Description
Incorporated in 1971, Havells is one of the leading players in the electricalconsumer goods industry in India. The company‘s operations span fourbroad segments, viz. cables & wires, switchgears, lighting, and electricalconsumer durables, in order of their contribution to revenues. Starting
primarily as a company dealing in industrial products, the company hasgradually shifted its focus onto consumer products over the past onedecade and is now considered a well-established brand in the domesticconsumer electricals market.
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ICRA EQUITY RESEARCH SERVICE
HAVELLS INDIA LIMITED
March 14, 2011 Industry: Electrical Equipment
Fundamental and Valuation Grades
ICRA Online has assigned the Fundamental Grade 4 and the Valuation
Grade B to Havells India Limited (Havells). The Fundamental Grade 4
assigned to Havells implies that the company has ?strong fundamentals?
relative to other listed securities in India. The grade factors in Havells‘
diversified product portfolio with core focus on the fast growing consumer
goods sector, its effective marketing and distribution reach that supports
premium pricing, and the significant growth potential of its subsidiary,
Sylvania. The grade also takes note of the intense competition that
Havells faces across the segments it operates in. The Valuation Grade B
assigned to Havells implies that the company is ?moderately undervalued?
on a relative basis (as on the date of the grading assigned).
Incorporated in 1971, Havells is one of the leading players in the electrical
consumer goods industry in India. The company‘s operations span four
broad segments, viz. cables & wires, switchgears, lighting, and electrical
consumer durables, in order of their contribution to revenues. Starting
primarily as a company dealing in industrial products, the company has
gradually shifted its focus onto consumer products over the past one
decade and is now considered a well-established brand in the domestic
consumer electricals market.
Havells has grown both organically and inorganically over the years. Its
last major acquisition that of the Frankfurt-based Sylvania in April 2007,
has placed Havells on the global map in the lighting industry.
Grading Positives
Established brand equity along with leading market shares in most areas
of operation, diversified product portfolio, presence in consumer products
segment with high growth potential and experienced management. The
company also has a strong financial profile, characterised by robust
profitability and cash generation, with working capital requirements being
limited. Potential upsides to our estimates: (1) Higher than expected
market share in new product segments; and (2) Better than expected
improvement in Sylvania‘s profitability and cash flow generation capacity
backed by growth in emerging economies.
Grading Sensitivities
Key sensitivities to our estimates include: (1) Further increase in
competition resulting in loss of market share, particularly in the intensely
competitive electrical consumer durables (ECD) division; (2) Slower than
expected revival in Sylvania‘s profitability and success in emerging
markets, particularly new geographies.
Fundamental & Valuation Grades: ICRA assigns fundamental grade of
??/5‘ and valuation grade of ??‘ to MSL. A fundamental grade of ??/5‘
indicates MSL‘s fundamentals are ??‘ relative to the other listed securities
in India. This grade factors in the companies‘ established presence in the
seamless and ERW pipes industry and favorable industry prospects over
the medium to long term. However, it is constrained by the high
competition from Chinese imports of seamless pipes in the domestic and
Middle East market, vulnerability to raw material prices and concentration
of MSL‘s sales on the oil and gas sector. A valuation grade of ??‘ on a
grading scale of ?A to E‘ indicates that the company is ? valued on sector
relative basis and has a ? potential over the next one year from its current
market price.
ICRA Online Grading Matrix
Valuation Assessment
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Fundamental Grading of ?4/5‘ indicates
?strong fundamentals?
Valuation Grading of ?B‘ indicates
?moderately undervalued? on a relative
basis
Key Stock Statistics
Current Market Price* (Rs.) 348.25 381.65
Shares Outstanding (crore) 12.48 12.48
Market Cap (Rs. crore) 4345.28 4762.0
52-Week High (Rs.)
446.50
446.50
52-Week Low (Rs.) 257.50 166.00
Free Float (%) 38.4% 35.4%
Beta 1.09 1.03
P/E on 2011-12 EPS Estimate (x) 12.3 17.7
Bloomberg Stock Code HAVL IN HAVL IN
*As on March 11, 2011
Havells Shareholding Pattern
(December 31, 2010)
Havells Share Price Movement (24 months)
Indian
Promoter
Group,
61.6%
Non-
Institutio
ns, 19.8%
Domestic
Institutio
ns, 2.4%
Foreign
Institutio
ns, 2.3%
Warburg
Pincus,
14.0%
0%
100%
200%
300%
400%
500%
600%
700%
800%
900%
Havells India Ltd
S&P CNX Nifty
BSE Consumer Durables
%
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Key Financials (Consolidated)
2009-10A 2010-11E 2011-12E 2012-13E
Operating Income (Rs. Crore) 5,432 5,928 6,462 7,059
EBITDA Margin (%) 5.73% 8.09% 9.73% 10.03%
PAT Margin (%) 1.28% 4.35% 5.45% 5.95%
EPS (Rs.) 5.8 20.7 28.2 33.7
EPS Growth (%) N/A 258% 36% 19%
P/E (x) N/A 16.8 12.3 10.3
P/BV (x) 10.5 7.1 4.7 3.3
RoE 14% 51% 46% 37%
RoCE 15% 27% 30% 31%
EV/EBITDA 16.9 11.0 8.4 7.4
Source: Company, ICRA Online’s estimates
Note: EPS Growth and PE estimates for 2009-10 are not meaningful
ICRA Equity Research Service Havells India Limited
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SUMMARY
Growth fuelled by increasing focus on consumer
electricals; considerable scope for future expansion in
related products
Starting off as a manufacturer of switchgears in 1971, Havells
till the late 1990s was largely involved in manufacturing
industrial products. Foreseeing strong growth prospects in the
consumer goods category, the company later diversified into
products such as fans, compact fluorescent lamps (CFLs),
modular switches, and power cables and wires. As these
products are used mostly during building construction or
renovation, the company benefited from the rapid growth in the
real estate sector, reporting a robust compounded annual
growth rate (CAGR) of around 40% in its revenues in the last
ten years.
To further capitalise on the growth potential in the consumer
goods category, Havells is now expanding its portfolio,
including products such as water heaters.
Strong growth prospects backed by presence in high-potential consumer goods segment
With its main focus being on electrical consumer goods, demand for most of Havells‘ products is driven by consumer spending
and power availability. Over the last four years, the top players in domestic electrical consumer goods‘ industry have
demonstrated strong revenue growth of 15-18%, driven by rising income levels, increasing urbanisation, and greater rural
electrification. Further, with standards of living improving and consumer focus increasing on saving energy, the demand for
quality products has been reporting strong growth. The trend is expected to sustain, with the main beneficiaries being
companies with established brands and product attributes that stand out in an increasingly cluttered market, high quality
standards that neutralise competition from unorganised-sector players, and extensive distribution networks that enable them to
reach the high growth centres in Tier-II and Tier-III cities. Given its established track record, Havells is in a favourable position
to capitalise on the sector‘s growth potential. We expect Havells to post a net profit CAGR of around 11% between 2009-10
and 2012-13(E) on a standalone basis.
Intense competition across segments
The segments in which Havells operates (except cables) are characterised by limited capital expenditure (capex) requirements
and availability of outsourcing or imports to meet demand. Consequently, Havells faces intense competition in most of its
business segments. Although there is only one large company - Crompton Greaves - that is into similar areas of operation as
Havells, low investment requirements have resulted in significant competition from single-product/segment companies (refer
Figure 4) and unorganised players. In this scenario, an established brand name and distribution network become critical, as
the same cannot be easily replicated. Havells‘ ability to differentiate products (for instance, introducing additional attributes like
low power consumption and electric shock prevention), and its effective brand building initiatives, thus, restricts competition
from the unorganised sector to some extent.
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Figure 1: Trend in Havells' Revenue Growth
Source: Company’s Annual Reports; ICRA Online’s estimates
0%
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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
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Per capita disposable income
Growth in per capita disposable income
Figure 2: IIP Consumer Durables Index
Source: Bloomberg
Figure 3: Growth in Disposable Incomes in Last Five Years
Source: Central Statistical Organisation; ICRA Online’s estimates
ICRA Equity Research Service Havells India Limited
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Figure 4: Havells' Competition Matrix
Source: Companies’ websites and annual reports, ICRA Online Research
Branding and distribution network—the key differentiators
With increasing urbanisation, Tier-II and -III towns are expected to be the key growth drivers over the next few years, which
makes extensive distribution network and brand presence critical for consumer goods‘ companies. Havells‘ ability to cross-
leverage its existing distribution network and its established brand presence give it a competitive edge over smaller companies
with limited reach.
Havells has established a pan-India distribution network over the years, using which it has been able to gain market share
rapidly even for its relatively new products like modular switches, CFLs, and electric fans. Its network compares well with that
of the largest electric appliance company in India, Bajaj Electricals, which reaches out through 50,000 retail outlets.
Table 1: Distribution Network of Havells versus Peer Companies
Source: Companies’ websites
At present, Havells has a network of 4,300 wholesalers/dealers and 35,000 retailers. In terms of brand, the company is
particularly strong in North and East India, which together account for around 56% of its total sales and 44% of its total dealer
base. While South India has been a major contributor to sales because of the sheer market size; Havells has been traditionally
weak in West India (which accounts for around 15% of its total sales), being a late entrant there. The company is however
making efforts to increase its market share in the region by expanding its dealer base (which is now comparable in size to its
dealer bases in North and South India).
To further leverage its presence across product segments, Havells has opened exclusive outlets named ?Havells Galaxy? in
several cities across India. These stores, owned by Havells‘ dealers, display and undertake retail sales for the entire product
range of the company. At present, there are 80 Havells Galaxy stores across India and the company plans to raise the number
to 200 by March 2012.
Havells has also been aggressive in its
advertising, with its advertisement expense to
sales ratio being significantly higher than that of
its close peers. The company‘s advertisements
and brand building initiatives have increased its
brand visibility among end-consumers. This,
together with the acquisition of established
brands like Crabtree and Standard over the
Category Products Havells
Crompton
Greaves
Bajaj
Electricals Matsushita
Phillips
India Osram
Surya
Roshni Legrand Schneider
Finolex
Cables
KEI
Industries
Fans ? ? ?
Water Heater ? ? ?
Irons ? ? ? ?
Kitchen Appliances ? ? ? ?
ICLs ? ? ? ? ?
FTLs ? ? ? ? ?
CFLs ? ? ? ? ? ? ?
LEDs ? ? ? ? ? ?
Luminaires ? ? ? ? ? ?
Low Voltage ? ? ?
Medium Voltage ? ?
High Voltage ?
Switches ? ? ? ? ? ? ?
Motors ? ?
Copper Cables ? ? ?
Aluminium Cables ? ? ?
High Voltage Cables ? ?
Residential Wires ? ? ?
N/A N/A 30% ~62%
Other Areas of Operation
Power
Systems,
Industrial
Systems etc.
Copper
Rods, PVC
Pipes &
Sheets, etc.
ERW Pipes
and HR &
CR Coils
Surya
N/A N/A N/A N/A
% of revenues contributed by
above-mentioned products
Bajaj Platini,
Morphy
Richards
Havells, Standard,
Crabtree
Special
Projects, High
Masts & Poles
and Towers
National,
Panasonic,
Anchor-Roma
TV, Music
Systems, Home
Appliances, etc.
Stainless
Steel Wires
100% 31% 67%
Healthcare
Products,
Television,
etc.
Electrical
Consumer
Durables
Lighting
Cables &
Wires
Switchgears
Brands
Company
Distributors/
Dealers
Retail Outlets
Havells 4,300 35,000
Bajaj Electricals 5,000 50,000
Legrand 600 3,000
Table 3: Advertising Spend of Havells versus Peer Companies
2006-07 2007-08 2008-09 2009-10
Havells 1.9% 2.4% 2.1% 3.3%
Bajaj Electricals 1.6% 1.5% 1.3% 1.5%
Crompton Greaves 0.4% 0.5% 0.5% 0.4%
Source: Companies’ Annual Reports, ICRA Online’s estimates
Table 2: Havells’ Regional Sales and Distribution Network
Region Havells’ Sales Havells’ Dealers
North 34% 26%
East 22% 18%
West 15% 27%
South 28% 29%
Total 100% 100%
Source: Company
ICRA Equity Research Service Havells India Limited
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years, has strengthened Havells‘ brand portfolio, enabling it to command a price premium in several products.
Figure 5: Havells’ Brands in India Figure 6: Havells’ International Brands
Sylvania turnaround to improve consolidated profits
The economic downturn that happened soon after Havells
acquired the Frankfurt-based Sylvania in April 2007 led to
Havells reporting losses on a consolidated basis in 2008-09
and 2009-10. This in turn kept Havells‘ consolidated earnings
per share (EPS) depressed during the two years ended
March 2010. Havells initiated a restructuring exercise aimed
at reducing fixed cost base at Sylvania that is expected to
result in annual savings of €33.5 million, a large part of which
would be reflected in its EBITDA in 2010-11. Initially, the
company had expected to break even at the net profit level in
2011-12, but the 9M, 2010-11 results of Sylvania indicate that
the subsidiary would make a nominal net profit of about
€1million in 2010-11 itself. With Sylvania turning around
[EBITDA positive in Q4, 2009-10 and net profits from 2010-
11(E) onwards] Havells‘ consolidated EPS is expected to
increase significantly over the medium term.
Further, in line with other global majors such as Philips and
Osram, Sylvania is looking at increasing its exposure in fast growing developing markets such as India, China, and Malaysia.
While bulk of the improvement in Sylvania‘s profits during the current year are attributable to cost savings from restructuri ng
programmes, increasing revenue contributions from the emerging markets including Latin America and Asia would drive
Sylvania‘s profitability in the long term.
Launch of Sylvania products in India to enable Havells serve a wider market, but distribution would be a challenge
The size of the market for luminaires and special lamps, the likely focus areas for Sylvania in India, was an estimated Rs.
2,100 crore in 2009, accounting for almost 30% of India‘s total lighting market that year. Considering Sylvania‘s track record of
operations and the growth potential of the Indian lighting industry, the scope for the brand‘s growth in India appears significant.
With its wider product range and access to the latest technologies such as of light emitting diodes (LEDs), Sylvania will be
positioning its products to access the institutional clients – thereby mitigating the risk of cannibalisation of Havells‘ existing
products. Havells would however need to establish a separate distribution channel for Sylvania products as its current network
is targeted primarily at retail customers. Accordingly, it may take some time for growth in Sylvania‘s products to pick up in
India. We expect Sylvania‘s products to achieve a turnover of around Rs. 50 crore (translating into a market share of around
2%) in its first full year of operations and thereafter grow in line with the estimated industry growth rate of around 25%.
Segment/
Products
Brand
Indian
Brands
Havells
Lighting,
ECDs,
Switchgears,
Cables &
Wires
Crabtree
Switches
Standard
Domestic
Switchgears
Segment/
Products
Brand
Multi-
National
Brands
Sylvania
Complete
Lighting
Range
Concord Lighting
Fixtures
Lumiance
Lighting
fixtures
Source: Company
Source: Company
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-300
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300
400
2008-09 2009-10 2010-11 2012-13
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Sylvania Havells Standalone Consolidated
Figure 7: Movement in Net Profits
Source: ICRA Online’s estimates
Note: Sylvania and Consolidated 2009-10 PAT figures are adjusted for
amounts charged by the company to Business Reconstruction Reserve
ICRA Equity Research Service Havells India Limited
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Company Snapshot (Standalone)
* Companies placed in order of their market position
Source: Company’s Annual Reports, Company data, ICRA Online’s estimates
0%
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70%
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2005-06 2006-07 2007-08 2008-09 2009-10
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Installed Capacity and Utilization Trend
Installed Capacity CapacityUtilisation
ICRA Equity Research Service Havells India Limited
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Lighting
Post-acquisition of Sylvania in 2007, lighting has become the major segment for the company accounting for around 60% of its
consolidated revenue base. The acquisition provided the company an access to international markets, Sylvania‘s premium
product-range and its well-established brand name. Although profitability in Sylvania‘ international operations was affected
because of global recessionary conditions and overall operational inefficiencies in the last two financial years, domestic
lighting segment of Havells continued to be profitable because of favourable market scenario in India and cost-efficient
operations. The business dynamics of domestic and international lighting operations of consolidated Havells entity continue to
be different and hence have been analysed separately in the following sections.
Lighting—Domestic
Domestic lighting segment holds significant growth potential
In the lighting segment, Havells is involved in manufacturing CFLs and
trading in luminaires. Both the categories hold significant growth potential
as the demand for the products is strongly correlated with real estate and
construction activities in the country. Moreover, the high share of lighting in
domestic power consumption (~20% in India), continuing power deficit and
mounting pressure on natural resources are factors contributing to the shift
in favour of more energy-efficient products, thus acting as key drivers of
CFL demand.
The domestic lighting industry reported a CAGR of 12% to around Rs. 72 billion over the five years till 2009-10. With personal
disposable incomes increasing and market preference shifting towards more energy-efficient products, the CFL segment
reported a much faster CAGR of 28% over the same period to account for almost one-third of the total domestic lighting
market. Havells, despite its late entry into the segment (in 2003-04) and the presence of large incumbents such as Philips,
Osram and Bajaj, has successfully garnered a market share of 8% in the CFL segment and of around 10% in the luminaire
segment.
Government initiatives expected to spur CFL growth
Although CFLs are much more energy efficient
1
than ICLs, CFL penetration is considerably low in the household sector in
India (10-15%) largely because of their high price (8-10 times more expensive than ICLs). Government initiatives to enhance
rural electrification in the country while simultaneously promoting use of energy efficient lighting systems by providing
subsidies (refer Table 4) is expected to boost demand for lighting products, particularly CFLs. The objective is to subsidise the
more expensive energy-efficient products, making them affordable for the target market. For instance, successful
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CFLs with a luminous efficiency of 50-95 lumens/Watt (lm/W) and offering 6,000-12,000 burning hours consume 75% less energy as
compared with ICLs, which have a luminous efficiency of 5 to 20 lm/W and offer 750-1000 burning hours. The luminous efficiency of light
emitting diodes (LEDs) is even higher at 100-130 lm/W and they offer around 50,000 burning hours.
2005-06
2006-07
2007-08
2008-09
2009-10
ICLs, 13%
ICLs, 10%
FTLs, 24%
FTLs, 16%
CFLs, 16%
CFLs, 27%
Luminaires,
20%
Luminaires,
22%
Others, 27%
Others, 25%
Domestic Lighting: Key Drivers and Challenges
Growth Drivers
? Increase in real estate activities backed by
strong economic growth
? High cost of energy, continuing power
deficit, and pressure on natural resources
? Greater focus on energy-efficient products
? Government initiatives to subsidise energy-
efficient products
Key Challenges
? Intense competition
? Keeping pace with changing technology
? Environmental threat posed by use of
mercury in CFLs
? Significant warranty returns in CFL
business
? Fragmented nature of luminaire business
Figure 8: Changing Trend in Lighting Industry
Source: ELCOMA India, ICRA Online’s estimates
Note: Above estimates are for calendar years
ICLs: Incandescent Lamps, FTLs: Fluorescent Tube Lights
ICRA Equity Research Service Havells India Limited
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implementation of Bachat Lamp Yojana (BLY) will reduce the price differential between ICLs and CFLs to Rs. 3-9 per piece,
thus attracting demand from price-sensitive and rural households.
Table 4: Summary of Key Government Initiatives that could boost Demand for Lighting Products in India
Programme Brief overview Objective Status
Rajiv Gandhi Grameen
Vidyutikaran Yojana/
Rural Electrification
Policy
Launched in April 2005 by
merging all existing similar
schemes
Has a target of electrifying 125,000 un-
electrified villages and giving access to 7.8
crore uncovered rural households by 2012
Although 118,499 villages
(95%) have already been
electrified, in terms of
households only 53% of the
target has been achieved,
which points to significant
demand potential over the
next few years
BLY Promotes replacement of
inefficient bulbs with CFLs by
leveraging the sale of
Certified Emission Rights
(CERs) under the Clean
Development Mechanism
(CDM) of the Kyoto Protocol
To distribute high quality CFLs at about Rs.15
per piece to households in the country.
Balance cost to be recovered by registering
the project under CDM. The scheme aims to
replace 40 crore ICLs in India with CFLs
Implemented/initiated in
Himachal Pradesh, Punjab,
Uttar Pradesh, Madhya
Pradesh, Kerala,
Chhattisgarh and Orissa
Source: Ministry of Power; ICRA Online Research
While the scope of BLY is limited to replacement of 40 crore ICLs (translating into an additional demand of 2% per annum for
CFLs), efforts in some developed nations are directed at mandatory replacement of all ICLs with more energy-efficient
products. Introduction of similar programmes in India could be a strong demand driver for CFLs, given that ICLs account for
roughly 65-70% of the total annual sales of lighting products in India (in terms of volumes). In India, we do not expect any
major replacement demand in the short to medium term unless Government implements mandatory phase-out of ICLs while
continuing to provide subsidises on CFLs.
Industry volumes for CFLs reported a CAGR of 40% during the last four years, with the growth moderating to 28.1% in 2009-
10 partly on account of the higher base effect and partly because of the slowdown in the real estate sector. The growth
(CAGR, four years) in value terms has been relatively low at 28% because of declining realisations.
Table 5: Estimation of Potential CFL Market for Havells
2007-08 2008-09 2009-10 2010-11(E) 2011-12(E) 2012-13(E)
Industry Sales Lakh pieces 1,400 1,990 2,550 3,213 4,048 5,101
Growth % 40% 42% 28% 26% 26% 26%
Total Sales Rs. Crore 1,162 1,510 1,900 2,410 3,036 3,775
Growth % 40% 30% 26% 27% 26% 24%
Realisation per CFL Rs. 83 76 75 75 75 74
Source: ELCOMA India, ICRA Online’s estimates
Considering the slow implementation of BLY and the uncertainty over Havells‘ participation in the same, we have not factored
in any incremental sales that may come from that scheme. While sustaining a high growth rate could be increasingly difficult
on a growing base, the CFL industry is likely to enjoy strong demand prospects, considering the currently low penetration
levels, the potential replacement demand, and the additional demand likely from increased residential and commercial/retail
construction activities over the next few years. Accordingly we expect the CFL market to report a CAGR of 26% over the next
five years.
Intensely competitive industry; Havells’ strategy to counter warranty claims to temper market share growth
The CFL market in India is intensely competitive, featuring around 20 organised- and several unorganised-sector players.
While till around two years back, the unorganised sector used to account for almost 40% of the CFL market, their share is now
expected to decline significantly on account of the following factors:
? Introduction of standards for CFLs by Bureau of Indian Standards (BIS): BIS has mandated that CFLs should
carry a high power factor (PF) stamp from October 1, 2009 onwards. According to ELCOMA, 14 companies have
acquired licences to manufacture CFLs with >0.85 PF
? Imposition of anti-dumping duty: This has restricted the import of low-cost CFLs from China to an extent
? Increasing consumer awareness: As the price differential between products offered by organised and unorganised
players is not significant, consumer preference has moved towards products with better quality parameters (such as
power factor, and guaranteed hours)
ICRA Equity Research Service Havells India Limited
8
Going forward, we expect the CFL industry to increasingly consolidate away from the unorganised sector as the shift towards
higher quality gains further momentum and the benefits of scale economies accrue to the larger players. Assuming a 20% shift
in market share from the unorganised to the organised sector over three to five years, the top five players (including Havells)
would gain 2.8% to 3.2% in market share, given their extensive distribution network, cost-efficient operations, and strong brand
presence. Havells however is following a cautious approach to contain warranty claims, a major concern for the industry.
