Havells India: Impressive new portfolio additions with INR5b+ revenue possibilities

13 February 2013

Update | Sector: Capital Goods

Havells India

BSE SENSEX

S&P CNX

19,561

5,923

CMP: INR683

TP: INR860

Buy

Well-fortified stance

Impressive new portfolio additions with INR5b+ revenue possibilities

New product introductions likely to leverage growth

Bloomberg

Equity Shares (m)

M.Cap. (INR b)/(USD b)

52-Week Range (INR)

1,6,12 Rel.Perf.(%)

HAVL IN

124.8

85/1.6

699/482

3/13/31

Valuation summary (INR b)

Y/E March

2013E 2014E 2015E

70.4 77.6 87.2

8.3

8.1

9.7

4.1

5.1

6.0

33.0 40.7 48.1

(3.1) 23.3 18.2

99.2 141.9 178.2

29.5 28.7 27.0

23.1 23.5 23.3

19.9 25.9 24.4

20.7

6.9

10.7

1.1

16.8

4.8

10.6

1.3

14.2

3.8

8.5

1.5

Net Sales

EBITDA

Adj PAT

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

Payout (%)

Valuation

P/E (x)

P/BV (x)

EV/EBITDA (x)

Div Yield (%)

Over the past few years, Havells India (HAVL) added new product lines/segments

which have become ~INR5b revenue product categories: i) company entered the

lighting segment in 2003 and the business contributed INR5.5b to revenues in

FY12 and ii) it entered the fans market in 2005 and contributed revenues of

INR4.9b in FY12. Going forward, we believe that new product portfolios, including

consumer/kitchen appliances (launched in FY11) and Reo switches (mass market

segment, launched in FY13), are likely to be in the INR5b+ category. Also,

possibilities exist that initiatives like exports under Havells brand, rejuvenation

of the strategy in luminaries etc over the next 1-3 years show the potential to

become INR5b revenue categories.

Sylvania - Gradual path to sustained recovery

Post the successful turnaround in FY11, Sylvania reported a sharp decline in

normalized EBITDA margins from 9.7% in 3QFY12 to ~3.3% in 2QFY13, largely driven

by a combination of cost increases and one-time factors. Going forward, we

believe that the path to sustained recovery will be driven by: i) price increases

(up 3-4% in 3QFY13) ii) gradual shift in revenue composition towards LatAm

which has a better growth trajectory of 7-10% and relatively stable margins of

7.5-10%, iii) Conversion of portfolio towards LED (contribution at ~10%) and iv)

acceleration of fixtures strategy in Sylvania with commissioning of Neemrana

plant (current revenue contribution from fixtures in LatAm is just 20%). We expect

the EBITDA to cash conversion in Sylvania at 70-80%, as the incremental capex/

working capital requirements will be limited.

Shareholding pattern %

As on

Dec-12 Sep-12 Dec-11

Promoter

61.6

Dom. Inst

1.2

1.1

1.2

Foreign

30.7

30.8

30.0

Others

6.5

6.6

7.3

Key success mantras - Focus on manufacturing, brand and innovation

Strategy of focusing on in-house production (v/s outsourcing at just 5-7% of total

revenues) is the key differentiator for HAVL enabling total quality control and

thus a premium positioning in the market. There is also a strong focus on brand

and distribution, with initiatives like creating a service network in electrical

appliances that is comparable to consumer durables industry, again an industry

first. Over the past 5 years, company has spent INR8.4b to set up manufacturing

plants and INR3.7b in brand building which has created strategic entry barriers.

Stock performance (1 year)

Maintain Buy

HAVL's stock has outperformed the BSE mid cap index by 40% over the past year.

Going forward, we believe the key stock price drivers are: 23% consolidated

earnings CAGR till FY15E, strong balance sheet, improving free cash generation

and potential increase in dividend payout ratio. Management had increased the

dividend payout to 25% in FY12 from ~12% in FY11 and we believe that given the

robust free cash generation, payout ratios can further increase. Maintain

Buy.

13 February 2013

Havells India

New product introductions likely to leverage growth



Over the past few years, Havells India (HAVL) added new product lines/segments which

have become ~INR5b revenue product categories:

i) entered the lighting segment in 2003 and the business contributed INR5.5b

of revenues in FY12 and

ii) entered the fans market in 2005 and contributed revenues of INR4.9b in FY12.

Going forward, we believe that new product portfolios, including consumer/kitchen

appliances (launched in FY11 and FY13, revenues expected at INR2b) and Reo switches

(mass market segment, launched in FY13) are likely to be in the INR5b+ category over the

next 3 years.

