enam havells aug2012

11

Havells India

ENAM SecuritiesIndia Research

August 13 , 2012

Relative to Sector: Outperformer Midcaps

Financial Summary (Consolidated)

Source: Company, ENAM estimates; Note: CMP as on 10 August 2012Source: ENAM Research, Bloomberg

Relative Performance

Shareholding (%) Jun-12 QoQ chg

Promoters : 61.6 0.0 FIIs : 20.0 0.2 MFs / UTI : 0.9 (0.1)Banks / FIs : 0.0 0.0Others : 17.5 (0.0)

Stock Data

No. of shares : 125 mnMarket cap : Rs 67.8 bn52 week high/low : Rs 616/ Rs 313Avg. daily vol. (6mth) : 349,900 sharesBloomberg code : HAVL IBReuters code : HVEL.BO

50

100

150

200

Jul-11 Jan-12 Jul-12

Sensex Havells India

Kashyap PujaraExecutive Director – [email protected] (+91 22 4325 1146)

Punit ChokhaniAsst VP – [email protected] (+91 22 4325 1130)

Y/E March

Net Sales (Rs mn)

Adj. PAT (Rs mn)

Consensus EPS* (Rs.)

EPS (Rs.)

Change ( Y oY %)

P/E ( x)

EV/EBITDA ( x)

RoE (%)

RoCE (%)

DPS ( Rs)

2011 56,126 3,071 - 25 341 - - 58 31 2.5

2012 65,182 3,700 - 30 20 - - 46 32 6.5

2013E 73,301 4,285 35 34 16 15.8 9.5 38 35 7.5

2014E 80,692 5,188 42 42 21 13.1 8.0 35 36 8.5

A closer look…calls for a re-rating

CMP: Rs 543Target Price: Rs 694

Potential Upside: 28%Absolute Rating: BUY

2

Investment argument…We believe valuation at 16x FY13E and 13x FY14E EPS does not fully reflect the benefits from unmatched distribution, premium branding, and scalability potential from Sylvania. We value India business at 18x FY14E EPS of Rs 35 and Sylvania at 10x FY14E EPS of Rs 7 to arrive at our SOTP-based TP of 694 (17x FY14E). Initiate coverage with BUY.

India business -- pillar of strength -- should be compared to companies like Page Ind, TTK Prestige, Exide and Whirlpool given similar (1) nature of business (dealer and brand-driven), (2) return ratios, and (3) consumption plays.

While Page trades at 23x FY14E (5-yr PAT CAGR of 40% with avg. RoCE of 30%), TTK trades at 22x FY14E despite higher RoCE and PAT CAGR - the street expects return ratios of TTK to moderate over the next 2 years

Exide and Whirlpool are both secular stories with high return ratios but they trade at lower valuations as they are prone to business cycles (whirlpool – vulnerable to mid cycle slowdowns and Exide - exposed to cyclical auto OEM market)

Given Havells standalone’s growth sustainability and return profile, we value it at 18x, which is higher than the valuation of Exide and Whirlpool but lower than that of Page and TTK Prestige

Source: Capitaline, ENAM Research. NOTE: Whirlpool RoCE and PAT numbers are 3-year CAGR

Earnings: Strong track record… …India business deserves 18x

TTK

Page

Havells Standalone

Exide

Whirlpool

10

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80

10 20 30 40 50 60

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oC

E TTK

PageHavells Standalone

Exide

Whirlpool

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FY14E PE (x)

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3

Comfort factors:

Distribution and branding act as a key entry barrier for the business. It has 16,000+ dealers across the world (6,000 in India). India is adding 700-800 dealers a year. Annual ad spends are > Rs 1 bn (3% of sales)

40% profit CAGR over last 20 years on the back of product launches and acquisitions. We expect 11% revenue and 18% profit CAGR over FY12-14. India business has been growing at 3x GDP for the last five years

Channel financing helps to reduce working capital requirement and increase dealer loyalty in India. Note Havells is one of the few companies in its space having the ability to avail channel financing, which gives it a distinct competitive advantage

…Investment argumentSylvania -- a potential cash cow: Management strategy to replicate India success in new geographies (emerging

markets) would drive Sylvania’s earnings going forward. However, exposure to Europe would keep earnings muted in

the short term. We value Sylvania at 10x FY14E EPS of Rs 7 (in line with peer average).