As is the industry norm, CFL manufacturers provide a product warranty varying from six months to one year from the date of
purchase
2
. This has been a major concern for CFL makers in India because market malpractices have led to significant claims
for returns. In 2007-08, Havells received claims for Rs. 13.62 crore, which was 12.7% of its CFL sales that year. To rectify the
situation, the company withdrew its products from certain States where malpractices were rampant, and this led to a 30%
decline in its sales to Rs. 84.5 crore in 2008-09. Consequently, the company‘s market share declined to 6% in 2008-09 from
10% in 2007-08. Subsequently, with operations in other States stabilising, Havells‘ market share reported improvement in
2009-10. Its warranty claims declined significantly in 2009-10 to Rs. 2.86 crore, which was 1.9% of its total CFL sales that
year.
Although there have been instances of companies withdrawing warranties in the past, the lack of participation from all
companies, besides the availability of cheaper alternatives from the unorganised sector, adversely affected sales, prompting
the reintroduction of warranties. Given that warranty related malpractices still exist, Havells is now following a conservative
strategy of restricting its presence to a few key markets. While this has adversely impacted sales and market share during the
last two years, it has also helped protect profitability margins. Considering Havells‘ conservative approach, we expect its
market share to stabilise at around 8.5% over 2010-11(E) to 2012-13(E).
Table 6: Movement in Havells' Market Share in CFL Segment
Units
2007-08 2008-09 2009-10 2010-11(E) 2011-12(E) 2012-13(E)
Industry Size Rs. crore 1,162 1,510 1,900 2,410 3,036 3,775
Market Share % 10% 6% 8% 8.5% 8.5% 8.5%
Source: ELCOMA India, ICRA Online’s estimates
Environmental threat posed by mercury use in CFLs, increasing affordability of solid-state lighting products may
affect CFL demand; access to Sylvania’s technology for advanced products may help maintain market share
Although critical given their importance in saving electricity, CFLs face environment related challenges because of the use of
mercury in their manufacturing. The threat is greater for developing nations such as India as CFLs manufactured here have a
higher mercury content (up to 13 mg in lower quality lamps); developed nations on the other hand have regulations restricting
such content to 1 mg per bulb. Given the environmental concerns, efforts are being made across the world to bring down the
cost of solid-state lighting products or LEDs, which are considered significantly superior in terms of energy efficiency and
environment friendliness. Although Havells has a single-product offering in the lighting segment (on a stand-alone basis) and a
limited presence in LEDs (trading operations), its acquisition of Sylvania provides it with access to a much wider product range
including fluorescent lamps, high-intensity discharge (HID) lamps and various special products for institutional clients.
Only new products to be launched under Sylvania brand to avoid cannibalisation of revenues
Havells is expected to launch Sylvania‘s products in India this financial year. To ensure that the launch does not lead to
cannibalisation of revenues, Sylvania‘s operations in India will be focused solely on institutional customers and its products will
be routed through an entirely different distribution channel. Havells on the other hand will continue with its own product range,
which largely serves domestic and retail customers. The launch of Sylvania products would also benefit from a high brand
recall, given that Sylvania was earlier operational in India through a joint venture named Sylvania Laxman Limi ted. Although
the joint venture ended in 1993, it was able to establish a strong presence and the brand is still recognised in the industry.
Significant scope of growth in luminaire segment
Apart from CFLs, Havells also has a presence in luminaires largely through trading. Because of intense competitive pressures
from incumbent players such as Philips and Bajaj, Havells currently ranks fourth in terms of market position with a share of
10% in a Rs. 2,000 crore market. Considering the strong prospects for residential, retail and commercial construction in India,
the luminaire segment is expected to report a healthy growth rate of around 15% per annum over 2010-11(E) to 2012-13(E).
Havells‘ competitive positioning in the luminaire segment is expected to improve further with the launch of Sylvania products,
which are largely targeted at institutional clients, including airports and stadiums.
2
Warranties are not offered on ICLs and FTLs because of their lower cost and lower guaranteed efficiency
ICRA Equity Research Service Havells India Limited
9
Lighting—International (Sylvania)
Leveraged buyout; modest funding support expected, going forward
To enter international markets, Havells acquired the lighting business of SLI
Sylvania in April 2007 for €234.5 million. Based out of Frankfurt, Sylvania is
the world‘s fourth largest player in the lighting industry and owns reputed
brands: Sylvania, Concord, Marlin, Lumiance and Linolite. Following this
acquisition, Havells got access to brand rights of Sylvania worldwide with the
exception of the USA, Canada, Mexico, Australia and New Zealand where the
brand rights are owned by Osram and some other players. Overall, the
acquisition price that Havells paid appears steep, especially in hindsight,
given that Sylvania‘s key markets went into a slowdown post-acquisition.
Havells funded the acquisition cost of Sylvania by taking fresh debt in the
latter‘s books. Out of the total funding requirement of €200 million, €80 million
was funded by a recourse debt that was backed by a guarantee from Havells
while the balance €120 million was funded by non-recourse debt.
Table 7: Cost of Sylvania Acquisition and Funding Pattern
Particulars Amount Remarks
Total cost of acquisition €234.5 million ~ Rs. 1273.12 crore at €-INR rate prevalent as on April 30, 2007. The cost included
€34.5 million of pension liabilities that were not to be funded
Funding requirement €200.0 million
Recourse debt €80.0 million Debt had recourse to Havells in the event of default. Out of the amount, only €10.0
million was pending as on December 31, 2010
Non-recourse debt €120.0 million
Source: Company
During the last three years, Havells also extended additional financial support to Sylvania via equity infusion, which in turn was
used for repayment of recourse debt and to meet cash flow mismatches. Till date, Havells has invested €114 million in the
subsidiary. This has depressed Havells‘ return on equity (RoE), as the additional investments have not yielded returns till
2009-10. Going forward, we estimate Havells‘ incremental financial exposure in Sylvania to be lower at around €16 million.
Table 8: Future Funding Support to Sylvania
In € mn Particulars
1. Recourse debt to be repaid over the next one year (by April 2012) 10.00
2. Interest to be paid on recourse debt 1.60
3. Guaranteed working capital debt 5.00
TOTAL 16.60
Source: Company
Prospects favourable for Sylvania, given its strong product portfolio, access to latest technologies, and high brand
recall value; expansion into newer markets to provide a boost to revenues over the long term
Havells‘ acquisition of Sylvania has given it access to the global lighting industry, which is expected to report a CAGR of 7-
10% over the next 10 years. Globally, the lamps industry is highly consolidated, featuring a few large players including Philips,
Osram (Siemens), GE, and Sylvania. These players together hold around 65% of the total market for lamps. Although
Sylvania‘s market share is relatively low at around 5% as compared with 29% of Philips, 19% of Osram, and 9% of GE, its
wide product range with the latest technologies and strong brands have enabled it to compete with the top three brands of the
world and sustain its market share in mature markets such as Europe. In contrast to the lamps industry, the luminaires industry
is highly fragmented, with smaller and regional players holding around 80% of the market. As against 7% of Philips, Sylvania
holds a 2% share of the luminaires market in countries where it operates.
Sylvania: Key Drivers and Challenges
Growth & Profitability Drivers
? Entry into fast-growing emerging markets
? Ability to access cheaper manufacturing
outsourcing options
Key Challenges
? Ability to garner market share in
emerging markets
? Ability to refinance debt in a timely
manner
ICRA Equity Research Service Havells India Limited
10
Note: The market share is estimated for markets where Sylvania is present
Till now, Sylvania had been focusing primarily on mature markets in Europe. With plans to launch operations in Eastern
Europe, Middle East, African and Asian markets, company‘s revenue growth is expected to recover in the next three years.
Global economic slowdown along with high fixed costs adveresely affected profitability during last three years;
slowdown impact similar as that on peers
After Havells acquired Sylvania in April 2007, the world economy suffered one of the worst recessions in decades, a fallout of
which was a significant decline in the revenues of companies across the lighting industry. This together with high fixed costs
led to several companies reporting operating losses during that period. Like Sylvania, Philips and Osram also undertook
restructuring, which subsequently allowed profit margins to recover to the 2008 levels in CY2010. Sylvania however had
weaker margins to begin with because of its higher fixed costs and delay in beginning the restructuring exercise (following
change in management), which meant the company‘s margins started recovering only from Q4, 2009-10.
Restructuring packages primarily aimed at correcting high operating leverage, the primary reason for losses
Table 9: Estimated Change in Operating Leverage Post-Restructuring
The primary reason for Sylvania
incurring losses following the
decline in revenues in 2008-09
was its high operating leverage
(refer Table 9). To correct this,
the company launched two
restructuring programmes
costing a total of €32million:
Project Phoenix (Jan 2009-Sep
€ mn Particulars 2008-09 (A) 2009-10(A) 2010-11 (E)
Sales 508.6 438.4 470.1
Less: Variable Costs 287.4 279.8 304.6
Contribution (A) 221.2 158.6 165.5
Less: Fixed Costs 209.7 159.9 144.6
Operating Profits (B) 11.5 -1.4 21.0
Degree of Operating Leverage (A/B) 19.2 - 7.9
Phillips, 29%
Osram, 19%
GE, 9%
Sylvania, 5%
Others, 38%
Phillips,
7%
GE, 2%Zumtobel,
11%
Sylvania,
2%
Others,
78%
Figure 12: Quarterly Movement in Margins of Sylvania & Competition
Source: Quarterly reports of companies, ICRA Online’s estimates
Figure 11: Quarterly Movement in Revenues of Sylvania & Competition
Source: Quarterly reports of companies, ICRA Online’s estimates
Source: Company
Figure 9: Estimated Market Shares in International Lighting Market
Figure 10: Estimated Market Shares in International Luminaires Market
Source: Company
Source: ICRA Online’s estimates
ICRA Equity Research Service Havells India Limited
11
2009) and Project Prakram (Sep 2009-Sep 2010). The two programmes were primarily aimed at rationalising the company‘s
cost structure
3
. The cost consisted mainly of severance payments made on account of reduction in manpower at the European
facilities.
Table 10: Summary of Restructuring Projects implemented at Sylvania
Restructuring Plan Phoenix Prakram Total
Duration of implementation Jan 2009-Sep 2009 Sep 2009-Sep 2010
Total cost €12.3 mn €20 mn €32 mn
Estimated annual savings €17.5 mn €16 mn €33.5 mn
Estimated pay-back period ~ 8.5 months ~ 15 months
Estimated savings €17.5 mn in 2009-10 ~ €12 mn by September 2010
Steps implemented ? Three manufacturing facilities shut
down
? Reduction in employee base by one-
third in two other facilities
? Reduction in administrative costs and
improvement in working capital
management
? Increase outsourcing of products
from cheaper manufacturing
destinations such as India and
China
? Rationalisation of fixed cost base
? Increase savings in material costs
? Value engineering and process
optimisation
Funding ? Use of retained earnings
? Release of funds from working capital
? Fresh equity infusion by Havells
? Use of debt funds by deferring
principal repayments
Source: Company
Adverse market conditions together with continued focus of Sylvania on internal restructuring programmes, which also
involved closure of certain production units, resulted in a decline in its net sales to €438 million in 2009-10 from €514 million in
2007-08. Although the fixed costs had been pruned to an extent with the implementation of Project Phoenix in 2009-10, the
company‘s profitability continued to decline because of a sharp fall in sales. This resulted in Sylvania reporting an operating
loss of €1.4 million in 2009-10.
Table 11: Sylvania’s Past Financial Performance
Source: Company, ICRA Online’s estimates
^ Note: As per reported numbers, the company has adjusted the amount directly from Business Reconstruction Reserve created out of retained earnings
3
Similar restructuring programmes were launched by some other players including Philips that were aimed at reducing the share of fixed
costs in the total cost structure.
€ million 2007-08 2008-09 2009-10
Gross Sales 514 509 438
% change
-1% -14%
EBITDA 27.5 11.5 -1.4
EBTDA % 5.4% 2.3% -0.3%
Depreciation 9.8 11.2 8.8
Interest 13.6 13.7 11.9
PBT 5.6 -13.2 -21.1
PBT% 1.1% -2.6% -4.8%
PAT 3.0 -16.4 -25.8
Exceptional Items -30.6 -43.8^
PAT after Exceptional Items 3.0 -47.0 -69.6
€/Rs. 57.3 65.0 67.0
ICRA Equity Research Service Havells India Limited
12
Following successful implementation of Project Phoenix and Project Prakram and with the market reviving, Sylvania‘s
operating profitability started improving in 2009-10.
Table 12: Quarterly Performance of Sylvania During and Post-Restructuring
€ million Q4,
2008- 09
Q1,
2009-10
Q2,
2009-10
Q3,
2009-10
Q4,
2009-10
Q1,
2010-11
Q2,
2010-11
Q3,
2010-11
Revenue 116.2 106.8 105.6 114.7 107.9 108.1 117.7 125.3
Growth (%) -9% -8% -1% 9% -6% 0% 9% 6%
EBITDA 2.8 0.5 0.6 -5.4 1.8 4.8 5.5 6.6^
EBITDA margin (%) 2.4% 0.5% 0.6% -4.7% 1.7% 4.4% 4.7% 5.3%
Depreciation 3.1 2.5 2.2 2.1 2.1 2.1 2.1 2.0
Interest 3.1 3.4 3.1 0.8 4.8 2.9 2.2 2.7
PBT before
Exceptional Items
-3.4 -5.4 -4.9 -8.4 -5.1 1.2 2.5 1.9
Exceptional items 18.6 5.9 6.3 25.1 3.1 0.6 0.0 1.1
PBT -22.0 -11.3 -11.2 -33.5 -8.2 0.6 2.5 0.4
Tax 0.6 0.3 -1 0.4 5.2 1.0 1.2 0.7
PAT -22.7 -11.6 -10.2 -33.9 -13.4 -0.4 1.3 -0.3
Source: Company’s quarterly reports
^ Normalised EBITDA excludes tax payment made in Brazil for previous years for € 2.4 million and treated as other income/ expenditure
Apart from the successful completion of the restructuring programmes and the sales revival in key regions, the launch of
operations in emerging markets also contributed to the improvement in Sylvania‘s margins from Q4, 2009-10 onwards. The
established global players in the lighting industry are increasingly focusing on emerging markets for future growth. Already,
Philips and Sylvania‘s share of revenues from emerging markets has increased to ~40% now from around 30% in the quarter
ended March 2009. Based on growth trends observed, the share is expected to increase further over 2010-11(E) to 2012-
13(E).
Future growth to be driven by emerging markets; profitability vulnerable to adverse movements in foreign exchange
With Sylvania planning to launch operations in other emerging markets such as Malaysia and China, growth in its top line is
expected to be higher in the next few quarters. Sales from Latin America (LATAM), another developing region, have grown
consistently since Q2, 2009-10, which together with the decline in sales from Europe, has led to an increase in LATAM‘s share
in the total sales to 31% in Q2, 2010-11 from 26% in Q1, 2009-10. In 9M, 2010-11, sales from the LATAM region reported an
increase of 35% over the corresponding previous, although part of it can be attributed to favourable currency movements.
While Sylvania as of now has a limited presence in Asian markets, which account for 5% of its total sales, growth in the region
has been healthy. Sylvania‘s sales in Asian markets increased by 69% in 9M, 2010-11 over the corresponding previous to
€11.35 million.
Launch of Project
Phoenix (Jan ‘09)
Conclusion of Project
Prakram (Sep ‘10)
Figure 13: Market-wise Revenue Break-up for Sylvania
Source: Company’s Quarterly reports
Figure 14: Market-wise Revenue Break-up for Philips
Source: Philips’ Quarterly reports
Gradual
improvement
in profitability
Emerging
markets, 28%
Emerging
markets, 36%
Developed
markets, 72%
Developed
markets, 64%
0%
20%
40%
60%
80%
100%
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
Emerging
markets, 30%
Emerging
markets, 36%
Developed
markets, 70%
Developed
markets, 64%
0%
20%
40%
60%
80%
100%
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
ICRA Equity Research Service Havells India Limited
13
Table 13: Quarterly Revenue Growth in Sylvania's Markets
€million Q4,
2008-09
Q1,
2009-10
Q2,
2009-10
Q3,
2009-10
Q4,
2009-10
Q1,
2010-11
Q2,
2010-11
Q3,
2010-11
Europe 77.72 70.63 65.48 77.33 76.83 64.95 65.59 74.10
Growth (%) -9% -7% 18% -1% -15% 1% 13%
LATAM & US 28.75 24.89 25.95 27.53 29.04 32.65 37.56 35.60
Growth (%) -13% 4% 6% 5% 12% 15% -5%
Asia 3.74 3.62 2.93 2.88 4.04 5.47 5.88 04.62
Growth (%) -3% -19% -2% 40% 35% 7% -21%
Other -1.75 -1.6 1.74 -1.27 -1.35 0.82 0.58 1.59
Total 108.46 97.28 95.88 106.69 109.01 104.21 109.85 115.91
Growth (%) -9% -10% -1% 11% 2% -4% 5% 6%
Source: Company’s Quarterly Reports
Going by the current trends, we expect Sylvania‘s sales to report a CAGR of 10% in the LATAM region and of 31% in the
Asian region (as a result of entry into newer markets); we expect the company‘s sales in the European region to decline
marginally in 2010-11 and stabilise at that level over the next three years. Further, taking into account the cost savings from
the restructuring programmes, we expect Sylvania to report an EBITDA of ~€21 million (EBITDA margin ~4.5%) in 2010-11.
The EBITDA margin, however, is exposed to the risk of adverse fluctuations in foreign exchange (forex), given Sylvania‘s
increasing exposure to emerging markets – both in terms of outsourcing of manufacturing as well as sales. Thus, a strong
appreciation in currencies of countries from where the products are imported or depreciation in currencies of countries of major
export can adversely affect the company‘s earnings. To reduce this risk, the company is focusing at localising sales and
procurements in key markets such as LATAM, thereby providing benefit of natural hedge. Further, the company is also
increasingly focusing at localising outsourcing and borrowings in countries like India and China – that are the key outsourcing
destinations for the company. Although this reduces the adverse impact of foreign currency movements to an extent, the
company‘s earnings would continue to be susceptible to the forex risk, given the increasing percentage of sales in new
geographies.
ICRA Equity Research Service Havells India Limited
14
Switchgears
Most profitable segment for company
In the switchgears segment, Havells‘ product range includes domestic
switchgears, modular switches, and low-voltage industrial switchgears
4
.
The domestic/retail segment is a small portion of the total switchgear
market (about 15%), but Havells enjoys robust profit margins here because
of its leadership position and targeted customer segment. Although sales
from industrial switchgears are limited (~30% of total segment sales) at
present, Havells is making efforts to expand its presence in the Rs. 7,130
crore low-voltage industrial products category.
About 70% of the revenues in the switchgears segment come from
domestic switchgears and modular switches, where Havells is able to
price its products at par with international brands such as Legrand and
Schneider Electric. Moreover, Havells has a wider distribution reach than
its close competitors, which enables it to capitalise on the growth
happening in Tier-II and Tier-III cities.
Currently, Havells is the market leader in the Rs 1,200 crore domestic
switchgears market, having increased its market share to about 20% in
2009-10 from 15% in 2005-06. Its market share in modular switches has
also improved significantly to 15% from just 5% in 2005-06, helped by Crabtree‘s premium image and easy availability. The
company currently faces limited competition in modular switches, as the only premium brands available are Legrand,
Schneider and Anchor Roma.
Future growth expected to be driven by construction of new houses and increasing disposable incomes
Domestic switchgear and modular switches are expected to
benefit from the current demand for premium urban housing and
rising disposable incomes. According to the Ministry of Urban
Housing
5
, the total requirement of urban housing during the XI
th
Plan period (2007-2012) works out to 2.65 crore dwelling units
(combining the housing shortage at the beginning of the Plan
period), which would sustain demand for domestic switchgear
and switches. Although a large proportion of this shortage
involves low-end housing, around 40% of the total housing units
would be worth Rs. 25 lakh and more—the target segment for
switchgears and switches.
4
The switchgears industry can be broadly classified in two segments: domestic/ commercial (low voltage) and industrial switchgears (medium
and high voltage). However, for Havells, the potential market considered is just the low-voltage segment because of its product focus.
5
Report of the Technical Group constituted by the Ministry of Urban Housing
Switchgears and Electrical Switches
Domestic/ Commercial
(Rs. 2,200cr)
ACBs,
MCCBs,
Switch fuse
unit,
Changeovers
etc. (Rs.
1,200 cr)
Modular
Switches
(Rs. 1,000 cr)
LV Industrial
(Rs. 7,130 cr)
Control
gears,
starters and
panels (Rs.
5,340 cr)
Switchgear
(Rs. 1,790 cr)
< Rs.15
lakh, 37%
Rs.15-25
lakh, 25%
Rs. 25-50
lakh, 22%
> Rs. 50
lakh, 16%
Switchgears: Key Drivers and Challenges
Growth Drivers
? Real estate activities in metros, Tier-I and
Tier-II cities
? Increasing personal disposable incomes
? Increasing consumer awareness
? Changing lifestyles leading to greater
preference for modular switches
Key Challenge
? Establishing market share in new
products to be launched in low voltage
industrial switchgears, given presence of
large players such as L&T, ABB and
Siemens.
Table 14: Product-wise Break-up of Havells’
Switchgear Revenues
% of total
Industrial 23%
Domestic 49%
Modular Switches 20%
Others (Capacitors & Motors) 9%
Total 100%
Source: Company data, ICRA Online’s estimates
Figure 15: LV Switchgears Market in India
Source: Company, ICRA Online Research
Note: Havells also includes capacitors and motors to calculate
revenues from Switchgears segment
Figure 16: Price- wise Break-up of Proposed Housing Units
Source: Industry research
ICRA Equity Research Service Havells India Limited
15
The domestic switchgear segment is also expected to benefit from rising consumer awareness, as the expenditure on
miniature circuit breakers (MCBs) generally accounts for less than 0.1% of the total cost of a house, but significantly reduces
the risk of damage from short circuits and electric current leakages. Moreover, the expenditure on domestic switchgear being a
one-time outlay (about Rs. 2,000 for a three bedroom-hall-kitchen house), we believe switchgears would be affordable for a
large part of the targeted population.
While the size of the domestic market for electrical switches is estimated at Rs. 2,200 crore, only 46% of this is accounted for
by modular switches, and just around 10% of households use them because of their higher prices. While the electrical
switches market is expected to grow at an annual rate of 9-11% over the next five years, we expect the growth to be faster for
modular switches, given the rising disposable incomes.
Nevertheless, the high dependence of switchgears and switches on real estate growth, especially premium housing, exposes
them to the cyclicality inherent in the sector. Havells‘ revenue growth in this segment slowed down to 7% in 2008-09 because
of the economic slowdown, and a repetition of the same cannot be ruled out in case GDP growth falters.