Also, possibilities exist that initiatives like exports under Havells brand (MCBs and electrical

wiring accessories), rejuvenation of 'Luminaires' portfolio etc over the next 1-3 years show

the potential to become INR5b revenue categories.

Thus, constant introductions of booster categories to the revenue stream led to a robust

revenue CAGR of 34% over the past 10 years; going forward, we expect strong revenue

CAGR of 18% during FY12-15E.

HAVL: Expect robust 18% revenue CAGR till FY15E with likely upside

Strong pipeline of new

product categories,

coupled with strong

growth in existing

segments to drive 18%

revenue CAGR till FY15E.

Possible line-up (not

factored in our earnings

estimates) includes:

Increasing contribution

of exports and

rejuvenation of

luminaries portfolio

Source: Company, MOSL

Potential INR5b+ revenue categories

Switchgear composition - FY12

Capacitors

Motors

Industrial

Switchgear,17%

Domestic

MCB, 50%

Modular

Switches, 25%

Mass market switches (Reo)



Switches, in FY12, contributed ~INR2.3b of the Switchgear segment's revenues of

INR9b. To expand the product offerings, HAVL has launched new products : Reo

(conventional switches), XPRO (intelligent switchgear) and Murano (premium

switches).



Of this, Reo operates in INR20b sized market and the target is to capture 25% of

the market over the longer term (revenue possibility of INR5b). Reo switches

were introduced in October 2012 and are expected to contribute INR1.5b in FY13

and INR3b in FY14. Reo includes switches, sockets, fan regulators, fuses etc.

13 February 2013

Havells India

Also, margins, post the volume increase, are expected to be comparable with the

existing switchgear portfolio. Thus, Reo switches can possibly lead to doubling of

switch business revenues in the next 12-18 months and will be an important growth

driver.



Of the INR20b market, Anchor Panasonic is the key player and the rest is controlled

by unorganized segment. Reo's positioning is again in the premium category, with

improved features (including lifetime warranty being provided for the first time

in this category). Thus, pricing is also at 20% premium to competition, leading to

improved margins.



Consumer Appliances

Composition - FY13E

Consumer/kitchen appliances



HAVL entered the consumer appliances segment in FY11 by launching water

heaters in September 2010 and small appliances such as juicers, mixers and irons

in August 2011. Since then, the portfolio has been expanded to include mixer

grinders, food processors, OTGs, induction cookers etc. The market size in

appliances and water heater segment is INR52b, of which HAVL's revenues in

FY13E are expected at ~INR2b; we believe there are possibilities to expand it to

INR5b in the next 3 years.



Also, in the appliances segment, strategy is to create product differentiation.

Given the initial success in water heaters and geysers, there are plans to commence

their in-house manufacturing (similar to the strategy adopted in other product

categories, post achieving a critical mass).

HAVL: Switchgear is the most profitable business segment

Contribution margin (%)

(FY12)

HAVL: Sales of kitchen/consumer appliances have improved

Source: Company, MOSL

Potential to figure in INR5b revenue category list

We note that there are several segments and product categories which hold good

potential over the long term. Few of these segments could possibly over the next 1-

3 years show the potential to be INR5b revenue categories. However, we have not

factored most of these possibilities in our earnings estimates.

Increasing export revenues from INR1.7b in FY12 to ~INR4-5b by FY15E

During FY03-09, HAVL's exports increased significantly from INR65m to INR2.1b and

largely comprised of MCB exports under the OEM brand. However since then, exports

13 February 2013

Havells India

Export Composition - FY12

have declined to INR1.7b in FY12 as the company decided to discontinue exports

under the OEM brand and launch the HAVL brand in overseas markets. While this led

to a near term impact, we believe there are possibilities of exports ramping up to

INR4-5b revenues in FY15E. Currency movements have also improved competitiveness

of exports meaningfully and thus the management will now redraw the export

strategy.

Exports under HAVL brand to be possibly driven by three pronged strategy



MCB exports under HAVL brand



In FY12, HAVL was amongst the top 5 players globally in MCBs and #1 in India. MCBs used to be an important

constituent of company's exports; in FY08 ~50% of MCBs sold in the UK were manufactured by HAVL.



Over the past 2 years, there has been an increased focus on exports under the HAVL brand discontinuing

exports under OEM brand. This led to MCB exports declining by 50% from levels of ~INR1.5b in FY10.



During FY12, company enhanced the product portfolio for switchgear category by adding new range of

control gear products and distribution boards. Also, special focus was on expanding geographies in emerging

markets in Africa and SAARC.



We believe that the initial success, albeit at a slower pace, has been encouraging. There are also

possibilities to leverage the distribution network of Sylvania in Europe and LatAm, including cross selling.



