31 July 2013
1QFY14 Results Update | Sector:
Capital Goods
Havells India
BSE SENSEX
19,346
Bloomberg
Equity Shares (m)
M.Cap. (INR b) / (USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
S&P CNX
5,742
HAVL IN
124.8
75.9/1.3
817/528
-17/-5/1
CMP: INR608
TP: INR625
Downgrade to Neutral
Financials & Valuation (INR b)
Y/E MAR
Net Sales
EBITDA
Adj PAT
Adj.EPS
(INR)
Growth
(%)
BV/Share
(INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (X)
2013
72.5
6.7
4.3
34.4
1.0
99.2
29.8
21.4
17.7
6.1
2014E 2015E
76.6
82.1
6.8
4.4
35.1
1.9
139.4
25.1
19.5
17.3
4.4
7.9
5.0
39.9
13.8
167.7
23.8
19.2
15.2
3.6
1QFY14 revenue growth at 1.8%, a negative surprise; operating performance
in line:
HAVL’s operating performance in 1QFY14 was in line with our estimates,
with adjusted EBITDA at INR1.4b (up 10% YoY) and adjusted net profit at INR1b
(up 16.9% YoY). However, revenue growth at 1.8% YoY is a negative surprise
and much lower than our estimate of 16.6% YoY. Adjusted for the 15% revenue
decline in industrial cables business, even the consumer centric business
revenue growth at 7% YoY is significantly lower than estimates. This is due to
seasonal weather fluctuations, slowdown in consumption demand and
aggressive postures by competitors in segments like fans etc.
Sylvania’s performance was again in line with expectations
and was impacted
by muted demand environment in Europe (revenue down 1% YoY) and currency
volatility in LatAm (revenue down 1% YoY, margins at 4.6% v/s 7.3% YoY).
Sylvania revenue was down 1% YoY in euro terms, while Adj EBITDA margin
stood at 3.9% (down 144bp YoY). However, we believe that in local currency,
the revenue growth is possibly ~3-5%.
FY14 guidance lowered:
Standalone revenue expected to grow at 9-10% v/s
earlier expectation of 14-15% growth. Consumer business growth is expected at
12-14% v/s earlier expectations of 17-18%. Switchgear and consumer durables
are expected to report 14-15% growth, while lighting business should report 5%
growth (as ~30% of the business is professional luminaries, which was impacted
by weak industrial and commercial demand).
Cut earnings estimates, downgrade to Neutral:
We cut estimates and factor
consolidated EPS of INR34.4/sh in FY14E (cutting est. by 14.6%) and INR39.9/sh
in FY15E (cutting est. by 13.7%). We also downgrade the stock to
Neutral
and
reduce our target price to INR625/sh (based on 16x FY15E PER for the
standalone business and 8x EV/EBITDA for Sylvania).
Satyam Agarwal
(AgarwalS@MotilalOswal.com); +91 22 3982 5410
Nirav Vasa
(Nirav.Vasa@MotilalOswal.com); +91 22 3982 5422
Investors are advised to refer through disclosures made at the end of the Research Report.