Co Name Country Co. product (Rs bn) FY13e FY14e FY13e FY14e FY12 FY13e FY14e FY12 FY13e FY14e FY12 FY13e FY14e

Koninklijke Phil Holland lighting, appliances 1,310 1,658 1,729 78 95 18 7 6 (14) 15 12 (9) 9 11

Foshan Elec-B China Lighting 54 23 26 3 3 14 na na 15 9 8 10 na na

Zumtobel Ag Austria lighting, appliances 26 88 91 2 3 6 6 5 25 17 9 4 6 11

Average 13 6 5 8 14 10

EV/EB ( x) P/E ( x) RoE ( %)Mkt Cap Sales (Rs bn) PAT ( Rs bn)

SOTP valuation FY14E

Havells Standalone

FY14E EPS (Rs) 35

P/E Multiple 18

Value Per Share (Rs) 625

Sylvania

FY14E EPS (Rs) 7

P/E Multiple 10

Value Per Share (Rs) 69

Total Value (Rs) 694

Source: Bloomberg, ENAM Research

4

Company overview

B2CB2CB2B

Havells India – FY12

Revenue : Rs 36.2 bn

EBITDA : Rs 4.6 bn

PAT : Rs 3.0 bn

Havells consolidated – FY12

Revenue : Rs 65.2 bnEBITDA : Rs 6.7 bn PAT : Rs 3.7 bnCapital employed : Rs 20.0 bnRoCE : 30%

4-year value CAGR – 14%

Contribution margin – 8%



Electrical cables –44% of sales

Domestic switchgears –25% of sales



Lighting fixtures & lamps -15% of sales



Consumer appliances –16% of sales

Europe – 62% of sales

Latin America & Asia -38% of sales

Sylvania – FY12

Revenue : Rs 29.0 bn

EBITDA : Rs 2.1 bn

PAT : Rs 0.7 bn

Source: Company, ENAM Research Refer Appendix for product details

Lighting fixtures & lamps -

5

Table of contentsSlide No.

India business 6

Sylvania 12

Risk factors 15

Company financials 16

Appendix 19

6

India Business

Growth in its DNA

7

Key strategy and strengths

Havells strategy is to cater to all electrical

product requirements of its customers,

leveraging on the same channel/ brand

Larger product basket

Focus on channel management

Brand positioning to equal quality supremacy

Transition from B2B to B2C segment

DEALERS

Multiple Products, Universal Branding, One Distribution Channel

Source: ENAM Research

8

Distribution to PUSH…Dealer network ↑ 6x in 8 yearsHavells has built one of the largest distribution network in the industry

Distribution network of 6,000 dealers reaching out to 1,00,000 retailers

Successfully expanding product portfolio through the established network,

while simultaneously expanding the network itself

Adding 700-800 dealers every year to its existing network

Impetus on dealer growth to grow core business

Entire business is through dealers. Personal attention and incentive

programs are high on agenda to motivate dealers and enhance loyalty.

Channel financing

Havells is one of the few companies in the space to offer channel financing to

its dealers through banks

Dealers get working capital loans from banks. Interest payable on these loans

is passed on as a cash discount to the dealers by Havells

Loans have a 5% recourse on Havells but are completely insured

Channel financing not only increases dealer loyalty, but also strengthens

Havells’ balance sheet

Benefits of channel financing

Havells

Bank

Insured 5% recourse

Cash discount

Reduces working capital

Enhances purchasing power of dealer

InterestDealer

Channel Financing has reduced working capital requirement of Havells

Source: Company, ENAM Research

Year Product launches

1976 Switchgears

1980 Electric meters

1996 Cables and wires

2003 Fans, lighting fittings and CFL

2006 Modular switches

2007 Power capacitors and motors

2010 Water heaters

2011 Small consumer appliances

Rs mn FY07 FY08 FY09 FY10 FY11 FY12

Debtors reported 310 661 867 795 1,121 1,597

Debtors ( incl. factoring) 2 ,307 3 ,046 2,752 3 ,606 4 ,956 6,740

Debtor cycle (Days)

Reported 7 12 14 12 14 16

Incl. factoring 55 54 46 56 63 68

2003 2011 Increase (x)

Dealers 1,000 5,600 5.6

Retailers 25,000 100,000 4.0

9

…Branding to PULLThe company has created a strong umbrella brand – HAVELLS -- all products are sold under this single brand.