Table 15: Expected Movement in Havells' Market Share
2009-10 2010-11(E) 2011-12(E) 2012-13(E)
Domestic Switchgear
Industry Sales Rs. Crore 1,200 1,380 1,587 1,825
Growth % 15% 15% 15%
Havells‘ Market Share % 22% 22% 22% 22%
Modular Switches
Industry Sales Rs. Crore 1,000 1,150 1,323 1,521
Growth % 15% 15% 15%
Havells‘ Market Share % 16% 16% 16%
Source: Company, ICRA Online’s estimates
Company plans to diversify into high-growth industrial switchgears, but benefits would accrue only over long term
Havells, which currently caters to only a small part of the total switchgears market, plans to expand its product portfolio so as
to be able to address the larger market, consisting of industrial switchgears. The industrial switchgears segment is expected to
report strong growth during the next few years on the back of the significant expenditure planned in the power sector and in
industrial construction. However, Havells is currently a marginal player in this segment as compared with established
companies like Larsen and Toubro (L&T) and Siemens. Although Havells started off as an industrial switchgear company, it
reduced the focus on this business over the years to target the high potential consumer electrical market. The company is now
building up its product portfolio to re-enter this segment. Given strong competition from players like L&T, we expect the growth
in the industrial switchgears segment to be modest in the next two to three years.
ICRA Equity Research Service Havells India Limited
16
Electrical Consumer Durables
Till 2009-10, the Electrical Consumer Durables (ECD) division of Havells had just one product—electric fans. Now it has two,
with the recent launch of electric water heaters.
One of the fastest growing segments for Havells, benefiting from
rapid growth in electric fans demand and increase in market
share
The revenues of the ECD division reported a sharp increase till 2009-
10 on the strength of high growth in the electric fans industry and the
substantial increase in Havells‘ market share during 2006-09. The
electric fan industry is now worth about Rs 3000 crore, with Havells
controlling around 12% of the market. Despite being a relatively late
entrant (the ECD division was started only in 2004), the company has
managed to place itself among the top five players in the industry that
control about 80% of the market. The company has been able to grow
its market share from 6% in 2006 to 12% in 2010 largely on account of
its marketing strategy wherein a number of additional product features
were offered, while the product was offered at prices almost similar to
that of the market leader (Crompton Greaves). Moreover, as Havells‘
fans cater to the premium segment, the growth can be attributed to
rising incomes and quality consciousness of Indian consumers.
Havells‘ also supported its strategy by aggressive advertising, and a
unique energy saving proposition offered in the form of 50W fans.
Moreover, Havells has been able to overtake established, but single-product companies, on the strength of its extensive
distribution network. The importance of distribution network in the case of home electronics and kitchen appliances is
highlighted by the findings of Technopak (a market research company), which indicates that ~79-85% of customers are willing
to travel only up to 2km for the intended purchase.
In raising its market share at a brisk pace over the
period 2006-10, Havells was also able to capitalise on
one of the fastest growth periods of the domestic electric
fans industry, which reported a CAGR of 18% between
2003-04 and 2009-10E. The growth was largely driven
by the real estate boom and the increase in disposable
incomes, as replacement demand for fans has
historically been limited, since older generation fans
generally had a long life span extending up to 20 years.
During 2009-10, the revenues of the key players in the
electric fans industry increased by a substantial 30% or
so, but the spike may partly be attributed to pent-up
demand.
Healthy growth prospects for domestic electric fans industry
The domestic electric fans industry is expected to grow at about 30% in 2010-11 with real estate activities picking up once
again; the uptrend is already reflecting in the half-yearly numbers of the major fan manufacturers like Havells and Crompton
Greaves. Beyond 2010-11, we estimate a growth rate of 18-20% over the next two years. Thereafter, we expect the growth
rate to moderate to less than 15% because of the base effect, but see the industry as continuing to benefit from two additional
upsides: increasing availability of power and shorter lifespan of newer generation fans.
In rural India, the ownership of fans is closely linked to power availability, especially in States where disposable incomes are
high. Although Punjab and Haryana are well-penetrated, Havells can benefit from increased power supply and rising rural
incomes in Uttar Pradesh, Rajasthan and Bihar, where higher incomes have not yet fully translated into fan purchases
because of power shortages. Although the key beneficiaries of this trend would be companies that manufacture lower-priced
fans, we expect Havells to capture the affluent households in these regions. Also, a ceiling fan is almost a necessity in the
hotter regions of India. As per the findings of a survey conducted by Max New York Life and NCAER, fan ownership ranks
higher than ownership of manual water pumps and steel cupboards among rural households.
0%
5%
10%
15%
20%
25%
30%
35%
0
400
800
1,200
1,600
2,000
2,400
2,800
A
n
n
u
a
l
G
r
o
w
t
h
r
a
t
e
R
s
.
C
r
o
r
e
Electrical Consumer Durables: Key Drivers and
Challenges
Growth Drivers
? Increased penetration of electricity in rural
areas
? New product launches
? Changing lifestyles and disposable incomes
Key Challenges
? Loss of market share in electric fans
? Intensifying competition in the electrical
appliances market
Source: CMIE, ICRA Online’s estimates
Figure 17: Growth in Indian Electric Fan Industry
ICRA Equity Research Service Havells India Limited
17
Havells’ market position in fans expected to remain strong, with growth supported by adequate spare capacities
Havells‘ competitive strength in electric fans is indicated by the pricing premium that its fans are able to command in the
market, even against the products of other established players like Crompton Greaves and Bajaj Electricals. Moreover, Havells
only sells fans priced above Rs. 1,000 each, which shields it from the intense competition from cheaper Chinese products in
the lower end of the market. With the size of the Indian middle class growing, we expect the share of high-end fans to increase
gradually.
Table 16: Electrical Fans—Peer Comparison
Amounts in Rs. Crore Revenue Revenue Growth
Incremental
Revenues
Realisation
Company 2008-09 2009-10 2008-09 2009-10 2009-10 2008-09 2009-10
Havells 275.3 357.6 14% 30% 82.3 1,229 1,202
Crompton Greaves 598.3 764.5 20% 22% 166.2 1,068 1,176
Usha International 357.4 495.2 13% 37% 137.8 988 1,004
Bajaj Electricals 296.5 379.3 21% 28% 82.8 933 943
Orient Paper & Industries 291.0 384.0 -16% 36% 88.5 914 903
Khaitan Electricals 195.7 258.0 -20% 32% 62.3 945 927
Note: Orient Paper exported fans worth Rs. 48 crore out of the revenues mentioned, resulting in a lower share in the domestic market. For calculating incremental
revenues in 2009-10, adjustment for export sales has been made
Source: Companies’ Annual Reports, ICRA Online’s estimates
The growth in Havells‘ electric fan sales is expected to
mirror the growth of the industry over 2010-11(E) to 2012-
13(E). Incremental growth in market share is not expected
to be substantial because of intense competition from
Crompton Greaves and Bajaj Electricals. The latter, for
instance, has a tie-up with China-based Midea (world‘s
largest fan company), which would help it introduce newer
models. Havells however does benefit from having the
third largest fan manufacturing capacity in India, with
ample spare capacity to service volume growth of 15-20%
over the medium term. The company‘s facility at Haridwar
(Uttarakhand) is the largest integrated fan manufacturing
factory in India, which allows it to have a cost advantage
over other players that outsource production to other
smaller units in India.
ECD division displays strong profitability, but full impact on EPS would be felt only after new product launches
The profit margins of Havells‘ ECD division are robust because of premium pricing, which makes it the second-most profitable
segment for the company. However, the division‘s overall contribution to the company‘s 2009-10 standalone revenues was just
around 15% (about 6.6% on a consolidated basis), which limited the impact of the benefit on the EPS. As the ECD division is
expected to demonstrate the highest revenue growth (CAGR of 22%) among all segments during 2010-11 to 2012-13(E)
0%
20%
40%
60%
80%
100%
0
20
40
60
80
U
n
i
t
s
i
n
l
a
k
h
s
Installed capacity Units sold Utilisation
0%
10%
20%
30%
40%
50%
60%
70%
Ceiling
fan
Time
clock
Torch In-house
toilet
Water
pump
Steel
cupboard
Sewing
machine
%
o
f
h
o
u
s
e
h
o
l
d
s
0%
20%
40%
60%
80%
100%
%
o
f
h
o
u
s
e
h
o
l
d
s
Power availability
% of households earning above Rs 2000 pm
Ceiling fan ownership
Source: The Max-NCAER Financial Protection Survey
Figure 18: Region-wise Power Availability and Fan Penetration Figure 19: Ownership of Household Goods in Rural India as per Survey
Source: The Max-NCAER Financial Protection Survey
Figure 20: Capacity Utilisation across Major Fan Manufacturers
Source: Capitaline, ICRA Online
ICRA Equity Research Service Havells India Limited
18
because of new product launches while sustaining EBITDA margins close to 22%, it is expected to be the key contributor to
Havells‘ future EBITDA growth (on a standalone basis).
Table 17: EBITDA Margin Comparison for ECD Segment
Note: For Havells, EBITDA margin has been calculated by
adjusting the contribution for unallocated expenses that have
been apportioned among the four segments on the basis of
sales
Source: Companies’ Annual Reports, ICRA Online’s estimates
While the contribution margins in Havells‘ ECD division improved to 28% in 2009-10 from about 21% in the previous two
years, we believe this improvement largely reflects the softening of raw material prices over the last one year (reduction in raw
material prices was not reflected in lower MRPs). Nonetheless, over the medium term, the margins would be supported by
increasing capacity utilisation and scale benefits when new products are introduced using a common distribution network.
Moreover, Havells‘ water heaters are catering to the premium segment, which allows it to earn adequate profits on the same.
Future growth to be driven by new products such as water heaters, but company would face intense competition in
new categories
We expect future profit growth of Havells‘ ECD division to be driven by new product launches such as water heaters. The size
of the water heaters market is estimated at Rs. 800 crore, and it is expected to grow at about 20% per annum over the
medium term, driven by rising disposable incomes, currently low penetration levels (only about 1.7 crore households own
water heaters as of 2009-10). Havells has targeted the premium consumer segment and expects to capture a market share of
5% by 2011-12, which is achievable considering the unique product attributes offered by the company, such as prevention of
electric shocks and highest power efficiency (five-star rated). We expect additional revenues of Rs. 50-60 crore from water
heaters from next year onwards, which should sustain growth of the ECD division.
The various listed players present in the electric appliances industry have reported strong profit growth during the past five
years, and since this business is driven by rising disposable incomes and availability of power, we expect the electric
appliances industry to grow at a healthy pace over the medium term. However, the electric appliances industry is already
cluttered, featuring both premium MNC brands like Philips, Panasonic and Morphy Richards (owned by Bajaj Electricals) and
relatively inexpensive brands like Sunflame, Prestige, Usha and Inalsa. Even retail chain owners like the Future Group have
launched their in-house brands (Onkyo), which are priced much lower.
Table 18: Product Portfolio and Growth Trend for Domestic ECD Companies
Electric Appliances Kitchen Appliances EBITDA CAGR
of ECD
Business
Revenue
CAGR of ECD
Business
Electric
Fans
Water
Heaters
Irons Mixer
Grinders
Toasters 2005-06 to
2009-10
2005-06 to
2009-10
Havells ? ?
Crompton Greaves ? ? ? ? ? 13% 15%
Bajaj Electricals ? ? ? ? ? 39% 23%
Khaitan Electricals ? ? ? ? -24%
Usha International ? ? ? ? ? 114% 43%
TTK Prestige ? ? ? 32% 18%
Philips ? NA NA
Panasonic ? ? NA NA
Inalsa ? ? ? NA NA
Sunflame ? ? ? ? NA NA
Source: Companies’ Annual Reports and websites, ICRA Online Research
Company EBITDA margin
2008-09 2009-10
Havells 13.4% 19.8%
Crompton Greaves 11.6% 14.7%
Bajaj Electricals 9.4% 12.8%
Orient Paper & industries 10.8% 13.5%
Khaitan Electricals 3.7% 6.4%
TTK Prestige 9.9% 16.2%
0%
5%
10%
15%
20%
25%
30%
%
E
B
I
T
D
A
m
a
r
g
i
n
Figure 21: Movement in EBITDA Margin for Havells’ ECD Division
Source: Company’s Annual Reports, ICRA Online’s estimates
Sudden spurt
because of
favourable raw
material price
movement
ICRA Equity Research Service Havells India Limited
19
Despite intense competition, we believe Havells is well poised to capitalise on the high growth potential of the electric
appliances industry, given the company‘s:
? established brand image and distribution network;
? launch of products in less cluttered categories, such as 5-star rated appliances that appeal to energy conscious
customers, and targeting of unexplored niches like Residual Current Circuit Breakers (RCCBs) in the case of water
heaters, which make the appliance electric shock proof; and
? ability to command price premium on the strength of differentiated products, established brand and distribution
reach, as seen in fans and switchgear, and even in water heaters, which command a significant price premium over
competing products of existing players.
ICRA Equity Research Service Havells India Limited
20
Cables and Wires
Although a major contributor to Havells’ revenues, this division
displays the weakest profitability
The cables and wires segment is the largest business segment for
Havells in terms of revenues, and accounted for 41% of its 2009-10
standalone sales. Havells‘ presence in the wires business is strategic in
nature, as the business complements its efforts to offer the entire range
of products that a customer would require while setting up the electrical
system of a new or upgraded house. However, this segment suffers
from relatively low and volatile contribution margins (less than 10%) on
account of low value addition, the commodity nature of the product, a
concentrated customer base, and intense competition in a fragmented
market that has several small players. About 43% of Havells‘ revenues
in this segment come from wires, which are also used by retail
customers, and are therefore less exposed to business cycles and
margin pressures. The business however continues to be dependent on
real estate activity.
Revenues in cables and wires are largely driven by the prices of copper and aluminium – which typically account for 72-75% of
the total cost. The realisation is therefore dependent on the underlying raw material cost, which is normally passed onto
customers with a time lag (the 9% decline in sales during 2008-09 was because of the softening of copper prices). During
2009-10 Havells‘ volumes in this segment increased by 25%, but revenues remained flat due to a fall in copper prices. Havells
however attempts to keep the impact of commodity price fluctuations on margins under control by minimising inventory.
Profit growth in Havells‘ cables and wires division is likely to remain muted as compared with that in its other divisions. This in
turn would gradually reduce the division‘s contribution to the company‘s EPS in the long term.
Demand outlook favourable, given the generation and transmission and distribution (T&D) capacity proposed over
the XI
th
Plan period; however, Havells not planning to focus on this segment
Havells‘ volume sales of cables and wires reported a CAGR of 12% from 2005-06 to 2009-10, and the growth rate is expected
to sustain, given the large capex planned in the power sector. Havells operates primarily in the segment consisting of low-
medium voltage cables and domestic wires, which are used mainly in power generation plants, distribution of power, and in
electrical systems within premises. The company has stayed away from the high-voltage (HV) cables used in transmission
because of its continued focus on consumer products. Also, players like KEI and Polycab, helped by their established track
record and experience in this domain, are better placed to capitalise on the growth in the HV cables business.
Table 19: Cables & Wires—Peer Comparison
Company EBITDA Margin Installed Capacity Capacity Utilisation
2008-09 2009-10 ’000 km 2009-10
Havells 6.4%* 8.8%* 1,150.00 45.0%
Finolex Cables 0.5% 16.6% 2,135.97 53.9%
KEI Industries 9.0% 6.3% 65.60 65.2%
Polycab NA NA NA NA
Note: Contribution margin mentioned in the case of Havells
Source: Companies’ Annual Reports, ICRA Online’s estimates
The size of the cables and wires industry was estimated at ~ Rs. 15,000 crore, of which about Rs. 10,000 crore would be
cables and the rest wires. Driven by the investments in the power sector and growth in real estate, the industry reported a
CAGR of 8% over the period 2000-08. The industry‘s future growth would be supported by the significant increase in power
generation capacity over 2011-12(E) to 2016-17(E), with the expected capacity addition being much higher than the 42,452
MW of capacity added during the last eight years.
Cables and Wires: Key Drivers and Challenges
Growth Drivers
? Large investments planned in power
sector
? Foray into new segments in cables
business
Key Challenges
? Increasing copper prices, which can exert
pressure on margins
? Competition from larger players
ICRA Equity Research Service Havells India Limited
21
Table 20: Demand Estimation for Power Cables
Globally, the expenditure on T&D and
generation has been equal in proportion, as
against the ratio of 0.5:1 in India. Hence, the
expenditure on distribution can far exceed the
intended target over the long term. Between
2000-01 and 2006-07, distribution lines
witnessed a CAGR of 2.5% in volume terms.
The growth is expected to be sustained over
the medium term, aided by a number of new
governmental initiatives, but a higher growth
rate would be contingent on T&D expenditure
catching up with the global norm.
We believe the Cable industry would continue to face pressure on margins because of rising raw material costs and
competition from China. As China accounts for 67% of Asia‘s total cable consumption, Chinese companies enjoy significant
economies of scale. Being a relatively commoditised product segment, overcapacities or slowdown in demand in China could
possibly result in Chinese cable companies diverting their products to India. Till now however, China cable demand has been
fairly robust, and was up 15% in 2009-10 as against a demand growth of around 5% in India.
Generation capacity planned over 2012-17 100,000 MW
Expected achievement of the target 60,000 MW (60%)
Estimated backlog from XI
th
Five Year Plan 20,000 MW
Expected capex on generation at Rs. 5 crore per MW Rs. 400,000 crore
Percentage spend on cables 3.0%
Demand for cables from new generation Rs. 12,000 crore
Capex on Distribution Rs. 250,000 crore
Percentage spend on cables 10.0%
Demand for distribution 957,302 cable kilometres
Demand for cables from distribution Rs. 25,000 crore
Source: Central Electricity Authority, ICRA Online Research
ICRA Equity Research Service Havells India Limited
22
Financial Outlook
Sales volume growth expected to be healthy over the medium term
Havells‘ operating income reported a healthy CAGR of 23% over the period 2005-06 to 2009-10, backed by the company‘s
entry into newer segments, cross-leveraging of its brand and extensive distribution network, and a healthy increase in
consumer demand following the rise in personal disposable incomes. The inorganic growth by way of acquisition of Sylvania
has contributed significantly to Havells‘ scale of operations. On a consolidated basis, Sylvania‘s operating income accounted
for 54% of Havells‘ total operating income in 2009-10.
Going forward, Havells‘ revenue growth is expected to be driven by sustained demand for consumer durables, launch of new
products (such as electric water heaters), backed by established brand and distribution network, and Havells‘ entry into newer
markets with the Sylvania brand. In our opinion, Havells‘ distribution reach and established brand should help the company
sustain its market share in most segments and fetch business in new ones, given its approach of diversifying its offerings
within consumer product categories, its performance track record, increasing consumer awareness, and the perceptible shift in
preference for quality products.
Overall, we expect Havells‘ standalone revenues to report a CAGR of 14-15% between 2009-10 and 2012-13(E) and its
consolidated revenues to grow at 11-12% during the same period.
Consolidated profit margins to improve from 2010-11 onwards on account of successful implementation of
restructuring programmes at Sylvania; adverse fluctuations in raw material prices and entry into new segments to
put minor pressure on standalone margins in 2010-11
In 2009-10, Havells‘ standalone operating profit margins (OPM) were at a five-year high of 12.35%, supported by benign raw
material prices. However, in 9M, 2010-11, the company posted a margin contraction of 141 basis points (y-o-y) because of
input cost pressures, largely in its cables division.
Following the completion of restructuring programmes in September 2010, the EBITDA margins of Sylvania reported
significant improvement to 5.3% in H1, 2010-11 from 0.63% in the corresponding previous. Going forward, with the
contribution from emerging markets increasing, Sylvania‘s margins are expected to improve further. We expect Sylvania to
report an EBITDA margin of 4.5% in 2010-11(E), which should improve further to 7.4% in 2011-12(E), and to 7.6% in 2012-
13(E).
Given the decreasing proportion of revenues from the cables segment, the impact of margin fluctuations on Havells‘
profitability is likely to decline over time. This apart, the company has surplus capacities across all segments, which are
expected to be adequate for growth over the next three years. With increase in capacity utilisation, Havells is expected to
benefit from economies of scale, which should reflect favourably in its operating margins. We expect Havells to report
operating margins of 11.4% in 2010-11(E), which would improve to around 11.7% by 2012-13(E). On a consolidated basis, the
EBITDA margins are expected to improve from 5.7% in 2009-10 to 8.1% in 2010-11(E) and thereafter gradually to 10% in
2012-13(E).
Robust EPS growth expected over medium term, largely driven by Sylvania’s turnaround and healthy growth in ECD
division
We expect Havells‘ consolidated EPS to post a CAGR of 80% over the period 2009-10 to 2012-13(E). While the standalone
profits are expected to report a moderate CAGR of about 11% during 2010-13 (E), Sylvania‘s profits would increase at a
CAGR of 260% during 2011-13(E), becoming the key growth driver of consolidated EPS. Hence, we believe the company‘s
stock should command a higher valuation than the stocks of similar players in electric appliances and switchgears, as Havells
would benefit not only from domestic growth, but also from the additional net profit growth of Sylvania, which till recently was a
drag on the EPS.
Havells has a consistent track record of paying dividend, and declared a dividend of Rs. 3 per share in 2009-10, maintaining
its historical payout ratio of about 11%. The company has indicated that it would maintain its Dividend Per Share (DPS) going
forward, which appears feasible, considering the sharp increase in profits during 2010-11. However, at the current market
price, the dividend yield on Havells‘ stock is negligible at about 0.86%.
Capital structure to improve on a consolidated basis; however refinancing risk persists
Erosion of Sylvania‘s net worth because of accumulated losses together with the larger debt taken for the purpose of
acquisition and restructuring resulted in Havells‘ consolidated gearing increasing to 2.66 times as on March 31, 2010 from 2.00
times as on March 31, 2009. As Sylvania starts posting net profits from 2010-11(E) onwards, we would expect rapid
improvement in the capital structure of the consolidated entity, going forward. Although Sylvania‘s overall debt is expected to
remain high on account of increasing working capital requirements, an improved net worth would allow the consolidated
gearing to be at a comfortable level of less than one time by 2012-13.
ICRA Equity Research Service Havells India Limited
23
The debt coverage indicators of Havells are also expected to improve significantly from 2011-12(E) onwards, with consolidated
Debt/EBITDA falling below 2 times. However, Sylvania‘s debt obligations of around € 40million that are due for repayment in
2012-13 would need to be refinanced.
Return ratios expected to improve considerably as investments in Sylvania start yielding returns
Havells‘ return ratios have remained subdued during the past two years because of the substantial investments in Sylvania
that are yet to yield returns. The standalone Return on Capital Employed (RoCE) of the company stood at a moderate 15.28%
in 2009-10 largely because the investment in Sylvania did not yield any returns till last year. Adjusting for the equity investment
in Sylvania, Havells‘ standalone ROCE was significantly higher at 34.5% in 2009-10.
Table 21: Estimated RoCE for Havells—Standalone and Consolidated
2009-10 2010-11(E) 2011-12(E) 2012-13(E)
Standalone ROCE 26.36% 23.79% 24.14% 24.43%
ROCE adjusted for Sylvania Investment 34.50% 32.57% 32.56% 31.68%
Consolidated ROCE 15.28% 27.12% 30.45% 31.15%
Source: ICRA Online’s estimates
Havells‘ Return on Equity (RoE) would also improve substantially from 13.71% in 2009-10 to 37.4% in 2012-13(E) following
Sylvania‘s turnaround. The company has limited capex requirements in the near future, other than a possible expansion of
capacity in electric fans to meet increasing demand. Havells‘ expansion plans in the other segments, on the other hand, would
be contingent on the growth that these segments achieve. As of now, Havells has adequate surplus capacities available to
meet the expected sales. For new products such as water heaters, the company initially plans to test the market by
outsourcing production, and later set up a facility in case it is able to elicit a favourable market response.
Overall, the incremental funding requirements of Havells (on a standalone basis) are expected to be low, given the limited
capex and working capital requirements.
