Thematic | June 2016

Light Electricals

Change is in the air

Ankur Sharma

(Ankur.VSharma@MotilalOswal.com); +91 22 3982 5449

Amit Shah

(Amit.Shah@MotilalOswal.com); +91 22 3029 5126

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Capital Goods | Change is in the air

Contents

Summary .............................................................................................................................. 3

Infographic ........................................................................................................................... 4

Light Electricals to grow at 10% CAGR over FY16-19 ............................................................. 5

Premiumization trend visible across product categories ..................................................... 16

Multiple themes at play ...................................................................................................... 18

Fans – structural story intact............................................................................................... 24

Lighting – LED movement underway ................................................................................... 29

Different types of lamps – LEDs v/s CFLs v/s ICLs ................................................................ 34

Pumps – weak industrial capex may constrain growth........................................................ 36

Switchgear – safety paramount .......................................................................................... 39

Wires & Cables – revival in the offing ................................................................................. 42

Consumer Appliances – new entrants aplenty .................................................................... 45

Companies .......................................................................................................................... 48

CG Consumer Electricals: Geared for growth ................................................................. 49

Financials and Valuations .............................................................................................. 50

Havells India: Future-ready ............................................................................................ 53

Financials and valuations ............................................................................................... 55

June 2016

2

Capital Goods | Change is in the air

Light Electricals

Change is in the air

Premiumization the key trend









Higher disposable incomes, increased availability of power, implementation of 7 Pay

Commission pay hikes, government impetus on low cost housing and faster shift to

the organized sector post GST implementation are the key growth drivers for Light

Electricals.

Premiumization trend is visible across product categories – there is a growing

preference towards aesthetics and energy efficiency.

Entry into new product categories, rising advertising spends, increasing distribution

reach and focus on energy efficiency are key themes to play.

Our top picks in the Light Electricals segment are Crompton Greaves Consumer

Electricals (CROMPTON; TP: INR165) and Havells India (HAVL; TP: INR425).

th

Light Electricals industry to grow at 10% CAGR over FY16-19:

We expect Appliances

(15% CAGR), Lighting (12% CAGR), Fans (12% CAGR) and Switches (11% CAGR) to be

the fastest growing segments over FY16-19. The key growth drivers are (a) rising

disposable income of Indian households, (b) improved power availability and

increased reach through the government’s rural electrification program, (c)

implementation of the 7

th

Pay Commission pay hikes for central government

employees, followed by hikes for state government and PSU employees, (d)

Government impetus on low cost housing and (e) shift of sales towards the

organized segment post GST implementation.

Premiumization trend visible across product categories:

There is a clear trend of

premiumization across product categories (Fans, Switches, Home and kitchen

appliances), as consumers focus on higher aesthetic value and energy efficient

products. The Indian consumer is increasingly focusing on the “cost of owning or life

cycle cost for the product” rather than looking at just the upfront costs for the

product. This has led to companies offering new variants that cater to these needs;

moreover, margins in premium products are higher than on standard products.

Change is in

the

air

Key themes – entry into new categories, higher advertising spends, increasing

distribution and focus on energy efficient products:

With the industry working on

an “asset light model”, there is a clear trend of players entering new product

categories. This is more so in Consumer Appliances, where most companies

completely outsource manufacturing and where there is no or little R&D

requirement and low capital investment. The key success factors in this segment are

(a) brand extension, (b) dealer incentives offered, (c) advertising spends, (d)

distribution reach, and (e) service centers for products.

Valuation and view:

Our top picks in the Light Electricals segment are Crompton

(Buy; TP: INR165) and Havells (Buy; TP: INR425). Key risks are delay in GST

implementation and slower than expected pickup in construction demand.

Click here for Video Link

June 2016

3

Capital Goods | Change is in the air

Infographic

June 2016

4

Capital Goods | Change is in the air

Light Electricals to grow at 10% CAGR over FY16-19

Multiple drivers falling into place





Over FY16-19, we expect Light Electricals to grow at 10% CAGR, with faster growth in

Appliances (15% CAGR), Lighting (12% CAGR), Fans (12% CAGR) and Switches (11%

CAGR).

The key growth drivers are (a) rising disposable income, (b) improved power

availability and increased reach through the government’s rural electrification

th

program, (c) implementation of the 7 Pay Commission wage hikes for central

government employees, followed by hikes for state government and PSU employees,

(d) government impetus on low cost housing and (e) shift of sales towards the

organized segment post GST implementation.

The Key Growth Drivers

Slowdown behind; expect growth to revive

The Indian Light Electricals market stood at INR685b as at the end of FY16, having

grown at a CAGR of 9% over FY11-16. Slowdown in construction activity had led to a

slowdown in the sale of Light Electricals as well during this period. Over FY16-19, we

expect Light Electricals to grow at 10% CAGR, with faster growth in Appliances (15%

CAGR), Lighting (12% CAGR), Fans (12% CAGR) and Switches (11% CAGR).

June 2016

5

Capital Goods | Change is in the air

Exhibit 1: Segment-wise size of Indian Light Electricals market (INR b)

Description

Domestic Switchgear

LV Industrial Switchgear

Modular Switches

Domestic Wires and Cables(LT)

Industrial cables(HT)

Pumps

Lighting (incl. LED)

Luminaires

Consumer Appliances (Home/ Kitchen)

Fans

Total light electricals market size

FY11

14

28

12

60

100

66

59

24

41

35

439

FY12

16

30

14

63

100

72

67

43

45

38

488

FY13

17

30

15

65

100

76

72

50

50

45

519

FY14

18

34

16

72

100

80

79

56

55

48

558

FY15

18

38

17

80

120

85

98

62

65

53

636

FY16

20

38

20

80

120

92

122

68

65

60

685

FY17E FY18E FY19E

21

40

22

84

132

99

149

79

75

67

769

23

43

25

88

145

107

158

91

86

75

841

24

46

27

97

160

116

157

105

99

84

915

% of

Total

3

6

3

13

19

13

15

10

10

8

CAGR CAGR

(FY11- (FY16-

16E, %) 19, %)

7

7

6

7

11

11

6

7

4

10

7

8

16

9

24

15

9

15

11

12

9

10

Source: Industry, MOSL

Rising disposable income levels imply greater affordability





Rising income levels across urban and rural India imply greater affordability for

Electrical Products. With growing disposable income, the Indian consumer has

become more discerning in his choice and taste.

Low penetration of Light Electrical Products, especially in rural areas, should

drive growth. The household penetration of Fans, for instance, is 90% in urban

areas and 65% in rural areas. The penetration of home and kitchen ppliances is

much lower (see table below).

The household penetration

of Fans is 90% in urban

areas and 65% in rural

areas.

