COMPANY UPDATE 21 FEB 2017

Havells India
BUY
INDUSTRY Appliances Added aspirational portfolio
Havells India (HAVL) has acquired Lloyd Electrics HAVL is a mass premium brand, hence upscaling
CMP (as on 20 Feb 2017) Rs 412
consumer durable business (Lloyd Consumer) for an product offerings and marketing would call for
Target Price Rs 469 EV of Rs 16bn on a debt-free, cash-free basis. HAVL increased efforts. However, we are confident of HAVLS
will acquire Lloyds intellectual property, manpower capabilities and expect early stabilisation of this
Nifty 8,879 acquisition.
and distribution network. The deal is expected to be
Sensex 28,662 completed by 31 Mar17. It is valued at 0.9x We dont see any meaningful synergy of this
KEY STOCK DATA EV/revenue and 14.5x EV/EBITDA of FY17. We expect acquisition for HAVL. However, we considered Lloyds
Bloomberg HAVL IN this deal to remain neutral for FY18, and 5% EPS consumer business at inflexion point and cash-rich
No. of Shares (mn) 625 accretive for FY19. HAVL has the ability to manage this business in the
correct manner. Lloyd Consumer has 10,000 dealers,
MCap (Rs bn)/(US$ mn) 258/3,855 The revenue and EBITDA expected from Lloyd
485 authorised and 31 company-owned service
6m avg traded value (Rs mn) 600 Consumer is Rs 18.5bn and Rs 1.1bn respectively for
centers.
FY17. This deal is significant for HAVL as Lloyd
STOCK PERFORMANCE (%)
Consumer would contribute 30% and 13% to its FY17 The Consumer Durables industry is currently
52 Week high / low Rs 460 / 267 revenue and EBITDA numbers, respectively. Lloyd estimated at US$ 15bn and growing in double digits.
3M 6M 12M Consumers revenue breakup is as follows air It has potential for further growth with low
Absolute (%) 29.1 (0.5) 47.0 conditioners (ACs) ~70%, TV panels 20-22% and the penetration levels, increasing urbanisation, and an
Relative (%) 19.5 (2.6) 26.1 rest from washing machine & appliances. aspirational and expanding middle class.

SHAREHOLDING PATTERN (%) Lloyd Consumers EBITDA margin stands at 6% vs. 10- We maintain BUY with a TP of Rs 469 based on 34x
13% for peers. The companys consumer business is in Mar-19EPS (35x for HAVLs EPS and 25x for Lloyd
Promoters 61.61
the investment phase, hence its A&P expense (4-5% of Consumers EPS).
FIs & Local MFs 2.66
its revenues) and distribution margin is higher than
FPIs 26.19 peers. A&P expenses for Voltas and Whirlpool are ~2% Financial Summary
Public & Others 9.54 of revenues. VHAVLs management is hoping to (Rs mn) FY15 FY16 FY17E FY18E FY19E
Source : BSE achieve double-digit margins in the next few years. Net Revenue 52,387 54,369 60,960 93,092 110,039
HAVL has forayed into new territory with high EBITDA 6,992 7,478 8,531 11,377 13,438
competition in prices and rapid technological changes. APAT 4,650 5,155 5,924 7,145 8,705
Lloyd stands at number 3 (after Voltas & LG) in the EPS (Rs) 7.4 8.3 9.5 11.4 13.9
residential AC market with 13% volume market share. P/E (x) 55.3 49.9 43.4 36.0 29.6
Naveen Trivedi Lloyd has positioned itself in the economy price EV/EBITDA (x) 36.3 32.6 29.8 22.6 19.1
naveen.trivedi@hdfcsec.com segment of the market for ACs and offers higher ROE (%) 20.6 20.5 21.2 22.9 24.9
+91-22-6171-7324 distribution margins to gain market share. Source: Company, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
 HAVELLS INDIA: COMPANY UPDATE

Residential Air Conditioner (RACs) Market Market Size of RACs

(Rs bn) (mn units)
Residential Air Conditioners
120 120
(RACs) market has registered 101 100
14% CAGR in the last 5 years 100 90 100

80 75
68 80
60
60 60 50

40 40

20 20
4
RACs penetration in India is a - 0
mere 3% as compared to 30% FY12 FY13 FY14 FY15 FY16 Global China India
globally and 25% in China
Source: Blue Star, HDFC sec Inst Research Source: Blue Star, HDFC sec Inst Research

RACs Penetration RACs Future Growth

(%) (mn units)
35% 12.0
30% 10.0
30% 10.0
25%
RACs market size in India is 25%
~4mn units and expected to 8.0
touch by 10mn units by 2020 20%
6.0
15%
3.8
4.0
10%

