Havells India
BSE SENSEX
28,662
S&P CNX
8,879
20 February 2017
Update
| Sector:
Capital Goods
CMP: INR413
TP: INR425(+3%) Downgrade to Neutral
Acquisition-led Consumer Durables foray a positive
However, current stock price leaves little upside; downgrading to Neutral
Havells board approves acquisition of Lloyd’s consumer durables business:
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 (%)
Financials Snapshot (INR b)
Y/E Mar
2017E 2018E
Net Sales
63.1
96.7
EBITDA
7.9
11.8
PAT
5.6
7.5
EPS (INR)
8.9
12.1
Gr. (%)
15.0
35.0
BV/Sh (INR)
44.1
49.1
RoE (%)
20.3
24.6
RoCE (%)
18.1
22.5
P/E (x)
46.2
34.2
P/BV (x)
9.4
8.4
HAVL IN
625
460/268
-3/-2/26
259.0
3.9
623
38.4
Havells India’s (HAVL) board has approved the acquisition of Lloyd Electric’s
consumer durables business for an enterprise value of INR16b on a debt-free/cash-
free basis, subject to closing adjustments. The company plans to finance the
transaction via debt and internal accruals. This acquisition is expected to be
completed by March 2017 upon completion of due diligence.
Acquisition to help Havells foray into consumer durables…:
The acquisition
2019E
112.8
14.0
8.8
14.1
17.0
56.2
25.1
24.1
29.3
7.4
will help HAVL to foray into the consumer durables business (air conditioners,
television, washing machines, refrigerators, etc.). Currently estimated at INR830b
(Exhibit 1), the consumer durables industry size is expected to grow in double digits
over next few years, given the low penetration levels, increasing urbanization, and
the aspirational and expanding middle-class.
…and gain access to Lloyd’s distribution network, service centers and
brand:
HAVL is acquiring the right to the ‘Lloyd’ brand, as well as its distribution
Shareholding pattern (%)
As On
Dec-16 Sep-16 Dec-15
Promoter
61.6
61.6
61.6
DII
2.7
2.9
4.1
FII
26.2
26.7
25.1
Others
9.5
8.8
9.1
FII Includes depository receipts
Stock Performance (1-year)
Havells India
Sensex - Rebased
450
400
350
300
250
network and service centers. Lloyd has 10,000+ direct/indirect dealer network
spread across India, 34 sales branches, 485 authorized service centers and 31
company-owned service centers. With a 14% share, Lloyd is among the top four
players in the room air conditioner market. It has grown impressively over past
three years, with ~70-75% of sales derived from air conditioners and the rest from
TVs/washing machines.
Valuations reasonable, given lower margins and return ratios of Lloyd:
HAVL would pay INR16b to acquire Lloyd’s consumer durable business, implying
P/sales of 0.9x/0.7x/0.6x on FY17/18/19E sales and P/E of 22x/16.8x/14x on
FY17/18/19E EPS. This appears favorable compared to Voltas and Blue Star, whose
UCP businesses are valued at ~22-25x FY19E EPS. However, RoCEs and margins for
Voltas and Blue Star are higher as well. We have not assumed any interest costs
related to working capital in our estimates; management commented that working
capital is in line with industry peers.
Valuation and view
.
We marginally tweak our FY18/19 estimates to factor in the
said acquisition. We value HAVL at 30x FY19E EPS (v/s 32x earlier) to account for
lower margins and return ratios post Lloyd acquisition, arriving at a target price of
INR425. We would closely look at the progress made on Lloyd integration and
improvement in margins/working capital before turning positive on the stock.
Moreover, the run-up in the stock price over the past two months leaves little
upside to our target price. We thus downgrade the stock to
Neutral.
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.
Ankur Sharma
(Ankur.VSharma@MotilalOswal.com); +91 22 6129 1556
Amit Shah
(Amit.Shah@MotilalOswal.com); +91 22 6129 1543