Exhibit 2: Low household penetration of home/kitchen appliances to drive growth

Description

Fans

Water Heaters

Mixer - Grinder

Induction cooktop

TV

Fridge

Air Cooler

Washing machine

Air Conditioner

% penetration

80

10

35

<5

77

33

8-10

13

3-4

Source: MOSL, Industry

Exhibit 3: Rising disposable income to drive growth in Light Electricals (per capita; INR)

Per capital income(Rs)

5%

4%

4%

3%

YoY Growth(%)

6%

7%

70,345

2012

72,868

2013

76,438

2014

78,627

2015

81,821

2016

86,975

2017

93,064

2018

Source: RBI, MOSL

June 2016

6

Capital Goods | Change is in the air

Exhibit 4: Rural incomes have been rising helped by MNREGA implementation and MSP

increase

Rural wages/day

YoY growth(%)

18%

11%

71

83

100

20%

20%

17%

140

120

161

14%

173

183

10%

4%

55

FY06

5%

58

FY07

FY08

64

8%

6%

51

FY04

2%

52

FY05

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Source: GOI, MOSL



A Light Electrical Product lasts for 3-15 years. There is an increasing tendency to

trade up, as these products are typically bought only once or twice over a

decade and are much cheaper relative to the cost of the house. This, along with

increasing consumer focus on aesthetics and energy efficiency, has also resulted

in a falling share of the unorganized segment (local players, Chinese imports)

and a shift to the organized segment over the last few years.

Exhibit 5: Value of electrical equipment used in a typical 1,000sf house

Description

Building Wires

Units

1 sq. mm

2.5 sq. mm

4 sq. mm

6 sq. mm

40A

4 way

40 A

Modular

1HP Equivalent

1200mm sweep

250mm sweep

With fittings

No. of units

7 coils

4 coils

2 coils

1 coil

14 nos.

1 nos.

1 nos.

70 nos.

1 nos.

5 nos.

1 nos.

10 nos.

INR/pc

1,355

3,205

4,730

7,115

410

3,500

2,835

12,000

1,600

1,750

450

INR

9,485

12,820

9,460

7,115

5,740

3,500

2,835

5,575

12,000

8,000

1,750

4,500

82,880

Source: Industry, MOSL

MCB

Distribution Box

Phase Selector

Switches, Sockets, Regulator

Motor

Fans

Ventilating Fan

Lights

Total

June 2016

7

Capital Goods | Change is in the air

Exhibit 6: Average life of key Light Electrical Products

Description

Building Wires

Distribution Boards

Miniature Circuit Breakers(MCB’s)

Switches

Fans

GLS / CFL

Fluorescent Tube Lamps

Consumer Appliances

Average life

15+ years

15+ years

10+ years

10+ years

5-7 years

2-3 years

2 years

5-7 years

Source: MOSL, Industry



Customers also take into account the safety features associated with the

product while making the purchase decision. A case in point is the market for

Miniature Circuit Breakers, which is largely with the organized players. This is

primarily because of the

safety aspect.

The Light Electricals industry is closely linked to the fortunes of the Real Estate

sector. We see a mixed picture here – the Urban Commercial (Office) and Retail

Real Estate market has bottomed out and is on track for strong recovery.

However, the Residential market remains subdued due to low affordability,

developers’ reluctance to cut prices and constrained supply – this is especially

true for tier-1 cities (we define these as the top-7 cities). Low Cost Housing

would be driven by the government’s thrust towards “Housing for All by 2022”

via the Pradhan Mantri Awas Yojna.

The Commercial Real Estate market was in a deep slump in CY12 (sales down

27%) and was flat in CY13. Recovery in absorption set in from CY14 and picked

up pace from CY15, with office absorption at 38.1msf, higher than the previous

peak of 37msf in CY11.

Exhibit 8: Vacancy rates declining, with higher absorption

Vacancy (%)

17.0

32 33

29

8.0

6.0 5.0

9.0

18.0 18.0 17.2 18.5

16.9 16.0

15.0 14.0

Real Estate – mixed trends



Commercial Real estate has

picked up pace from CY15

with office absorption at

38.1msf, higher than

previous peak of 37msf in

CY11



Exhibit 7: Office space absorption and completion

Office Space - Absorption

43 41 41 44

33

23 23

22 23

32 33

20

31

37

27 27 30

38 36

32

30

Office Space - Completion

36

30

36

12.0

25

Source: Industry, MOSL

* we take top-7 cities in India



Source: Industry, MOSL

* we take top-7 cities in India

Even within Retail Real Estate, CY14 was the bottom, with absorption declining

69% to 1.6msf. However, CY15 has seen a sharp bounce, with 3.3msf sold; the

strong growth should continue over the next few years.

June 2016

8

Capital Goods | Change is in the air

Exhibit 9: Retail space absorption and completion

Absorption(mn sq ft)

13.8

9.4

4.1

Completion(mn sq ft)

Exhibit 10: Vacancy rates have peaked out

Vacancy (%)

20

18

18

17

18

16

16

18

18

8.5

6.3 6.9

4.1

5.7

3.6

7.5 7.5

5.4

15

1.3

3.8 3.7 9.6 6.6 4.0 4.0 10.7 4.5 5.1 1.6 3.3 4.9 6.0 4.6

2.8

Source: Industry, MOSL

* we take top-7 cities in India



Source: Industry, MOSL

* we take top-7 cities in India



The Residential Real Estate market remains subdued. CY15 was another year of

decline – 0.16m units were sold against the peak of 0.2m units in FY12. We also

highlight that 0.45m units are lying unsold and at the current pace of sales

would take 3-4 years to be cleared out. New launches also declined to 0.2m

units in CY15 against the peak of 0.26m units in CY12.

Given the builders’ reluctance to cut prices, reduced affordability, high

inventory of unsold flats (0.56m as of December 2015) and the new clauses

introduced by the recent Real Estate Regulatory Act, there could be a lull in new

launches over the next 6-9months. However, CY16 should be the bottom for the

market – we expect a recovery in CY17 in both new launches and unit

absorption. This would be driven by continued rate cuts by the RBI, a recovery in

the general economy and quicker completion of ongoing projects as required

under the new Real Estate Act.

Expect a recovery in CY17

for Residential Real Estate

demand, both new

launches and unit

absorption driven by

continued rate cuts by the

RBI, a recovery in the

general economy and

quicker completion of

ongoing projects

Exhibit 11: Residential Real Estate to bottom out in CY16 (units)

Units launched

247,000

203,000

130,000

90,000

102,000

2008

101,000

2009

2010

2011

2012

2013

2014

184,000

167,000

198,000

193,386

165,840

157,798

Units sold

237,621

225,821

256,000

200,334

2015

Source: Industry, MOSL

* we take top-7 cities in India



Another key indicator of Housing growth is home loans by housing finance

companies, NBFCs and banks. These have grown at a CAGR of 19% over FY05-16.

The slowdown in Residential Real Estate is more specific to the top-7 cities;

smaller cities and towns have remained largely insulated.

June 2016

9

Capital Goods | Change is in the air

Exhibit 12: Housing loans have grown at 19% CAGR over FY05-16

Housing loan O/S

41

6.2

22

16

17

7.2

YoY Growth(%)

9.9

8.4

11.5

25

1.7

2.4

3.0

3.4

13

3.8

12

2009

4.3

13

2010

5.1

19

18

16

2005

2006

2007

2008

2011

2012

2013

2014

2015

2016

Source: MOSL, Industry

“Pradhan Mantri Awas Yojna” aims to add 30m houses by FY19

In June 2015, the Union Cabinet approved the “Pradhan Mantri Awas Yojna” to

provide “Housing for All” by 2022. The aim was to construct 20m houses in urban

areas. The highlights of the scheme are:



On an average, central grant of INR0.1m/house would be available under the

slum rehabilitation program. The state government would have flexibility in

deploying this slum rehabilitation grant to any slum rehabilitation project taken

for development using land as a resource for providing houses to slum dwellers.



Under the credit-linked interest subsidy component, interest subsidy of 6.5% on

housing loans availed up to tenure of 15 years would be provided to

economically weaker section (EWS) / low income group categories, wherein the

subsidy payout on NPV basis would be ~INR0.23m/house.