Havells India
1QFY14 revenue growth at 1.8% is shocking, operating performance in-line
HAVL operating performance in 1QFY14 was in-line with our estimates with
adjusted EBIDTA at INR1.4b (up 10% YoY) and adjusted Net Profit at INR1.0b (up
16.9% YoY). However, revenue growth at 1.8% YoY is shocking and is much
lower than our estimates of 16.6% YoY. Adjusted for 15% revenue decline in
industrial cables business, even the consumer centric business revenue growth
at 7% YoY is significantly lower than estimates.
We understand that the FMEG industry growth has not declined in the same
proportion and the muted revenue growth of HAVL is a combined result of: i)
slowdown in consumption spending and the demand environment is challenging
ii) weather variations entailing short summer in 2013 with monsoons in mid
June (vs extended summer in 2012 leading to a 42% fan growth, 35% in wires
and 24% in lighting in 1QFY13); we understand that HAVL is the worst impacted
in the FMEG industry given that North and East where the YoY impact has been
the maximum contributes 55-60% of HAVL revenues. iii) aggressive postures by
competitors in specific segments like fans, etc.
Sylvania’s performance was again in-line with expectations, and was impacted
by muted demand environment in Europe (revenues down 1% YoY) and
currency volatility in LatAm (revenues down 1% YoY, margins at 4.6%, vs 7.3%
YoY). Sylvania revenues were down 1% YoY in euro terms while Adj EBITDA
margins stood at 3.9% (down 144bps YoY). However, we understand that in
local currency, the revenue growth is possibly ~3-5%.
We had highlighted few of these constraints in our recent update (June 2013):
“Well-fortified stance, but headwinds increasing...Demand slowdown in India &
Europe; Currency volatility in LatAm”. However, the slowdown in consumer
business was much below our estimates and the stock reacted sharply (down
20% post results). In May 2013, the management had guided for 14-15% YoY
growth in standalone business during FY14 which has now been scaled down to
9-10% growth. Also, the consumer business is expected to grow by 12-14% in
remaining quarters of FY14, while industrial business should grow at 5%.
Sylvania is expected to maintain revenues (in Euro terms), and EBITDA margins
are now expected at ~5.5% (vs earlier guidance of 6%).
Margins improved given mix change and increased in-house
manufacturing
Sales growth of just 1.8% YoY in 1QFY14 is shocking
Source: Company, MOSL
Source: Company, MOSL
31 July 2013
2

Havells India
Segmental analysis: Industrial business declines, consumer business
revenue growth at just 7%
In the standalone business, Switchgear revenues were up 14.3% YoY; however
excluding sales from Reo switches (INR176m, launched in Oct 2012), revenue
growth was just 7% YoY. Cables and wires sales declined 6% YoY (due to drop in
Industrial Cables, down 15% YoY and wires were up just 5%), while consumer
durable sales grew just 5.8% YoY. Lighting business reported sales decline of
1.1% and the management explained that the decline is largely in professional
luminaries (~30% of the business) which is impacted by poor industrial and
commercial spending.
Contribution margins in Switchgear business stood at 36.1%, down 30bps YoY
and is possibly impacted by lower margin in REO switches (given the initial
launch), while Cables and Wires business’ contribution margins stood at 10%,up
20bp YoY and has improved given drop in sales of industrial cables which has
much poor profitability. Contribution margins in Consumer Durables stood at
26.9%, up 153bp YoY. Lighting business has witnessed strong improvement with
contribution margins at 25.1% (up 209bps YoY) and we understand that this is
partly being driven by change in product mix towards CFLs / consumer
luminaries and increased in-house production post commissioning of the
Neemrana plant.
We would be closely watchful of the margin trends, as we believe that if the
consumption slowdown accentuates, possibilities of aggressive postures by
competitors cannot be ruled out and this will impact the industry profit pool.
Segmental Performance
Y/E March
1Q
Sales (INR M)
Switchgear
Cables & Wires
Consumer Durable
Lighting & Fixtures
% YoY
Switchgear
Cables & Wires
Consumer Durable
Lighting & Fixtures
Contribution Margin (%)
Switchgear
Cables & Wires
Consumer Durable
Lighting & Fixtures
2,415
4,313
2,102
1,498
FY13
2Q
2,551
3,907
1,623
1,561
3Q
2,697
4,085
2,032
1,770
4Q
3,118
4,620
2,136
1,823
FY14
1Q
2,760
4,049
2,223
1,482
14.6
21.0
56.6
23.9
15.0
5.8
33.1
13.6
19.3
4.6
51.0
22.2
31.2
-3.1
17.8
20.6
14.3
-6.1
5.8
-1.1
36.4
9.8
25.3
23.0
33.2
10.8
22.6
22.5
35.2
10.1
25.0
23.9
31.3
36.1
6.0
10.0
26.7
26.9
24.6
25.1
Source: Company, MOSL
31 July 2013
3