5% 3% 2.0

0% -
Global China India 2016 2020

Source: Blue Star, HDFC sec Inst Research Source: Blue Star, HDFC sec Inst Research

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 HAVELLS INDIA: COMPANY UPDATE

Lloyd Consumer Business Performance

(Rs mn) FY15 FY16 9MFY16 9MFY17
Revenues 8,707 13,842 8,392 12,423
YoY Gr. (%) 59% 27% 48%
EBIT 963 1,057 647 874
YoY Gr. (%) 10% 18% 35%
Capital Employed 2,300 2,380 na na
RoCE (%) 29% 31% na na
Source: Lloyd Electric & Engineering, HDFC sec Inst Research

Change in Estimates
FY18E FY19E
New Old Chg (%) New Old Chg (%)
Sales 93,092 69,660 33.6 110,039 80,749 36.3
EBITDA 11,377 9,825 15.8 13,438 11,493 16.9
PAT 7,145 7,031 1.6 8,705 8,314 4.7
EPS 11.4 11.3 1.6 13.9 13.3 4.7
Source: Company, HDFC sec Inst Research

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 HAVELLS INDIA: COMPANY UPDATE

Havells recent performance

Net Revenue Gross Margin
Net Revenue Growth - RHS Gross Profit Gross Margin (%) - RHS

16,000 Rs mn % 23.0 7,000 Rs mn % 43.0

14,000 19.5 6,000
12,000 16.0 41.0
5,000
10,000 12.5
4,000
8,000 9.0 39.0
3,000
6,000 5.5
4,000 2.0 2,000 37.0
2,000 (1.5) 1,000
- (5.0) - 35.0

3Q FY14
4Q FY14
1Q FY15
2Q FY15
3Q FY15
4Q FY15
1Q FY16
2Q FY16
3Q FY16
4Q FY16
1Q FY17
2Q FY17
3Q FY17

3Q FY14
4Q FY14
1Q FY15
2Q FY15
3Q FY15
4Q FY15
1Q FY16
2Q FY16
3Q FY16
4Q FY16
1Q FY17
2Q FY17
3Q FY17
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Employee Expense ASP Expense

Employee Expense % of Sales - RHS ASP Expense % of Sales - RHS

1,400 Rs mn 9.0 600 Rs mn 4.5

1,200 500
7.5 3.5
1,000 400
800
6.0 300 2.5
600
200
400 4.5 1.5
100
200
- 3.0 - 0.5

3Q FY14
4Q FY14
1Q FY15
2Q FY15
3Q FY15
4Q FY15
1Q FY16
2Q FY16
3Q FY16
4Q FY16
1Q FY17
2Q FY17
3Q FY17
3Q FY14
4Q FY14
1Q FY15
2Q FY15
3Q FY15
4Q FY15
1Q FY16
2Q FY16
3Q FY16
4Q FY16
1Q FY17
2Q FY17
3Q FY17

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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 HAVELLS INDIA: COMPANY UPDATE

EBITDA APAT
EBITDA EBITDA Margin (%) - RHS APAT NPM (%) - RHS
Rs mn
2,500 Rs mn 16.0 1,800 14.0
1,600
2,000 1,400 11.5
14.5
1,200
1,500 1,000
13.0 9.0
800
1,000
600
11.5 400 6.5
500
200
- 10.0 - 4.0

3Q FY14
4Q FY14
1Q FY15
2Q FY15
3Q FY15
4Q FY15
1Q FY16
2Q FY16
3Q FY16
4Q FY16
1Q FY17
2Q FY17
3Q FY17

3Q FY14
4Q FY14
1Q FY15
2Q FY15
3Q FY15
4Q FY15
1Q FY16
2Q FY16
3Q FY16
4Q FY16
1Q FY17
2Q FY17
3Q FY17
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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 HAVELLS INDIA: COMPANY UPDATE

HAVL Market Share

Market Size HAVL' Mkt Share Organized
Segments Rank Peers
(Rs bn) (%) Penetration
Switch Gears - MCB 20 27-28 1 Medium Legrand, Schneider
Switch Gears - Switches 22 14-15 3 Medium Panasonic (Anchor), Legrand
Cable - Domestic 80 16 3 Low Finolex, Polycab
Cable - Industrial 120 10 3 Low Polycab, KEI
Lighting & Fixtures 65 10-14 2-4 Medium Philips, Crompton, Bajaj, Wipro
Fans 62 15 3 High Crompton, Orient, Usha
Water Heater 14 9 4-5 Low Racold, AO Smith
Other Appliances 52 2-3 na Low Bajaj, Philips
Source: Company, HDFC sec Inst Research