Central assistance at the rate of INR0.15m/house for EWS category would be

provided under affordable housing in partnership and beneficiary-led individual

house construction or enhancement. State governments or housing boards can

take up affordable housing projects to avail the central government grant.



The scheme would cover the entire urban area consisting of 4,041 statutory

towns with initial focus on 500 class-I cities and it will be implemented in three

phases till April 2019.



Phase-I (April 2015 - March 2017) to cover 100 cities to be selected from

states/UTs as per their willingness



Phase-II (April 2017 - March 2019) to cover additional 200 cities



Phase-III (April 2019 - March 2022) to cover other remaining cities

As seen in the table below, ~0.7m EWS houses have been taken up for funding

across states with a total budgeted spend of INR100b as of May 2016.

“Pradhan Mantri Awas

Yojna” aims to provide

“Housing for All” by 2022

with target to construct

20m houses in urban areas.

June 2016

10

Capital Goods | Change is in the air

Exhibit 13: Progress of Pradhan Mantri Awas Yojna as of May 2016 (INR in Crore)

Sr.

No.

Name of the State

No of Cities

considered

for funding

-

59

-

-

85

-

9

-

-

-

-

12

-

9

2

38

15

-

-

37

10

-

-

8

-

2

-

1

19

-

175

63

-

-

19

108

671

Project

Proposals

Considered

-

110

-

-

85

-

11

-

-

-

-

77

-

9

2

38

21

-

-

45

17

-

-

8

-

6

-

1

23

-

197

144

-

-

21

108

923

EWS

Houses

-

1,93,147

-

-

30,216

-

12,670

-

-

-

-

66,983

-

1,077

224

20,239

16,522

-

-

43,393

71,701

-

-

10,286

-

11,548

-

1,280

12,307

-

34,013

80,481

-

-

2,757

74,880

6,83,724

Central

Assistance

involved

-

2,897.21

-

-

453.24

-

190.05

-

-

-

-

853.62

-

16.16

3.36

303.59

247.83

-

-

644.12

1,063.74

-

-

154.29

-

143.22

-

12.80

184.61

-

510.20

1,207.22

-

-

41.36

1,123.20

10,049.77

Central

Assistance

Released

(projects)

-

334.95

-

-

79.89

-

76.02

-

-

-

-

318.05

-

6.46

-

121.43

-

-

-

208.44

-

-

-

8.18

-

33.29

-

-

37.53

-

40.50

261.76

-

-

13.76

88.85

1,629.11

Subsidy provided by the

state and central

governments under this

scheme has increased by

more than 70%; from

INR70,000, the allocation

has now gone up to

INR120,000.

1

A&N Island (UT)

2

Andhra Pradesh

3

Arunanchal Pradesh

4

Assam

5

Bihar

6

Chandigarh (UT)

7

Chhattisgarh

8

D&N Haveli (UT)

9

Daman & Diu (UT)

10

Delhi (UT)

11

Goa

12

Gujarat

13

Haryana

14

Himachal Pradesh

15

Jammu & Kashmir

16

Jharkhand

17

Karnataka

18

Kerala

19

Lakshdweep (UT)

20

Madhya Pradesh

21

Maharashtra

22

Manipur

23

Meghalaya

24

Mizoram

25

Nagaland

26

Orissa

27

Puducherry (UT)

28

Punjab

29

Rajasthan

30

Sikkim

31

TamilNadu

32

Telangana

33

Tripura

34

Uttar Pradesh

35

Uttrakhand

36

West Bengal

Grand Total

Source: Ministry of Housing and Urban Development



In March 2016, the Union Cabinet approved the “Pradhan Mantri Awas Yojna”

for rural areas. All the existing rural housing programs have devolved into this.

Highlights of the scheme:

Subsidy provided by the state and central governments under this scheme has

increased by more than 70%; from INR70,000, the allocation has now gone up to

INR120,000. In hilly and difficult areas, it has increased from INR75,000 to

INR130,000. Additionally, taking into account benefits of labor under MNREGA

(90 days) and INR12,000 under Swach Bharat Mission, the total benefit adds up

to INR150,000 for house construction. Bringing transparency in the selection of

beneficiaries, the data from the census conducted in 2011 will be used.



June 2016

11

Capital Goods | Change is in the air







In the years from 1985 to 2015, around 35m houses have been constructed;

under the new program,

the government targets to construct 10m houses in

three years till FY19.

The central government will spend INR820b on rural housing till FY19; in

addition, the states will be spending over INR500b as their share. The annual

allocation from the central government will go up from INR100b to over

INR270b.

In our view, the infusion of resources of this magnitude will be a

game changer in the rural housing scene and the rural economy.

Our view:

If the government is able to construct 30m new houses under this

program, it would alone generate demand for ~60m new fans (assuming two

fans used in one house) or 20m fans per year over a three-year period to FY19.

To put this in perspective, the Indian Fan industry sells ~47m fans per year.

GST implementation to drive faster shift to organized segment

In FY15, the unorganized

segment constituted ~25%

of overall industry sales,

though down from ~40% in

FY10.







The Goods and Services Tax (GST) legislation was passed in the Lok Sabha (lower

house of Parliament) on May 6, 2015. The Government of India seems

committed to replace all indirect taxes levied on goods and services by the

center and the states with a common GST by April 2017. With GST

implementation, it is anticipated that the tax base will be comprehensive, as all

goods and services will be taxable, with minimum exemptions.

In India, there is significant presence of the unorganized segment in Light

Electricals. We estimate that in FY15, the unorganized segment constituted

~25% of overall industry sales, though down from ~40% in FY10.

GST implementation is expected to narrow the large indirect tax differential

between the organized and unorganized players. This would be achieved by

ensuring better compliance and enforcement by (a) reducing the threshold limit

for exemption from indirect taxes to INR1m under GST from INR15m under the

current excise duty regime, (b) tracking the flow of GST credit in the entire value

chain using technology platforms, (c) ensuring availability of seamless input

credit, and (d) reducing the overall effective tax rates.

Exhibit 14: Measures that will lead to shift of trade from unorganized to organized

segment

Source: Havells, Frost, Industry, MOSLe

June 2016

12

Capital Goods | Change is in the air

Exhibit 15: Unorganized players as a % of overall category sales for Light Electricals

Description

Fans

Lighting

Pumps

Domestic Switchgear

Industrial Switchgear

Switches

FY10

40

60

45

20

30

50

FY15

25

40

30

<5

20-25

30

Source: Havells, Frost, Industry, MOSLe

7th Pay Commission wage hike implementation to accelerate demand

growth over next two years



The government estimates

the impact of the Pay

Commission

recommendations at

INR1.02t for FY17.







The central government constitutes the Pay Commission every 10 years to

recommend revisions in pay scales for central government employees. Very

often, these recommendations are also adopted by the states after some

modifications. Recommendations of the 7

th

Pay Commission, which came into

effect from January 2016, are expected to impact 4.8m central government

employees and 5.5m pensioners.

The 7

th

Pay Commission has recommended a 24% increase in pay and

allowances for government employees. Pay would go up by 16%, allowances by

63% and pensions by 24%. It has also recommended an annual increment of 3%

for central government employees.

The government estimates the impact of the Pay Commission recommendations

at INR1.02t for FY17. Moreover, the state governments would also be revising

the salaries of their employees (~10m), followed by similar revisions by public

sector undertakings (PSUs).