Source: ICRA Online’s estimates
Figure 22: Movement in Havells’ (Consol.) Capitalisation Indicators
Source: ICRA Online’s estimates
Figure 23: Sylvania’s Debt Repayments vs. Cash Accruals
-
0.50
1.00
1.50
2.00
2.50
3.00
0
200
400
600
800
1,000
1,200
1,400
1,600
2009-10 2010-11(E) 2011-12(E) 2012-13(E)
(
t
i
m
e
s
)
R
s
c
r
o
r
e
Net Worth Debt Gearing
0
10
20
30
40
50
60
2010-11(E) 2011-12(E) 2012-13(E)
€
M
i
l
l
i
o
n
Cash accruals Principal repayments
ICRA Equity Research Service Havells India Limited
24
Company Profile
Incorporated in 1971, Havells is a manufacturer of electrical consumer goods. The company‘s operations can be broadly
clubbed under four heads: lighting, switchgears, electrical consumer durables (ECDs), and cables & wires. Each of the product
categories is recognised as a separate vertical and is led by an independent head.
Figure 24: Segment-wise Product Profile
Havells has grown at an annualised rate of around 40% over
the past one decade, through the organic as well as inorganic
route. At present, it has 11 manufacturing locations across
India. Some details on the major manufacturing facilities that
have been set up by the company since incorporation are
summarised in Figure 26.
Figure 26: Major Greenfield Expansions undertaken by Havells since Incorporation
Lighting
• CFLs
• Luminaires for
Domestic,
Commercial &
Industrial Applications
Switchgears
• Domestic
Switchgears
• Modular Switches
• Industrial
Switchgears
• Motors
• Capacitors
ECDs
• Fans (Ceiling and
Pedestal)
Cables & Wires
• Low-tension Cables
• Wires
1987: Started
manufacturing
MCBs at Badli,
Delhi, in joint
venture with
Geyer, Germany
1990: Set
up a
manufacturi
ng plant at
Sahibabad
(UP), for
changeover
switches
1993: Set up
manufacturing
plant at
Faridabad,
Haryana ,for
Control Gear
Products
2004: Set up
manufacturing
plant for
domestic
switchgear at
Baddi, for
CFLs at
Faridabad
(Haryana), and
for fans at
Noida (UP)
2005: Set up fan
manufacturing
plant at Haridwar
(Uttarakhand)
2006: Added
CFL
manufacturing
unit at Haridwar
(Uttarakhand)
2007: Set
up
capacitor
manufactur
ing plant at
Noida (UP)
2009: Set up
second
switchgear
manufacturing
unit at Baddi
(Himachal
Pradesh)
2578.29
228.16
0
500
1,000
1,500
2,000
2,500
3,000
R
s
.
C
r
o
r
e
Turnover PAT
Source: Company, ICRA Online
Source: Company, ICRA Online
Figure 25: Trend in Havells' Revenues and Profits
Source: Company, ICRA Online
ICRA Equity Research Service Havells India Limited
25
Apart from the new manufacturing setups, Havells made several acquisitions in its areas of operations to expand its capacities
as well as to augment its distribution network and brand portfolio.
Figure 27: Major Acquisitions by Havells over the Years
The Sylvania acquisition is the largest by Havells so far. Although the purchase was funded largely by debt, Havells has also
extended financial support to the entity over the last three years (refer Table 22).
Table 22: Havells' exposure in Sylvania
In €mn Particulars As on Dec 31, 2010 Remarks
Fund-based exposure
1. Equity invested 85.00 Includes €50 million infused initially at the time of
acquisition, funded by equity infusion received from
Warburg Pincus in 2007-08. Funds have been used for:
? Repayment of recourse debt
? Partial funding of restructuring plans
? Improvement in net worth, which got eroded on
account of losses
2. Recourse debt repaid 20.00 Part of €80 million recourse debt
3. Estimated interest paid 8.40
TOTAL (Fund-based) 113.4
Non-fund based exposure
6. Additional working capital debt
guaranteed by Havells
5.00
TOTAL (Non-Fund-based) 5.00
Source: Company, ICRA Online’s estimates
Segment Overview
On a stand-alone basis, the cables and wires segment accounts for a major proportion of Havells‘ total revenues. However,
the segment‘s share declined from around 46% in 2006-07 to 42% in 2009-10, primarily on account of the increase in the
revenue shares of the switchgears and ECD divisions that have registered a much higher CAGR during the last four years.
Table 23: Segment-wise Trend in Revenues
Segment 2006-07 2007-08 2008-09 2009-10
CAGR
Rs. Cr % of total Rs. Cr % of total Rs. Cr % of total Rs. Cr % of total
Switchgears 428.87 25% 568.18 25% 623.37 27% 724.44 28% 19%
Cables & Wires 777.99 46% 1,064.29 47% 1,106.58 47% 1,094.88 42% 12%
Lighting &
Fixtures 238.73 14% 289.44 13% 280.46 12% 374.34 14% 16%
ECDs 169.88 10% 240.02 11% 276.92 12% 362.48 14% 29%
Others 71.01 4% 83.78 4% 54.05 2% 36.88 1% -20%
Total 1,686.48 100% 2,245.71 100% 2,341.38 100% 2,593.02 100%
Source: Company’s Annual Reports, ICRA Online’s estimates
Acquired
Towers
and
Transform
ers Ltd.
and turned
it into a
profitably
manufactu
ring
Energy
Meters
Company
1983
Acquired
Electric
Control
&
Switchb
oards
1997
Acquired
controlling
stake in
Duke Arnics
Electronics
(P) Limited
and
controlling
interest in
an industry
major a
Standard
Electricals
Ltd.
2000
Acquired
business
of Havells
Industries
Limited,
MCCB of
Crabtree
2001
Acquired
lighting
business
of
Frankfurt
based
Sylvania
2007
Acquir
ed
Standa
rd
Electric
als
Limited
2010
Source: Company, ICRA Online
ICRA Equity Research Service Havells India Limited
26
With the acquisition of Sylvania, the share of the lighting division in the total revenues of Havells on a consolidated basis is
much higher at around 60% as compared with the 14% on a standalone basis.
The ECDs (or fans) segment has been the fastest growing segment for Havells (registering a CAGR of 29% over 2007-10),
backed by rising sales volumes.
In terms of profitability, the switchgears segment has the highest contribution margins of 36%, followed by ECDs with 28%,
lighting & fixtures with 19%, and cables with 8%.
Table 24: Segment-wise Trend in Contribution Margins
Segment 2006-07 2007-08 2008-09 2009-10
Switchgears 30% 31% 33% 36%
Cables & Wires 12% 9% 6% 8%
Lighting & Fixtures 11% 13% 19% 19%
ECDs 15% 22% 21% 28%
Source: Company Annual Reports; ICRA Online’s estimates
Havells‘ financial performance during the first nine months of the current financial year as compared to corresponding previous
is summarised in Table 25.
Table 25: Havells' Performance in 9M, 2010-11 as compared to 9M, 2009-10
Particulars 9M, 2009-10 9M, 2010-11 Change
Net Revenue 1773.4 2129.4 20%
EBITDA 226.4 242.6 7%
PBT 211.4 224.6 6%
Tax 49 51.6
PAT 162.4 173 7%
Source: Company’s Quarterly Reports
ICRA Equity Research Service Havells India Limited
27
Havells‘ segment-wise performance and ICRA‘s estimates for 2010-11 are summarised in Table 26.
Table 26: Segment-wise Performance in 9M, 2010-11
9M, 2009-10 9M, 2010--11 Remarks 2010-11(E)
Switchgears
Revenue 515.2 562.7 765
Contribution 190.3 202.2
Contribution margin (%) 36.9% 35.9%
Cables & Wires
Revenue 733.6 892.2 1,231
Contribution 69.6 73.7
Contribution margin (%) 9.5% 8.3%
Decline on account of adverse
movements in raw material prices
Lighting & Fixtures
Revenue 259.1 334.6 445
Contribution 51.2 59.4
Contribution margin (%) 19.7% 17.7%
Decline on account of increase in
outsourcing work for Sylvania
ECDs
Revenue 240.3 338.2 463
Contribution 68.0 88.2
Contribution margin (%) 28.3% 26.1%
Others
Revenue 25.2 1.7
Source: Company’s Quarterly Reports, ICRA Online’s estimates
Governance and Management Structure
Havells is managed by an 11-member Board, which includes six Independent Directors. While the promoter group holds
61.56% equity stake in the company, the rest is widely held and includes institutional investors. The disclosures by the
company through its Annual Reports and Quarterly Results are adequate. The accounting policies followed by Havells are in
line with standard practices and there has been no material auditor-qualification in recent periods.
Mr. Qimat Rai Gupta, the Chairman and Managing Director (CMD) of Havells, is a first-generation entrepreneur. While the
promoters—the CMD and Mr. Anil Gupta (the second generation)—are hands-on in the business, the company has an
experienced management team. Each of its four business segments is headed by experienced professionals, who manage the
operations independently under the broad guidance of the top management and the Board.
ICRA Equity Research Service Havells India Limited
28
Valuation Grading
In assessing a company's valuation, various parameters are looked at including the company's earnings and growth
prospects, its ability to generate free cash flows, and its capacity to generate returns from the capital invested. The valuation is
also benchmarked against an appropriate peer set or index. The opinion on a company's relative valuation is expressed using
the following five-point scale as follows:
Table 27: ICRA Equity Research Service—Valuation Grades
Valuation Grade Grade Implication
A Significantly undervalued
B Moderately undervalued
C Fairly valued
D Moderately overvalued
E Significantly overvalued
While assessing a company's relative valuation, the historical price volatility exhibited by the stock, besides its liquidity, is also
taken into account. The extent of overvaluation or undervaluation is adjusted for the relative volatility displayed by the stock.
Table 28: Havells India Limited—Relative Valuations (vis-a-vis peer companies)
Havells India
Limited*
Bajaj Electricals
Limited#
Crompton Greaves
Limited#
Asian Paints
(India)#
TTK Prestige Ltd#
Finolex Cables
Limited#
Market Cap
4,345.28 2,249.2 16,989.9 24,251.8 2,217.8 728.8
(Rs. crore)
CMP (Rs.) 348.3 227.6 264.9 2529.7 1959.1 47.7
2010-11
E
2011-12
E
2010-11
E
2011-12
E
2010-11
E
2011-12
E
2010-11
E
2011-12
E
2010-11
E
2011-12
E
2010-11
E
2011-12
E
Price/
Earnings
16.8 12.3 15.2 11.6 18.7 16.1 27.2 22.4 27.1 21.3 7.0 6.8
EV/
EBITDA
11.0 8.4 9.4 7.4 12.3 10.6 17.6 14.6 18.4 14.6 5.6 5.1
Price /
Sales
0.7 0.7 0.8 0.7 1.7 1.5 3.1 2.6 3.1 2.4 0.4 0.4
Price /
Book Value
7.1 4.7 3.7 2.9 5.2 4.1 10.9 8.6 12.2 8.7 1.0 0.9
Price/
Cash Flow
12.8 9.9 15.0 12.5 16.1 14.6 25.4 19.9 NA NA 8.1 3.9
Source: Bloomberg, ICRA Online’s estimates
* ICRA estimates based on share price as on 11 March 2011 on NSE; # Bloomberg Consensus estimates as on 11 March 2011
For valuation, we have compared Havells with other consumer durable companies (Bajaj Electricals, Crompton Greaves and
TTK Prestige), Asian Paints (which has similar demand drivers viz. urbanisation and investments in housing) and Finolex
Industries (cables and wires segment). Havells‘ current valuations are at a discount to its closest peer - Crompton Greaves.
We believe Havells‘ valuations have been impacted by the significant loss reported by Sylvania till 2009-10. The premium that
Crompton Greaves enjoys can be explained by the company‘s large size, well-known brand and presence in the high-growth
power systems business (although the segment posted weak results in Q3 2010-11). For TTK Prestige, the high valuations are
partly driven by a jump in profits caused by robust growth in sales and fall in input costs in 2009-10 (net profits more than
doubled). The valuation premium that Havells commands over Finolex Cables can be attributed to latter‘s presence only in the
cables business where valuations are lower because of the low profitability and earnings volatility in the sector. Asian Paints‘
premium valuations are partly explained by its strong brand name and market position. However, Havells is currently trading at
a slight premium to Bajaj Electricals on 2011-12 forward P/E basis.
ICRA Equity Research Service Havells India Limited
29
Table 29: Havells India Limited—Relative Valuations (vis-a-vis indices)
Havells India
Limited*
S&P CNX 100# BSE Midcap#
BSE Consumer
Durables#
Historical Avg.
Havells
Market Cap
4,317.8 - - - -
(Rs. crore)
CMP (Rs.) 346.1 5,426.0 6,604.7 5,791.4 -
2010-11E 2011-12E 2010-11E 2011-12E 2010-11E 2011-12E 2010-11E 2011-12E (5-Yrs)
Price/Earnings 16.8 12.3 16.5 13.7 11.7 9.3 20.8 16.4 13.15
EV/EBITDA 11.0 8.4 12.1 9.5 8.7 6.9 17.8 14.0 8.51
Price /Sales 0.7 0.7 1.8 1.6 0.9 0.8 1.1 0.9 0.47
Price /Book Value 7.1 4.7 2.7 2.3 1.5 1.3 5.0 4.1 4.07
Price/Cash Flow 12.8 9.9 11.8 10.1 8.5 7.1 28.3 32.1 -
Source: Bloomberg, ICRA Online’s estimates
* ICRA estimates based on share price as on 11 March 2011 on NSE; # Bloomberg Consensus estimates as on 11 March 2011
Havells‘ current valuations are at a discount to broader index– S&P CNX 100 and BSE Consumer Durables Index, though it is
quoting at a premium to the BSE Midcap Index.
Havells‘ EBITDA is expected to grow at a robust CAGR of 21.5% during 2011-13 period. The P/E of the company on
estimated 2010-11 earnings is currently about 16.8 times, which is modest considering the estimated EPS growth of 36% and
19% in 2011-12(E) and 2012-13(E) respectively.
Havells India Limited: Stock Performance over last three years
Figure 28: Havells versus CNX 100
Source: Bloomberg, ICRA Online’s estimates
Mar ’07–Mar ’08: Havells‘ acquired the lighting business of the Frankfurt-based Sylvania, the world‘s fourth largest player in
the lighting industry, for €234.5 million. Of the total funding requirement of €200 million, €80 million was funded by a recourse
debt that was backed by a guarantee from Havells while the balance €120 million was funded by non-recourse debt.
The initial impact of the acquisition on the stock price was positive, with Havells outperforming the CNX100 index until Mar ‘08.
2007-08 and 2008-09: Havells had to extend additional financial support to the subsidiary by way of equity infusion, which was
used for repayment of recourse debt and to meet cash flow mismatches during the slowdown beginning mid-2008. Till date,
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Apr ‘07: Acquisition of
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business
Jun 10: Sylvania
turns around
post-
restructuring
CY2008: Slowdown
in world economy;
Sylvania business
reports losses
Havells reports loss
at consolidated level
in 2008-09
Restructuring
measures undertaken
at Sylvania to reduce
operating leverage
ICRA Equity Research Service Havells India Limited
30
the company has invested €101.4million (~Rs.636 crore) in the subsidiary. This suppressed the RoE of Havells, as additional
investments have not yielded returns till 2009-10.
Havells significantly underperformed the CNX100 index during this period.
Mar ’09 Onwards: Havells identified high operating leverage as the key cause of losses and has undertaken various
measures to reduce manpower at the European facilities.
9M, 2010-11: Sylvania reports profits at the standalone levels for the first time since its acquisition by Havells.
Havells‘ current valuations are at a discount to most of its domestic competitors (Crompton Greaves, Asian Paints, and TTK
Prestige), as well as the S&P CNX 100 on 2011-12 PE basis. The company is also trading at marginal discount to its own five-
year-average historical multiples. Considering the expected upside from Sylvania and increasing share of profits expected
from the high-margin consumer electrical business, ICRA has assigned a Valuation Grade of ‘B’ on a grading scale of ?A to E‘
to Havells, which indicates that the company is ‘moderately undervalued’ on a relative basis.
ICRA Equity Research Service Havells India Limited
31
Annexure I: Index Comparison
CNX100 Index
We have compared the performance of Havells‘ stock with the CNX100 index since November 2005, and compared the
forward P/E estimates of the stock and the index. While Havells has outperformed the index over the last five years, it is
currently trading at a forward P/E of 12.3x, 10% discount in comparison to CNX100 which currently has a Forward P/E of
13.7x. However, Havells can be expected to register a stronger earnings growth over the next three years.
BSE Mid-Cap Index
? In comparison to BSE Mid-Cap Index, Havells 1-year Fwd P/E is at a premium of 32% at 12.3x, against 9.3x for the index.
This premium can be explained by the higher earnings growth expectations for Havells as compared to the broader BSE
Mid-Cap Index constituents.
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Figure 29: Havells vs. CNX 100: Price Movements
Source: Bloomberg, ICRA Online’s estimates
Figure 30: Havells vs. CNX 100: Forward P/E Ratios
Source: Bloomberg, ICRA Online’s estimates
Figure 31: Havells vs. BSE Mid-Cap Index: Price Movements
Source: Bloomberg, ICRA Online’s estimates
Figure 32: Havells vs. BSE Mid-Cap Index: 1-Yr Fwd P/E Ratios
Source: Bloomberg, ICRA Online’s estimates
ICRA Equity Research Service Havells India Limited
32
Annexure II: Havells (Consolidated)–P&L Estimates
Table 30: Key Financial Indicators – P&L Estimates (Consolidated)
Rs. Crore 2008-09A 2009-10A 2010-11E 2011-12E 2012-13E
Operating Income 5,477.5 5,431.5 5,928.2 6,462.3 7,058.9
EBITDA 271.7 311.4 479.8 628.7 708.1
Depreciation 90.5 83.7 81.7 85.9 88.5
EBIT 189.8 249.9 433.1 541.6 623.1
Interest Expenses 108.4 87.1 82.9 80.9 57.0
Other Income 8.6 22.2 35.0 -1.2 3.5
Extraordinary Items -198.7 0.0 0.0 10.4 0.0
PBT -117.3 162.8 350.1 471.0 566.2
PAT -160.2 69.6 257.9 352.0 420.2
No. of shares* (Cr.) 12.0 12.0 12.5 12.5 12.5
DPS 2.5 3.0 2.5 2.5 2.5
EPS - 5.8 20.7 28.2 33.7
CEPS - 12.74 27.22 35.09 40.76
Source: Company’s Annual Reports, ICRA Online’s estimates
* Adjusted
Annexure III: Havells (Consolidated)–Balance Sheet Estimates
Table 31: Key Financial Indicators – Balance Sheet Estimates (Consolidated)
Amounts in Rs. Crore 2008-09A 2009-10A 2010-11E 2011-12E 2012-13E
Assets
Net Fixed Assets 1,211.3 1,208.6 1,241.4 1,288.2 1,342.2
Capital Work-in-progress 30.8 33.6 75.0 80.0 50.0
Total Net Fixed Assets 1,242.1 1,242.2 1,316.4 1,368.2 1,392.2
Cash and Bank Balances 247.3 148.1 117.0 123.5 146.7
Receivables 757.3 698.2 772.6 799.5 838.9
Inventories 794.7 824.6 1,136.9 1,275.0 1,450.4
Loans & Advances 120.6 106.7 146.2 155.5 165.2
Other Current Assets 120.8 61.2 40.5 46.5 52.5
Total Assets 3,282.9 3,081.0 3,529.9 3,768.3 4,046.3
Liabilities
Net Worth 614.7 400.2 612.8 930.6 1,314.1
Total Debt 1,227.8 1,066.4 1,169.1 1,014.2 817.3
Deferred Tax Liability -9.7 26.6 27.0 27.0 27.0
Trade Creditors 622.2 649.4 730.4 790.4 863.8
Other Current Liabilities and Provisions 827.9 938.2 990.5 1,006.1 1,023.9
Total Liabilities 3,282.9 3,081.0 3,529.9 3,768.3 4,046.3
Source: Company’s Annual Reports, ICRA Online’s estimates
ICRA Equity Research Service Havells India Limited
33
Annexure IV: Havells (Consolidated)–Cash Flow Estimates
Table 32: Key Financial Indicators – Cash Flow Estimates (Consolidated)
Rs. Crore 2008-09A 2009-10A 2010-11E 2011-12E 2012-13E
PBT -117.3 162.8 350.1 471.0 566.2
Taxes Paid 42.9 93.2 92.2 119.1 146.0
Depreciation 90.5 83.7 81.7 85.9 88.5
Change in Net Working Capital 240.6 241.0 -307.5 -104.7 -139.2
Cash Flow from Operating Activities 170.9 394.3 32.1 333.2 369.4
Investments 3.2 0.0 -0.3 0.0 0.0
Capital Expenditure -165.7 -83.8 -155.9 -137.7 -112.5
Cash Flow from Investing Activities -162.5 -83.8 -156.2 -137.7 -112.5
Equity Raised/ (Buyback) 137.3 0.0 9.6 0.0 0.0
Loans Raised/ (Repaid) 79.0 -11.2 146.7 -37.6 23.3
Others (including Extra-ordinaries) 0.0 2.4 386.2 0.0 0.0
Dividend 34.3 26.9 0.3 36.5 36.5
Cash Flow from Financing Activities 44.6 -38.2 146.4 -74.1 -13.2
Opening Cash Balance 242.9 247.3 148.1 117.0 123.5
Closing Cash Balance 247.3 148.1 117.0 123.5 146.7
Source: Company’s Annual Reports, ICRA Online’s estimates
Annexure V: Havells (Consolidated)–Key Financial Ratios
Table 33: Key Financial Ratios (Consolidated)
2008-09A 2009-10A 2010-11E 2011-12E 2012-13E
Profitability Indicators
Sales Growth 9.5% -0.8% 9.1% 9.0% 9.2%
EBITDA Growth -22.2% 14.6% 54.1% 31.0% 12.6%
EPS Growth - 257.6% 36.5% 19.4%
Cash EPS Growth - 113.6% 28.9% 16.2%
EBITDA Margin 5.0% 5.7% 8.1% 9.7% 10.0%
EBIT Margin 3.5% 4.6% 7.3% 8.4% 8.8%
PAT margin -2.9% 1.3% 4.4% 5.4% 6.0%
RoE - 13.7% 50.9% 45.6% 37.4%
ROCE - 15.3% 27.1% 30.4% 31.2%
Liquidity Ratios
Debtor Days 49.4 46.2 47.6 45.2 43.4
Inventory Days 71.1 75.8 97.5 101.7 106.1
Net Working Capital/ Sales 0.1 0.0 0.1 0.1 0.1
Capitalization Ratios
Total Debt/ Equity 2.0 2.7 1.9 1.1 0.6
Interest Coverage 2.5 3.6 5.8 7.8 12.4
Total Debt/ EBITDA 4.5 3.4 2.4 1.6 1.2
Valuation Ratios
Price/ Sales 0.8 0.8 0.7 0.7 0.6
Price/ Earnings - - 16.8 12.3 10.3
Price/ Book Value 6.8 10.5 7.1 4.7 3.3
EV/ EBITDA 19.4 16.9 11.0 8.4 7.4
Source: Company’s Annual Reports, ICRA Online’s estimates
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doc_842021542.pdf
Incorporated in 1971, Havells is one of the leading players in the electricalconsumer goods industry in India. The company‘s operations span fourbroad segments, viz. cables & wires, switchgears, lighting, and electricalconsumer durables, in order of their contribution to revenues. Starting
primarily as a company dealing in industrial products, the company hasgradually shifted its focus onto consumer products over the past onedecade and is now considered a well-established brand in the domesticconsumer electricals market.