Exports of electrical wiring accessories



Exports of electrical wiring accessories (EWA,

comprising of switches, sockets, fuses, wires etc)

from India are not much and HAVL has recently

introduced some of these product categories in the

UK.



Initial attempts are to set up a manufacturing base

in India and establish a strong R&D as the electrical

socket size etc differs among European countries.



There are possibilities to leverage on the

distribution network of Sylvania and thus EWA

exports can be important driver, going forward.



CMI/HID lighting



CMI/HID lighting plant was commissioned in 2009

and the products are mostly exported. Also, outside

the US, Europe and Japan Neemrana is the only

factory manufacturing CMI/HID products.



We note that FY13E revenues of ~INR300m can

possibly increase to INR1-1.5b over the medium

term, and the inflexion point is expected to be

September 2013 as the royalty payment to Philips

will cease (royalty at 12% of revenues).

HAVL's exports decline, OEM supplies have been discontinued

Currency movement have made exports competitive

INR/Euro (% YoY)

Source: Company, MOSL

13 February 2013

Havells India

We believe

opportunities exist

to rejuvenate the

portfolio in lighting

business through

cross-selling, new

product introductions in

Luminaries. HAVL has a

market share of 11-12% in

the lighting business,

while Philips is the

market leader

with 25%+ share

Introduction of Sylvania brand in India/rejuvenating the strategy on 'Luminaries'



Significant cross-selling opportunity:

HAVL has already launched the Sylvania brand

in India in select categories and while sales will take time to ramp up, we note

there are possibilities for cross-selling in the lighting business as well. The cross-

selling strategy is being successfully used by HAVL in the switchgear business,

with MCBs being launched in Crabtree (traditionally present in modular switches),

mass market switches being launched in HAVL brand (present largely in MCBs etc)

and wires/switches in Standard (traditionally in industrial switchgear etc). This

strategy has led to possibilities of doubling revenues in switchgear business over

the next 3 years from INR9b in FY12. Also, wires business reported a revenue

growth of ~35% in 9MFY13, largely driven by cross selling possibilities (launched

under Standard brand).



Neemrana Luminaries plant:

In Luminaries, HAVL commissioned the only

manufacturing plant in the country at Neemrana (Rajasthan) and revenues are

targeted at INR5b in the next 2 years. While this will initially replace outsourcing

from China, we believe over a period of time it provides opportunities to increase

offerings in the fixtures market. Around 60 designs have already been approved

and the global R&D team is being strengthened. Also, a large part of the company's

LED strategy is focused on the fixture market and thus is more customer centric

than technology centric.

HAVL's positioning in Lighting and Luminaries business

Lighting

Rank

Mkt Size (INR M)

Mkt Share

Peers

20,000

11%

Philips, Osram

Luminaries

25,000

12%

Philips, Bajaj, Crompton, Wipro

Source: Company, MOSL

Revenues to be aided by various initiatives across product categories

While the large revenue drivers for HAVL will be the new portfolio additions as

discussed above, there are various initiatives that are being taken in terms of

expanding categories across product segments. Some of these initiatives also have

possibilities to contribute more meaningfully to growth over the longer term period.

Industrial

motors revenues likely to reach INR1.5b by FY14



In industrial motors, revenues are targeted to increase from

INR700m in FY13 to INR1.5b in FY14.



This would be driven by new products in segments like i)

smoke ventilation motors which are used in buildings,

parking lots, metros, tunnels etc and the demand is quite

strong and ii) mining motors will be launched in April 2013.

Industrial

MCBs



In MCBs, HAVL is ranked among the Top 5 players globally

and is the No. 1 player in India. The business contributes

~50% of switchgear business.



The intention going forward is to establish a strong base

in industrial MCBs as well. The initial step was to set up

an integrated manufacturing facility at Sahibabad in Uttar

Pradesh and it was commissioned in FY12.

13 February 2013



Profitability improvement in underground cables



In FY13, the target is also to improve the profitability of

underground cables business.

Rural

distribution in India could open up many possibilities





The cost of Reo switch is ~INR20/switch v/s INR50/ modular

switches and will also enable the company to penetrate

the rural distribution network (Class C/Class D towns).



This again will be a new addition in the distribution

network and going forward this network can be leveraged

to launch more consumer products under the HAVL brand,

including fans, consumer appliances, wires, MCBs etc.

Hence, this could lead to interesting long term possibilities.