The impact of the 6

th

Pay Commission was much bigger, as (a) it had

recommended a 36% pay hike, and (b) the hike was paid with arrears of two

years. The 6

th

Pay Commission was set up in July 2006 and its recommendations

were submitted in March 2008. 40% of the arrears were paid in 2009 and 60% in

2010 instead of the originally scheduled 2006.

Exhibit 16: 6

Pay Commission impact on pay and

allowances of central government employees

Pay and Allowances(INRb)

60

966

737

460

-4

31

7

12

12

11

928

993

YoY (%)

1,116

1,252

1,392

th

Exhibit 17: Pay and allowances as a percentage of the

government’s total expenditure

% of total expenditure

8.34

6.45

9.43

7.75

7.61

7.91

7.87

7.76

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: MOSL, GOI



Source: MOSL, GOI

We expect the wage hikes recommended by the 7

th

Pay Commission to be paid

on current basis. Unlike the previous occasion, there wouldn’t be a significant

arrears portion. We believe the limited bounty would result in a

13

June 2016

Capital Goods | Change is in the air

disproportionate benefit for smaller ticket items like Light Electricals and also

lead to increased premiumization of the same product.

Exhibit 18: CY09 and CY10 see increased lighting sales post

th

6 Pay commission pay out

9%

7%

1%

1,305

1,218

1,317

Lighting(Units m)

7%

7%

1%

1,384

-5%

1,492 1,418

18.0

FY07

20.8

FY08

YoY (%)

8%

5%

23.8

16.1

2.6

20.9

FY09

29.1

FY10

37.4

FY11

8.3

(3.1)

36.2

FY12

39.2

FY13

2.7

40.3

FY14

44.8

FY15

10

Exhibit 19: FY10 fan volumes see a spurt post the 6

Commission payout

Fans (mn units)

29.9

28.6

YoY Growth(%)

th

Pay

1,057

968

1,126

1,140

CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14

Source: MOSL, Industry

Source: MOSL, Industry

Exhibit 20: Breakdown of employees by rank

Senior

Management

position, 3%

Middle

management,

9%

Exhibit 21: Employee break up by age

1%

29%

Supervisory

and clerical

tasks, 89%

22%

20-30 years

30-40 years

40-50 years

50-60 years

Others

22%

26%

Source: 7 Pay Commission, MOSL

th

Source: 7 Pay Commission, MOSL

th

Exhibit 22: Break up of Central Government employees by area of residence

Metros, 18%

Others, 53%

Top 67 cities

(ex metros), 29%

Source: 7 Pay Commission , 2011 Census, MOSL

th

June 2016

14

Capital Goods | Change is in the air

Increased pace of village electrification and improved power availability to

drive rural demand for Electricals





Rural electrification has been a challenge for successive central governments.

Given India’s federal structure, the states provide last-mile connectivity and

maintain infrastructure; the center provides policy and financial support.

With its aim of “Power for All”, the Government of India has put village

electrification at the top of its agenda. The Modi government launched the

“Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY)” to ensure rapid

electrification, feeder separation, and strengthening of rural distribution

infrastructure. The aim is to electrify the remaining 18,452 villages across India

by May 2018. (Note: A village is considered electrified if all the public places and

10% of households have electricity).

Exhibit 23: Villages electrified in India – 7,008 villages electrified in FY16

Villages electrified

556,633

512,513

482,864

560,552

572,414

577,629

584,637

FY02

FY07

FY12

FY13

FY14

FY15

FY16

Source: CEA, MOSL

In FY16, a record 7,008

villages were electrified

(target: 7,000 villages),

higher than the total

villages electrified in the

preceding three years.





In FY16, a record 7,008 villages were electrified (target: 7,000 villages), higher

than the total villages electrified in the preceding three years. A total 580k

villages (~98% of total villages) have been electrified and the aim is to complete

the electrification of all villages in FY17 itself, much before the deadline of May

2018 that the government has set for itself.

An increase in grid connected villages, and in turn, higher availability of power

for households would lead to higher demand for Light Electrical Products such

as Fans, Lights, Switches, etc.

June 2016

15

Capital Goods | Change is in the air

Premiumization trend visible across product categories

Key drivers: Need for energy efficiency I Focus on aesthetics



In our view, the drive towards premiumization is because of two key critical factors:

(a) need for energy efficiency, and (b) focus on aesthetics.

Energy efficiency: “Life cycle cost versus cost of purchase”

Energy Efficiency Services

Limited (EESL) started a

pilot project in Andhra

Pradesh, where it intends to

distribute five-star-rated

fans normally priced

INR1,900 at INR995





As consumers realize the longer-term benefits of savings on “higher star”

products, they are more willing to pay higher upfront prices to take advantage

of the savings over the life of the product. The government’s initiative to drive

energy efficiency through increased use of LEDs and five-star-rated Pumps and

Fans has led to higher consumer awareness. A five-star-rated Fan costs

~INR1,900 (50W) against INR1,400-1,500 (75W) for a normal Fan. We estimate a

saving of INR300/year as a result of using the five-star-rated Fan versus the

normal Fan, which consumes 40% more power.

Energy Efficiency Services Limited (EESL) has recently started a pilot project in

Andhra Pradesh, where it intends to distribute five-star-rated fans normally

priced INR1,900 at INR995 – the reduction in price is possible due to bulk

purchases. Tenders have already been called for. The fans would be distributed

on an upfront payment of INR100 followed by 24 installments of INR50 each.



EESL is driving a similar movement in Lamps, where it targets to replace

Incandescent Lamps (ICLs) with Light-emitting Diodes (LEDs). In CY14, ~725m

ICLs were sold in India at an average price of INR10. Currently, the average price

of an LED Lamp in the market is INR220-250/unit while EESL is able to source

9W LED Lamps for INR80-85/unit. It distributes these to end consumers through

DISCOMs. We note that despite retail prices of LED Lamps being 3-4x the retail

prices of Compact Fluorescent Lamps (CFLs), there is a clear trend towards

buying more LED Lamps.

16

June 2016

Capital Goods | Change is in the air



Despite Havells selling only through dealers, LED sales account for 45% of its

overall sales and this is expected to rise to 70-75% in the next 2-3 years. Havells

has not participated in EESL’s program for residential lighting, but is

participating in LED street lighting through its subsidiary, Promptec.

Units

hours

watts

Kilowatt-hour (kWh)

rupees

rupees

no of bulbs

rupees

rupees

rupees

ratio

ICL

1,500

60

0.06

0.36

18,000

33

10

330

18330

9.2

CFL

10,000

14

0.014

0.084

4,200

5

60

300

4500

2.2

LED

50,000

6

0.006

0.036

1,800

1

200

200

2000

1

Exhibit 24: Cost comparison – LED v/s CFL v/s ICL

Description

Life Span

Equivalent Wattage

Power consumed per hour

Cost of usage for one hour @Rs 6 per kWh

Cost of usage for 50,000 hours (A)

Bulbs needed for 50,000 hours of running

Bulb Cost

Cost of replacement(B)

Total 50,000 hour lighting cost (A+B)

Ratio of cost

Increasing consumer focus on aesthetics



Source: MOSLe, Industry

The Indian consumer is becoming increasingly discerning and trading up is

evident across product categories. Companies have begun launching products

with better aesthetics and additional features.