1
ICRA EQUITY RESEARCH SERVICE
HAVELLS INDIA LIMITED
March 14, 2011 Industry: Electrical Equipment
Fundamental and Valuation Grades
ICRA Online has assigned the Fundamental Grade 4 and the Valuation
Grade B to Havells India Limited (Havells). The Fundamental Grade 4
assigned to Havells implies that the company has ?strong fundamentals?
relative to other listed securities in India. The grade factors in Havells‘
diversified product portfolio with core focus on the fast growing consumer
goods sector, its effective marketing and distribution reach that supports
premium pricing, and the significant growth potential of its subsidiary,
Sylvania. The grade also takes note of the intense competition that
Havells faces across the segments it operates in. The Valuation Grade B
assigned to Havells implies that the company is ?moderately undervalued?
on a relative basis (as on the date of the grading assigned).
Incorporated in 1971, Havells is one of the leading players in the electrical
consumer goods industry in India. The company‘s operations span four
broad segments, viz. cables & wires, switchgears, lighting, and electrical
consumer durables, in order of their contribution to revenues. Starting
primarily as a company dealing in industrial products, the company has
gradually shifted its focus onto consumer products over the past one
decade and is now considered a well-established brand in the domestic
consumer electricals market.
Havells has grown both organically and inorganically over the years. Its
last major acquisition that of the Frankfurt-based Sylvania in April 2007,
has placed Havells on the global map in the lighting industry.
Grading Positives
Established brand equity along with leading market shares in most areas
of operation, diversified product portfolio, presence in consumer products
segment with high growth potential and experienced management. The
company also has a strong financial profile, characterised by robust
profitability and cash generation, with working capital requirements being
limited. Potential upsides to our estimates: (1) Higher than expected
market share in new product segments; and (2) Better than expected
improvement in Sylvania‘s profitability and cash flow generation capacity
backed by growth in emerging economies.
Grading Sensitivities
Key sensitivities to our estimates include: (1) Further increase in
competition resulting in loss of market share, particularly in the intensely
competitive electrical consumer durables (ECD) division; (2) Slower than
expected revival in Sylvania‘s profitability and success in emerging
markets, particularly new geographies.
Fundamental & Valuation Grades: ICRA assigns fundamental grade of
??/5‘ and valuation grade of ??‘ to MSL. A fundamental grade of ??/5‘
indicates MSL‘s fundamentals are ??‘ relative to the other listed securities
in India. This grade factors in the companies‘ established presence in the
seamless and ERW pipes industry and favorable industry prospects over
the medium to long term. However, it is constrained by the high
competition from Chinese imports of seamless pipes in the domestic and
Middle East market, vulnerability to raw material prices and concentration
of MSL‘s sales on the oil and gas sector. A valuation grade of ??‘ on a
grading scale of ?A to E‘ indicates that the company is ? valued on sector
relative basis and has a ? potential over the next one year from its current
market price.
ICRA Online Grading Matrix
Valuation Assessment
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Fundamental Grading of ?4/5‘ indicates
?strong fundamentals?
Valuation Grading of ?B‘ indicates
?moderately undervalued? on a relative
basis
Key Stock Statistics
Current Market Price* (Rs.) 348.25 381.65
Shares Outstanding (crore) 12.48 12.48
Market Cap (Rs. crore) 4345.28 4762.0
52-Week High (Rs.)
446.50
446.50
52-Week Low (Rs.) 257.50 166.00
Free Float (%) 38.4% 35.4%
Beta 1.09 1.03
P/E on 2011-12 EPS Estimate (x) 12.3 17.7
Bloomberg Stock Code HAVL IN HAVL IN
*As on March 11, 2011
Havells Shareholding Pattern
(December 31, 2010)
Havells Share Price Movement (24 months)
Indian
Promoter
Group,
61.6%
Non-
Institutio
ns, 19.8%
Domestic
Institutio
ns, 2.4%
Foreign
Institutio
ns, 2.3%
Warburg
Pincus,
14.0%
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Havells India Ltd
S&P CNX Nifty
BSE Consumer Durables
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Key Financials (Consolidated)
2009-10A 2010-11E 2011-12E 2012-13E
Operating Income (Rs. Crore) 5,432 5,928 6,462 7,059
EBITDA Margin (%) 5.73% 8.09% 9.73% 10.03%
PAT Margin (%) 1.28% 4.35% 5.45% 5.95%
EPS (Rs.) 5.8 20.7 28.2 33.7
EPS Growth (%) N/A 258% 36% 19%
P/E (x) N/A 16.8 12.3 10.3
P/BV (x) 10.5 7.1 4.7 3.3
RoE 14% 51% 46% 37%
RoCE 15% 27% 30% 31%
EV/EBITDA 16.9 11.0 8.4 7.4
Source: Company, ICRA Online’s estimates
Note: EPS Growth and PE estimates for 2009-10 are not meaningful
ICRA Equity Research Service Havells India Limited
2
SUMMARY
Growth fuelled by increasing focus on consumer
electricals; considerable scope for future expansion in
related products
Starting off as a manufacturer of switchgears in 1971, Havells
till the late 1990s was largely involved in manufacturing
industrial products. Foreseeing strong growth prospects in the
consumer goods category, the company later diversified into
products such as fans, compact fluorescent lamps (CFLs),
modular switches, and power cables and wires. As these
products are used mostly during building construction or
renovation, the company benefited from the rapid growth in the
real estate sector, reporting a robust compounded annual
growth rate (CAGR) of around 40% in its revenues in the last
ten years.
To further capitalise on the growth potential in the consumer
goods category, Havells is now expanding its portfolio,
including products such as water heaters.
Strong growth prospects backed by presence in high-potential consumer goods segment
With its main focus being on electrical consumer goods, demand for most of Havells‘ products is driven by consumer spending
and power availability. Over the last four years, the top players in domestic electrical consumer goods‘ industry have
demonstrated strong revenue growth of 15-18%, driven by rising income levels, increasing urbanisation, and greater rural
electrification. Further, with standards of living improving and consumer focus increasing on saving energy, the demand for
quality products has been reporting strong growth. The trend is expected to sustain, with the main beneficiaries being
companies with established brands and product attributes that stand out in an increasingly cluttered market, high quality
standards that neutralise competition from unorganised-sector players, and extensive distribution networks that enable them to
reach the high growth centres in Tier-II and Tier-III cities. Given its established track record, Havells is in a favourable position
to capitalise on the sector‘s growth potential. We expect Havells to post a net profit CAGR of around 11% between 2009-10
and 2012-13(E) on a standalone basis.
Intense competition across segments
The segments in which Havells operates (except cables) are characterised by limited capital expenditure (capex) requirements
and availability of outsourcing or imports to meet demand. Consequently, Havells faces intense competition in most of its
business segments. Although there is only one large company - Crompton Greaves - that is into similar areas of operation as
Havells, low investment requirements have resulted in significant competition from single-product/segment companies (refer
Figure 4) and unorganised players. In this scenario, an established brand name and distribution network become critical, as
the same cannot be easily replicated. Havells‘ ability to differentiate products (for instance, introducing additional attributes like
low power consumption and electric shock prevention), and its effective brand building initiatives, thus, restricts competition
from the unorganised sector to some extent.
-20
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1,000
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2,000
2,500
3,000
R
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Figure 1: Trend in Havells' Revenue Growth
Source: Company’s Annual Reports; ICRA Online’s estimates
0%
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30%
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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
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(
'
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s
)
Per capita disposable income
Growth in per capita disposable income
Figure 2: IIP Consumer Durables Index
Source: Bloomberg
Figure 3: Growth in Disposable Incomes in Last Five Years
Source: Central Statistical Organisation; ICRA Online’s estimates
ICRA Equity Research Service Havells India Limited
3
Figure 4: Havells' Competition Matrix
Source: Companies’ websites and annual reports, ICRA Online Research
Branding and distribution network—the key differentiators
With increasing urbanisation, Tier-II and -III towns are expected to be the key growth drivers over the next few years, which
makes extensive distribution network and brand presence critical for consumer goods‘ companies. Havells‘ ability to cross-
leverage its existing distribution network and its established brand presence give it a competitive edge over smaller companies
with limited reach.
Havells has established a pan-India distribution network over the years, using which it has been able to gain market share
rapidly even for its relatively new products like modular switches, CFLs, and electric fans. Its network compares well with that
of the largest electric appliance company in India, Bajaj Electricals, which reaches out through 50,000 retail outlets.
Table 1: Distribution Network of Havells versus Peer Companies
Source: Companies’ websites
At present, Havells has a network of 4,300 wholesalers/dealers and 35,000 retailers. In terms of brand, the company is
particularly strong in North and East India, which together account for around 56% of its total sales and 44% of its total dealer
base. While South India has been a major contributor to sales because of the sheer market size; Havells has been traditionally
weak in West India (which accounts for around 15% of its total sales), being a late entrant there. The company is however
making efforts to increase its market share in the region by expanding its dealer base (which is now comparable in size to its
dealer bases in North and South India).
To further leverage its presence across product segments, Havells has opened exclusive outlets named ?Havells Galaxy? in
several cities across India. These stores, owned by Havells‘ dealers, display and undertake retail sales for the entire product
range of the company. At present, there are 80 Havells Galaxy stores across India and the company plans to raise the number
to 200 by March 2012.
Havells has also been aggressive in its
advertising, with its advertisement expense to
sales ratio being significantly higher than that of
its close peers. The company‘s advertisements
and brand building initiatives have increased its
brand visibility among end-consumers. This,
together with the acquisition of established
brands like Crabtree and Standard over the
Category Products Havells
Crompton
Greaves
Bajaj
Electricals Matsushita
Phillips
India Osram
Surya
Roshni Legrand Schneider
Finolex
Cables
KEI
Industries
Fans ? ? ?
Water Heater ? ? ?
Irons ? ? ? ?
Kitchen Appliances ? ? ? ?
ICLs ? ? ? ? ?
FTLs ? ? ? ? ?
CFLs ? ? ? ? ? ? ?
LEDs ? ? ? ? ? ?
Luminaires ? ? ? ? ? ?
Low Voltage ? ? ?
Medium Voltage ? ?
High Voltage ?
Switches ? ? ? ? ? ? ?
Motors ? ?
Copper Cables ? ? ?
Aluminium Cables ? ? ?
High Voltage Cables ? ?
Residential Wires ? ? ?
N/A N/A 30% ~62%
Other Areas of Operation
Power
Systems,
Industrial
Systems etc.
Copper
Rods, PVC
Pipes &
Sheets, etc.
ERW Pipes
and HR &
CR Coils
Surya
N/A N/A N/A N/A
% of revenues contributed by
above-mentioned products
Bajaj Platini,
Morphy
Richards
Havells, Standard,
Crabtree
Special
Projects, High
Masts & Poles
and Towers
National,
Panasonic,
Anchor-Roma
TV, Music
Systems, Home
Appliances, etc.
Stainless
Steel Wires
100% 31% 67%
Healthcare
Products,
Television,
etc.
Electrical
Consumer
Durables
Lighting
Cables &
Wires
Switchgears
Brands
Company
Distributors/
Dealers
Retail Outlets
Havells 4,300 35,000
Bajaj Electricals 5,000 50,000
Legrand 600 3,000
Table 3: Advertising Spend of Havells versus Peer Companies
2006-07 2007-08 2008-09 2009-10
Havells 1.9% 2.4% 2.1% 3.3%
Bajaj Electricals 1.6% 1.5% 1.3% 1.5%
Crompton Greaves 0.4% 0.5% 0.5% 0.4%
Source: Companies’ Annual Reports, ICRA Online’s estimates
Table 2: Havells’ Regional Sales and Distribution Network
Region Havells’ Sales Havells’ Dealers
North 34% 26%
East 22% 18%
West 15% 27%
South 28% 29%
Total 100% 100%
Source: Company
ICRA Equity Research Service Havells India Limited
4
years, has strengthened Havells‘ brand portfolio, enabling it to command a price premium in several products.
Figure 5: Havells’ Brands in India Figure 6: Havells’ International Brands
Sylvania turnaround to improve consolidated profits
The economic downturn that happened soon after Havells
acquired the Frankfurt-based Sylvania in April 2007 led to
Havells reporting losses on a consolidated basis in 2008-09
and 2009-10. This in turn kept Havells‘ consolidated earnings
per share (EPS) depressed during the two years ended
March 2010. Havells initiated a restructuring exercise aimed
at reducing fixed cost base at Sylvania that is expected to
result in annual savings of €33.5 million, a large part of which
would be reflected in its EBITDA in 2010-11. Initially, the
company had expected to break even at the net profit level in
2011-12, but the 9M, 2010-11 results of Sylvania indicate that
the subsidiary would make a nominal net profit of about
€1million in 2010-11 itself. With Sylvania turning around
[EBITDA positive in Q4, 2009-10 and net profits from 2010-
11(E) onwards] Havells‘ consolidated EPS is expected to
increase significantly over the medium term.
Further, in line with other global majors such as Philips and
Osram, Sylvania is looking at increasing its exposure in fast growing developing markets such as India, China, and Malaysia.
While bulk of the improvement in Sylvania‘s profits during the current year are attributable to cost savings from restructuri ng
programmes, increasing revenue contributions from the emerging markets including Latin America and Asia would drive
Sylvania‘s profitability in the long term.
Launch of Sylvania products in India to enable Havells serve a wider market, but distribution would be a challenge
The size of the market for luminaires and special lamps, the likely focus areas for Sylvania in India, was an estimated Rs.
2,100 crore in 2009, accounting for almost 30% of India‘s total lighting market that year. Considering Sylvania‘s track record of
operations and the growth potential of the Indian lighting industry, the scope for the brand‘s growth in India appears significant.
With its wider product range and access to the latest technologies such as of light emitting diodes (LEDs), Sylvania will be
positioning its products to access the institutional clients – thereby mitigating the risk of cannibalisation of Havells‘ existing
products. Havells would however need to establish a separate distribution channel for Sylvania products as its current network
is targeted primarily at retail customers. Accordingly, it may take some time for growth in Sylvania‘s products to pick up in
India. We expect Sylvania‘s products to achieve a turnover of around Rs. 50 crore (translating into a market share of around
2%) in its first full year of operations and thereafter grow in line with the estimated industry growth rate of around 25%.
Segment/
Products
Brand
Indian
Brands
Havells
Lighting,
ECDs,
Switchgears,
Cables &
Wires
Crabtree
Switches
Standard
Domestic
Switchgears
Segment/
Products
Brand
Multi-
National
Brands
Sylvania
Complete
Lighting
Range
Concord Lighting
Fixtures
Lumiance
Lighting
fixtures
Source: Company
Source: Company
-500
-400
-300
-200
-100
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2008-09 2009-10 2010-11 2012-13
P
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Sylvania Havells Standalone Consolidated
Figure 7: Movement in Net Profits
Source: ICRA Online’s estimates
Note: Sylvania and Consolidated 2009-10 PAT figures are adjusted for
amounts charged by the company to Business Reconstruction Reserve
ICRA Equity Research Service Havells India Limited
5
Company Snapshot (Standalone)
* Companies placed in order of their market position
Source: Company’s Annual Reports, Company data, ICRA Online’s estimates
0%
10%
20%
30%
40%
50%
60%
70%
0
2
4
6
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10
12
14
2005-06 2006-07 2007-08 2008-09 2009-10
C
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Installed Capacity and Utilization Trend
Installed Capacity CapacityUtilisation
ICRA Equity Research Service Havells India Limited
6
Lighting
Post-acquisition of Sylvania in 2007, lighting has become the major segment for the company accounting for around 60% of its
consolidated revenue base. The acquisition provided the company an access to international markets, Sylvania‘s premium
product-range and its well-established brand name. Although profitability in Sylvania‘ international operations was affected
because of global recessionary conditions and overall operational inefficiencies in the last two financial years, domestic
lighting segment of Havells continued to be profitable because of favourable market scenario in India and cost-efficient
operations. The business dynamics of domestic and international lighting operations of consolidated Havells entity continue to
be different and hence have been analysed separately in the following sections.
Lighting—Domestic
Domestic lighting segment holds significant growth potential
In the lighting segment, Havells is involved in manufacturing CFLs and
trading in luminaires. Both the categories hold significant growth potential
as the demand for the products is strongly correlated with real estate and
construction activities in the country. Moreover, the high share of lighting in
domestic power consumption (~20% in India), continuing power deficit and
mounting pressure on natural resources are factors contributing to the shift
in favour of more energy-efficient products, thus acting as key drivers of
CFL demand.
The domestic lighting industry reported a CAGR of 12% to around Rs. 72 billion over the five years till 2009-10. With personal
disposable incomes increasing and market preference shifting towards more energy-efficient products, the CFL segment
reported a much faster CAGR of 28% over the same period to account for almost one-third of the total domestic lighting
market. Havells, despite its late entry into the segment (in 2003-04) and the presence of large incumbents such as Philips,
Osram and Bajaj, has successfully garnered a market share of 8% in the CFL segment and of around 10% in the luminaire
segment.
Government initiatives expected to spur CFL growth
Although CFLs are much more energy efficient
1
than ICLs, CFL penetration is considerably low in the household sector in
India (10-15%) largely because of their high price (8-10 times more expensive than ICLs). Government initiatives to enhance
rural electrification in the country while simultaneously promoting use of energy efficient lighting systems by providing
subsidies (refer Table 4) is expected to boost demand for lighting products, particularly CFLs. The objective is to subsidise the
more expensive energy-efficient products, making them affordable for the target market. For instance, successful
1
CFLs with a luminous efficiency of 50-95 lumens/Watt (lm/W) and offering 6,000-12,000 burning hours consume 75% less energy as
compared with ICLs, which have a luminous efficiency of 5 to 20 lm/W and offer 750-1000 burning hours. The luminous efficiency of light
emitting diodes (LEDs) is even higher at 100-130 lm/W and they offer around 50,000 burning hours.
2005-06
2006-07
2007-08
2008-09
2009-10
ICLs, 13%
ICLs, 10%
FTLs, 24%
FTLs, 16%
CFLs, 16%
CFLs, 27%
Luminaires,
20%
Luminaires,
22%
Others, 27%
Others, 25%
Domestic Lighting: Key Drivers and Challenges
Growth Drivers
? Increase in real estate activities backed by
strong economic growth
? High cost of energy, continuing power
deficit, and pressure on natural resources
? Greater focus on energy-efficient products
? Government initiatives to subsidise energy-
efficient products
Key Challenges
? Intense competition
? Keeping pace with changing technology
? Environmental threat posed by use of
mercury in CFLs
? Significant warranty returns in CFL
business
? Fragmented nature of luminaire business
Figure 8: Changing Trend in Lighting Industry
Source: ELCOMA India, ICRA Online’s estimates
Note: Above estimates are for calendar years
ICLs: Incandescent Lamps, FTLs: Fluorescent Tube Lights
ICRA Equity Research Service Havells India Limited
7
implementation of Bachat Lamp Yojana (BLY) will reduce the price differential between ICLs and CFLs to Rs. 3-9 per piece,
thus attracting demand from price-sensitive and rural households.
Table 4: Summary of Key Government Initiatives that could boost Demand for Lighting Products in India
Programme Brief overview Objective Status
Rajiv Gandhi Grameen
Vidyutikaran Yojana/
Rural Electrification
Policy
Launched in April 2005 by
merging all existing similar
schemes
Has a target of electrifying 125,000 un-
electrified villages and giving access to 7.8
crore uncovered rural households by 2012
Although 118,499 villages
(95%) have already been
electrified, in terms of
households only 53% of the
target has been achieved,
which points to significant
demand potential over the
next few years
BLY Promotes replacement of
inefficient bulbs with CFLs by
leveraging the sale of
Certified Emission Rights
(CERs) under the Clean
Development Mechanism
(CDM) of the Kyoto Protocol
To distribute high quality CFLs at about Rs.15
per piece to households in the country.
Balance cost to be recovered by registering
the project under CDM. The scheme aims to
replace 40 crore ICLs in India with CFLs
Implemented/initiated in
Himachal Pradesh, Punjab,
Uttar Pradesh, Madhya
Pradesh, Kerala,
Chhattisgarh and Orissa
Source: Ministry of Power; ICRA Online Research
While the scope of BLY is limited to replacement of 40 crore ICLs (translating into an additional demand of 2% per annum for
CFLs), efforts in some developed nations are directed at mandatory replacement of all ICLs with more energy-efficient
products. Introduction of similar programmes in India could be a strong demand driver for CFLs, given that ICLs account for
roughly 65-70% of the total annual sales of lighting products in India (in terms of volumes). In India, we do not expect any
major replacement demand in the short to medium term unless Government implements mandatory phase-out of ICLs while
continuing to provide subsidises on CFLs.
Industry volumes for CFLs reported a CAGR of 40% during the last four years, with the growth moderating to 28.1% in 2009-
10 partly on account of the higher base effect and partly because of the slowdown in the real estate sector. The growth
(CAGR, four years) in value terms has been relatively low at 28% because of declining realisations.
Table 5: Estimation of Potential CFL Market for Havells
2007-08 2008-09 2009-10 2010-11(E) 2011-12(E) 2012-13(E)
Industry Sales Lakh pieces 1,400 1,990 2,550 3,213 4,048 5,101
Growth % 40% 42% 28% 26% 26% 26%
Total Sales Rs. Crore 1,162 1,510 1,900 2,410 3,036 3,775
Growth % 40% 30% 26% 27% 26% 24%
Realisation per CFL Rs. 83 76 75 75 75 74
Source: ELCOMA India, ICRA Online’s estimates
Considering the slow implementation of BLY and the uncertainty over Havells‘ participation in the same, we have not factored
in any incremental sales that may come from that scheme. While sustaining a high growth rate could be increasingly difficult
on a growing base, the CFL industry is likely to enjoy strong demand prospects, considering the currently low penetration
levels, the potential replacement demand, and the additional demand likely from increased residential and commercial/retail
construction activities over the next few years. Accordingly we expect the CFL market to report a CAGR of 26% over the next
five years.
Intensely competitive industry; Havells’ strategy to counter warranty claims to temper market share growth
The CFL market in India is intensely competitive, featuring around 20 organised- and several unorganised-sector players.
While till around two years back, the unorganised sector used to account for almost 40% of the CFL market, their share is now
expected to decline significantly on account of the following factors:
? Introduction of standards for CFLs by Bureau of Indian Standards (BIS): BIS has mandated that CFLs should
carry a high power factor (PF) stamp from October 1, 2009 onwards. According to ELCOMA, 14 companies have
acquired licences to manufacture CFLs with >0.85 PF
? Imposition of anti-dumping duty: This has restricted the import of low-cost CFLs from China to an extent
? Increasing consumer awareness: As the price differential between products offered by organised and unorganised
players is not significant, consumer preference has moved towards products with better quality parameters (such as
power factor, and guaranteed hours)
ICRA Equity Research Service Havells India Limited
8
Going forward, we expect the CFL industry to increasingly consolidate away from the unorganised sector as the shift towards
higher quality gains further momentum and the benefits of scale economies accrue to the larger players. Assuming a 20% shift
in market share from the unorganised to the organised sector over three to five years, the top five players (including Havells)
would gain 2.8% to 3.2% in market share, given their extensive distribution network, cost-efficient operations, and strong brand
presence. Havells however is following a cautious approach to contain warranty claims, a major concern for the industry.