Havells India
Havells to acquire Lloyd’s consumer durables business for INR16b
HAVL’s board has approved the acquisition of Lloyd’s consumer durables
business for an enterprise value of INR16b on a debt-free/cash-free basis,
subject to closing adjustments. The company plans to finance the transaction via
debt and internal accruals. This acquisition is expected to be completed by
March 2017 upon completion of due diligence.
The acquisition will provide HAVL with access to Lloyd’s well-established
infrastructure, people, distribution and service network, including and but
limited to absolute, exclusive ownership and right to all intellectual property of
Brand Lloyd logo, trademark, goodwill and attendant rights. The acquisition
includes businesses such as aircon, TV, washing machines and other household
appliances, including the Lloyd brand and distribution network. However,
manufacturing facilities of Lloyd are not part of the deal. HAVL will sign a supply
agreement with Lloyd for ACs until it sets up its own facilities.
As of end-FY16, Lloyd had 10,000+ direct/indirect dealer network spread across
India, 34 sales branches, 485 authorized service centers and 31 company-owned
service centers. With a 14% share, Lloyd is among the top 4-5 players in the
room ACs market. It has grown impressively over past three years, with ~70-75%
of sales derived from air conditioners and the rest from TVs/washing machines.
The acquisition will help HAVL to foray into the consumer durables business.
Currently estimated at INR830b (Exhibit 1), the consumer durables industry size
is expected to grow in double digits over next few years, given the low
penetration levels, increasing urbanization, and the aspirational and expanding
middle-class. The urban market accounts for 67% of consumer durables
revenues and the rural market for the remaining 33%.
The acquisition would make HAVL a credible consumer durables company with a
very strong portfolio in electricals. We note that the consumer durables market
is dominated by the Korean companies (LG, Samsung), along with a few Indian
names like Voltas, LG and Blue Star.
Value (INR m)
100,000
122,000
93,400
514,000
829,400
Source: MOSL, Industry Research
Acquisition to help Havells foray into consumer durables
Exhibit 1: Consumer durables industry market size (INR m)
Name of the segment
Air conditioners
Washing machine
Fridges
Television
Total
Exhibit 2: Penetration of product categories in India
Product
Fans
Water heater
Mixer-Grinder
TV
Fridge
Air cooler
Washing Machine
Air conditioner
Penetration
80%
10%
35%
77%
33%
8-10%
13%
3-4%
Source: MOSL, Industry Research
20 February 2017
2

Havells India
Acquisition to provide access to Lloyd’s well-established infrastructure and
brand
The acquisition will provide HAVL with access to Lloyd’s well-established
infrastructure, people, distribution and service network, including and but
limited to absolute, exclusive ownership and right to all intellectual property of
Brand Lloyd logo, trademark, goodwill and attendant rights. As of end-FY16,
Lloyd had 10,000+ direct/indirect dealer network spread across India, 34 sales
branches, 485 authorized service centers and 31 company-owned service
centers. With a 14% share, Lloyd is among the top 4-5 players in the room ACs
market. It has grown impressively over past three years, with ~70-75% of sales
derived from air conditioners and the rest from TVs/washing machines.
Exhibit 3: No. of service centers of key air condition players in India
Name of the company
Voltas
Blue Star
Hitachi home and Life
Daikin
LG
Carrier
Lloyd Electric
Panasonic
Nos (FY16)
200
25
41
75
194
175
485
100
Source: MOSL, Company
Exhibit 4: Dealer touch points of various players in India
Company
Voltas
Blue Star
Daikin
Videocon
Hitachi
Lloyd Electric
Symphony
Carrier Midea
Touch points
>12,000
3800
4000
7000
4000
>10,000
23,400
3,200
Source: MOSL, Company
Tier 3/4 cities – a traditional focus area for Lloyd, but metro/tier 1
contribution has started to increase:
Historically, Lloyd has focused on tier 3/4
cities instead of metros (a focus area for peers). In FY16, ~33% of Lloyd’s sales
were derived from the top eight cities v/s industry average of 45%. However,
this contribution rose to 40% in 2QFY17 due to its increased focus on
metros/tier 1 cities, where brand and quality command utmost importance. It
has been able to penetrate into metros/tier 1 cities via a) strong advertising
campaigns (signed up Virat Kohli/RCB along with Shruti Hasan) and brand
campaign around ‘Khushiyon Ki Guarantee’ (intends to spend ~4% of sales on
advertising); b) strong focus on product quality/reliability; c) higher dealer
margins (in CY16, under its Lloyd Diamond Celebration Offer, it provided
additional 8-10% margins to dealers, which helped it gain share. However, this
also meant lower margins v/s peers since its cost structure is broadly similar to
peers); and d) focus on service via its “MyLloyd app” (allows users to register
complaints within 10 seconds, get warranty service and also trade in old
products).
3
20 February 2017