Assumptions
FY15 FY16 FY17E FY18E FY19E
HAVL Revenue Growth (%)
Lighting & Fixtures 2.8 7.3 9.4 14.4 14.6
Consumer Durables 20.5 9.9 18.8 14.0 16.5
Switch Gears 4.9 (0.2) 8.0 13.2 16.5
Cables and Wires 13.7 0.1 9.2 15.2 16.0
Others - - - 10.0 10.0
Total Revenue 11.0 3.0 13.0 14.3 15.9
Lloyd Consumer revenue growth (%) - - - 25.0 25.0
EBIT Margin (%)
Lighting & Fixtures 26.6 24.1 27.0 25.6 25.5
Consumer Durables 25.1 25.4 26.3 26.1 26.3
Switch Gears 36.5 39.4 39.8 39.8 39.9
Cables and Wires 12.1 14.1 14.3 14.8 15.1
Others - - 22.7 20.0 20.0
Total EBIT 22.7 23.9 24.7 24.5 24.7
Lloyd Consumer EBITDA margin (%) - - - 6.0 6.3
Source: Company, HDFC sec Inst Research

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 HAVELLS INDIA: COMPANY UPDATE

Income Statement Balance Sheet

(Rs mn) FY15 FY16 FY17E FY18E FY19E (Rs mn) FY15 FY16 FY17E FY18E FY19E
Net Revenues 52,387 54,369 60,960 93,092 110,039 SOURCES OF FUNDS
Growth (%) 11.0 3.8 12.1 52.7 18.2 Share Capital - Equity 624 625 625 625 625
Material Expenses 31,784 31,735 35,113 56,527 67,015 Reserves 23,134 25,817 28,818 32,310 36,265
Employee Expense 3,127 3,763 4,327 4,976 5,723 Total Shareholders Funds 23,758 26,442 29,443 32,934 36,889
ASP Expense 1,550 1,788 2,005 3,062 3,619 Long Term Debt 417 - - 5,000 5,000
Distribution Expense 1,837 1,917 2,149 3,282 3,879 Short Term Debt 417 442 392 342 292
Other Expenses 6,433 7,006 8,069 12,700 14,984 Total Debt 835 442 392 5,342 5,292
EBITDA 6,992 7,478 8,531 11,377 13,438 Net Deferred Taxes 434 749 749 749 749
EBITDA Growth (%) 9.0 6.9 14.1 33.4 18.1 Long Term Provisions & Others 61 107 107 107 107
EBITDA Margin (%) 13.3 13.8 14.0 12.2 12.2 TOTAL SOURCES OF FUNDS 25,088 27,741 30,692 39,133 43,038
Depreciation 875 922 1,188 1,324 1,460 APPLICATION OF FUNDS
EBIT 6,117 6,556 7,343 10,053 11,978 Net Block 9,848 10,615 11,941 12,617 13,157
Other Income (Including EO CWIP 280 306 602 602 602
522 2,711 1,161 385 596
Items) Non Current Investments 10,118 4,603 4,603 4,603 4,603
Interest 176 126 38 459 425 LT Loans & Advances 409 631 631 631 631
PBT 6,463 9,141 8,467 9,980 12,149 Other Non Current Assets 1,754 4 4 4 4
Total Tax 1,813 1,988 2,371 2,794 3,402 Total Non-current Assets 22,408 16,158 17,780 18,456 18,996
RPAT 4,650 7,153 6,096 7,185 8,747 Inventories 6,897 7,844 8,795 13,430 15,875
Associates 42 Debtors 1,325 1,576 1,768 2,699 3,191
Exceptional Gain/(loss) - 2,016 212 - - Other Current Assets 631 925 993 1,327 1,504
Adjusted PAT 4,650 5,155 5,924 7,145 8,705 Cash & Equivalents 5,224 13,442 13,996 4,563 7,904
APAT Growth (%) (3.8) 10.9 14.9 20.6 21.8 Total Current Assets 14,076 23,787 25,552 22,020 28,473
Adjusted EPS (Rs) 7.4 8.3 9.5 11.4 13.9 Creditors 3,945 4,363 4,892 7,471 8,831
EPS Growth (%) (3.8) 10.8 14.9 20.6 21.8 Other Current Liabilities & Provns 7,455 7,842 7,748 9,872 11,601
Source: Company, HDFC sec Inst Research Total Current Liabilities 11,400 12,206 12,640 17,343 20,432
Net Current Assets 2,676 11,581 12,912 4,677 8,042
TOTAL APPLICATION OF FUNDS 25,084 27,739 30,692 23,133 27,038
Source: Company, HDFC sec Inst Research

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 HAVELLS INDIA: COMPANY UPDATE