Havells has positioned itself as a premium player in the electrical consumer segment to PULL customers.

A strong balance sheet enables it to build brand equity --- ad spend of more than Rs 1 bn (~3% of sales), which is difficult to replicate by other players in this space.

Company-owned Havells World and dealer-run Havells Galaxy are brand initiatives of their own kindHavells World outlets are used by the company to showcase its product range, provide technical assistance to dealers, and improve visibility of its brands. Walk-in customers are diverted to dealers

The company plans to increase its exclusive retail outlets (Havells Galaxy) to 200 in FY13 from 140 currently

Havells’ ad spend :~3% of sales


Exclusive outlets – a branding initiative

0

200

400

600

800

1,000

1,200

FY08 FY09 FY10 FY11 FY12

(Rs mn)

0

1

2

3

4(%)

Havells (LHS) Bajaj Electricals (LHS)

Havells (RHS) Bajaj Electricals (RHS)

10

Sustainable growth…

Since its listing in 1993, revenue has grown at

average multiple of 6x GDP growth.

Despite higher revenue base and sluggish

economy, domestic revenue has grown at 3x GDP

growth in the last 5 years.

0

3

6

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12

15M

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(x)

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12(%)

Havells Sales growth as a multiple to GDP

Real GDP (RHS)

(40)

(20)

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60

80

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FY0

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FY0

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FY0

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FY0

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(%)

EBITDA margin CopperAluminium Steel

EBIDTA margin has been in 10-13% band over the last decade, despite volatile raw material prices.

Consistent growth Stable margin

Given its strengths and strategy, we believe Havells’ domestic revenue will continue to post 15-20% CAGR with sustainable EBIDTA margin of 12-13% over next few years

Source: Company, Business Beacon, Bloomberg

11

…with strong cash flows

Strong cash generation

Revenue to post 19% CAGR (FY12-14E) with stable margin

Channel financing-Shrinking working capital requirement


0

10

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60

FY11 FY12 FY13E FY14E

(Rs bn)

12.0

12.2

12.4

12.6

12.8

13.0(%)

Revenue EBITDA margin (RHS)

(4)

(2)

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(Days)

(40)

(20)

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60(%)

Wcap (days) Core RoCE (RHS)

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(Rs bn)

Cash Flow from operations

12

Sylvania

To replicate Havells India success story

13

India not enough; eyeing the globeExpansion in other geographies to address

scalability ceiling. Acquisition of Sylvania in 2007 –

1st major step in that direction.

Sylvania business in line with domestic strategy

Distribution network of over 10,000 dealers -

presence across Europe, LatAm and Asia

Sylvania is a 100-year old brand - well entrenched in

the market place. This has transformed Havells into a

global player competing with the likes of Philips, GE

and Osram

Successfully executed turnaround

Immediately after the acquisition, Lehman and Euro

zone crisis (Europe- 61 % of sale) caused Sylvania to slip

into losses, thus breaching covenants

Havells restructured operations at Sylvania by

shutting plants

retrenching staff across Europe

outsourcing manufacturing to low cost countries

Havells took a restructuring charge of ~Rs 5 bn over

FY09-10

Havells managed to turnaround Sylvania in FY10

Funding (mn €) Comments

EV 235

Pension Liabilities 35

Recourse Loan on Havells India 80 Repayed € 50 mn by timely equity infusion from Warbug Pincus

Repaid € 23 mn in 7 tranches of € 3.3 mn

Non Recourse Loan 120 Term loan of € 80 mn - Repayed € 17 mn

Refinanced the remaining. Current Loan of € 117 mn

A well-structured bet

Source: Company

(3) (3)

3

45

67

889 9

109 9

109 8

(1)

(4)

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H1

FY1

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9M

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H1

FY1

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9M

FY1

2

FY1

2

(%)

Europe America

Post acquisition, Sylvania slipped into losses due to Euro

zone issues

Restructured operations enabled turnaround.