Havells India
Sylvania: impacted by demand headwinds in Europe and currency volatility
in LATAM
In Sylvania, sales in Europe were down 1% during the quarter (vs down 6.5% in
FY13) while growth in LATAM region was impacted, down 1.3% YoY (vs +4.4% in
FY13) partly due to adverse currency movements. Adj EBITDA margins have
declined to 3.9% (down 144bp YoY) and are impacted both in Europe (down
130bp YoY) and LATAM (down 270bp QoQ). Interest cost at Euro 1.2m has
significantly declined from Euro 2.1m during 1QFY13 due to reduction in gross
debt from Euro 119m to Euro88m.
We understand that overseas business faces multiple headwinds: i) Demand in
Europe is impacted by constrained spending (and is also reflected with the
Construction Volume Index of Production, as reported by Eurostat, declining
6.1% 3mma in May 2013, and is similar to the de-growth of ~7-8% witnessed
during 2009/2010) ii) Margins in LatAm are impacted by currency volatility, with
key markets like Columbia, Brazil and Argentina, contributing ~50-55% of LatAm
revenues, witnessing sharp currency depreciation vs USD: Argentina 17%, Brazil
11%, Columbia 6% etc. Sylvania is impacted as it procures from China in USD and
sells in local currency; and the management stated that the attempt is to pass
on the cost increases in the market. This has also impacted demand across
regions.
Also, we believe that the currency volatility could well continue to impact
2QFY14 performance. Key things to monitor: increasing share of fixtures
particularly in LatAm as 50% of production from Neemrana is earmarked for
Sylvania and cautious expansion beyond Europe and LatAm (in other markets
notably ASEAN and Africa).
2Q
FY13
109.6
-5.1
3.6
3.3
0.0
3.6
1.9
3.0
0.0
0.2
24.3
23.2
0.4
22.8
-24.4
-1.6
3Q
FY13
109.7
-3.7
7.0
6.4
2.0
5.0
1.5
2.0
0.5
-1.0
1.5
2.5
-0.5
3.0
1.0
4.0
4Q
FY13
113.2
1.1
6.9
6.1
-1.2
8.1
2.2
0.6
-0.4
-0.1
0.0
4.8
-1.3
6.1
-0.7
5.4
1Q
FY14
106.7
-1.1
4.2
3.9
0.0
4.2
1.7
1.4
-0.2
-1.5
0.0
-0.2
0.6
-0.8
1.5
0.7
2Q
FY14
110.5
0.8
3.1
2.8
0.0
3.1
3Q
FY14
110.0
0.3
4.0
3.7
0.0
4.0
4Q
FY14
117.0
3.3
6.4
5.5
0.0
6.4
Sylvania Quarterly performance (Euro m)
1Q
FY13
Revenues
107.9
Growth %
1.1
Normalized EBITDA
Margin %
Pension Liability (Benefit) / loss
Reported EBITDA
Depreciation
Interest
Other Income/ (loss)
Forex gain/(loss)
Exceptional gain/(loss)
Reported PBT
Tax
Reported PAT
Less: exceptional (gain) / loss
Adjusted Net Profit
5.8
5.4
0.0
5.8
1.8
6.3
3.5
-1.7
0.0
-0.5
0.9
-1.4
1.8
0.4
1.8
1.9
1.9
1.1
1.1
1.2
0.5
0.5
0.8
0.0
0.0
0.0
0.0
0.0
0.0
0.7
1.5
4.1
0.3
0.6
1.0
0.4
0.9
3.1
0.0
0.0
0.0
0.4
0.9
3.1
Source: Company, MOSL
31 July 2013
4