Exhibit 25: Premium products being offered across product categories

Product

Category

Fans

Premium

Products

Decorative Fans,

5 Star rated fans

Kids fans,

Under light fans

with remote

BLDC fans

Name of company

and model

Crompton:

Prudence, Harmoni, Kohinur, Obernon, Luster Eros, Titanis,

Nebula, Jupiter, Kanon Painted, Karissa, Triton, Twirl, SAIL, Radiance,Aura,

Diamnond, Embera

Bajaj:

Disney Range, Magnifique, Euro, Cruzair,

Havells:

Momenta, Opus, Ebony, Lumos , ES50, Florina, Veneto, Melania, Aureues, Avion, Cedar,

Dew,Florence

Orient:

New Breeze, Subaris, Adalia, Andrea, Valeria, Spectra, Arista, Curl, Jazz, Cristo, Cyril, Joan,

Avalon

Usha:

Barbie Glam, Daraemon, Chota Bheem, Fontana, E Series,Striker Galaxy

Khaitan:

Flamingao, Flair, Magnate, Vega, Newtec, Decora, Hunar, LA Vega, Hunar

Anchor:

Woods, Roma, Ave, Vision, Viola

Havells:

Euro II, Pearlz, Oro

Schneider Electric:

Livia, NEO, ZEN Cleo,

Legrand:

Myrius, Mylinc, Arteor

Usha:

Cold press Juicers,

Morphy Richard:

Deluxe Food processor

Havells:

Riso cooker, Insta Cook (induction cooktop)

Source: MOSL, Company

Switches

Aesthetic switches

Shock resistant

Multi-function and

premium

appliances

Kitchen

appliances

June 2016

17

Capital Goods | Change is in the air

Multiple themes at play

New category entry I Rising ad spends I Focus on after sales and distribution





With the industry working on an “asset light model”, there is a clear trend of players

entering new product categories. This is more so in kitchen and home appliances.

To win in an environment of intense competition, companies are focusing more on

advertising, sales network and after sales services.

Entry into new categories by existing players as a brand extension





An interesting trend observed over the last few years is brand extension by

existing players into related product categories. This trend is more visible in

kitchen and home appliances, where most companies follow an outsourcing

model. The companies source products from China and only handle

marketing/distribution. With no or little R&D requirement and low capital

investment, this is an attractive business opportunity.

The success of entry into related categories depends on the existing brand

positioning and perception, dealer margins offered, advertising spend to build a

connect with the consumer, distribution reach (electronics dealers v/s hardware

dealers to sell Consumer Appliances) and service centers.

New product categories

Consumer Appliances, Switchgear, Lighting

Lighting, Switches, Fans

Lighting, Switchgears, Fans, Wires and cable

Lighting, Electric Appliances

Fans, Consumer Durables

Fans, Switchgears, Kitchen Appliances

Consumer Appliances, Air Cooler,

Consumer appliances, Coolers, Pumps

Fans, Switches, Lighting, Switchgears

Fans, Lighting, Switches

Source: MOSL, Industry, Company

Exhibit 26: Recent entries into new product categories by existing players

Company

Orient Electric

Finolex

Anchor

Eveready

Surya Roshni

V-Guard

Crompton Greaves

Havells

Luminous

Polycab

Core Product

Fans

Cables

Switches

Batteries

Lighting

Voltage Stabilizers, Inverters

Fans, Lighting, Pumps

Switchgear, Lighting, Fans

Invertors

Wires





The key reason behind entering related product categories is to get a higher

wallet share of the retail store and the customer while leveraging on existing

brand equity.

For most companies that have recently entered the Consumer Appliances

business, the challenge is to develop the appliance network since the existing

electricals dealer network is not suitable for distribution of appliances.

June 2016

18

Capital Goods | Change is in the air

Exhibit 27: Company wise presences across electrical and kitchen appliances

Electric Appliances

Name of company

Havells

Crompton Greaves

Bajaj Electricals

Khaitan Electricals

Usha

Orient Electricals

Eveready

TTK Prestige

Philips

Panasonic

Inalsa

Sunflame

Fans

Y

Y

Y

Y

Y

Y

Y

Water Heaters

Y

Y

Y

Y

Y

Air Coolers

Y

Y

Y

Y

Y

Y

Irons

Y

Y

Y

Y

Y

Kitchen Appliances

Mixer Grinders

Y

Y

Y

Y

Y

Y

Toasters

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Source: MOSL, Industry, Company

Exhibit 28: Asset turns for the industry high given the asset light business model

25.9

Bajaj

CG

Havells

V Guard

24.2

16.0

11.0

4.1

6.7

7.3

4.0

3.9

4.3

11.2

Surya Roshni

Average

14.5

FY14

FY15

Source: Company, MOSLe

Increasing advertising spends to gain market share in new product

categories

V Guard, has the highest

advertising spends led by

expanding from its

traditional base in South

India to other regions in

North, West and East India,.





A key differentiator in the Light Electricals segment is advertising spends to gain

consumer mind share and develop a “pull” factor for the company.

Our analysis of the advertising spends across key listed players in FY15 highlights

that advertising spends range between 0.7% and 4.1% of revenue. V Guard,

which is expanding from its traditional base in South India to other regions in

North, West and East India, has the highest advertising spends. It spent 4.3% of

its sales on advertising in FY16.

Exhibit 29: Advertising spends by company (% of sales)

Name of company

Bajaj Electricals

Crompton **

Havells

V Guard

Surya Roshni

FY15

1.3

2.5

3.4

4.1

0.7

FY14

1.6

2.7

2.5

4.2

0.3

FY13

1.3

2.7

3.1

4.5

1.2

FY12

1.3

2.2

3.1

4.2

0.6

FY11

2.2

1.7

2.5

3.8

1.3

Source: Company, MOSL, ** ad spend for entire Crompton Greaves, For Bajaj, we exclude the E&P

segment

June 2016

19

Capital Goods | Change is in the air







Crompton has spent ~2% of its sales on advertising over the past six years.

However, this is set to change with the new management, which intends to

aggressively increase advertising spends to gain higher market share. This is

already evident from the number of television commercials (TVCs) Crompton

has been airing over the last few months, with a focus on Lighting, Fans and

Appliances. The management intends to bring advertising spends in line with

the competition.

Havells has deftly used advertising spends (3-3.5% of sales) to create a premium

positioning. This has enabled it to charge a premium on its products.

With most companies now eyeing market share in new product categories,

advertising campaigns are becoming more important.

R&D spends across key players remain low

The industry is based on

“outsource and assemble”

model and thus the R&D

spends, which stand at 0.3-

1% of sales across

companies.





Within the Consumer Appliances space, most companies use an outsourcing

model. They buy products from China and distribute these in India. Havells is

one of the few companies preferring to “insource”. It has set up factories in

India to manufacture Water Heaters and Kitchen Appliances, and will be

extending this to other product categories as well.

Even in the case of other product categories such as Fans, Pumps and Lighting,

the industry has an “outsource and assemble” model. Most components are

outsourced and assembled by the seller.

Exhibit 30: R&D spending by company

Name of company

Bajaj Electricals

Crompton Greaves

Havells

V Guard

FY15

1.0

0.8

0.5

0.3

FY14

0.3

0.7

0.5

0.4

FY13

0.4

0.6

0.4

0.3

FY12

0.4

0.6

0.2

0.2

FY11

0.3

0.8

0.3

0.2

FY10

0.3

0.6

0.3

0.3

Source: Company, MOSL





This “outsource and assemble” model is in turn reflected in the R&D spends,

which stand at 0.3-1% of sales across companies.