Cash Flow Statement Key Ratios

(Rs mn) FY15 FY16 FY17E FY18E FY19E FY15 FY16 FY17E FY18E FY19E
Reported PBT 6,463 9,142 8,467 9,980 12,149 PROFITABILITY (%)
Non-operating & EO Items 1 (2,014) (40) 40 42 GPM 39.3 41.6 42.4 39.3 39.1
Interest Expenses (229) (450) (38) (459) (425) EBITDA Margin 13.3 13.8 14.0 12.2 12.2
Depreciation 875 922 1,188 1,324 1,460 EBIT Margin 11.7 12.1 12.0 10.8 10.9
Working Capital Change 399 (911) (368) (2,135) (1,072) APAT Margin 8.9 13.2 10.0 7.7 7.9
Tax Paid (1,505) (1,446) (2,371) (2,794) (3,402) RoE 20.6 20.5 21.2 22.9 24.9
OPERATING CASH FLOW ( a ) 6,005 5,243 6,838 5,955 8,752 RoIC (or Core RoCE) 25.3 30.6 39.1 29.3 26.0
Capex (1,628) (1,741) (2,942) (2,000) (2,000) RoCE 19.4 19.9 20.4 21.4 21.9
Free Cash Flow (FCF) 4,377 3,502 3,897 3,955 6,752 EFFICIENCY
Investments (3,476) 2,412 - (16,000) - Tax Rate (%) 28.1 27.9 28.0 28.0 28.0
Non-operating Income (986) (1,427) 77 41 106 Fixed Asset Turnover (x) 3.9 3.7 3.5 4.8 5.1
INVESTING CASH FLOW ( b ) (6,089) (756) (2,865) (17,959) (1,894) Inventory (days) 48.1 52.7 52.7 52.7 52.7
Debt Issuance/(Repaid) (1,154) (434) (458) 5,887 998 Debtors (days) 9.2 10.6 10.6 10.6 10.6
Interest Expenses (171) (62) 38 459 425 Other Current Assets (days) 4.4 6.2 5.9 5.2 5.0
FCFE 3,394 3,129 3,401 9,383 7,325 Payables (days) 27.5 29.3 29.3 29.3 29.3
Share Capital Issuance 99 41 - - (0) Other Current Liab & Provns (days) 51.9 52.6 46.4 38.7 38.5
Dividend (1,460) (4,511) (2,923) (3,654) (4,750) Cash Conversion Cycle (days) (17.8) (12.5) (6.5) 0.4 0.5
Others - - - - - Net D/E (x) (0.2) (0.5) (0.5) 0.0 (0.1)
FINANCING CASH FLOW ( c ) (2,686) (4,965) (3,343) 2,692 (3,326) Interest Coverage (x) 37.8 57.5 223.8 22.8 29.6
NET CASH FLOW (a+b+c) (2,770) (478) 630 (9,312) 3,532 PER SHARE DATA (Rs)
EO Items, Others 3,996 12,692 - - - EPS 7.4 8.3 9.5 11.4 13.9
Closing Cash & Equivalents 1,228 750 13,996 4,563 7,904 CEPS 8.8 9.7 11.4 13.6 16.3
Source: Company, HDFC sec Inst Research Dividend 2.4 6.0 4.0 5.0 6.5
Book Value 38.0 42.3 47.1 52.7 59.1
VALUATION
P/E (x) 55.3 49.9 43.4 36.0 29.6
P/BV (x) 10.8 9.7 8.7 7.8 7.0
EV/EBITDA (x) 36.3 32.6 29.8 22.6 19.1
EV/Revenues (x) 4.8 4.5 4.2 2.8 2.3
OCF/EV (%) 2.4 2.1 2.7 2.3 3.4
FCF/EV (%) 1.7 1.5 1.5 1.5 2.6
FCFE/Mkt Cap (%) 1.4 1.2 1.3 3.6 2.8
Dividend Yield (%) 0.6 1.5 1.0 1.2 1.6
Source: Company, HDFC sec Inst Research

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 HAVELLS INDIA: COMPANY UPDATE

RECOMMENDATION HISTORY
Date CMP Reco Target
Havells TP
500 19-May-16 363 NEU 371
20-Oct-16 409 BUY 459
450
10-Jan-17 361 BUY 432
400 18-Jan-17 379 BUY 437
350 21-Feb-17 412 BUY 469
300
250
Rating Definitions
200
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
Feb-16

Sep-16

Feb-17
Nov-16
Jun-16
May-16

Dec-16
Mar-16

Oct-16
Aug-16
Apr-16

Jan-17
Jul-16

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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 HAVELLS INDIA: COMPANY UPDATE

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