Havells India

Sylvania: Gradual path to sustained recovery



Post the successful turnaround in FY11, Sylvania reported a sharp decline in

normalized EBITDA margins from 9.7% in 3QFY12 to ~3.3% in 2QFY13; this was

largely driven by a combination of cost increases and one-time factors. Also, the

company reported the first-ever quarterly loss of EUR1.6m in 3QFY13, post a loss

of EUR0.3m in 3QFY11. During 3QFY13 margins bounced back to 6.4% led by

improvement in Europe (3QFY13 margins at 5% v/s 0.8% QoQ) post several

corrective measures and operating leverage. Going forward the management

believes that these margins are sustainable.

Even in FY13 EBITDA margins are in the range of 7-10% for most of the countries

and the impact is largely in specific countries like Brazil, the US,Germany leading

to lower aggregate numbers in profitability. Further, several one-offs also

contributed to compounding of the effect: for instance, bad debt in Greece

(EUR1.5m), import restrictions in Argentina etc.

The initial part of restructuring focused on manufacturing operations, cost

rationalization (including employees), improvement in working capital cycle,

value engineering and process optimization, increased outsourcing etc. These

initiatives contributed to a bulk of the profitability improvement during FY08-11.

Over the longer term, attempt is to ingrain the 'profitability focus' culture of HAVL

among all country managers. Cost structure is also being rationalized through

improved procurements, better logistics etc.

Going forward, we believe that the path to sustained recovery will be driven by

the following: i) price increases to compensate cost increases (already pushed

through ~3-4% in 3QFY13), ii) gradual shift in revenue composition towards LatAm

(now contributes 37% of revenues, v/s 31% in FY10), which has a better growth

trajectory of ~7-10% and relatively stable margins of ~7.5-10%, iii) Sylvania is

converting portfolio towards LED (contribution at ~10%) and in LatAm, the process

is to establish a central office for LED and thus will bring in more product

introductions and iv) with the commissioning of Luminaires plant in Neemrana

(Rajasthan), the fixtures strategy for Sylvania, particularly in LatAm could also be

accelerated (current revenue contribution from fixtures in LatAm is just 20%).

Also, we expect EBITDA to cash conversion in Sylvania at ~70-80%, as the

incremental capex/working capital requirements will be limited.

However, this is easier said than done, particularly given the constrained macro

environment. Also, several global peers like Philips, Osram, Zumtobel etc have

taken aggressive postures in various markets. European construction spending

continues to decline, leading to moderating revenues in several countries.

Given this, we expect Sylvania to report adjusted EBITDA margins of 5% in FY13E

(down from 8.4% in FY12) and gradually improve to 6% in FY14E /6.7% in FY15E.

Thus, we expect Sylvania to report adjusted PAT of EUR2.8m in FY13E (down from

EUR16.6m in FY12) and improving to EUR8.8m in FY14E / EUR11.7m in FY15E. The

improvement is driven by increased revenue contribution from LatAm (+7.5%

CAGR till FY15E) and margin improvement in Europe (+260bp).

13 February 2013

Havells India

Increased LatAm contribution likely to support 2.4% sales CAGR (FY13-15E)

Sylvania has witnessed a very gradual shift in revenue composition towards LatAm

(now contributes ~37% of revenues v/s 31% in FY10). LatAm has a better growth

trajectory of ~7-10% and relatively stable margins of ~7.5-10%, and we believe that

this shift will lead to improved growth profile. We expect Sylvania's revenues to

improve by 2.4% CAGR during FY12-15E, driven by 7.5% revenue CAGR in LatAm, while

Europe is expected to witness a decline of 1% CAGR in this period.

LatAm contributes ~37% to Sylvania's revenues (Euro m)

LatAm has a relatively better growth trajectory v/s Europe

Sylvania revenue growth

Top 5 countries = 50%+ revenue contribution

Sylvania's Europe revenues are down 35% from peak

Strong co-relation with construction spend in Europe

(6 months time lag)

Key countries where profitability was impacted in FY13

Sylvania's revenue operating matrix (Euro m)

FY09

Revenues

Europe

LatAm

Others

Total

Revenues % YoY

Europe

LatAm

Others

Total

Revenues Composition (%)

Europe

LatAm

Others

334.6

126.3

12.3

473.2

FY10

286.6

121.2

13.0

406.7

-14.3

-4.0

5.5

-14.1

FY11

280.6

145.0

23.8

449.4

-2.1

19.6

82.5

10.5

FY12

275.1

149.8

23.2

448.1

-2.0

3.3

-2.4

-0.3

FY13E

254.9

162.8

24.5

442.2

-7.3

8.7

5.6

-1.3

FY14E

246.4

175.0

25.2

446.6

-3.3

7.5

3.0

1.0

FY15E

250.4

188.1

26.0

464.5

1.6

7.5

3.0

4.0

Europe revenues

impacted by constrained

macro and are down 35%

from peak levels.