As is the industry norm, CFL manufacturers provide a product warranty varying from six months to one year from the date of
purchase
2
. This has been a major concern for CFL makers in India because market malpractices have led to significant claims
for returns. In 2007-08, Havells received claims for Rs. 13.62 crore, which was 12.7% of its CFL sales that year. To rectify the
situation, the company withdrew its products from certain States where malpractices were rampant, and this led to a 30%
decline in its sales to Rs. 84.5 crore in 2008-09. Consequently, the company‘s market share declined to 6% in 2008-09 from
10% in 2007-08. Subsequently, with operations in other States stabilising, Havells‘ market share reported improvement in
2009-10. Its warranty claims declined significantly in 2009-10 to Rs. 2.86 crore, which was 1.9% of its total CFL sales that
year.
Although there have been instances of companies withdrawing warranties in the past, the lack of participation from all
companies, besides the availability of cheaper alternatives from the unorganised sector, adversely affected sales, prompting
the reintroduction of warranties. Given that warranty related malpractices still exist, Havells is now following a conservative
strategy of restricting its presence to a few key markets. While this has adversely impacted sales and market share during the
last two years, it has also helped protect profitability margins. Considering Havells‘ conservative approach, we expect its
market share to stabilise at around 8.5% over 2010-11(E) to 2012-13(E).
Table 6: Movement in Havells' Market Share in CFL Segment
Units
2007-08 2008-09 2009-10 2010-11(E) 2011-12(E) 2012-13(E)
Industry Size Rs. crore 1,162 1,510 1,900 2,410 3,036 3,775
Market Share % 10% 6% 8% 8.5% 8.5% 8.5%
Source: ELCOMA India, ICRA Online’s estimates
Environmental threat posed by mercury use in CFLs, increasing affordability of solid-state lighting products may
affect CFL demand; access to Sylvania’s technology for advanced products may help maintain market share
Although critical given their importance in saving electricity, CFLs face environment related challenges because of the use of
mercury in their manufacturing. The threat is greater for developing nations such as India as CFLs manufactured here have a
higher mercury content (up to 13 mg in lower quality lamps); developed nations on the other hand have regulations restricting
such content to 1 mg per bulb. Given the environmental concerns, efforts are being made across the world to bring down the
cost of solid-state lighting products or LEDs, which are considered significantly superior in terms of energy efficiency and
environment friendliness. Although Havells has a single-product offering in the lighting segment (on a stand-alone basis) and a
limited presence in LEDs (trading operations), its acquisition of Sylvania provides it with access to a much wider product range
including fluorescent lamps, high-intensity discharge (HID) lamps and various special products for institutional clients.
Only new products to be launched under Sylvania brand to avoid cannibalisation of revenues
Havells is expected to launch Sylvania‘s products in India this financial year. To ensure that the launch does not lead to
cannibalisation of revenues, Sylvania‘s operations in India will be focused solely on institutional customers and its products will
be routed through an entirely different distribution channel. Havells on the other hand will continue with its own product range,
which largely serves domestic and retail customers. The launch of Sylvania products would also benefit from a high brand
recall, given that Sylvania was earlier operational in India through a joint venture named Sylvania Laxman Limi ted. Although
the joint venture ended in 1993, it was able to establish a strong presence and the brand is still recognised in the industry.
Significant scope of growth in luminaire segment
Apart from CFLs, Havells also has a presence in luminaires largely through trading. Because of intense competitive pressures
from incumbent players such as Philips and Bajaj, Havells currently ranks fourth in terms of market position with a share of
10% in a Rs. 2,000 crore market. Considering the strong prospects for residential, retail and commercial construction in India,
the luminaire segment is expected to report a healthy growth rate of around 15% per annum over 2010-11(E) to 2012-13(E).
Havells‘ competitive positioning in the luminaire segment is expected to improve further with the launch of Sylvania products,
which are largely targeted at institutional clients, including airports and stadiums.
2
Warranties are not offered on ICLs and FTLs because of their lower cost and lower guaranteed efficiency
ICRA Equity Research Service Havells India Limited
9
Lighting—International (Sylvania)
Leveraged buyout; modest funding support expected, going forward
To enter international markets, Havells acquired the lighting business of SLI
Sylvania in April 2007 for €234.5 million. Based out of Frankfurt, Sylvania is
the world‘s fourth largest player in the lighting industry and owns reputed
brands: Sylvania, Concord, Marlin, Lumiance and Linolite. Following this
acquisition, Havells got access to brand rights of Sylvania worldwide with the
exception of the USA, Canada, Mexico, Australia and New Zealand where the
brand rights are owned by Osram and some other players. Overall, the
acquisition price that Havells paid appears steep, especially in hindsight,
given that Sylvania‘s key markets went into a slowdown post-acquisition.
Havells funded the acquisition cost of Sylvania by taking fresh debt in the
latter‘s books. Out of the total funding requirement of €200 million, €80 million
was funded by a recourse debt that was backed by a guarantee from Havells
while the balance €120 million was funded by non-recourse debt.
Table 7: Cost of Sylvania Acquisition and Funding Pattern
Particulars Amount Remarks
Total cost of acquisition €234.5 million ~ Rs. 1273.12 crore at €-INR rate prevalent as on April 30, 2007. The cost included
€34.5 million of pension liabilities that were not to be funded
Funding requirement €200.0 million
Recourse debt €80.0 million Debt had recourse to Havells in the event of default. Out of the amount, only €10.0
million was pending as on December 31, 2010
Non-recourse debt €120.0 million
Source: Company
During the last three years, Havells also extended additional financial support to Sylvania via equity infusion, which in turn was
used for repayment of recourse debt and to meet cash flow mismatches. Till date, Havells has invested €114 million in the
subsidiary. This has depressed Havells‘ return on equity (RoE), as the additional investments have not yielded returns till
2009-10. Going forward, we estimate Havells‘ incremental financial exposure in Sylvania to be lower at around €16 million.
Table 8: Future Funding Support to Sylvania
In € mn Particulars
1. Recourse debt to be repaid over the next one year (by April 2012) 10.00
2. Interest to be paid on recourse debt 1.60
3. Guaranteed working capital debt 5.00
TOTAL 16.60
Source: Company
Prospects favourable for Sylvania, given its strong product portfolio, access to latest technologies, and high brand
recall value; expansion into newer markets to provide a boost to revenues over the long term
Havells‘ acquisition of Sylvania has given it access to the global lighting industry, which is expected to report a CAGR of 7-
10% over the next 10 years. Globally, the lamps industry is highly consolidated, featuring a few large players including Philips,
Osram (Siemens), GE, and Sylvania. These players together hold around 65% of the total market for lamps. Although
Sylvania‘s market share is relatively low at around 5% as compared with 29% of Philips, 19% of Osram, and 9% of GE, its
wide product range with the latest technologies and strong brands have enabled it to compete with the top three brands of the
world and sustain its market share in mature markets such as Europe. In contrast to the lamps industry, the luminaires industry
is highly fragmented, with smaller and regional players holding around 80% of the market. As against 7% of Philips, Sylvania
holds a 2% share of the luminaires market in countries where it operates.
Sylvania: Key Drivers and Challenges
Growth & Profitability Drivers
? Entry into fast-growing emerging markets
? Ability to access cheaper manufacturing
outsourcing options
Key Challenges
? Ability to garner market share in
emerging markets
? Ability to refinance debt in a timely
manner
ICRA Equity Research Service Havells India Limited
10
Note: The market share is estimated for markets where Sylvania is present
Till now, Sylvania had been focusing primarily on mature markets in Europe. With plans to launch operations in Eastern
Europe, Middle East, African and Asian markets, company‘s revenue growth is expected to recover in the next three years.
Global economic slowdown along with high fixed costs adveresely affected profitability during last three years;
slowdown impact similar as that on peers
After Havells acquired Sylvania in April 2007, the world economy suffered one of the worst recessions in decades, a fallout of
which was a significant decline in the revenues of companies across the lighting industry. This together with high fixed costs
led to several companies reporting operating losses during that period. Like Sylvania, Philips and Osram also undertook
restructuring, which subsequently allowed profit margins to recover to the 2008 levels in CY2010. Sylvania however had
weaker margins to begin with because of its higher fixed costs and delay in beginning the restructuring exercise (following
change in management), which meant the company‘s margins started recovering only from Q4, 2009-10.
Restructuring packages primarily aimed at correcting high operating leverage, the primary reason for losses
Table 9: Estimated Change in Operating Leverage Post-Restructuring
The primary reason for Sylvania
incurring losses following the
decline in revenues in 2008-09
was its high operating leverage
(refer Table 9). To correct this,
the company launched two
restructuring programmes
costing a total of €32million:
Project Phoenix (Jan 2009-Sep
€ mn Particulars 2008-09 (A) 2009-10(A) 2010-11 (E)
Sales 508.6 438.4 470.1
Less: Variable Costs 287.4 279.8 304.6
Contribution (A) 221.2 158.6 165.5
Less: Fixed Costs 209.7 159.9 144.6
Operating Profits (B) 11.5 -1.4 21.0
Degree of Operating Leverage (A/B) 19.2 - 7.9
Phillips, 29%
Osram, 19%
GE, 9%
Sylvania, 5%
Others, 38%
Phillips,
7%
GE, 2%Zumtobel,
11%
Sylvania,
2%
Others,
78%
Figure 12: Quarterly Movement in Margins of Sylvania & Competition
Source: Quarterly reports of companies, ICRA Online’s estimates
Figure 11: Quarterly Movement in Revenues of Sylvania & Competition
Source: Quarterly reports of companies, ICRA Online’s estimates
Source: Company
Figure 9: Estimated Market Shares in International Lighting Market
Figure 10: Estimated Market Shares in International Luminaires Market
Source: Company
Source: ICRA Online’s estimates
ICRA Equity Research Service Havells India Limited
11
2009) and Project Prakram (Sep 2009-Sep 2010). The two programmes were primarily aimed at rationalising the company‘s
cost structure
3
. The cost consisted mainly of severance payments made on account of reduction in manpower at the European
facilities.
Table 10: Summary of Restructuring Projects implemented at Sylvania
Restructuring Plan Phoenix Prakram Total
Duration of implementation Jan 2009-Sep 2009 Sep 2009-Sep 2010
Total cost €12.3 mn €20 mn €32 mn
Estimated annual savings €17.5 mn €16 mn €33.5 mn
Estimated pay-back period ~ 8.5 months ~ 15 months
Estimated savings €17.5 mn in 2009-10 ~ €12 mn by September 2010
Steps implemented ? Three manufacturing facilities shut
down
? Reduction in employee base by one-
third in two other facilities
? Reduction in administrative costs and
improvement in working capital
management
? Increase outsourcing of products
from cheaper manufacturing
destinations such as India and
China
? Rationalisation of fixed cost base
? Increase savings in material costs
? Value engineering and process
optimisation
Funding ? Use of retained earnings
? Release of funds from working capital
? Fresh equity infusion by Havells
? Use of debt funds by deferring
principal repayments
Source: Company
Adverse market conditions together with continued focus of Sylvania on internal restructuring programmes, which also
involved closure of certain production units, resulted in a decline in its net sales to €438 million in 2009-10 from €514 million in
2007-08. Although the fixed costs had been pruned to an extent with the implementation of Project Phoenix in 2009-10, the
company‘s profitability continued to decline because of a sharp fall in sales. This resulted in Sylvania reporting an operating
loss of €1.4 million in 2009-10.
Table 11: Sylvania’s Past Financial Performance
Source: Company, ICRA Online’s estimates
^ Note: As per reported numbers, the company has adjusted the amount directly from Business Reconstruction Reserve created out of retained earnings
3
Similar restructuring programmes were launched by some other players including Philips that were aimed at reducing the share of fixed
costs in the total cost structure.
€ million 2007-08 2008-09 2009-10
Gross Sales 514 509 438
% change
-1% -14%
EBITDA 27.5 11.5 -1.4
EBTDA % 5.4% 2.3% -0.3%
Depreciation 9.8 11.2 8.8
Interest 13.6 13.7 11.9
PBT 5.6 -13.2 -21.1
PBT% 1.1% -2.6% -4.8%
PAT 3.0 -16.4 -25.8
Exceptional Items -30.6 -43.8^
PAT after Exceptional Items 3.0 -47.0 -69.6
€/Rs. 57.3 65.0 67.0
ICRA Equity Research Service Havells India Limited
12
Following successful implementation of Project Phoenix and Project Prakram and with the market reviving, Sylvania‘s
operating profitability started improving in 2009-10.
Table 12: Quarterly Performance of Sylvania During and Post-Restructuring
€ million Q4,
2008- 09
Q1,
2009-10
Q2,
2009-10
Q3,
2009-10
Q4,
2009-10
Q1,
2010-11
Q2,
2010-11
Q3,
2010-11
Revenue 116.2 106.8 105.6 114.7 107.9 108.1 117.7 125.3
Growth (%) -9% -8% -1% 9% -6% 0% 9% 6%
EBITDA 2.8 0.5 0.6 -5.4 1.8 4.8 5.5 6.6^
EBITDA margin (%) 2.4% 0.5% 0.6% -4.7% 1.7% 4.4% 4.7% 5.3%
Depreciation 3.1 2.5 2.2 2.1 2.1 2.1 2.1 2.0
Interest 3.1 3.4 3.1 0.8 4.8 2.9 2.2 2.7
PBT before
Exceptional Items
-3.4 -5.4 -4.9 -8.4 -5.1 1.2 2.5 1.9
Exceptional items 18.6 5.9 6.3 25.1 3.1 0.6 0.0 1.1
PBT -22.0 -11.3 -11.2 -33.5 -8.2 0.6 2.5 0.4
Tax 0.6 0.3 -1 0.4 5.2 1.0 1.2 0.7
PAT -22.7 -11.6 -10.2 -33.9 -13.4 -0.4 1.3 -0.3
Source: Company’s quarterly reports
^ Normalised EBITDA excludes tax payment made in Brazil for previous years for € 2.4 million and treated as other income/ expenditure
Apart from the successful completion of the restructuring programmes and the sales revival in key regions, the launch of
operations in emerging markets also contributed to the improvement in Sylvania‘s margins from Q4, 2009-10 onwards. The
established global players in the lighting industry are increasingly focusing on emerging markets for future growth. Already,
Philips and Sylvania‘s share of revenues from emerging markets has increased to ~40% now from around 30% in the quarter
ended March 2009. Based on growth trends observed, the share is expected to increase further over 2010-11(E) to 2012-
13(E).
Future growth to be driven by emerging markets; profitability vulnerable to adverse movements in foreign exchange
With Sylvania planning to launch operations in other emerging markets such as Malaysia and China, growth in its top line is
expected to be higher in the next few quarters. Sales from Latin America (LATAM), another developing region, have grown
consistently since Q2, 2009-10, which together with the decline in sales from Europe, has led to an increase in LATAM‘s share
in the total sales to 31% in Q2, 2010-11 from 26% in Q1, 2009-10. In 9M, 2010-11, sales from the LATAM region reported an
increase of 35% over the corresponding previous, although part of it can be attributed to favourable currency movements.
While Sylvania as of now has a limited presence in Asian markets, which account for 5% of its total sales, growth in the region
has been healthy. Sylvania‘s sales in Asian markets increased by 69% in 9M, 2010-11 over the corresponding previous to
€11.35 million.
Launch of Project
Phoenix (Jan ‘09)
Conclusion of Project
Prakram (Sep ‘10)
Figure 13: Market-wise Revenue Break-up for Sylvania
Source: Company’s Quarterly reports
Figure 14: Market-wise Revenue Break-up for Philips
Source: Philips’ Quarterly reports
Gradual
improvement
in profitability
Emerging
markets, 28%
Emerging
markets, 36%
Developed
markets, 72%
Developed
markets, 64%
0%
20%
40%
60%
80%
100%
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
Emerging
markets, 30%
Emerging
markets, 36%
Developed
markets, 70%
Developed
markets, 64%
0%
20%
40%
60%
80%
100%
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
ICRA Equity Research Service Havells India Limited
13
Table 13: Quarterly Revenue Growth in Sylvania's Markets
€million Q4,
2008-09
Q1,
2009-10
Q2,
2009-10
Q3,
2009-10
Q4,
2009-10
Q1,
2010-11
Q2,
2010-11
Q3,
2010-11
Europe 77.72 70.63 65.48 77.33 76.83 64.95 65.59 74.10
Growth (%) -9% -7% 18% -1% -15% 1% 13%
LATAM & US 28.75 24.89 25.95 27.53 29.04 32.65 37.56 35.60
Growth (%) -13% 4% 6% 5% 12% 15% -5%
Asia 3.74 3.62 2.93 2.88 4.04 5.47 5.88 04.62
Growth (%) -3% -19% -2% 40% 35% 7% -21%
Other -1.75 -1.6 1.74 -1.27 -1.35 0.82 0.58 1.59
Total 108.46 97.28 95.88 106.69 109.01 104.21 109.85 115.91
Growth (%) -9% -10% -1% 11% 2% -4% 5% 6%
Source: Company’s Quarterly Reports
Going by the current trends, we expect Sylvania‘s sales to report a CAGR of 10% in the LATAM region and of 31% in the
Asian region (as a result of entry into newer markets); we expect the company‘s sales in the European region to decline
marginally in 2010-11 and stabilise at that level over the next three years. Further, taking into account the cost savings from
the restructuring programmes, we expect Sylvania to report an EBITDA of ~€21 million (EBITDA margin ~4.5%) in 2010-11.
The EBITDA margin, however, is exposed to the risk of adverse fluctuations in foreign exchange (forex), given Sylvania‘s
increasing exposure to emerging markets – both in terms of outsourcing of manufacturing as well as sales. Thus, a strong
appreciation in currencies of countries from where the products are imported or depreciation in currencies of countries of major
export can adversely affect the company‘s earnings. To reduce this risk, the company is focusing at localising sales and
procurements in key markets such as LATAM, thereby providing benefit of natural hedge. Further, the company is also
increasingly focusing at localising outsourcing and borrowings in countries like India and China – that are the key outsourcing
destinations for the company. Although this reduces the adverse impact of foreign currency movements to an extent, the
company‘s earnings would continue to be susceptible to the forex risk, given the increasing percentage of sales in new
geographies.
ICRA Equity Research Service Havells India Limited
14
Switchgears
Most profitable segment for company
In the switchgears segment, Havells‘ product range includes domestic
switchgears, modular switches, and low-voltage industrial switchgears
4
.
The domestic/retail segment is a small portion of the total switchgear
market (about 15%), but Havells enjoys robust profit margins here because
of its leadership position and targeted customer segment. Although sales
from industrial switchgears are limited (~30% of total segment sales) at
present, Havells is making efforts to expand its presence in the Rs. 7,130
crore low-voltage industrial products category.
About 70% of the revenues in the switchgears segment come from
domestic switchgears and modular switches, where Havells is able to
price its products at par with international brands such as Legrand and
Schneider Electric. Moreover, Havells has a wider distribution reach than
its close competitors, which enables it to capitalise on the growth
happening in Tier-II and Tier-III cities.
Currently, Havells is the market leader in the Rs 1,200 crore domestic
switchgears market, having increased its market share to about 20% in
2009-10 from 15% in 2005-06. Its market share in modular switches has
also improved significantly to 15% from just 5% in 2005-06, helped by Crabtree‘s premium image and easy availability. The
company currently faces limited competition in modular switches, as the only premium brands available are Legrand,
Schneider and Anchor Roma.
Future growth expected to be driven by construction of new houses and increasing disposable incomes
Domestic switchgear and modular switches are expected to
benefit from the current demand for premium urban housing and
rising disposable incomes. According to the Ministry of Urban
Housing
5
, the total requirement of urban housing during the XI
th
Plan period (2007-2012) works out to 2.65 crore dwelling units
(combining the housing shortage at the beginning of the Plan
period), which would sustain demand for domestic switchgear
and switches. Although a large proportion of this shortage
involves low-end housing, around 40% of the total housing units
would be worth Rs. 25 lakh and more—the target segment for
switchgears and switches.
4
The switchgears industry can be broadly classified in two segments: domestic/ commercial (low voltage) and industrial switchgears (medium
and high voltage). However, for Havells, the potential market considered is just the low-voltage segment because of its product focus.
5
Report of the Technical Group constituted by the Ministry of Urban Housing
Switchgears and Electrical Switches
Domestic/ Commercial
(Rs. 2,200cr)
ACBs,
MCCBs,
Switch fuse
unit,
Changeovers
etc. (Rs.
1,200 cr)
Modular
Switches
(Rs. 1,000 cr)
LV Industrial
(Rs. 7,130 cr)
Control
gears,
starters and
panels (Rs.
5,340 cr)
Switchgear
(Rs. 1,790 cr)
< Rs.15
lakh, 37%
Rs.15-25
lakh, 25%
Rs. 25-50
lakh, 22%
> Rs. 50
lakh, 16%
Switchgears: Key Drivers and Challenges
Growth Drivers
? Real estate activities in metros, Tier-I and
Tier-II cities
? Increasing personal disposable incomes
? Increasing consumer awareness
? Changing lifestyles leading to greater
preference for modular switches
Key Challenge
? Establishing market share in new
products to be launched in low voltage
industrial switchgears, given presence of
large players such as L&T, ABB and
Siemens.
Table 14: Product-wise Break-up of Havells’
Switchgear Revenues
% of total
Industrial 23%
Domestic 49%
Modular Switches 20%
Others (Capacitors & Motors) 9%
Total 100%
Source: Company data, ICRA Online’s estimates
Figure 15: LV Switchgears Market in India
Source: Company, ICRA Online Research
Note: Havells also includes capacitors and motors to calculate
revenues from Switchgears segment
Figure 16: Price- wise Break-up of Proposed Housing Units
Source: Industry research
ICRA Equity Research Service Havells India Limited
15
The domestic switchgear segment is also expected to benefit from rising consumer awareness, as the expenditure on
miniature circuit breakers (MCBs) generally accounts for less than 0.1% of the total cost of a house, but significantly reduces
the risk of damage from short circuits and electric current leakages. Moreover, the expenditure on domestic switchgear being a
one-time outlay (about Rs. 2,000 for a three bedroom-hall-kitchen house), we believe switchgears would be affordable for a
large part of the targeted population.
While the size of the domestic market for electrical switches is estimated at Rs. 2,200 crore, only 46% of this is accounted for
by modular switches, and just around 10% of households use them because of their higher prices. While the electrical
switches market is expected to grow at an annual rate of 9-11% over the next five years, we expect the growth to be faster for
modular switches, given the rising disposable incomes.
Nevertheless, the high dependence of switchgears and switches on real estate growth, especially premium housing, exposes
them to the cyclicality inherent in the sector. Havells‘ revenue growth in this segment slowed down to 7% in 2008-09 because
of the economic slowdown, and a repetition of the same cannot be ruled out in case GDP growth falters.
Table 15: Expected Movement in Havells' Market Share
2009-10 2010-11(E) 2011-12(E) 2012-13(E)
Domestic Switchgear
Industry Sales Rs. Crore 1,200 1,380 1,587 1,825
Growth % 15% 15% 15%
Havells‘ Market Share % 22% 22% 22% 22%
Modular Switches
Industry Sales Rs. Crore 1,000 1,150 1,323 1,521
Growth % 15% 15% 15%
Havells‘ Market Share % 16% 16% 16%
Source: Company, ICRA Online’s estimates
Company plans to diversify into high-growth industrial switchgears, but benefits would accrue only over long term
Havells, which currently caters to only a small part of the total switchgears market, plans to expand its product portfolio so as
to be able to address the larger market, consisting of industrial switchgears. The industrial switchgears segment is expected to
report strong growth during the next few years on the back of the significant expenditure planned in the power sector and in
industrial construction. However, Havells is currently a marginal player in this segment as compared with established
companies like Larsen and Toubro (L&T) and Siemens. Although Havells started off as an industrial switchgear company, it
reduced the focus on this business over the years to target the high potential consumer electrical market. The company is now
building up its product portfolio to re-enter this segment. Given strong competition from players like L&T, we expect the growth
in the industrial switchgears segment to be modest in the next two to three years.