A comparison of the “outsourced/traded” components across players reveals

that Havells has the fewest traded products. It focuses on “insourcing” products

to have a better control on quality and the supply chain. This has also resulted in

Havells having the highest gross margins in the industry (~42%). Bajaj Electric

has the least “insourcing” – it manufactures only ~3% of its products.

FY16

3%

50%

>90%

40%

Source: Company, MOSLe

Exhibit 31: In-house manufacturing of Electricals portfolio

Name of company

Bajaj Electricals

Crompton Greaves

Havells

V Guard

June 2016

20

Capital Goods | Change is in the air

Exhibit 32: Higher in-house manufacturing results in higher gross margins

Name of company

Bajaj Electricals

Crompton Greaves

Havells

V Guard

FY16

30%

29%

42%

31%

Source: Company, MOSLe



Most companies operating in the Kitchen Appliances segment outsource

production to China and market these products through their

distribution/dealer network. Havells is among the few companies to have

“insourced” manufacturing of Water Heaters; it has also commissioned a new

plant to manufacture Kitchen Appliances.

Distribution reach: A key differentiator in Light Electricals industry



Bajaj Electricals has the

widest reach across

Consumer Electricals

companies whereas

Crompton has ~50% share

at each electrical outlet

selling its products



One of the key differentiators in the Light Electricals industry is distribution

reach and dealer touch points.

Bajaj Electricals has the widest reach across Consumer Electricals companies. It

has been in the Indian market for almost 80 years and also has a wide product

portfolio across Consumer Appliances (Induction Cookers, Irons, Water Heaters,

Mixers, Grinders, etc), Fans and Lighting.

FY16

500,000

+150,000

+100,000

30,000-

33,000

200,000

30,000

FY15

400,000

134,000

+100,000

25,000

200,000

3.2mn touch points for batteries

Other touch points

5,000 authorized dealers and

104 “Bajaj World” showrooms

60 Crompton “Exclusive” showrooms

375 Havells Galaxy stores

2000 channel partners

Exhibit 33: Retail touch points by player (number of units)

Name of company

Bajaj Electricals

Crompton Greaves

Havells

V Guard

Surya Roshni

Eveready

Source: Company, MOSL, ** Eveready touch points for electrical outlets only

Exhibit 34: Distributors by company

Name of company

Bajaj Electricals

Crompton Greaves

Havells

V Guard

Surya Roshni

Eveready

FY15

1,000

4,000

6,300

500

20,000

4,000

Source: Company, MOSLe





While having a high number of retail touch points is important, it is equally

important to have a high share of retail store sales. Crompton has ~50% share at

each electrical outlet selling its products – this implies that sales per store are

much higher than peers. However, with its entry into Consumer Appliances, it

needs to get its products into Home Appliance/Hardware stores, where it is a

recent entrant, having started this business only in FY11.

E-commerce as a channel to go to market has been gaining importance and

most companies have opted to have separate SKUs for the online and offline

platforms. This helps to reduce cannibalization of sales by aggressive

21

June 2016

Capital Goods | Change is in the air

discounting by online stores. Companies such as Bajaj Electricals, Murphy

Richards and Philips also sell their products online through their own website.

Companies such as Havells and V Guard, however, push sales only through their

authorized distributors and dealers.

Exhibit 35: Product category-wise “Go to Market” channels

Name of company

Fans

Lighting

Switches

Pumps

Cable and Wires

Iron

Mixer/Grinder

Cookware

Water Heater

Electricals

Store

Y

Y

Y

N

Y

N

N

N

Y

Appliance

Store

N

N

N

N

N

Y

Y

Y

Y

Multi Brand

retail

Y

Y

Y

N

N

Y

Y

Y

Y

E Commerce

Y

Y

Y

Y

Y

Y

Y

Y

Source: MOSL, Industry

Attractive commissions and incentives necessary to gain and retain dealers

Crompton offer highest

dealer commissions and

incentives amongst the

peers





Given the intensely competitive environment in the Light Electricals sector,

dealer commissions and incentives are key to gaining acceptance at retail stores.

Crompton has been ahead of peers in offering dealer commissions and

incentives and this explains its high share in the retail stores where it is present.

Dealer incentives and commissions ensure that the distribution channel

continues to push the company’s products into the market.

While Crompton’s new management has been pushing up advertising spends as

it tries to garner greater consumer connect, we believe it could also raise dealer

commissions/incentives to increase its penetration.

FY15

1.2

1.4

0.8

1.0

1.1

FY14

0.8

1.8

0.7

1.0

0.9

FY13

0.6

2.0

0.8

0.9

1.2

FY12

0.6

1.6

0.7

0.6

1.0

FY11

0.4

2.6

0.8

4.2

0.8

Exhibit 36: Dealer commissions/incentives offered across players (% of sales)

Name of Company

Bajaj Electricals

Crompton

Havells

V Guard

Surya Roshni

Source: MOSL, Company, ** we have considered only the consumer business for the comparison

After sales service: Equally important, as Electricals can last for 5-7 years



After sales service is equally important in the case of Consumer Electricals, as

these products typically last for 7-10 years. This is more so in the case of

Consumer Appliances and Fans.

June 2016

22

Capital Goods | Change is in the air

Exhibit 37: Service center strength of key players in the Light Electricals segment

Name of company

Bajaj Electricals

Crompton Greaves

Racold India

Phillips

V Guard

Murphy Richard

Nos.

400

+500

+100

+180

150

150

Source: Company, MOSL



Havells has a different model, where it has tied up with electricians (>0.15m all

over India), who repair the product at the consumer’s house, saving the

consumer the effort to go to a service center.

June 2016

23

Capital Goods | Change is in the air

Fans – structural story intact

Medium term threat from government’s bulk tendering program



Industry shifting to premium fans with 40% of sale from these models vs. ~10-15% in

FY06; Havells market leader in this segment with a +25% share

Governments’ bulk procurement programme targets to replace 160m fans over FY16-

19e; save 30% power compared to normal fans



Fan sales to grow 12% CAGR in FY16-19e; premiumisation drives value

growth



The unorganized segment

(local and Chinese products)

contributes ~20-25% of

sales.





The Indian Fan market has grown at a CAGR of 11% in value terms to ~INR60b

over FY11-16. Of this, 6-7% growth has come from volumes and the balance

from price increases. In volume terms, ~50m Fans are sold in India, with the

organized market at 75%.

There is a shift towards Premium Fans, which now account for 40% of the

market against 10-15% in 2006. The Indian consumer’s increasing focus on

aesthetics and energy efficiency is driving the premiumization trend.

Key players in the organized market are Crompton, Orient Electricals, Usha

International, Khaitan, Bajaj Electricals, and Havells. The unorganized segment

(local and Chinese products) contributes ~20-25% of sales.

Exhibit 38: Growth in Indian Fan industry over FY11-19e

18%

Fans (INRm)

YoY (%)

13%

9%

10%

7%

45

48

53

60

67

12%

12%

12%

84

75

35

FY11

38

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e







The Bureau of Energy Efficiency (BEE) launched the voluntary standard labeling

program from 2009. This forced the industry to look at infusing technology and

rework marketing campaigns to highlight energy efficiency. Over 2009-12,

manufacturers imported motor testing lines, air delivery measurement systems

and computerized testing systems for motors to meet newly-defined

parameters in air delivery, fan speed and power input.