Havells India
Lloyd’s market share gains could be difficult to sustain given low pricing and
high dealer margins:
Our channel checks indicate that Lloyd has been able to
grow market share over last two years primarily by offering a) lower prices
versus peers and b) higher dealer margins. This is reflected in the lower EBIT
margin for Lloyd (7.6% in FY16 v/s 13% for Voltas and 10% for Blue Star). Given
the commoditized nature of the business, it may be difficult to expand margins
as it would lead to market share loss for the company.
Valuations and view
Havells would pay INR16b to acquire Lloyd’s consumer durable business,
implying P/sales of 0.9x/0.7x/0.6x FY17/18/19E sales and P/E of 22x/16.8x/14x
FY17/18/19E EPS. This is favorable compared to Voltas and Blue Star, whose
UCP businesses are valued at ~22-25x FY19E EPS. However, RoCEs and margins
for Voltas and Blue Star are higher as well. We have not assumed any interest
costs related to working capital in our estimates, but note that Lloyd has
working capital at ~50% of sales and its debt of ~INR8b is primarily related to
short-term working capital.
FY17
16,000
720
22.2
0.9
14.7
FY18
952
16.8
0.7
11.3
FY19
1143
14.0
0.6
9.4
Exhibit 5: Brief valuation of Lloyd’s consumer durables segment
Description (INR m)
Enterprise Value
Consumer Durable Segment PAT
P/E
P/Sales
EV/EBIDTA
Source: MOSL, Company
Exhibit 6: Implication of the acquisition on Havells P&L
Havells - Impact on P/L
Lloyd Consumer durable sales
Lloyd EBIT
Margin(%)
Interest Expenses
Loss of other income
PBT
Tax
PAT
Havells PAT
% change
FY18
24,050
1,443
6.0%
(660)
(700)
83
28
55
7,472
1%
FY19 Comments
28,860
1,732
6.0%
(660) Additional debt of INR6b to fund the deal
(700) Loss of interest income on INR10b paid in cash
372
126
245
8,603
3%
Source: MOSL, Company
20 February 2017
4

Havells India
About Lloyd Electric and Engineering Ltd.
The company has been present in the air conditioning industry for more than
two decades. With its capacity to design, develop, manufacture and maintain
highly engineered HVAC systems, Lloyd is also present in the HVAC systems
space and in the heat transfer industry.
The company is the largest manufacturer of evaporators and condenser coils for
air conditioners and heat exchangers/radiators serving the entire spectrum of
the heating, ventilation, air conditioning and refrigeration (HVAC&R) industry.
For FY16, on a standalone basis, Lloyd derived 24% of its total revenue from the
sale of evaporators, heat exchangers and components.
Lloyd is also an original equipment manufacturer (OEM) supplier to
manufacturers of air conditioners in India, and provides customized
airconditioning solutions for institutional clients like Indian Railways and Metro
Rail. For FY16, on a standalone basis, 17% of its revenue was derived from sale
of air conditioners to OEMs, retail customers and packaged air conditioning,
while 59% was contributed by the Lloyd branded products portfolio.
20 February 2017
5

Havells India
Lloyd Electric and Engineering Financials
Lloyd Electric
Sales
YoY (%)
Cost RM consumed
Purchased of stock in trade
Change in inventory
Gross Profit
Margin(%)
Employee cost
Other expenses
EBITDA
Margin
Depreciation
EBIT
Margin
Other income
Interest
PBT
Exceptional
Tax
Recurring PAT
Margin(%)
Reported PAT
EPS
YoY (%)
Segmental Sales
Consumer Durables
OEM and Packaged Aircon
Heat Exchangers and Components
Less: Inter segmental
Total
YoY Sales Growth(%)
Consumer Durables
OEM and Packaged Aircon
Heat Exchangers and Components
EBIT
Consumer Durables
OEM and Packaged Aircon
Heat Exchangers and Components
Total
Less: Other unallocable
Less: Exceptional items
Less: Other Income
Reported EBIT
FY12
9,021
(7,913)
(834)
1,345
1,619
18%
(250)
(463)
905
10.0%
-191
714
8%
30
-291
453
-117
336
3.7%
336
8.2
FY13
11,694
30%
(9,621)
(404)
762
2,431
21%
(344)
(687)
1400
12.0%
-223
1177
10%
59
-508
729
-167
562
4.8%
562
13.8
67%
694
8,228
2,772
11,694
-14%
46%
7%
FY14
14,397
23%
(12,213)
(449)
1,385
3,120
22%
(390)
(954)
1776
12.3%
-238
1538
11%
120
-840
818
-57
761
5.3%
761
18.7
36%
2,520
9,347
2,530
14,397
263%
14%
-9%
FY15
18,350
27%
(14,655)
(599)
947
4,042
22%
(530)
(1,260)
2253
12.3%
-340
1913
10%
46
-928
1030
-214
817
4.4%
817
20.0
7%
9,618
7,512
5,812
(4,592)
18,350
282%
-20%
130%
963
396
687
2,045
(87)
-30
(30)
-59
(59)
-120
(120)
-46
1,913
FY16
23,825
30%
(17,002)
(1,427)
49
5,445
23%
(722)
(1,370)
3353
14.1%
-342
3011
13%
10
-1047
1974
-458
-237
1,279
5.4%
561
31.3
57%
13,842
8,508
5,888
(4,413)
23,825
44%
13%
1%
1,057
502
818
2,376
(73)
695
-10
2,988
FY17
30,479
28%
(24,726)
5,753
19%
(938)
(1,986)
2829
9.3%
-359
2470
8%
20
-1099
1391
(459)
932
3.1%
932
22.8
-27%
18,500
10,209
6,183
(4,413)
30,479
34%
20%
5%
1,092
613
859
2,563
(73)
0
-20
2,470
FY18
38,380
26%
(31,314)
7,066
18%
(1,219)
(2,483)
3364
8.8%
-377
2987
8%
20
-1154
1853
(611)
1,241
3.2%
1,241
30.4
33%
24,050
12,251
6,492
(4,413)
38,380
30%
20%
5%
1,443
735
902
3,080
(73)
0
-20
2,987
FY19
45,965
20%
(37,423)
8,542
19%
(1,585)
(3,103)
3853
8.4%
-396
3457
8%
30
-1212
2276
(751)
1,525
3.3%
1,525
37.4
23%
28,860
14,702
6,816
(4,413)
45,965
20%
20%
5%
1,732
882
947
3,560
(73)
0
-30
3,457
808
5,629
2,584
9,021
20 February 2017
6