ICRA Equity Research Service Havells India Limited
16
Electrical Consumer Durables
Till 2009-10, the Electrical Consumer Durables (ECD) division of Havells had just one product—electric fans. Now it has two,
with the recent launch of electric water heaters.
One of the fastest growing segments for Havells, benefiting from
rapid growth in electric fans demand and increase in market
share
The revenues of the ECD division reported a sharp increase till 2009-
10 on the strength of high growth in the electric fans industry and the
substantial increase in Havells‘ market share during 2006-09. The
electric fan industry is now worth about Rs 3000 crore, with Havells
controlling around 12% of the market. Despite being a relatively late
entrant (the ECD division was started only in 2004), the company has
managed to place itself among the top five players in the industry that
control about 80% of the market. The company has been able to grow
its market share from 6% in 2006 to 12% in 2010 largely on account of
its marketing strategy wherein a number of additional product features
were offered, while the product was offered at prices almost similar to
that of the market leader (Crompton Greaves). Moreover, as Havells‘
fans cater to the premium segment, the growth can be attributed to
rising incomes and quality consciousness of Indian consumers.
Havells‘ also supported its strategy by aggressive advertising, and a
unique energy saving proposition offered in the form of 50W fans.
Moreover, Havells has been able to overtake established, but single-product companies, on the strength of its extensive
distribution network. The importance of distribution network in the case of home electronics and kitchen appliances is
highlighted by the findings of Technopak (a market research company), which indicates that ~79-85% of customers are willing
to travel only up to 2km for the intended purchase.
In raising its market share at a brisk pace over the
period 2006-10, Havells was also able to capitalise on
one of the fastest growth periods of the domestic electric
fans industry, which reported a CAGR of 18% between
2003-04 and 2009-10E. The growth was largely driven
by the real estate boom and the increase in disposable
incomes, as replacement demand for fans has
historically been limited, since older generation fans
generally had a long life span extending up to 20 years.
During 2009-10, the revenues of the key players in the
electric fans industry increased by a substantial 30% or
so, but the spike may partly be attributed to pent-up
demand.
Healthy growth prospects for domestic electric fans industry
The domestic electric fans industry is expected to grow at about 30% in 2010-11 with real estate activities picking up once
again; the uptrend is already reflecting in the half-yearly numbers of the major fan manufacturers like Havells and Crompton
Greaves. Beyond 2010-11, we estimate a growth rate of 18-20% over the next two years. Thereafter, we expect the growth
rate to moderate to less than 15% because of the base effect, but see the industry as continuing to benefit from two additional
upsides: increasing availability of power and shorter lifespan of newer generation fans.
In rural India, the ownership of fans is closely linked to power availability, especially in States where disposable incomes are
high. Although Punjab and Haryana are well-penetrated, Havells can benefit from increased power supply and rising rural
incomes in Uttar Pradesh, Rajasthan and Bihar, where higher incomes have not yet fully translated into fan purchases
because of power shortages. Although the key beneficiaries of this trend would be companies that manufacture lower-priced
fans, we expect Havells to capture the affluent households in these regions. Also, a ceiling fan is almost a necessity in the
hotter regions of India. As per the findings of a survey conducted by Max New York Life and NCAER, fan ownership ranks
higher than ownership of manual water pumps and steel cupboards among rural households.
0%
5%
10%
15%
20%
25%
30%
35%
0
400
800
1,200
1,600
2,000
2,400
2,800
A
n
n
u
a
l
G
r
o
w
t
h
r
a
t
e
R
s
.
C
r
o
r
e
Electrical Consumer Durables: Key Drivers and
Challenges
Growth Drivers
? Increased penetration of electricity in rural
areas
? New product launches
? Changing lifestyles and disposable incomes
Key Challenges
? Loss of market share in electric fans
? Intensifying competition in the electrical
appliances market
Source: CMIE, ICRA Online’s estimates
Figure 17: Growth in Indian Electric Fan Industry
ICRA Equity Research Service Havells India Limited
17
Havells’ market position in fans expected to remain strong, with growth supported by adequate spare capacities
Havells‘ competitive strength in electric fans is indicated by the pricing premium that its fans are able to command in the
market, even against the products of other established players like Crompton Greaves and Bajaj Electricals. Moreover, Havells
only sells fans priced above Rs. 1,000 each, which shields it from the intense competition from cheaper Chinese products in
the lower end of the market. With the size of the Indian middle class growing, we expect the share of high-end fans to increase
gradually.
Table 16: Electrical Fans—Peer Comparison
Amounts in Rs. Crore Revenue Revenue Growth
Incremental
Revenues
Realisation
Company 2008-09 2009-10 2008-09 2009-10 2009-10 2008-09 2009-10
Havells 275.3 357.6 14% 30% 82.3 1,229 1,202
Crompton Greaves 598.3 764.5 20% 22% 166.2 1,068 1,176
Usha International 357.4 495.2 13% 37% 137.8 988 1,004
Bajaj Electricals 296.5 379.3 21% 28% 82.8 933 943
Orient Paper & Industries 291.0 384.0 -16% 36% 88.5 914 903
Khaitan Electricals 195.7 258.0 -20% 32% 62.3 945 927
Note: Orient Paper exported fans worth Rs. 48 crore out of the revenues mentioned, resulting in a lower share in the domestic market. For calculating incremental
revenues in 2009-10, adjustment for export sales has been made
Source: Companies’ Annual Reports, ICRA Online’s estimates
The growth in Havells‘ electric fan sales is expected to
mirror the growth of the industry over 2010-11(E) to 2012-
13(E). Incremental growth in market share is not expected
to be substantial because of intense competition from
Crompton Greaves and Bajaj Electricals. The latter, for
instance, has a tie-up with China-based Midea (world‘s
largest fan company), which would help it introduce newer
models. Havells however does benefit from having the
third largest fan manufacturing capacity in India, with
ample spare capacity to service volume growth of 15-20%
over the medium term. The company‘s facility at Haridwar
(Uttarakhand) is the largest integrated fan manufacturing
factory in India, which allows it to have a cost advantage
over other players that outsource production to other
smaller units in India.
ECD division displays strong profitability, but full impact on EPS would be felt only after new product launches
The profit margins of Havells‘ ECD division are robust because of premium pricing, which makes it the second-most profitable
segment for the company. However, the division‘s overall contribution to the company‘s 2009-10 standalone revenues was just
around 15% (about 6.6% on a consolidated basis), which limited the impact of the benefit on the EPS. As the ECD division is
expected to demonstrate the highest revenue growth (CAGR of 22%) among all segments during 2010-11 to 2012-13(E)
0%
20%
40%
60%
80%
100%
0
20
40
60
80
U
n
i
t
s
i
n
l
a
k
h
s
Installed capacity Units sold Utilisation
0%
10%
20%
30%
40%
50%
60%
70%
Ceiling
fan
Time
clock
Torch In-house
toilet
Water
pump
Steel
cupboard
Sewing
machine
%
o
f
h
o
u
s
e
h
o
l
d
s
0%
20%
40%
60%
80%
100%
%
o
f
h
o
u
s
e
h
o
l
d
s
Power availability
% of households earning above Rs 2000 pm
Ceiling fan ownership
Source: The Max-NCAER Financial Protection Survey
Figure 18: Region-wise Power Availability and Fan Penetration Figure 19: Ownership of Household Goods in Rural India as per Survey
Source: The Max-NCAER Financial Protection Survey
Figure 20: Capacity Utilisation across Major Fan Manufacturers
Source: Capitaline, ICRA Online
ICRA Equity Research Service Havells India Limited
18
because of new product launches while sustaining EBITDA margins close to 22%, it is expected to be the key contributor to
Havells‘ future EBITDA growth (on a standalone basis).
Table 17: EBITDA Margin Comparison for ECD Segment
Note: For Havells, EBITDA margin has been calculated by
adjusting the contribution for unallocated expenses that have
been apportioned among the four segments on the basis of
sales
Source: Companies’ Annual Reports, ICRA Online’s estimates
While the contribution margins in Havells‘ ECD division improved to 28% in 2009-10 from about 21% in the previous two
years, we believe this improvement largely reflects the softening of raw material prices over the last one year (reduction in raw
material prices was not reflected in lower MRPs). Nonetheless, over the medium term, the margins would be supported by
increasing capacity utilisation and scale benefits when new products are introduced using a common distribution network.
Moreover, Havells‘ water heaters are catering to the premium segment, which allows it to earn adequate profits on the same.
Future growth to be driven by new products such as water heaters, but company would face intense competition in
new categories
We expect future profit growth of Havells‘ ECD division to be driven by new product launches such as water heaters. The size
of the water heaters market is estimated at Rs. 800 crore, and it is expected to grow at about 20% per annum over the
medium term, driven by rising disposable incomes, currently low penetration levels (only about 1.7 crore households own
water heaters as of 2009-10). Havells has targeted the premium consumer segment and expects to capture a market share of
5% by 2011-12, which is achievable considering the unique product attributes offered by the company, such as prevention of
electric shocks and highest power efficiency (five-star rated). We expect additional revenues of Rs. 50-60 crore from water
heaters from next year onwards, which should sustain growth of the ECD division.
The various listed players present in the electric appliances industry have reported strong profit growth during the past five
years, and since this business is driven by rising disposable incomes and availability of power, we expect the electric
appliances industry to grow at a healthy pace over the medium term. However, the electric appliances industry is already
cluttered, featuring both premium MNC brands like Philips, Panasonic and Morphy Richards (owned by Bajaj Electricals) and
relatively inexpensive brands like Sunflame, Prestige, Usha and Inalsa. Even retail chain owners like the Future Group have
launched their in-house brands (Onkyo), which are priced much lower.
Table 18: Product Portfolio and Growth Trend for Domestic ECD Companies
Electric Appliances Kitchen Appliances EBITDA CAGR
of ECD
Business
Revenue
CAGR of ECD
Business
Electric
Fans
Water
Heaters
Irons Mixer
Grinders
Toasters 2005-06 to
2009-10
2005-06 to
2009-10
Havells ? ?
Crompton Greaves ? ? ? ? ? 13% 15%
Bajaj Electricals ? ? ? ? ? 39% 23%
Khaitan Electricals ? ? ? ? -24%
Usha International ? ? ? ? ? 114% 43%
TTK Prestige ? ? ? 32% 18%
Philips ? NA NA
Panasonic ? ? NA NA
Inalsa ? ? ? NA NA
Sunflame ? ? ? ? NA NA
Source: Companies’ Annual Reports and websites, ICRA Online Research
Company EBITDA margin
2008-09 2009-10
Havells 13.4% 19.8%
Crompton Greaves 11.6% 14.7%
Bajaj Electricals 9.4% 12.8%
Orient Paper & industries 10.8% 13.5%
Khaitan Electricals 3.7% 6.4%
TTK Prestige 9.9% 16.2%
0%
5%
10%
15%
20%
25%
30%
%
E
B
I
T
D
A
m
a
r
g
i
n
Figure 21: Movement in EBITDA Margin for Havells’ ECD Division
Source: Company’s Annual Reports, ICRA Online’s estimates
Sudden spurt
because of
favourable raw
material price
movement
ICRA Equity Research Service Havells India Limited
19
Despite intense competition, we believe Havells is well poised to capitalise on the high growth potential of the electric
appliances industry, given the company‘s:
? established brand image and distribution network;
? launch of products in less cluttered categories, such as 5-star rated appliances that appeal to energy conscious
customers, and targeting of unexplored niches like Residual Current Circuit Breakers (RCCBs) in the case of water
heaters, which make the appliance electric shock proof; and
? ability to command price premium on the strength of differentiated products, established brand and distribution
reach, as seen in fans and switchgear, and even in water heaters, which command a significant price premium over
competing products of existing players.
ICRA Equity Research Service Havells India Limited
20
Cables and Wires
Although a major contributor to Havells’ revenues, this division
displays the weakest profitability
The cables and wires segment is the largest business segment for
Havells in terms of revenues, and accounted for 41% of its 2009-10
standalone sales. Havells‘ presence in the wires business is strategic in
nature, as the business complements its efforts to offer the entire range
of products that a customer would require while setting up the electrical
system of a new or upgraded house. However, this segment suffers
from relatively low and volatile contribution margins (less than 10%) on
account of low value addition, the commodity nature of the product, a
concentrated customer base, and intense competition in a fragmented
market that has several small players. About 43% of Havells‘ revenues
in this segment come from wires, which are also used by retail
customers, and are therefore less exposed to business cycles and
margin pressures. The business however continues to be dependent on
real estate activity.
Revenues in cables and wires are largely driven by the prices of copper and aluminium – which typically account for 72-75% of
the total cost. The realisation is therefore dependent on the underlying raw material cost, which is normally passed onto
customers with a time lag (the 9% decline in sales during 2008-09 was because of the softening of copper prices). During
2009-10 Havells‘ volumes in this segment increased by 25%, but revenues remained flat due to a fall in copper prices. Havells
however attempts to keep the impact of commodity price fluctuations on margins under control by minimising inventory.
Profit growth in Havells‘ cables and wires division is likely to remain muted as compared with that in its other divisions. This in
turn would gradually reduce the division‘s contribution to the company‘s EPS in the long term.
Demand outlook favourable, given the generation and transmission and distribution (T&D) capacity proposed over
the XI
th
Plan period; however, Havells not planning to focus on this segment
Havells‘ volume sales of cables and wires reported a CAGR of 12% from 2005-06 to 2009-10, and the growth rate is expected
to sustain, given the large capex planned in the power sector. Havells operates primarily in the segment consisting of low-
medium voltage cables and domestic wires, which are used mainly in power generation plants, distribution of power, and in
electrical systems within premises. The company has stayed away from the high-voltage (HV) cables used in transmission
because of its continued focus on consumer products. Also, players like KEI and Polycab, helped by their established track
record and experience in this domain, are better placed to capitalise on the growth in the HV cables business.
Table 19: Cables & Wires—Peer Comparison
Company EBITDA Margin Installed Capacity Capacity Utilisation
2008-09 2009-10 ’000 km 2009-10
Havells 6.4%* 8.8%* 1,150.00 45.0%
Finolex Cables 0.5% 16.6% 2,135.97 53.9%
KEI Industries 9.0% 6.3% 65.60 65.2%
Polycab NA NA NA NA
Note: Contribution margin mentioned in the case of Havells
Source: Companies’ Annual Reports, ICRA Online’s estimates
The size of the cables and wires industry was estimated at ~ Rs. 15,000 crore, of which about Rs. 10,000 crore would be
cables and the rest wires. Driven by the investments in the power sector and growth in real estate, the industry reported a
CAGR of 8% over the period 2000-08. The industry‘s future growth would be supported by the significant increase in power
generation capacity over 2011-12(E) to 2016-17(E), with the expected capacity addition being much higher than the 42,452
MW of capacity added during the last eight years.
Cables and Wires: Key Drivers and Challenges
Growth Drivers
? Large investments planned in power
sector
? Foray into new segments in cables
business
Key Challenges
? Increasing copper prices, which can exert
pressure on margins
? Competition from larger players
ICRA Equity Research Service Havells India Limited
21
Table 20: Demand Estimation for Power Cables
Globally, the expenditure on T&D and
generation has been equal in proportion, as
against the ratio of 0.5:1 in India. Hence, the
expenditure on distribution can far exceed the
intended target over the long term. Between
2000-01 and 2006-07, distribution lines
witnessed a CAGR of 2.5% in volume terms.
The growth is expected to be sustained over
the medium term, aided by a number of new
governmental initiatives, but a higher growth
rate would be contingent on T&D expenditure
catching up with the global norm.
We believe the Cable industry would continue to face pressure on margins because of rising raw material costs and
competition from China. As China accounts for 67% of Asia‘s total cable consumption, Chinese companies enjoy significant
economies of scale. Being a relatively commoditised product segment, overcapacities or slowdown in demand in China could
possibly result in Chinese cable companies diverting their products to India. Till now however, China cable demand has been
fairly robust, and was up 15% in 2009-10 as against a demand growth of around 5% in India.
Generation capacity planned over 2012-17 100,000 MW
Expected achievement of the target 60,000 MW (60%)
Estimated backlog from XI
th
Five Year Plan 20,000 MW
Expected capex on generation at Rs. 5 crore per MW Rs. 400,000 crore
Percentage spend on cables 3.0%
Demand for cables from new generation Rs. 12,000 crore
Capex on Distribution Rs. 250,000 crore
Percentage spend on cables 10.0%
Demand for distribution 957,302 cable kilometres
Demand for cables from distribution Rs. 25,000 crore
Source: Central Electricity Authority, ICRA Online Research
ICRA Equity Research Service Havells India Limited
22
Financial Outlook
Sales volume growth expected to be healthy over the medium term
Havells‘ operating income reported a healthy CAGR of 23% over the period 2005-06 to 2009-10, backed by the company‘s
entry into newer segments, cross-leveraging of its brand and extensive distribution network, and a healthy increase in
consumer demand following the rise in personal disposable incomes. The inorganic growth by way of acquisition of Sylvania
has contributed significantly to Havells‘ scale of operations. On a consolidated basis, Sylvania‘s operating income accounted
for 54% of Havells‘ total operating income in 2009-10.
Going forward, Havells‘ revenue growth is expected to be driven by sustained demand for consumer durables, launch of new
products (such as electric water heaters), backed by established brand and distribution network, and Havells‘ entry into newer
markets with the Sylvania brand. In our opinion, Havells‘ distribution reach and established brand should help the company
sustain its market share in most segments and fetch business in new ones, given its approach of diversifying its offerings
within consumer product categories, its performance track record, increasing consumer awareness, and the perceptible shift in
preference for quality products.
Overall, we expect Havells‘ standalone revenues to report a CAGR of 14-15% between 2009-10 and 2012-13(E) and its
consolidated revenues to grow at 11-12% during the same period.
Consolidated profit margins to improve from 2010-11 onwards on account of successful implementation of
restructuring programmes at Sylvania; adverse fluctuations in raw material prices and entry into new segments to
put minor pressure on standalone margins in 2010-11
In 2009-10, Havells‘ standalone operating profit margins (OPM) were at a five-year high of 12.35%, supported by benign raw
material prices. However, in 9M, 2010-11, the company posted a margin contraction of 141 basis points (y-o-y) because of
input cost pressures, largely in its cables division.
Following the completion of restructuring programmes in September 2010, the EBITDA margins of Sylvania reported
significant improvement to 5.3% in H1, 2010-11 from 0.63% in the corresponding previous. Going forward, with the
contribution from emerging markets increasing, Sylvania‘s margins are expected to improve further. We expect Sylvania to
report an EBITDA margin of 4.5% in 2010-11(E), which should improve further to 7.4% in 2011-12(E), and to 7.6% in 2012-
13(E).
Given the decreasing proportion of revenues from the cables segment, the impact of margin fluctuations on Havells‘
profitability is likely to decline over time. This apart, the company has surplus capacities across all segments, which are
expected to be adequate for growth over the next three years. With increase in capacity utilisation, Havells is expected to
benefit from economies of scale, which should reflect favourably in its operating margins. We expect Havells to report
operating margins of 11.4% in 2010-11(E), which would improve to around 11.7% by 2012-13(E). On a consolidated basis, the
EBITDA margins are expected to improve from 5.7% in 2009-10 to 8.1% in 2010-11(E) and thereafter gradually to 10% in
2012-13(E).
Robust EPS growth expected over medium term, largely driven by Sylvania’s turnaround and healthy growth in ECD
division
We expect Havells‘ consolidated EPS to post a CAGR of 80% over the period 2009-10 to 2012-13(E). While the standalone
profits are expected to report a moderate CAGR of about 11% during 2010-13 (E), Sylvania‘s profits would increase at a
CAGR of 260% during 2011-13(E), becoming the key growth driver of consolidated EPS. Hence, we believe the company‘s
stock should command a higher valuation than the stocks of similar players in electric appliances and switchgears, as Havells
would benefit not only from domestic growth, but also from the additional net profit growth of Sylvania, which till recently was a
drag on the EPS.
Havells has a consistent track record of paying dividend, and declared a dividend of Rs. 3 per share in 2009-10, maintaining
its historical payout ratio of about 11%. The company has indicated that it would maintain its Dividend Per Share (DPS) going
forward, which appears feasible, considering the sharp increase in profits during 2010-11. However, at the current market
price, the dividend yield on Havells‘ stock is negligible at about 0.86%.
Capital structure to improve on a consolidated basis; however refinancing risk persists
Erosion of Sylvania‘s net worth because of accumulated losses together with the larger debt taken for the purpose of
acquisition and restructuring resulted in Havells‘ consolidated gearing increasing to 2.66 times as on March 31, 2010 from 2.00
times as on March 31, 2009. As Sylvania starts posting net profits from 2010-11(E) onwards, we would expect rapid
improvement in the capital structure of the consolidated entity, going forward. Although Sylvania‘s overall debt is expected to
remain high on account of increasing working capital requirements, an improved net worth would allow the consolidated
gearing to be at a comfortable level of less than one time by 2012-13.
ICRA Equity Research Service Havells India Limited
23
The debt coverage indicators of Havells are also expected to improve significantly from 2011-12(E) onwards, with consolidated
Debt/EBITDA falling below 2 times. However, Sylvania‘s debt obligations of around € 40million that are due for repayment in
2012-13 would need to be refinanced.
Return ratios expected to improve considerably as investments in Sylvania start yielding returns
Havells‘ return ratios have remained subdued during the past two years because of the substantial investments in Sylvania
that are yet to yield returns. The standalone Return on Capital Employed (RoCE) of the company stood at a moderate 15.28%
in 2009-10 largely because the investment in Sylvania did not yield any returns till last year. Adjusting for the equity investment
in Sylvania, Havells‘ standalone ROCE was significantly higher at 34.5% in 2009-10.
Table 21: Estimated RoCE for Havells—Standalone and Consolidated
2009-10 2010-11(E) 2011-12(E) 2012-13(E)
Standalone ROCE 26.36% 23.79% 24.14% 24.43%
ROCE adjusted for Sylvania Investment 34.50% 32.57% 32.56% 31.68%
Consolidated ROCE 15.28% 27.12% 30.45% 31.15%
Source: ICRA Online’s estimates
Havells‘ Return on Equity (RoE) would also improve substantially from 13.71% in 2009-10 to 37.4% in 2012-13(E) following
Sylvania‘s turnaround. The company has limited capex requirements in the near future, other than a possible expansion of
capacity in electric fans to meet increasing demand. Havells‘ expansion plans in the other segments, on the other hand, would
be contingent on the growth that these segments achieve. As of now, Havells has adequate surplus capacities available to
meet the expected sales. For new products such as water heaters, the company initially plans to test the market by
outsourcing production, and later set up a facility in case it is able to elicit a favourable market response.
Overall, the incremental funding requirements of Havells (on a standalone basis) are expected to be low, given the limited
capex and working capital requirements.