Contribution of LatAm

has increased from 27%

in FY09 to 37% currently

Source: Company, MOSL

13 February 2013

Havells India

Correcting LED and fixtures strategy could boost revenue growth rates

Sylvania is converting portfolio towards LED (contribution at ~10%) and the process is

to establish a central office in LatAm to bring more product introductions, particularly

in LED segment. Also, with the commissioning of Luminaires plant in Neemrana

(Rajasthan), the fixtures strategy for Sylvania, particularly in LatAm, could also be

accelerated (current revenue contribution from fixtures in LatAm is just 20%). Lamps

contribute 65% of revenues for the company and correcting the mix could be an

important driver.

Sylvania revenues have underperformed peers, also driven

by market shift towards LEDs (Jun-09 index to 100)

Neemrana plant can also help in correcting the fixtures strategy,

largely for LatAM

Source: Company, MOSL

OSRAM PBT margin (%)

Expect margin improvement of 175bp during FY13E-15E, driven by Europe

(+260bp)

Even in FY13 EBITDA margins are in the range of 7-10% for most of the countries and

the impact is largely in specific countries like Brazil, the US,Germany leading to lower

aggregate numbers in profitability. Further, several one-offs also contributed to

compounding of the effect: for instance, bad debt in Greece (EUR1.5m), import

restrictions in Argentina etc.

Sylvania: Region-wise EBITDA margins

FY10

FY11

13.9

13.2

-0.5

26.6

5.0

9.1

-2.1

5.9

FY12

24.6

12.5

0.3

37.4

8.9

8.3

1.3

8.3

FY13E

9.7

12.4

0.1

22.1

3.8

7.6

0.4

5.0

FY14E

13.0

13.6

0.3

26.8

FY15E

16.0

15.0

0.3

31.4

6.4

8.0

1.0

6.7

MOSL

EBIT margin improving (%)

Adj EBITDA (EUR M)

Europe

LatAm

Others

Total

Adj EBITDA %

Europe

LatAm

Others

Total

-4.0

10.5

0.6

7.1

-1.4

8.7

4.6

1.7

5.3

7.8

1.0

6.0

Source: Company,

13 February 2013

Havells India

Focus on manufacturing, brand, innovation - Key success mantra

Strategy of focusing on in-house production (v/s outsourcing at just 5-7% of revenues)

is the key differentiator for HAVL and enables a total control on quality and thus the

premium positioning in market. Management stated that bringing mechanical accuracy

was a key challenge to achieve electrical accuracy. There is also a strong focus on

brand and distribution, with initiatives like creating a service network in electrical

appliances that is comparable to consumer durables industry, again an industry first.

Over the past 5 years, HAVL spent INR8.4b to set up manufacturing plants and INR3.7b

in brand building (advertisement), which have created important entry barriers.

The InSites: Visit to HAVL's manufacturing plants

Over a three-day period, we visited Havells India's switchgear

manufacturing plants in Baddi, Himachal Pradesh (16% of revenues)

and Neemrana, Rajasthan (17-18% of revenues), India.



Baddi is the most automated switchgear manufacturing plant

in India, with a capacity of 50m domestic switchgear poles per

annum and 70m electrical wiring accessories per annum.



Neemrana plant manufactures motors (largest manufacturing facility in India),

CFL (among the largest plants in Asia) and consumer & industrial lighting (first

ever large scale lighting fixture plant in India).

Various initiatives like

Total Quality

Management, Six Sigma

and lean manufacturing

provide enough

flexibility to respond

quickly to changes in

demand environment

Plant-wise revenue possibilities

Manufacturing excellence to achieve electrical excellence



Increased automation in Baddi plant:

The production process at Baddi is almost

fully integrated, with robotics systems also being planned for future expansions.

Management stated that in terms of manufacturing processes, Baddi is among the

top 4-5 plants globally for switches and MCBs and also among the best in Asia.

Increased automation led to lower rejection rates (0.1% at shop floor) and

improved quality, thus leading to premium positioning.



Neemrana is the first manufacturing plant for lighting fixtures in India and the

largest in Asia and also has the largest LV motors plant in India. The plant will now

replace sourcing from India and for LatAm from Chinese operations.