Havells India
Lloyd Electric Balance Sheet
Networth
Non-current liabilities
Long term Borrowings
Others
Short term Borrowings
Trade payable
Other current liabilities
Short term provision
Total
Non - current assets
Fixed Assets
Non-current investments
Long term loans and advances
Other non-current assets
Current Assets
Inventories
Trade receivables
Cash and cash equivalent
Short term loans and advances
Other current assets
Total
Net working capital
% of sales
Working Capital
Inventory
Debtors
Loans and Advances
Other Current assets
Trade Payables
Current Liabilities
NWC days
FY12
4,735
934
147
2,254
728
408
184
9,390
FY13
5,615
947
173
3,364
1,034
670
258
12,060
FY14
6,348
1,246
60
4,570
1,740
637
237
14,838
FY15
7,387
918
63
5,931
2,146
1,058
349
17,851
FY16
7,881
790
58
7,380
2,735
1,714
222
20,779
2,603
868
312
170
3,092
863
487
169
3,309
854
27
164
3,233
858
46
222
3,300
1,009
166
32
3,123
1,526
266
234
287
9,390
3,851
43%
4,448
2,296
140
393
171
12,060
5,348
46%
5,647
3,318
510
857
152
14,838
7,361
51%
7,193
4,581
575
974
169
17,851
9,365
51%
8,769
5,986
666
615
236
20,779
10,935
46%
126
62
9
12
29
17
163
139
72
12
5
32
21
175
143
84
22
4
44
16
193
143
91
19
3
43
21
193
134
92
9
4
42
26
171
20 February 2017
7

