BSE SENSEX
32,802
S&P CNX
10,118
Havells India
CMP: INR507
TP: INR590(+16%)
Upgrade to Buy
Expanding share in the electrical sector in India
Entry into durables adds another leg of growth
6 December 2017
Update | Sector: Capital Goods
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
HAVL IN
625.0
564/311
4/0/24
316.3
4.9
656
38.4
Financials Snapshot (INR b)
2018E 2019E 2020E
Y/E Mar
Net Sales
83.2 100.4 114.7
EBITDA
10.7 13.6
15.8
Adj PAT
7.2
8.9
10.5
Adj EPS (INR)
11.5 14.3
16.8
EPS Gr. (%)
20.5 23.9
17.7
BV/Sh(INR)
59.0 67.2
76.8
RoE (%)
19.5 21.2
21.9
RoCE (%)
19.7 21.9
22.8
Payout (%)
42.8 42.8
42.8
Valuations
P/E (x)
44.3 35.7
30.4
P/BV (x)
8.6
7.6
6.6
EV/EBITDA (x)
29.0 22.5
19.0
Div Yield (%)
0.8
1.0
1.2
Shareholding pattern (%)
As On
Sep-17 Jun-17 Sep-16
Promoter
61.6
61.6
61.6
DII
3.5
3.2
2.9
FII
25.7
26.3
26.7
Others
9.3
8.9
8.8
FII Includes depository receipts
Stock Performance (1-year)
Havells India
Sensex - Rebased
600
525
450
375
300
Continuously entering new categories to drive growth:
Havells India (HAVL) has
consistently identified and entered new product categories over the years (see
Exhibit 1). Some of the key categories where it has made a successful entry include
lighting in 2003, premium fans in 2005, water heaters in 2010, REO Switches in
2012, air coolers in 2014, re-launch of the
Standard
brand in 2016 (target of
INR10b by FY20) and EHV cables. The recent acquisition of Lloyd gives HAVL a
strong foothold in the fast growing durables segment – the aim is to double
revenue in the next three years through new product launches, expansion of
existing product portfolio and increased channel penetration (in talks with large
format stores to stock Lloyd products).
GST rate cuts to accelerate market share gains from the unorganized sector:
The
government has cut GST rates across electrical categories from 28% to 18% and
this should accelerate the shift towards the organized sector, especially in
categories like cables/wires, fans, switches and lighting, where the share of the
unorganized segment is high. Implementation of the E-waybill from April 2018
would further accelerate this transition. Media reports suggest a cut in rates from
28% to 18% for durables as well – this would have a positive impact on Lloyd’s sales
in air-conditioners for the upcoming summer season in 2018.
EESL threat recedes; LED bulb prices stabilizing:
The market has been concerned
on the impact of EESL’s bulk sourcing on prices of fans, lighting products and
durables (air conditioners, washing machines and refrigerators). Our recent
meeting with EESL indicates that its focus has now shifted to electric vehicles,
smart meters and solar rooftops from fans and lighting (LED bulbs, streetlights).
This is positive for electrical companies like HAVL that can leverage their strong
channel relationships to drive sales. We believe the change in EESL’s stance is
driven by (a) installation issues with durables unlike LED lamps, which are ‘plug and
play’, (b) regular servicing requirements of durables, and (c) high cost of raising
product awareness with the customer.
Margins revert to normalized levels post demonetization/GST disruption:
HAVL’s
EBITDA margin had dipped to 12.7% in 3QFY17, as discounts/schemes were offered
to counter the impact of demonetization. EBITDA margin further dipped to 10% in
1QFY18 on GST-related destocking and delays in passing on RM cost hikes to the
channel. With all the demonetization-related schemes being rolled back and price
hikes taken, EBITDA margin has bounced back to 15.8% in 2QFY18 and should
sustain at the historical 13.5-14%. We expect sales growth to accelerate, led by (a)
lighting, consumer durables, and Lloyd Electric, and (b) market share gains in
cables/wires and switches.
Upgrade to Buy; retain TP at INR590 (35x Dec’19 EPS):
We expect HAVL to report
21% EPS CAGR over FY17-20, with EBITDA margin expanding 40bp to 13.8%. With
the Lloyd acquisition, HAVL has turned itself into a complete electricals and
durables behemoth, and is well positioned to tap into the under-penetrated Indian
market. Our target price is based on 35x Dec’19 EPS (in line with Crompton
Consumer Electricals).
Ankur Sharma – Research analyst
(Ankur.VSharma@MotilalOswal.com); +91 22 6129 1556
Amit Shah – Research analyst
(Amit.Shah@MotilalOswal.com); +91 22 6129 1543
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.