Neemrana plant (INR b)

Source: Company, MOSL

13 February 2013

Havells India

Over the past 5 years,

HAVL has spent INR8.4b

to set up manufacturing

plants, which have

created important entry

barriers

Post commissioning of

Neemrana plant, the

outsourcing component

in lighting business is

expected to decline

meaningfully. Also, in

consumer durables,

there are plans for in-

house manufacturing of

water heaters as the

business approaches

critical mass

Strong in-house manufacturing - a vital competitive advantage (Capex incurred)

Source: Company, MOSL

Outsourcing component stood at just 14% in FY12

Source: Company, MOSL

Focus on brand and distribution



In house manufacturing provides total quality control, enhancing brand equity:

The most important benefit of control over the manufacturing process is complete

control over the product quality and in turn a better customer experience. For

instance: i) average variation range (in manufacturing process of switchgear) has

been lowered to 5 microns v/s the industry average of 20 microns. Thus, Indian

markets are also being offered products comparable to the European standards,

ii) manufacturing lamps at less than 1mg mercury levels v/s industry standard of

5-10mg and iii) target is that no CFL lamp should fail at the retailer's level and thus

every CFL lamp is being tested post 48 hours of manufacturing.



Bringing innovation to after sales service:

HAVL has also set up new industry norms

in after sales customer service and for the first time a network for the electrical

appliances industry that is comparable to consumer durables segment. This

initiative was started over the past 2 years and will also cover low value products

like Reo switches (INR20/switch) as well. Thus, 95% of the customers are being

serviced in 24 hours. A toll free customer care number is also the industry first and

also a practice that every customer complaint to be addressed at the customer's

residence, even for smaller value items. This is only possible due to complete

control on quality through in-house manufacturing.



Superior channel financing/dealer incentive lead to strong bonding:

Channel

financing is an important initiative for the dealers, which has lowered the working

capital requirements. Dealer incentives are being credited within 48 hours of the

monthly closing, while other companies take a longer time of ~1 month. Also,

dealer initiatives like annual trips, 0.3% of the sales for tour expenses etc have

led to a strong bonding.

13 February 2013

Havells India

HAVL spends ~5-6% of revenues in advertisement, highest among peers

Note:

For computing advertisement as a percentage of sales, revenues have been taken exclusive of cables and wires in Havells,

exclusive of power and industrial for Crompton and exclusive of project businesses for Bajaj

Source: Company, MOSL

Transfer of brand to listed entity without any consideration, a huge corporate

governance positive:

HAVL promoters have agreed to transfer the ownership of

the "Havells" brand to the listed entity from April 1, 2016 without any

consideration. The current trademark licensing agreement between HAVL and

promoters will expire in March 2016. HAVL pays royalty at 1% of sales/10% of

profits of Havells brand, subject to a cap of INR400m. Thus, with the transfer of

the brand in April 2016, the royalty payment to the promoters will stop. This will

result in a theoritical EPS benefit of ~6% for FY14E. While the actual gains in

financials will be visible only post April 2016, we believe that this development is

a big corporate governance positive. HAVL had raised dividend payout ratio in

FY12 to 25% from 12% in FY11, given the strong cash flow generation visibility.

Going forward, the intent to at least maintain/further increase the payout ratio.

We believe that this move to transfer the Havells brand is the second in series, in

terms of improving corporate governance.



Havells 'Galaxy' opens up interesting possibilities:

HAVL is successfully building a

chain of stores, called Havells Galaxy. These stores are exclusive in nature and

opens up interesting possibilities going forward. The number of Galaxy stores is

expected to increase from 50 around three years back to ~200 by March 2013.

HAVL now derives about 10% of its revenue from Galaxy stores. Recent initiatives

like connecting directly with the electricians could also expand possibilities and

strengthen the pull effect for HAVL's products.



Culture of innovation



Addressing gaps in the market leading to premium positioning:

One of the key

strengths of brand HAVL has been innovation to address the existing gaps in the

market. This had also contributed significantly to the premium positioning of the

brand.



Strong R&D, integrating global network:

The global R&D network is also being

integrated and with a complete control on the manufacturing process, it will enable

HAVL to shorten the time period for new product introductions. The attempt is to

integrate various global R&D teams (Fixtures R&D in UK, Lamps R&D in Belgium,

~10 R&D centers in India/China etc). Also, there are plans to double the R&D

strength from 200 people currently over the next year, and thus a key focus area.

13 February 2013

Havells India

Maintain Buy, with a target price of INR860

HAVL's stock has outperformed the BSE mid cap index by 40% over the past year.

Going forward, we believe the key stock price drivers are: 23% consolidated

earnings CAGR till FY15E (factoring an improvement in Sylvania's profitability),

strong balance sheet, improving free cash generation and potential increase in

dividend payout ratio.