EBIDTA margin moved from -3% to 8%

14

Sylvania – Potential cash cowRoadmap

Europe – Focus on profitability

After successfully reducing costs, focus now is

to improve realizations to pass on costs

To increase outsourcing (45% of Europe sales

is outsourced from China)

LatAm and emerging markets to drive growth

Revenue mix shifting towards Latin America +

other markets. (Revenue growing at 10-12%

vs. flat growth in Europe)

Plans to enter other EMs - South Africa and

China

Opportunity to cross-sell

Havells has started exporting switchgears to

Europe to leverage on Sylvania’s distribution

network

Sylvania’s range of fixtures will be introduced in

India by a plant set up by Havells in Nirmana

(Rajasthan)

Sylvania is well poised to repay debt from its

own cash flows

Euro mn FY12 FY13E FY14E FY15E FY16EPAT 10 9 12 16 21(+) Depreciation 8 7 7 7 7(-) Chng wcap 8 3 1 0 1(-) Capex 4 4 4 4 4FCF 6 9 14 19 23Cash & Bank 13Debt Repayment 4 11 14 16

Sales Mix FY10 FY12 FY13E FY14EEurope 71% 61% 0% 0%Latin America + Others 29% 39% 0% 0%

A potential cash cow

Euro mn FY13 FY14 FY15 FY16 FY17 TotalBy Sylvania 4 11 14 16 32 77By Havells India 40 0 0 0 0 40Total 44 11 14 16 32 117

Refinanced debt – payment schedule


Focus: To tilt sales to LatAM and Asia

15

Mitigant

Risks to call

Mitigant Mitigant

Sylvania’s exposure to Europe

Sylvania generates 62% of its

revenue from Europe. A slowdown in

Europe can significantly impact

Sylvania’s performance.

New acquisitions

Havells plans to enter new emerging

markets like Africa and China

through acquisitions. Failure to

integrate these new acquisitions

can impact future performance.

Risk of inventory

While working capital of the company

is negligible (largely due to channel

financing), Havells carries the risk of

inventory write-downs mainly in the

cables and wires business (45% of

domestic revenue). Key raw materials

are copper and aluminum.

The company has been shifting its revenue mix towards Latin America and Asia - up from 29% of sales in FY10 to 39% in FY12.

In the past 20 years, Havells has

acquired multiple companies and

managed to scale them well as

indicated by its 20-year PAT CAGR

of 40%.

Even though this could lead to

quarterly lumpiness, historically,

Havells has managed to maintain

standalone annual margin in the

10-13% range.

16

Company financials…


Consolidated assumptionsHavells Standalone (Rs bn) FY11 FY12 FY13E FY14E

Switchgear ( A) 8 10 11 12

Value growth (YoY) 12% 23% 12% 12%

Contribution margin (%) 34% 34% 34% 34%

Cables (B) 14 18 21 25



Lighting & Fixtures ( C) 5 6 8 9



Consumer Durables (D) 5 6 8 10



(A)+( B)+( C)+( D) 32 40 47 56

Less ( Discounts, excise duty) 3 4 4 5

Net Revenue 29 36 43 51

Standalone Unallocable Exp 2 4 4 5

Standalone EBIT* 3 4 5 6

EBIT margin (%) 11% 12% 12% 11%

Note: EBIT = Segmental contribution - Unallocables

Sylvania (Euro mn) FY11 FY12 FY13E FY14E

Net Revenue 450 448 452 466


EBIT 18 31 28 32

EBIT margin (%) 4.0% 6.8% 6.2% 6.8%

Havells Consolidated (Rs bn) FY11 FY12 FY13E FY14E

Net Revenue 56 65 73 81


EBIT 5.0 6.0 6.8 7.9

EBIT margin (%) 8.9% 9.3% 9.3% 9.7%

17

…Company financials…

Source: Company, ENAM Research* Interest includes bank charges

Profit & Loss (Rs mn)