Orient introduced energy-efficient fans under its

Summer Crown

brand in 2009-

10 while Cromptom Greaves developed such fans in 2010-11. Bajaj unveiled

eight models (four each in the 4-star and 5-star categories) in 2011-12.

The Fan market also saw the emergence of the ‘children’ category, with Bajaj

and Havells being the market leaders in introducing child-focused models. Bajaj

entered the category by signing an exclusive tie-up in 2008-09, which allowed it

to unveil Fans with Disney characters. The company continued with new

launches in this category in 2010-11 and 2011-12.

24

June 2016

Capital Goods | Change is in the air

Exhibit 39: Fans – share of unorganized segment has been falling

50%

Unorganized Sector(%)

30%

30%

25%

FY07

FY12

FY13

FY14



Another category that has gathered pace in the past few years is

Decorative/Premium Ceiling Fans. Havells took the lead in this category

(>INR2,500/unit) and enjoys over 25% share. Orient introduced its Remote-

controlled Premium Fans range in 2009-10. Crompton too launched a full range

of Premium Ceiling Fans. We highlight below the key models being offered

across players in the Premium, Decorative and Children categories.

Exhibit 40: Premium Ceiling Fans by key players in the industry

Product

Category

Premium

Products

Decorative

Fans,

5 Star rated

fans

Kids fans,

Under light

fans with

remote

BLDC fans

Name of company and model

Fans

Crompton

- Prudence, Harmoni, Kohinur, Obernon, Luster Eros, Titanis, Nebula, Jupiter, Kanon Painted, Karissa,

Triton, Twirl, SAIL, Radiance, Aura, Diamnond, Embera

Bajaj

- Disney Range, Magnifique, Euro, Cruzair,

Havells

-Momenta, Opus, Ebony, Lumos , ES50, Florina, Veneto, Melania, Aureues, Avion, Cedar, Dew,Florence

Orient

-New Breeze, Subaris, Adalia, Andrea, Valeria, Spectra, Arista, Curl, Jazz, Cristo, Cyril, Joan, Avalon

Usha

- Barbie Glam, Daraemon, Chota Bheem, Fontana, E Series,Striker Galaxy

Khaitan

- Flamingao, Flair, Magnate, Vega, Newtec, Decora, Hunar, LA Vega, Hunar



Premium Fans now account

for 40% of total Fan sales,

up from 10-15% in 2006.





Premium Fans now account for 40% of total Fan sales, up from 10-15% in 2006.

Companies are focusing more on Premium Fans, driven by shifting consumer

preference and higher margins in this category.

Crompton, which is present across the entry and mid segments, has ~30% of its

models in these segments. It has ~70% of its models in the premium and star-

rated segments. Havells is clearly positioned in the premium segment, with just

~13% of its models in the standard range.

Crompton, which offers 75 models of Ceiling Fans, has the biggest portfolio.

Usha, the second-largest player, has a portfolio of 62 models.

June 2016

25

Capital Goods | Change is in the air

Exhibit 41: Ceiling Fan categorization by segment and player

Ceiling fans

Under light fans

Kids fans

Decorative fans

BEE 5 Star rated

Standard/Plain fans

Total no. of models

Crompton

18%

4%

40%

9%

30%

75

Havells

17%

6%

61%

4%

13%

54

Orient

22%

4%

47%

10%

18%

49

Usha

15%

13%

30%

29%

15%

62

Bajaj

8%

13%

48%

13%

18%

39

Source: Company websites, MOSL

Exhibit 42: Fans sold by type in India

Pedestral/Desk

fans, 20%

Ceiling fans, 70%

Fresh Air, 5%

Industrial, 2%

Cooler Fans, 2%

Source: Industry, MOSL

Crompton remains market leader by wide margin



Crompton remains the undisputed market leader in Fans, despite severe

competition from both domestic players and cheap Chinese imports. It has built

a reputation for offering reliable, durable and trouble-free Fans.

Exhibit 43: Market share in Fans (FY11-FY16E)

CG

31%

15%

14%

14%

26%

FY11

31%

15%

15%

15%

24%

FY12

Bajaj Elec

32%

15%

15%

14%

25%

FY13

Havells

Orient

26%

18%

15%

14%

27%

FY14

Others

25%

18%

15%

14%

28%

FY15

29%

17%

16%

11%

27%

FY16

Source: Industry, MOSL,

June 2016

26

Capital Goods | Change is in the air

Exhibit 44: Market share in Fans (FY16)

Others, 29%

Crompton

Greaves, 27%

Orient fans, 17%

Bajaj Electricals,

11%

Havells, 16%

Source: Industry, MOSL

Focus on energy efficiency increasing; EESL takes lead by distributing BEE 5-

star-rated fans





EESL is able to procure 5-

star-rated Fans at INR1,100-

1,200/unit, though the

usual market price of

similar Fans is INR1,800-

1,900/unit.







Energy Efficiency Services Limited (EESL) is implementing the government’s

“National

Energy Efficient Fan”

program. It is procuring BEE 5-star-rated Fans

(50W) with a replacement warranty of 2.5 years and intends to replace 160m

Fans till FY19.

EESL is able to procure 5-star-rated Fans at INR1,100-1,200/unit, though the

usual market price of similar Fans is INR1,800-1,900/unit. The government has

put a cap of two fans per household under this program.

Usage of 50W BEE 5-star-rated Ceiling Fans distributed under the program

would reduce the average consumer’s electricity bills by INR700-730/year. The

cost of the Fans would be recovered in less than two years. These Fans are 30%

more energy efficient than the usual 75-80W Conventional Fans.

EESL has launched the scheme in Vijayawada, where it is providing two energy-

efficient Fans to each consumer at an equated monthly installment (EMI) of

INR60/fan. The EMI would be added to the consumers’ electricity bills for two

years. The consumer can also purchase the Fan by paying INR1,250 upfront.

Consumers can participate in the program by providing copies of the latest

electricity bill and residence proof at the designated distribution center.

EESL is procuring the Fans via bulk tendering from leading manufacturers such

as Crompton, Orient, Usha and Bajaj Electricals. The Fans are provided to

consumers through the state distribution company or EESL outlets.

June 2016

27

Capital Goods | Change is in the air

Exhibit 45: Comparison – normal Ceiling Fan v/s BEE 5-star-rated Fan v/s BLDC motor Fan

Source: MOSL, Bijllee Bachao

Note: Super-efficient fans have BLDC motors





Major Fan manufacturers are launching Fans with brushless direct current

(BLDC) motors that use just 50% of the energy used by regular Fans. While BLDC

Fans consume 50% of the electricity consumed normal Fans, they also cost

~INR1,500 more. The typical payback for a BLDC Fan is ~1 year. Orient launched

BLDC Fans priced at INR4,800/unit last year. Others including Crompton are also

looking to launch Fans in this segment.

Our channel checks indicate that while a 5-star-rated Fan saves 35-40% power

cost, its air circulation is 200-210 cubic meters/minute against a standard Fan’s

230-240 cubic meters/minute.