Outlook for cash flow is strong as there would be limited capex requirements

(~INR1.5b pa) till FY15E. Net working capital requirement is also limited

(standalone business at 3.5-4% of revenues), while the company is trying to

replicate the channel financing scheme for Sylvania, which could further free up

NWC (~20% of revenues). HAVL has reduced the consolidated net debt by INR1.8b

in FY12 and we expect a reduction of INR3.7b in FY13E/INR2.8b in FY14E, resulting

in debt-free status by FY15E.



Management had increased the dividend payout to 25% in FY12 from ~12% in FY11

and we believe that given the robust free cash generation, payout ratios can

further increase. Maintain

Buy

with a target price of INR860 (upside of 26%).



Expect consolidated FCF to improve meaningfully (INR m)

Return ratios remain healthy (%)

Outlook for cash flows is strong as there would be limited capex requirements (~INR1.5b pa) till FY15E.

Source: Company, MOSL

Domestic net working

capital requirement is

limited, company is

trying to replicate the

channel financing

scheme in Sylvania,

which could further free

up NWC (~20% of

revenues)

Standalone business reported NWC cycle at just 15 days, while consolidated at 72 days

FY10

Working capital (Reported)

Debtors factoring

Acceptances

Adj working capital (Adjusted)

Standalone

FY11

FY12 FY13E

Consolidated

FY10

FY11

FY12

FY13E

Source: Company, MOSL

13 February 2013

Havells India

Trend in standalone and consolidated EPS (INR/sh)

Source: Company, MOSL

HAVL SOTP valuations - Standalone

A. Standalone

Target FY15 PE (x)

Impied Value (INR m)

Value/sh (INR) -

B. Sylvania

Target FY15 EV/EBITDA (x)

Enterprise Value

Net debt

Impied Value (INR m)

Value/sh (INR) -

Total Value /sh (INR) {A+B}

95,274

764

15,303

3,439

11,864

860

Source: Company, MOSL

13 February 2013

Havells India

HAVL operating matrix: Standalone operations and Sylvania

FY10

Standalone business (INR m)

Revenues

Swtichgear

Cables and wire

Consumer Durables

Lighting and Fixtures

Others

Total

Revenue Growth (% YoY)

Swtichgear

Cables and wire

Consumer Durables

Lighting and Fixtures

Total

EBIT Margin (%)

Swtichgear

Cables and wire

Consumer Durables

Lighting and Fixtures

Standalone EBIT (%)

FY11

FY12

FY13E

FY14E

FY15E

6,941

10,686

3,372

3,569

339

24,907

11.4

-3.4

21.8

27.3

6.4

37.6

8.3

30.2

19.8

12.7

7,344

12,318

4,692

4,447

28,817

11.1

27.4

40.1

28.0

15.7

37.0

7.3

27.6

18.4

11.4

8,962

15,930

5,721

5,544

36,156

22.0

29.3

21.9

24.7

25.5

37.5

9.2

28.8

25.1

11.5

10,664

17,363

7,895

6,653

42,575

19.0

9.0

38.0

20.0

17.8

35.0

10.1

24.8

23.0

11.6

13,330

19,099

10,263

7,651

50,343

25.0

10.0

30.0

15.0

18.2

35.0

10.3

24.0

22.5

11.8

15,996

21,964

12,316

8,607

58,883

20.0

15.0

20.0

12.5

17.0

36.0

10.5

26.0

22.0

12.3

Sylvania (Euro m)

Revenue

Europe

LatAm

Others

Total

Revenues % YoY

Europe

LatAm

Others

Total

Adj EBIDTA %

Europe

LatAm

Others

Total

287

121

407

-14.3

-4.0

5.5

-14.1

-1.4

8.7

4.6

0.4

281

145

449

-2.1

19.6

82.5

10.5

5.0

9.1

-2.1

6.5

275

149

448

-2.0

2.8

0.6

-0.3

8.9

8.0

3.3

8.4

254

156

435

-7.7

4.4

7.5

-2.9

3.7

7.4

12.1

5.5

246

167

440

-3.2

7.5

3.0

1.0

250

180

457

1.7

7.5

3.0

4.0

5.3

6.5

7.8

8.0

1.0

6.0

6.8

Source: Company, MOSL

13 February 2013

Havells India

Financials and Valuation

Income Statement

Y/E March

Net Sales

Change (%)

Raw Materials

Staff Cost

Other Expenses

EBITDA

% of Net Sales

Depreciation

Interest

Other Income

PBT

Tax

Rate (%)

Extra-ordinary Inc.(net)

Reported PAT

Change (%)

Adjusted PAT

Change (%)

2011

56,126

8.7

31,925

6,405

12,226

5,570

9.9

804

902

237

4,101

1,031

25.1

(31)