Havells India
Other takeaways
Net working capital in the standalone business stood at 11 days of sales (vs 13
days as at the end of 4QFY13). Net working capital in Sylvania has declined to 37
days of sales vs 43 days at the end of 4QFY13 and 61 days YoY. Net cash from
operations in standalone business have increased to INR1.6b in 1QFY14 (up
from INR1.3b YoY).
FY14 Guidance:
Standalone revenues expected to grow at 9-10% vs earlier
expectations of 14-15% growth. Consumer business growth is expected at 12% -
14% vs earlier expectations of 17-18%. Switchgear and consumer durables are
expected to report 14-15% growth, while lighting business should report ~5%
growth (as ~30% of the business is professional luminaries, which has got
impacted by weak industrial and commercial demand). Industrial cables
business is also expected to report growth of 5% vs decline of 15% in 1QFY14.
Management expects to maintain 1QFY14 margins in domestic operations, and
is being supported by initiatives like efficiency improvement initiatives, in-house
manufacturing, etc.
HAVL is trying to improve its market share in Western India, where its market
share is lower and these segments are dominated by regional players. HAVL is
also planning to test launch pumps to broadbase the product portfolio. Reo
switches are expected to contribute INR1b to revenues in FY14.
Cutting Earnings Estimates, Downgrade Rating
We are cutting estimates, and now factor in consolidated EPS of INR34.4/sh in
FY14 (cutting est by 14.6%, growth of 1.9% YoY) and INR39.9/sh in FY15 (cutting
est by 13.7%, growth of 13.8%). We model standalone revenue CAGR at 8.8%
and EBIDTA margin expansion of 20bps.
The key risks are more accentuated slowdown in domestic consumer demand
and possibilities of aggressive postures by competitors impacting margins.
We downgrade the stock to Neutral, and lower our price target to INR625/sh
(based on 16x FY15 PER for standalone business and 8x EV/EBIDTA for Sylvania).
We expect consolidated earnings CAGR of 8% till FY15.
31 July 2013
5

Havells India
Havells India: an investment profile
Company description
Havells India is one of the largest electrical company in
India, and also has a presence in Europe / LatAm in
lighting business through Sylvania. It owns some of the
prestigious global brands like Crabtree, Sylvania,
Concord, Luminance, Linolite, & SLI Lighting.
Key investment risks
Key investment arguments
Domestic business:
HAVL has centered its business
model around dealers, which has also enabled the
company to introduce new products. Launch of
mass market switches ‘Reo’, Galaxy stores, etc
provide opportunities to expand the distribution
reach.
Overseas business:
Sylvania's performance has
been impacted by currency volatility in LatAm and
poor demand in Europe. Key things to monitor will
be: increasing share of fixtures particularly in LatAm
as 50% of production from Neemrana is earmarked
for Sylvania and cautious expansion beyond Europe
and LatAm (in other markets notably ASEAN and
Africa).
New products:
New products in consumer durables
/ REO switches are showing encouraging response.
Plans to test launch pumps in FY14 and also Sylvania
in India.
Havells
Crompton
12.3
8.3
1.4
1.4
0.5
0.4
7.3
5.0
Slowdown in consumption demand and increased
competition:
Most of HAVL's markets are prone to
price wars, especially cables, fans and CFL, where
there is considerable competition. Aggressive
postures in an environment of weak demand could
impact margins.
Prolonged slowdown in European region:
HAVL has
significant operations in Europe through its
subsidiary Sylvania. Any prolonged slowdown in the
region will have adverse impact on earnings.
Recent developments
For Sylvania, the strategy is being reoriented
towards Asia, and the target is to increase revenue
contribution to 20% vs 5% currently. During FY14,
Sylvania could be launched in India and also China.
Increasing share of fixtures particularly in LatAm
Valuation and view
Cut earnings by 14-15% for FY14/15.
Downgrade rating to
Neutral
Sector view
Cautious in the medium term.
Comparative Valuation
L&T
17.7
14.8
2.6
2.3
1.3
1.2
12.5
11.2
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
17.3
15.2
4.4
3.6
1.0
0.9
11.5
9.5
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY14
FY15
34.4
39.9
Consensus
Forecast
40.0
48.0
Variation
(%)
-14.0
-16.8
Target price and recommendation
Current
Price (INR)
608
Target
Price (INR)
625
Upside
(%)
2.8
Reco.
Neutral
Shareholding pattern (%)
Jun-13
Promoter
Domestic Inst
Foreign
Others
61.6
1.0
31.2
6.3
Mar-13
61.6
1.0
30.9
6.5
Jun-12
61.6
0.9
30.8
6.7
Stock performance (1 year)
31 July 2013
6

Havells India
Financials and valuation
31 July 2013
7

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Havells India
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HAVELLS INDIA LTD
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31 July 2013
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8