Source: ICRA Online’s estimates
Figure 22: Movement in Havells’ (Consol.) Capitalisation Indicators
Source: ICRA Online’s estimates
Figure 23: Sylvania’s Debt Repayments vs. Cash Accruals
-
0.50
1.00
1.50
2.00
2.50
3.00
0
200
400
600
800
1,000
1,200
1,400
1,600
2009-10 2010-11(E) 2011-12(E) 2012-13(E)
(
t
i
m
e
s
)
R
s
c
r
o
r
e
Net Worth Debt Gearing
0
10
20
30
40
50
60
2010-11(E) 2011-12(E) 2012-13(E)
€
M
i
l
l
i
o
n
Cash accruals Principal repayments
ICRA Equity Research Service Havells India Limited
24
Company Profile
Incorporated in 1971, Havells is a manufacturer of electrical consumer goods. The company‘s operations can be broadly
clubbed under four heads: lighting, switchgears, electrical consumer durables (ECDs), and cables & wires. Each of the product
categories is recognised as a separate vertical and is led by an independent head.
Figure 24: Segment-wise Product Profile
Havells has grown at an annualised rate of around 40% over
the past one decade, through the organic as well as inorganic
route. At present, it has 11 manufacturing locations across
India. Some details on the major manufacturing facilities that
have been set up by the company since incorporation are
summarised in Figure 26.
Figure 26: Major Greenfield Expansions undertaken by Havells since Incorporation
Lighting
• CFLs
• Luminaires for
Domestic,
Commercial &
Industrial Applications
Switchgears
• Domestic
Switchgears
• Modular Switches
• Industrial
Switchgears
• Motors
• Capacitors
ECDs
• Fans (Ceiling and
Pedestal)
Cables & Wires
• Low-tension Cables
• Wires
1987: Started
manufacturing
MCBs at Badli,
Delhi, in joint
venture with
Geyer, Germany
1990: Set
up a
manufacturi
ng plant at
Sahibabad
(UP), for
changeover
switches
1993: Set up
manufacturing
plant at
Faridabad,
Haryana ,for
Control Gear
Products
2004: Set up
manufacturing
plant for
domestic
switchgear at
Baddi, for
CFLs at
Faridabad
(Haryana), and
for fans at
Noida (UP)
2005: Set up fan
manufacturing
plant at Haridwar
(Uttarakhand)
2006: Added
CFL
manufacturing
unit at Haridwar
(Uttarakhand)
2007: Set
up
capacitor
manufactur
ing plant at
Noida (UP)
2009: Set up
second
switchgear
manufacturing
unit at Baddi
(Himachal
Pradesh)
2578.29
228.16
0
500
1,000
1,500
2,000
2,500
3,000
R
s
.
C
r
o
r
e
Turnover PAT
Source: Company, ICRA Online
Source: Company, ICRA Online
Figure 25: Trend in Havells' Revenues and Profits
Source: Company, ICRA Online
ICRA Equity Research Service Havells India Limited
25
Apart from the new manufacturing setups, Havells made several acquisitions in its areas of operations to expand its capacities
as well as to augment its distribution network and brand portfolio.
Figure 27: Major Acquisitions by Havells over the Years
The Sylvania acquisition is the largest by Havells so far. Although the purchase was funded largely by debt, Havells has also
extended financial support to the entity over the last three years (refer Table 22).
Table 22: Havells' exposure in Sylvania
In €mn Particulars As on Dec 31, 2010 Remarks
Fund-based exposure
1. Equity invested 85.00 Includes €50 million infused initially at the time of
acquisition, funded by equity infusion received from
Warburg Pincus in 2007-08. Funds have been used for:
? Repayment of recourse debt
? Partial funding of restructuring plans
? Improvement in net worth, which got eroded on
account of losses
2. Recourse debt repaid 20.00 Part of €80 million recourse debt
3. Estimated interest paid 8.40
TOTAL (Fund-based) 113.4
Non-fund based exposure
6. Additional working capital debt
guaranteed by Havells
5.00
TOTAL (Non-Fund-based) 5.00
Source: Company, ICRA Online’s estimates
Segment Overview
On a stand-alone basis, the cables and wires segment accounts for a major proportion of Havells‘ total revenues. However,
the segment‘s share declined from around 46% in 2006-07 to 42% in 2009-10, primarily on account of the increase in the
revenue shares of the switchgears and ECD divisions that have registered a much higher CAGR during the last four years.
Table 23: Segment-wise Trend in Revenues
Segment 2006-07 2007-08 2008-09 2009-10
CAGR
Rs. Cr % of total Rs. Cr % of total Rs. Cr % of total Rs. Cr % of total
Switchgears 428.87 25% 568.18 25% 623.37 27% 724.44 28% 19%
Cables & Wires 777.99 46% 1,064.29 47% 1,106.58 47% 1,094.88 42% 12%
Lighting &
Fixtures 238.73 14% 289.44 13% 280.46 12% 374.34 14% 16%
ECDs 169.88 10% 240.02 11% 276.92 12% 362.48 14% 29%
Others 71.01 4% 83.78 4% 54.05 2% 36.88 1% -20%
Total 1,686.48 100% 2,245.71 100% 2,341.38 100% 2,593.02 100%
Source: Company’s Annual Reports, ICRA Online’s estimates
Acquired
Towers
and
Transform
ers Ltd.
and turned
it into a
profitably
manufactu
ring
Energy
Meters
Company
1983
Acquired
Electric
Control
&
Switchb
oards
1997
Acquired
controlling
stake in
Duke Arnics
Electronics
(P) Limited
and
controlling
interest in
an industry
major a
Standard
Electricals
Ltd.
2000
Acquired
business
of Havells
Industries
Limited,
MCCB of
Crabtree
2001
Acquired
lighting
business
of
Frankfurt
based
Sylvania
2007
Acquir
ed
Standa
rd
Electric
als
Limited
2010
Source: Company, ICRA Online
ICRA Equity Research Service Havells India Limited
26
With the acquisition of Sylvania, the share of the lighting division in the total revenues of Havells on a consolidated basis is
much higher at around 60% as compared with the 14% on a standalone basis.
The ECDs (or fans) segment has been the fastest growing segment for Havells (registering a CAGR of 29% over 2007-10),
backed by rising sales volumes.
In terms of profitability, the switchgears segment has the highest contribution margins of 36%, followed by ECDs with 28%,
lighting & fixtures with 19%, and cables with 8%.
Table 24: Segment-wise Trend in Contribution Margins
Segment 2006-07 2007-08 2008-09 2009-10
Switchgears 30% 31% 33% 36%
Cables & Wires 12% 9% 6% 8%
Lighting & Fixtures 11% 13% 19% 19%
ECDs 15% 22% 21% 28%
Source: Company Annual Reports; ICRA Online’s estimates
Havells‘ financial performance during the first nine months of the current financial year as compared to corresponding previous
is summarised in Table 25.
Table 25: Havells' Performance in 9M, 2010-11 as compared to 9M, 2009-10
Particulars 9M, 2009-10 9M, 2010-11 Change
Net Revenue 1773.4 2129.4 20%
EBITDA 226.4 242.6 7%
PBT 211.4 224.6 6%
Tax 49 51.6
PAT 162.4 173 7%
Source: Company’s Quarterly Reports
ICRA Equity Research Service Havells India Limited
27
Havells‘ segment-wise performance and ICRA‘s estimates for 2010-11 are summarised in Table 26.
Table 26: Segment-wise Performance in 9M, 2010-11
9M, 2009-10 9M, 2010--11 Remarks 2010-11(E)
Switchgears
Revenue 515.2 562.7 765
Contribution 190.3 202.2
Contribution margin (%) 36.9% 35.9%
Cables & Wires
Revenue 733.6 892.2 1,231
Contribution 69.6 73.7
Contribution margin (%) 9.5% 8.3%
Decline on account of adverse
movements in raw material prices
Lighting & Fixtures
Revenue 259.1 334.6 445
Contribution 51.2 59.4
Contribution margin (%) 19.7% 17.7%
Decline on account of increase in
outsourcing work for Sylvania
ECDs
Revenue 240.3 338.2 463
Contribution 68.0 88.2
Contribution margin (%) 28.3% 26.1%
Others
Revenue 25.2 1.7
Source: Company’s Quarterly Reports, ICRA Online’s estimates
Governance and Management Structure
Havells is managed by an 11-member Board, which includes six Independent Directors. While the promoter group holds
61.56% equity stake in the company, the rest is widely held and includes institutional investors. The disclosures by the
company through its Annual Reports and Quarterly Results are adequate. The accounting policies followed by Havells are in
line with standard practices and there has been no material auditor-qualification in recent periods.
Mr. Qimat Rai Gupta, the Chairman and Managing Director (CMD) of Havells, is a first-generation entrepreneur. While the
promoters—the CMD and Mr. Anil Gupta (the second generation)—are hands-on in the business, the company has an
experienced management team. Each of its four business segments is headed by experienced professionals, who manage the
operations independently under the broad guidance of the top management and the Board.
ICRA Equity Research Service Havells India Limited
28
Valuation Grading
In assessing a company's valuation, various parameters are looked at including the company's earnings and growth
prospects, its ability to generate free cash flows, and its capacity to generate returns from the capital invested. The valuation is
also benchmarked against an appropriate peer set or index. The opinion on a company's relative valuation is expressed using
the following five-point scale as follows:
Table 27: ICRA Equity Research Service—Valuation Grades
Valuation Grade Grade Implication
A Significantly undervalued
B Moderately undervalued
C Fairly valued
D Moderately overvalued
E Significantly overvalued
While assessing a company's relative valuation, the historical price volatility exhibited by the stock, besides its liquidity, is also
taken into account. The extent of overvaluation or undervaluation is adjusted for the relative volatility displayed by the stock.
Table 28: Havells India Limited—Relative Valuations (vis-a-vis peer companies)
Havells India
Limited*
Bajaj Electricals
Limited#
Crompton Greaves
Limited#
Asian Paints
(India)#
TTK Prestige Ltd#
Finolex Cables
Limited#
Market Cap
4,345.28 2,249.2 16,989.9 24,251.8 2,217.8 728.8
(Rs. crore)
CMP (Rs.) 348.3 227.6 264.9 2529.7 1959.1 47.7
2010-11
E
2011-12
E
2010-11
E
2011-12
E
2010-11
E
2011-12
E
2010-11
E
2011-12
E
2010-11
E
2011-12
E
2010-11
E
2011-12
E
Price/
Earnings
16.8 12.3 15.2 11.6 18.7 16.1 27.2 22.4 27.1 21.3 7.0 6.8
EV/
EBITDA
11.0 8.4 9.4 7.4 12.3 10.6 17.6 14.6 18.4 14.6 5.6 5.1
Price /
Sales
0.7 0.7 0.8 0.7 1.7 1.5 3.1 2.6 3.1 2.4 0.4 0.4
Price /
Book Value
7.1 4.7 3.7 2.9 5.2 4.1 10.9 8.6 12.2 8.7 1.0 0.9
Price/
Cash Flow
12.8 9.9 15.0 12.5 16.1 14.6 25.4 19.9 NA NA 8.1 3.9
Source: Bloomberg, ICRA Online’s estimates
* ICRA estimates based on share price as on 11 March 2011 on NSE; # Bloomberg Consensus estimates as on 11 March 2011
For valuation, we have compared Havells with other consumer durable companies (Bajaj Electricals, Crompton Greaves and
TTK Prestige), Asian Paints (which has similar demand drivers viz. urbanisation and investments in housing) and Finolex
Industries (cables and wires segment). Havells‘ current valuations are at a discount to its closest peer - Crompton Greaves.
We believe Havells‘ valuations have been impacted by the significant loss reported by Sylvania till 2009-10. The premium that
Crompton Greaves enjoys can be explained by the company‘s large size, well-known brand and presence in the high-growth
power systems business (although the segment posted weak results in Q3 2010-11). For TTK Prestige, the high valuations are
partly driven by a jump in profits caused by robust growth in sales and fall in input costs in 2009-10 (net profits more than
doubled). The valuation premium that Havells commands over Finolex Cables can be attributed to latter‘s presence only in the
cables business where valuations are lower because of the low profitability and earnings volatility in the sector. Asian Paints‘
premium valuations are partly explained by its strong brand name and market position. However, Havells is currently trading at
a slight premium to Bajaj Electricals on 2011-12 forward P/E basis.
ICRA Equity Research Service Havells India Limited
29
Table 29: Havells India Limited—Relative Valuations (vis-a-vis indices)
Havells India
Limited*
S&P CNX 100# BSE Midcap#
BSE Consumer
Durables#
Historical Avg.
Havells
Market Cap
4,317.8 - - - -
(Rs. crore)
CMP (Rs.) 346.1 5,426.0 6,604.7 5,791.4 -
2010-11E 2011-12E 2010-11E 2011-12E 2010-11E 2011-12E 2010-11E 2011-12E (5-Yrs)
Price/Earnings 16.8 12.3 16.5 13.7 11.7 9.3 20.8 16.4 13.15
EV/EBITDA 11.0 8.4 12.1 9.5 8.7 6.9 17.8 14.0 8.51
Price /Sales 0.7 0.7 1.8 1.6 0.9 0.8 1.1 0.9 0.47
Price /Book Value 7.1 4.7 2.7 2.3 1.5 1.3 5.0 4.1 4.07
Price/Cash Flow 12.8 9.9 11.8 10.1 8.5 7.1 28.3 32.1 -
Source: Bloomberg, ICRA Online’s estimates
* ICRA estimates based on share price as on 11 March 2011 on NSE; # Bloomberg Consensus estimates as on 11 March 2011
Havells‘ current valuations are at a discount to broader index– S&P CNX 100 and BSE Consumer Durables Index, though it is
quoting at a premium to the BSE Midcap Index.
Havells‘ EBITDA is expected to grow at a robust CAGR of 21.5% during 2011-13 period. The P/E of the company on
estimated 2010-11 earnings is currently about 16.8 times, which is modest considering the estimated EPS growth of 36% and
19% in 2011-12(E) and 2012-13(E) respectively.
Havells India Limited: Stock Performance over last three years
Figure 28: Havells versus CNX 100
Source: Bloomberg, ICRA Online’s estimates
Mar ’07–Mar ’08: Havells‘ acquired the lighting business of the Frankfurt-based Sylvania, the world‘s fourth largest player in
the lighting industry, for €234.5 million. Of the total funding requirement of €200 million, €80 million was funded by a recourse
debt that was backed by a guarantee from Havells while the balance €120 million was funded by non-recourse debt.
The initial impact of the acquisition on the stock price was positive, with Havells outperforming the CNX100 index until Mar ‘08.
2007-08 and 2008-09: Havells had to extend additional financial support to the subsidiary by way of equity infusion, which was
used for repayment of recourse debt and to meet cash flow mismatches during the slowdown beginning mid-2008. Till date,
0
10
20
30
40
50
60
70
80
90
100
0%
100%
200%
300%
400%
500%
600%
V
o
l
u
m
e
(
M
n
)
%
C
h
a
n
g
e
(
P
r
i
c
e
/
P
o
i
n
t
s
)
Volume in Mn Havells CNX100 Index
Apr ‘07: Acquisition of
Sylvania’s lighting
business
Jun 10: Sylvania
turns around
post-
restructuring
CY2008: Slowdown
in world economy;
Sylvania business
reports losses
Havells reports loss
at consolidated level
in 2008-09
Restructuring
measures undertaken
at Sylvania to reduce
operating leverage
ICRA Equity Research Service Havells India Limited
30
the company has invested €101.4million (~Rs.636 crore) in the subsidiary. This suppressed the RoE of Havells, as additional
investments have not yielded returns till 2009-10.
Havells significantly underperformed the CNX100 index during this period.
Mar ’09 Onwards: Havells identified high operating leverage as the key cause of losses and has undertaken various
measures to reduce manpower at the European facilities.
9M, 2010-11: Sylvania reports profits at the standalone levels for the first time since its acquisition by Havells.
Havells‘ current valuations are at a discount to most of its domestic competitors (Crompton Greaves, Asian Paints, and TTK
Prestige), as well as the S&P CNX 100 on 2011-12 PE basis. The company is also trading at marginal discount to its own five-
year-average historical multiples. Considering the expected upside from Sylvania and increasing share of profits expected
from the high-margin consumer electrical business, ICRA has assigned a Valuation Grade of ‘B’ on a grading scale of ?A to E‘
to Havells, which indicates that the company is ‘moderately undervalued’ on a relative basis.
ICRA Equity Research Service Havells India Limited
31
Annexure I: Index Comparison
CNX100 Index
We have compared the performance of Havells‘ stock with the CNX100 index since November 2005, and compared the
forward P/E estimates of the stock and the index. While Havells has outperformed the index over the last five years, it is
currently trading at a forward P/E of 12.3x, 10% discount in comparison to CNX100 which currently has a Forward P/E of
13.7x. However, Havells can be expected to register a stronger earnings growth over the next three years.
BSE Mid-Cap Index
? In comparison to BSE Mid-Cap Index, Havells 1-year Fwd P/E is at a premium of 32% at 12.3x, against 9.3x for the index.
This premium can be explained by the higher earnings growth expectations for Havells as compared to the broader BSE
Mid-Cap Index constituents.
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Figure 29: Havells vs. CNX 100: Price Movements
Source: Bloomberg, ICRA Online’s estimates
Figure 30: Havells vs. CNX 100: Forward P/E Ratios
Source: Bloomberg, ICRA Online’s estimates
Figure 31: Havells vs. BSE Mid-Cap Index: Price Movements
Source: Bloomberg, ICRA Online’s estimates
Figure 32: Havells vs. BSE Mid-Cap Index: 1-Yr Fwd P/E Ratios
Source: Bloomberg, ICRA Online’s estimates
ICRA Equity Research Service Havells India Limited
32
Annexure II: Havells (Consolidated)–P&L Estimates
Table 30: Key Financial Indicators – P&L Estimates (Consolidated)
Rs. Crore 2008-09A 2009-10A 2010-11E 2011-12E 2012-13E
Operating Income 5,477.5 5,431.5 5,928.2 6,462.3 7,058.9
EBITDA 271.7 311.4 479.8 628.7 708.1
Depreciation 90.5 83.7 81.7 85.9 88.5
EBIT 189.8 249.9 433.1 541.6 623.1
Interest Expenses 108.4 87.1 82.9 80.9 57.0
Other Income 8.6 22.2 35.0 -1.2 3.5
Extraordinary Items -198.7 0.0 0.0 10.4 0.0
PBT -117.3 162.8 350.1 471.0 566.2
PAT -160.2 69.6 257.9 352.0 420.2
No. of shares* (Cr.) 12.0 12.0 12.5 12.5 12.5
DPS 2.5 3.0 2.5 2.5 2.5
EPS - 5.8 20.7 28.2 33.7
CEPS - 12.74 27.22 35.09 40.76
Source: Company’s Annual Reports, ICRA Online’s estimates
* Adjusted
Annexure III: Havells (Consolidated)–Balance Sheet Estimates
Table 31: Key Financial Indicators – Balance Sheet Estimates (Consolidated)
Amounts in Rs. Crore 2008-09A 2009-10A 2010-11E 2011-12E 2012-13E
Assets
Net Fixed Assets 1,211.3 1,208.6 1,241.4 1,288.2 1,342.2
Capital Work-in-progress 30.8 33.6 75.0 80.0 50.0
Total Net Fixed Assets 1,242.1 1,242.2 1,316.4 1,368.2 1,392.2
Cash and Bank Balances 247.3 148.1 117.0 123.5 146.7
Receivables 757.3 698.2 772.6 799.5 838.9
Inventories 794.7 824.6 1,136.9 1,275.0 1,450.4
Loans & Advances 120.6 106.7 146.2 155.5 165.2
Other Current Assets 120.8 61.2 40.5 46.5 52.5
Total Assets 3,282.9 3,081.0 3,529.9 3,768.3 4,046.3
Liabilities
Net Worth 614.7 400.2 612.8 930.6 1,314.1
Total Debt 1,227.8 1,066.4 1,169.1 1,014.2 817.3
Deferred Tax Liability -9.7 26.6 27.0 27.0 27.0
Trade Creditors 622.2 649.4 730.4 790.4 863.8
Other Current Liabilities and Provisions 827.9 938.2 990.5 1,006.1 1,023.9
Total Liabilities 3,282.9 3,081.0 3,529.9 3,768.3 4,046.3
Source: Company’s Annual Reports, ICRA Online’s estimates
ICRA Equity Research Service Havells India Limited
33
Annexure IV: Havells (Consolidated)–Cash Flow Estimates
Table 32: Key Financial Indicators – Cash Flow Estimates (Consolidated)
Rs. Crore 2008-09A 2009-10A 2010-11E 2011-12E 2012-13E
PBT -117.3 162.8 350.1 471.0 566.2
Taxes Paid 42.9 93.2 92.2 119.1 146.0
Depreciation 90.5 83.7 81.7 85.9 88.5
Change in Net Working Capital 240.6 241.0 -307.5 -104.7 -139.2
Cash Flow from Operating Activities 170.9 394.3 32.1 333.2 369.4
Investments 3.2 0.0 -0.3 0.0 0.0
Capital Expenditure -165.7 -83.8 -155.9 -137.7 -112.5
Cash Flow from Investing Activities -162.5 -83.8 -156.2 -137.7 -112.5
Equity Raised/ (Buyback) 137.3 0.0 9.6 0.0 0.0
Loans Raised/ (Repaid) 79.0 -11.2 146.7 -37.6 23.3
Others (including Extra-ordinaries) 0.0 2.4 386.2 0.0 0.0
Dividend 34.3 26.9 0.3 36.5 36.5
Cash Flow from Financing Activities 44.6 -38.2 146.4 -74.1 -13.2
Opening Cash Balance 242.9 247.3 148.1 117.0 123.5
Closing Cash Balance 247.3 148.1 117.0 123.5 146.7
Source: Company’s Annual Reports, ICRA Online’s estimates
Annexure V: Havells (Consolidated)–Key Financial Ratios
Table 33: Key Financial Ratios (Consolidated)
2008-09A 2009-10A 2010-11E 2011-12E 2012-13E
Profitability Indicators
Sales Growth 9.5% -0.8% 9.1% 9.0% 9.2%
EBITDA Growth -22.2% 14.6% 54.1% 31.0% 12.6%
EPS Growth - 257.6% 36.5% 19.4%
Cash EPS Growth - 113.6% 28.9% 16.2%
EBITDA Margin 5.0% 5.7% 8.1% 9.7% 10.0%
EBIT Margin 3.5% 4.6% 7.3% 8.4% 8.8%
PAT margin -2.9% 1.3% 4.4% 5.4% 6.0%
RoE - 13.7% 50.9% 45.6% 37.4%
ROCE - 15.3% 27.1% 30.4% 31.2%
Liquidity Ratios
Debtor Days 49.4 46.2 47.6 45.2 43.4
Inventory Days 71.1 75.8 97.5 101.7 106.1
Net Working Capital/ Sales 0.1 0.0 0.1 0.1 0.1
Capitalization Ratios
Total Debt/ Equity 2.0 2.7 1.9 1.1 0.6
Interest Coverage 2.5 3.6 5.8 7.8 12.4
Total Debt/ EBITDA 4.5 3.4 2.4 1.6 1.2
Valuation Ratios
Price/ Sales 0.8 0.8 0.7 0.7 0.6
Price/ Earnings - - 16.8 12.3 10.3
Price/ Book Value 6.8 10.5 7.1 4.7 3.3
EV/ EBITDA 19.4 16.9 11.0 8.4 7.4
Source: Company’s Annual Reports, ICRA Online’s estimates
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