Havells India
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2012
65,182
16.1
6,573
10.1
949
5,625
1,281
414
0
4,757
1,058
22.2
0
3,699
4,252
64.3
2013
72,478
11.2
6,745
9.3
1,097
5,649
1,232
279
1,944
6,640
824
12.4
0
5,816
4,290
0.9
2014
81,858
12.9
7,425
9.1
1,155
6,269
741
413
0
5,941
1,478
24.9
0
4,463
5,410
26.1
2015
85,694
4.7
7,211
8.4
1,387
5,825
640
504
0
5,689
1,836
32.3
0
3,853
5,159
-4.6
2016
77,142
-10.0
8,002
10.4
1,267
6,735
449
863
7,240
14,389
2,300
16.0
0
12,089
4,849
-6.0
2017E
63,084
-18.2
7,912
12.5
1,321
6,591
50
1,147
1
7,689
2,190
28.5
0
5,579
5,578
15.0
2018E
96,710
53.3
11,805
12.2
1,430
10,375
(INR Million)
2019E
112,761
16.6
14,023
12.4
1,644
12,379
660
700
0
10,415
2,964
28.5
0
7,531
7,531
35.0
660
600
0
12,319
3,507
28.5
0
8,812
8,812
17.0
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
624
8,927
9,551
9,795
556
19,908
27,577
17,293
10,284
663
0
27,187
13,678
8,905
2,336
2,267
21,850
19,770
2,080
5,337
19,907
2013
624
13,797
14,420
9,785
480
24,686
30,054
18,503
11,551
249
0
29,468
13,184
8,623
4,736
2,926
20,276
17,787
2,489
9,192
24,686
2014
624
16,036
16,660
10,506
517
27,685
32,075
20,451
11,624
444
0
36,929
14,934
10,005
8,819
3,170
25,692
22,672
3,020
11,237
27,685
2015
622
17,557
18,180
4,191
434
22,806
30,298
18,469
11,829
383
0
32,519
13,663
6,232
7,775
4,850
25,506
21,983
3,523
7,013
22,806
2016
625
24,954
25,579
1,297
744
27,704
28,272
17,486
10,786
214
2,575
27,636
8,371
2,594
14,652
2,019
13,710
9,480
4,230
13,926
27,704
2017E
625
26,881
27,506
6,000
0
33,590
20,604
7,143
13,461
315
0
19,620
8,432
1,989
7,070
2,129
14,805
10,228
4,577
4,814
33,590
2018E
625
30,028
30,653
6,000
0
36,738
21,604
8,573
13,031
484
0
27,351
12,854
4,135
8,081
2,281
19,127
13,728
5,399
8,224
36,738
(INR Million)
2019E
625
34,458
35,083
5,000
0
40,167
25,604
10,217
15,387
564
0
30,355
14,965
4,795
8,153
2,443
21,139
15,527
5,611
9,216
40,167
20 February 2017
8

Havells India
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
6.8
8.3
15.3
1.3
25.5
60.6
27.0
0.9
8.9
0.3
44.5
24.7
32.0
3.3
50
77
39
0.8
2013
6.9
8.6
23.1
1.5
28.3
60.1
17.9
1.1
11.8
0.4
29.7
21.9
28.3
2.9
43
66
45
0.4
2014
8.7
10.5
26.7
3.0
49.1
47.6
15.5
1.1
12.4
0.7
32.5
19.2
33.2
3.0
45
67
45
0.1
2015
8.3
10.5
29.1
2.9
57.6
50.0
14.2
1.8
21.6
0.7
28.4
17.0
38.8
3.8
27
58
36
-0.2
2016
7.8
9.8
41.0
4.0
93.0
53.2
10.1
3.1
30.2
1.0
19.0
20.4
64.3
2.8
12
40
25
-0.5
2017E
8.9
11.0
44.1
5.0
65.5
46.2
9.4
4.1
32.5
1.2
20.3
18.1
24.9
1.9
12
49
29
0.0
2018E
12.1
14.4
49.1
6.0
58.2
34.2
8.4
2.6
21.7
1.5
24.6
22.5
36.2
2.6
16
49
30
-0.1
2019E
14.1
16.7
56.2
6.0
49.7
29.3
7.4
2.3
18.2
1.5
25.1
24.1
38.7
2.8
16
48
30
-0.1
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
6,573
414
-431
-1,058
0
5,498
-1,691
3,807
0
-271
-1,961
515
-1,270
-1,281
-943
-2,979
558
1,779
2,336
2013
6,745
691
-1,868
-824
1,944
6,688
-1,950
4,738
0
-70
-2,020
67
-10
-1,232
-1,095
-2,270
2,399
2,336
4,735
2014
7,425
413
2,453
-1,891
0
8,399
-1,424
6,975
0
-685
-2,109
3
722
-741
-2,190
-2,206
4,084
4,736
8,820
2015
7,211
503
3,180
-1,836
0
9,058
-1,531
7,528
0
799
-732
-198
-6,315
-640
-2,219
-9,372
-1,045
8,819
7,774
2016
8,002
861
-33
-2,300
7,240
13,770
-54
13,716
-2,575
3,377
748
131
-2,895
-365
-4,511
-7,640
6,878
7,775
14,653
2017E
7,912
1,227
1,529
-2,190
1
8,479
-4,098
4,382
2,575
-14,796
-16,319
-743
4,703
-50
-3,653
257
-7,582
14,652
7,070
2018E
11,805
780
-2,399
-2,964
0
7,222
-1,168
6,054
0
0
-1,168
0
0
-660
-4,383
-5,043
1,011
7,070
8,081
(INR Million)
2019E
14,023
600
-921
-3,507
0
10,195
-4,080
6,115
0
0
-4,080
0
-1,000
-660
-4,383
-6,043
72
8,081
8,153
20 February 2017
9

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