operating Profit 219.80 658.90 724.40 796.90 800.60
Net Profit 113.60 488.20 492.60 542.00 589.30
OPM% 4.52 11.42 12.28 13.33 13.54
NPM % 2.34 8.46 8.35 9.06 9.97
EPS 1.96 8.12 8.19 9.01 9.80
Switchgear revenues increased by 23%
in Q3FY10 compared to the prior The company has registered strong results for the quarter ended December
year comparable period. 2009. The net sales witnessed a sharp growth rate of around 22% at
Rs.5913.30 million from Rs.4860.60 million in the like period previous year
translating operating profits sharply higher at Rs.800.60 million from
Rs.219.80 million in Q3FY09. Strong growth of over 40% in Electrical Con-
sumer Durables (Fans) along with 23% growth in each Switchgears and
Lighting and Fixtures contributed in the growth of the company. Similarly,
Electrical Consumer Durables (Fans) the bottom line ascended manifold at Rs.589.30 million from Rs.113.60 mil-
showed strong growth of 42% on y-o-y lion clocked in Q3FY09. Continuing lower utilization of credit facilities
basis underpinning growth from driven by efficient working capital management has placed interest cost re-
branded consumer products portfolio. duction. Tax increased due to reduction in fiscal exemption for Baddi unit and
higher contribution from non exempted unit like cable & wire. The company
has witnessed a sharp expansion in margins. Operating profit margins stood at
13.54% while net profit margins were close to 10% in quarter ended Decem-
ber 2009. EPS also grew manifold to stay at Rs.9.80 from Rs.1.96 in Q3FY09.

Industry Outlook
In the Union Budget 2010-11, the government doubled the allocation for the
power sector to Rs.5,130 crore. It also increased the allocation under Rajiv
Gandhi Grameen Vidyutikaran Yojana (RGGVY) to Rs.5,500 crore. This is
expected to provide a boost to the power transmission and distribution indus-
try. According to CMIE, in 2010-11, production of switchgears is expected to
rise by 20.5 per cent. During December 2009, production was 63.6 per cent
During December 2009, production of higher than a year-ago. During the month production stood at 18.2 lakh units,
switchgears was 63.6 per cent higher the highest since August 2008. In 2009-10, switchgear production is expected
than a year-ago. to revive and rise by 15.6 per cent to 1,795.2 lakh units. This is further ex-
pected to increase to 2,163.2 lakh units in 2010-11. The increasing penetration
of electricity in villages too will provide a boost to the industry.

Net sales of the wire & cable industry grew by 21.3 per cent in the December
2009 quarter over the sales reported in the December 2008 quarter. As the
power sector is on a capex spree, demand for wires & cables is expected to
remain healthy next year. This will drive the sales volume of the industry.

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Investment Rationale
Entry in CMH lamps: The Company has entered Ceramic Metal Halide
(CMH) business, a new generation lighting which shows the true colour of
life. The CMH plant is expected to manufacture 1 million units per annum.
The company has a revenue target of The company has plans to export 90% of production to developed market,
Rs.100 crore from CMH business Europe. The company has a revenue target of Rs 100 crore from this busi-
ness. The development of the lamps has been done by Sylvania, which was
acquired by Havell's in 2007. The lamps will be manufactured at Havell's
plant in Neemrana, Rajasthan. Being new product line and high margin low
volume business, this would help the company to gain market interest along
with benefits of being the first manufactures of CMH.

Restructuring Sylvania will improve profitability: Phoenix and Prakram,

the two restructuring plans, have been introduced to mainly reduce fixed
cost base through reduction in work force and also variablising fixed cost
through increased outsourcing from China and India. Both plans cost € 34
With the successful completion of
million with payback of around 12 months. The first restructuring plan
restructuring activity, benefits would
Phoenix has been successfully completed and second restructuring plan
be reaped in the form of improving
Prakram is under implementation focusing on factories in mainland Europe,
bottom line
to be completed by mid 2010. The restructuring payback of 9-12 months
could provide cost benefits of ~ € 22 million on a stagnant sales base in
2010. The full year benefits in 2011 should be around € 30 million with
incremental sales to bring gross margins in excess of 25%.

Havells Galaxy, expanding reach: Havells Galaxy, an exclusive show-

room of the company offers an end to end solution to all electrical needs
from the time electricity enters home to the light output. The company
plans to open many such galaxies by the end of this financial year. Cur-
Havells Galaxy is one-stop shop for rently, there are 35 such display centers spread across the country including
entire electrical equipments including cities i.e. Jalandhar, New Delhi, Noida, Faridabad, Mumbai, Surat,
Switchgears, Cables, Fans, CFls etc. Lucknow, Kanpur, Chennai, Kolkata, Baroda, Jaipur, Bangalore, Udaipur,
Sri Ganganagar, Aligarh, Himmatnagar, Kolhapur, Udaipur, Bhuvneshwar,
Ernakulum, Madurai, Kuch, Karur, Raipur and Bokaro.

Foray in LED market: The Company has entered the Light-emitting-

Diodes (LED) Market. Havells Sylvania (Global Operations) has set a tar-
get of € 50 million turnover from LED segment in next two years while
Havells India would target revenue of Rs.100 crores by 2012 from the do-
mestic market. The Company has set-up a lighting R&D centre at its exist-
ing plant at Neemrana, Rajasthan for the purpose. The LED product range
of company called Endura would include spotlights, downlights, commer-
cial Lights and street Lights

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Consolidated Financial Matrix

Rs. Million

Particulars FY06 FY07 FY08 FY09

Net sales 10035.26 15472.20 50029.30 54774.90
Growth% ------ 54.18 223.35 9.49
Expenditure 8994.61 14014.60 46563.30 51889.40
EBITDA 1040.65 1457.60 3466.00 2885.50
Growth% ------- 40.07 137.79 -16.75
EBITDA margin 10.37 9.42 6.93 5.27
Other income 35.89 54.30 250.30 86.10
Depreciation 65.38 97.40 694.30 905.00
EBIT 1011.16 1414.50 3022.00 2066.60
Interest 225.50 209.40 1035.90 1252.70
PBT 785.66 1205.10 1986.10 813.90
Tax 153.01 183.90 376.50 429.10
Adjusted PAT 632.65 1021.20 1609.60 384.80
Growth % ------- 61.42 57.62 -76.09
Extraordinary item 0.00 0.00 0.00 -1987.80
Reported PAT 632.65 1021.20 1609.60 -1603.00
Net Profit margins 6.30 6.60 3.22 0.70
Equity Capital 134.40 268.80 289.60 300.80
Reserves & surplus 1625.67 2355.30 6433.40 5822.30
EPS 23.54 19.00 27.79 6.40
CEPS 25.97 20.81 39.78 21.44

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Past Price movement of the stock

Valuation
With expansion in product portfolio, strong distribution network and effi-
cient acquisitions, Havells India would be multiplying its sales going for-
ward. Further, acquisition of Sylvania would prove a long term bet and
successful completion of restructuring activity of the same would be key
growth driver for the company. Recently received export order worth
USD 200 million and strong capex plans will add fuel to the company’s
revenue. However, debt repayment and sell off Rajasthan unit can be a
cause of concern. In the wake of such growth, Havells India Ltd seems to
be extremely attractive investment opportunity.

Presently, the stock is trading at Rs 572 which is at 16.27 times to its

TTM earnings and 5.62 times to its book value of Rs 101.78. Since the
stock offers good opportunity, we initiate a ‘BUY’ signal on the stock
with a target price of INR 700.00 in short to medium term investment
horizon expecting an appreciation of about 23% from the current level of
INR 572.00.

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