3,036

2,584

271.6

2012

65,182

16.1

36,272

7,904

14,432

6,573

10.1

949

1,281

414

4,757

1,058

22.2

3,699

21.9

4,252

64.6

2013E

70,425

8.0

40,202

7,658

14,242

8,324

11.8

1,021

1,172

369

6,500

1,008

15.5

5,492

48.5

4,120

-3.1

2014E

77,593

10.2

44,681

7,650

17,133

8,129

10.5

1,178

776

311

6,487

1,419

21.9

5,068

-7.7

5,080

23.3

(INR Million)

2015E

87,223

12.4

50,111

8,094

19,303

9,715

11.1

1,272

757

355

8,040

2,050

25.5

5,990

18.2

6,002

18.2

Balance Sheet (Consolidated)

Y/E March

Share Capital

Reserves

Net Worth

Loans

Deffered Tax Liability

Minority Interest

Capital Employed

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Goodwill

Curr. Assets

Inventory

Debtors

Cash & Bank Balance

Loans & Advances

Other Current Assets

Current Liab. & Prov.

Creditors

Other Liabilities

Provisions

Net Current Assets

Misc. Expenses

Application of Funds

E: MOSL Estimates

2011

624

5,914

6,537

11,065

559

18,166

28,454

18,499

9,955

249

3,354

22,081

10,860

7,724

1,779

1,206

512

17,729

6,637

9,898

1,195

4,352

18,166

2012

624

8,932

9,556

9,795

556

19,913

27,577

17,293

10,284

663

3,625

27,187

13,678

8,905

2,336

1,682

585

21,846

6,953

12,816

2,076

5,341

19,913

2013E

624

13,329

13,953

7,579

556

22,094

28,427

17,858

10,569

719

3,562

30,111

14,566

9,115

3,994

1,810

627

22,866

7,898

12,744

2,224

7,245

22,094

(INR Million)

2014E

624

17,083

17,707

5,958

556

24,227

29,489

18,540

10,949

838

3,543

32,999

15,822

9,299

5,326

1,906

646

24,103

8,560

13,073

2,470

8,896

24,227

2015E

624

21,613

22,237

5,338

556

28,137

31,113

19,812

11,301

973

3,543

38,498

17,635

9,957

8,306

1,954

646

26,179

9,528

13,946

2,705

12,319

28,137

13 February 2013

Havells India

Financials and Valuation

Ratios

Y/E March

Basic (INR)

Adjusted EPS

Growth (%)

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation (x)

P/E (consolidated)

Cash P/E

EV/EBITDA

EV/Sales

Price/Book Value

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors. (Days)

Asset Turnover (x)

Leverage Ratio

Debt/Equity (x)

2011

24.3

20.7

271.6

31.0

52.4

2.5

11.8

2012

29.6

34.1

64.6

37.2

76.6

6.5

25.5

2013E

44.0

33.0

-3.1

52.2

99.2

7.5

19.9

2014E

40.6

40.7

23.3

50.1

141.9

9.0

25.9

2015E

48.0

48.1

18.2

58.2

178.2

10.0

24.4

20.0

18.3

8.9

0.9

8.9

1.0

20.7

13.1

10.7

1.3

6.9

1.1

16.8

13.6

10.6

1.1

4.8

1.3

14.2

11.7

8.5

0.9

3.8

1.5

39.5

17.9

44.5

26.4

29.5

23.1

28.7

23.5

27.0

23.3

3.1

3.3

3.2

3.1

1.7

1.0

0.5

0.3

0.2

Cash Flow Statement

Y/E March

PBT before EO Items

Add : Depreciation

Interest

Less : Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

EO Income

CF from Oper. incl. EO Items

(Inc)/Dec in FA

(Pur)/Sale of Investments

CF from Investments

(Inc)/Dec in Net Worth

(Inc)/Dec in Debt

Less : Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

E: MOSL Estimates

13 February 2013

2011

4,101

804

902

1,031

-1,542

3,234

-31

3,203

-1,799

-1,941

243

401

902

363

-621

641

1,481

1,779

2012

4,757

949

1,281

1,058

-431

5,498

-1,691

-1,961

193

-1,270

1,281

943

-3,301

236

1,779

2,337

2013E

6,500

1,021

1,172

1,008

-247

7,437

-1,362

-1,299

-2,216

1,172

1,095

-4,480

1,659

2,336

3,994

(INR Million)

2014E

6,487

1,178

776

1,419

-319

6,703

-1,678

-1,660

-2

-1,621

776

1,314

-3,713

1,330

3,994

5,326

2015E

8,040

1,272

757

2,050

-443

7,577

-1,759

-2

-620

757

1,460

-2,839

2,978

5,326

8,306

Capital Goods

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Havells India

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