Y/E March 2011 2012 2013E 2014E

Net sales 56,126 65,182 73,301 80,692

Other operating income 198 64 218 219

Total income 56,324 65,246 73,519 80,911

Cost of goods sold 42,071 48,938 56,018 61,230

Contribution (%) 25 25 24 24 Advt/Sales/Distrn O/H 8,484 9,671 9,854 10,999

Operating Prof it 5,769 6,638 7,647 8,682

Other income 39 350 155 204

PBIDT 5,808 6,987 7,803 8,886

Depreciation 804 949 979 1,022

Interest* 902 1,281 1,339 1,225

Other pretax 0 0 0 0

Pre-tax prof it 4,102 4,758 5,485 6,638

Tax provision 1,031 1,058 1,200 1,450

(-) Minority Interests 0 0 0 0

Associates 0 0 0 0

Adjusted PAT 3,071 3,700 4,285 5,188

E/o income / (Expense) (30) 0 0 0

Reported PAT 3,041 3,700 4,285 5,188

Key ratios (%)

Y/E March 2011 2012 2013E 2014E

Sales growth 9 16 12 10

OPM 10 10 10 11

Oper. profit growth 70 15 15 14

COGS / Net sales 75 75 76 76

Overheads/Net sales 15 15 13 14

Depreciation / G. block 3 3 3 3

Effective interest rate* 8 12 16 19

Net sales/ Net working cap (x) 27 22 21 19

Net sales / Gr block (x) 2.0 2.2 2.4 2.6

Incremental RoCE 88 80 187 85

RoCE 31 32 35 36

Debt / equity (x) 1.7 1.0 0.5 0.4

Effective tax rate 25 22 22 22

RoE 58 46 38 35

Payout ratio (Div/NP) 10 22 22 20

EPS (Rs.)^ 25 30 34 42

EPS Growth 341 20 16 21

CEPS (Rs.) 31 37 42 50

DPS (Rs.) 3 7 8 9

18

…Company financials


Balance sheet (Rs mn)

Y/E March 2011 2012 2013E 2014E

Total assets 18,275 20,010 20,419 23,851

Gross block 28,454 29,731 30,999 32,252

Net fixed assets 9,955 10,284 10,572 10,803

CWIP 249 663 250 250

Investments 0 0 0 0

Wkg. cap. (excl cash) 2,938 3,103 3,751 4,688

Cash / Bank balance 1,779 2,336 2,221 4,485

Goodwill 3,354 3,625 3,625 3,625

Capital employed 18,275 20,010 20,419 23,851

Equity capital 624 624 624 624

Reserves 5,920 8,930 12,282 16,410

Borrowings 11,173 9,900 6,957 6,261

Deferred Tax Liability 559 556 556 556

Cash flow (Rs mn)

Y/E March 2011 2012 2013E 2014E

Sources 625 2,133 95 2,373

Cash profit 3,013 3,717 4,080 5,189

(-) Dividends 207 811 936 1,061

Retained earnings 2,806 2,906 3,145 4,128

Issue of equity 0 0 0 0

Borrowings 454 (1,273) (2,943) (696)

Others (2,635) 500 (106) (1,059)

Applicat ions 625 2,133 95 2,373

Capital expenditure 2,029 1,277 1,268 1,253

Investments 310 0 0 0

Net current assets (2,013) (164) (649) (937)

Change in cash 299 1,020 (524) 2,057

19

Appendix

Havells: 20-year earnings CAGR of 40%

Product portfolio

New launches

Domestic business: Segmental performance

Sylvania – Product range

20

20-year earnings CAGR of 40%

New product launches and acquisitions led to robust performance


2007 - 102003 - 07

Forayed into fans, lighting and CFLs in 2003, positioning its products in the premium category

As a result of its strong brand and distribution network, Havells garnered significant market share in a short span of time

2006 market share: ~6% in fans, 3% in lightings, ~10% in CFLs

In 2007, Havells acquired Sylvania – A 100-year old lighting major in Europe to gain global footprint

Acquisition was an LBO, wherein Havells acquired a global business for ~Rs 16 bn with an equity investment of Rs 1.6 bn

Restructured operations post the European crisis & turned around Sylvania

In 1958, started as a mere distributor of switches

Acquired brand “Havells” in 1971 and started manufacturing switchgears and meters

Post listing in 1993, it ventured into cable/wire manufacturing

1958 - 2003

Transformation phase:Distributor to manufacturer

Expansion of product portfolio

Transformation phase:Global foray

2010…

Leveraging on strengths:consumer appliances & cross selling of products

Leveraging on a well-established distribution network and brand, Havells successfully introduced a range of water heaters (2010) and small consumer appliances (2011) in the Indian market. This would drive volume in future

It is now bringing in lighting range from Sylvania into India

Rs mn 1993 2003 2007 2010 2013E 20 YR CAGRRevenue 109 2,525 15,472 51,626 73,301 38%EBITDA 14 255 1,458 3,222 7,647 37%Margin 13% 10% 9% 6% 10%PAT 5 90 1,021 696 4,285 41%

RoCE 20% 45% 16% 34%

Aberration: Sylvania slipped into losses due to

the European crisis

21

Havells India – Product portfolio

Source: Company

Domestic switchgear – MCBMkt size ~ INR 16 bn Market share ~ 28% (15% in 2006)

Peers Legrand (MDS & Indo Asian)Schneider

1

Modular Switches – CrabtreeMkt size ~ INR 14 bnMkt share ~ 15% (5% in 2006)2

Industrial switchgearMkt size ~ INR 30 bnMarket share ~ 6% (7% in 2006)5

Cable & WireMkt size ~ INR 170 bnMarket share ~ 9% (6% in 2006)2

Lighting – CFLMkt size ~ INR 20 bnMkt share ~ 11% (10% in 2006)3

Lighting - LuminairesMkt size ~ INR 25 bnMarket share ~ 11% (3% in 2006)4

Electrical Consumer Durable - FansMkt size ~ INR 35 bnMkt share ~ 15% (6% in 2006)3

Peers Matsushita/ AnchorRomaLegrand

Peers L&TSchneider, SiemensABB

Peers Cable Wire

Polycab FinolexKEI Polycab

Peers PhilipsSuryaOsram

PeersPhilipsBajajCromptonWipro

Peers CromptonUshaOrient

22

New launches

Small Domestic AppliancesMkt size ~ INR 50 bnNew

Peers R RecoldBajajRecold

Source: Company

23

Domestic business: Segmental performance

Electrical consumer durablesLighting

Cables & WiresSwitchgears


0

2,000

4,000

6,000

8,000

10,000

12,000

FY07 FY08 FY09 FY10 FY11 FY12

(Rs mn)

30

32

34

36

38

40(%)

Sales Contribution (RHS)

0

4,000

8,000

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16,000

20,000


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15(%)

Sales Contribution (RHS)

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8,000


(Rs mn)

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Sales contribution %

0

2,000

4,000

6,000

8,000


(Rs mn)

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15

20

25

30(%)

Sales contribution %

24

Sylvania – Product range

Architectural / accent

Industrial/commercial

Fluorescent Energy saving/ (CFL/ LED)

Incandescent Halogen High density discharge (HID)

Major peers

ZumtobelPhilips

PhilipsOsramGE

Source: Company

Fixtures (33% of revenue) Lamps (55% of revenue) Others (12% of revenue)

2525

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CONFLICT OF INTEREST DISCLOSUREWe, at ENAM, are committed to providing the most honest and transparent advice to our clients. However, given the nature of the capital markets, from time to time we are faced with situations that could give rise to potential conflict of interest. In order to provide complete transparency to our clients, before we make any recommendations, we are committed to making a disclosure of our interest and any potential conflict IN ADVANCE so that the interests of our clients are safe- guarded at all times. In light of this policy, we have instituted what we believe to be the most comprehensive disclosure policy among leading investment banks/brokerages in the world so that our clients may make an informed judgment about our recommendations. The following disclosures are intended to keep you informed before you make any decision- in addition, we will be happy to provide information in response to specific queries that our clients may seek from us.

Disclosure of interest statement (As of August 8, 2012)1. Analyst ownership of the stock No2. Firm ownership of the stock No3. Directors ownership of the stock No4. Investment Banking mandate No5. Broking relationship No

We are committed to providing completely independent and transparent recommendations to help our clients reach a better decision.

enam havells aug2012

Economy & Finance

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