June 2016

28

Capital Goods | Change is in the air

Lighting – LED movement underway

Expect 13% CAGR over CY15-18, driven by strong jump in LED sales





Government’s UJALA programme drives switch of ICL/FTL’s to LEDs’

Governments’ bulk procurement programme targets to replace 770m ICL’s and 35m

streetlights by FY19

Lighting sales to grow 13% CAGR in FY16-19e; LEDs’ replace traditional

lamps



Mr Piyush Goyal aims to

replace 770m ICLs and 35m

street lights with LEDs by

FY19 under the

government’s demand-side

management initiatives.









The Prime Minister, Mr Narendra Modi launched the “National Program for LED-

based Home and Street Lighting” with the aim to replace incandescent lamps

(ICLs) with light-emitting diodes (LEDs) for residential and street lighting. The

original aim was to install LED lamps for household and street lighting in 100

cities by March 2016.

The Power Minister, Mr Piyush Goyal has said that the aim is to replace 770m

ICLs and 35m street lights with LEDs by FY19 under the government’s demand-

side management initiatives.

This program has recently been named as “UJALA” or “Unnat

Jyoti by

Affordable LEDs for All”.

UJALA

is successfully running across 12 states –

Rajasthan, Maharashtra, Karnataka, Kerala, Uttar Pradesh, Himachal Pradesh,

Delhi, Andhra Pradesh, Puducherry, Jharkhand, Bihar and Uttarakhand.

The LED market, which stood at INR5b in CY10, is expected to jump to INR115b

by CY17, driven by the government’s initiatives and would form 45-50% of the

overall lighting market v/s 6% in CY10 and 15-20% currently.

The Indian lighting market has grown at 17% CAGR over CY10-14 and is set to

grow at 13% CAGR over CY15-18, driven by a strong jump in LED sales.

Exhibit 46: India lighting industry growth (CY08-18E)

Lighting market(INRm)

YoY(%)

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15E

CY16E

CY17E

CY18E

Source: Industry, MOSLe

Exhibit 47: Lighting market by source

Source type

GLS/FTL/CFL

LED

Others

% of total

70-75%

15-20%

10-15%

June 2016

29

Capital Goods | Change is in the air

Switch from traditional lamps to LEDs to drive growth





Government targets to

replace~27m street lights in

India by FY19



Growth in the lighting industry would be driven by a sharp jump in LED sales.

The LED market, which stood at INR5b in CY10, is expected to jump to INR113b

by CY18, driven by the government’s initiatives. LEDs would form 45-50% of the

overall lighting market in CY18 v/s 6% in CY10 and 15-20% currently. We expect

the overall lighting market to grow at a CAGR of 13% over CY16-18 to INR262b.

Replacement of incandescent lamps (ICLs) and compact fluorescent lamps (CFLs)

with LEDs makes economic sense, as LEDs have a longer life

(50,000 hours v/s

10,000 hours for CFLs and 1,500 hours for ICLs),

are more energy efficient

(80-

100 lumens/watt v/s 50 lumens for CFLs and 13-15 lumens for ICLs),

and have a

payback period of 2-2.5 years vs. CFL’s.

The key driver of increased usage of LEDs over the next few years would be the

government’s push to replace street lighting

(via municipalities)

and residential

lighting

(via state DISCOMs)

to achieve energy efficiency and savings. There are

~27m street lights in India, which the government targets to replace by FY19. It

has banned the sale of 100W ICLs and intends to ban 60W and 40W ICLs by

CY17. This along with a further fall in LED prices

(already down to INR200 from

INR1,000-1,200 earlier)

would fuel a large scale switchover to LEDs. We also

expect commercial establishments

(retail outlets/offices/shops)

to increasingly

opt for LED down-lights instead of the less efficient FTLs and CFLs, especially as

the price gap between LED and CFL down-lights has narrowed significantly.

Exhibit 48: LED sales over CY13-18E

LED Sales(INR m)

76%

82%

61,799

19,250

33,950

54%

16%

3%

CY14A

CY15E

CY16E

CY17E

CY18E

95,023

YoY (%)

110,150

113,923

CY13A

Source: ELCOMMA, MOSLe



New players have entered the market (Eveready,

Syska LED, Oreva),

sensing the

large opportunity in LEDs over the next few years. As seen in the CFL segment,

we expect the industry to consolidate after the initial euphoria. With the

government’s thrust on replacing ICLs with CFLs, the number of CFL

manufacturers in India doubled from 30 in 2009 to 60 currently. These 60 CFL

manufacturers have a cumulative capacity of 1b units per year.

June 2016

30

Capital Goods | Change is in the air

Exhibit 49: Cost comparison – ICL v/s CFL v/s LED

Description

Life Span

Wattage

Power consumed per hour

Cost of usage for one hour @Rs 6 per kWh

Cost of usage for 50,000 hours

Bulbs needed for 50,000 hours of running

Bulb Cost

Cost of replacement

Total 50000 hour lighting cost

Ratio of cost

Units

hours

watts

Kilowatt-hour (kWh)

rupees

rupees

no of bulbs

rupees

rupees

rupees

ratio

ICL

1,500

60

0.06

0.36

18000

33

10

330

18330

8.7

CFL

10,000

14

0.014

0.084

4200

5

120

600

4800

2.3

LED

50,000

6

0.006

0.036

1800

1

300

0

2100

1.0

Exhibit 50: LED usage by end market

Automobiles,

5%

Others,

10%

TV/

Mobile,

25%

General Lighting,

60%

Source: MOSL, Industry



The “UJALA” programme aims to replace ICLs with LEDs for residential and

street lighting. According to ELCOMA, 725m ICLs were sold in CY14 (780m in

CY13). Replacement of these ICLs with LEDs would help save 50b units of power

and INR25b in costs.

June 2016

31

Capital Goods | Change is in the air

Exhibit 51: State-wise sale of ICLs

State

Andhra Pradesh

Assam

Bihar

Chhattisgarh

Delhi

Gujarat

Haryana

HP

J&K

Jharkhand

Karnataka

Kerala

Maharashtra

Manipur

Meghalaya

MP

Nagaland

Odisha

Punjab

Rajasthan

Tamil Nadu

Tripura

UP

Uttrakhand

WB

Other states

Total

M units

68

9

62

18

51

42

19

4

6

16

43

21

93

1

1

36

1

12

18

26

51

2

82

7

62

7

758

Source: EESL, ELCOMA



Energy Efficiency Services Limited (EESL) has also initiated the street light

replacement program in various municipal corporations across the country.

India has 27.5m streetlights, which could be replaced with LEDs at a total cost of

INR177b. Each fixture is likely to cost INR6,500 against the usual INR8,000 on

bulk procurement by EESL.

Market share by player





The top five players in the industry have a 51% share, with Philips being far

ahead of its peers.

To tap into the LED opportunity, new players have entered the market

(Eveready,

Syska LED, Oreva).

June 2016

32

Capital Goods | Change is in the air

Exhibit 52: Market share in the Indian lighting industry

100%

75%

50%

25%

0%

FY11

FY12

FY13

FY14

FY15

FY16

Source: MOSL, Industry

Bajaj

Havells

CG

Surya

Phillips

Others

Exhibit 53: Market share in the Indian lighting market in FY16

Havells, 4%

Crompton, 6%

Bajaj

Electricals,

6%

Surya Roshni, 8%

Others, 52%

Philips, 25%

June 2016

33

Capital Goods | Change is in the air

Different types of lamps – LEDs v/s CFLs v/s ICLs

LEDs are more efficient and environment friendly

How does an LED bulb really work?

A light-emitting diode (LED) is a sort of semiconductor. The movement of free

electrons across a diode releases energy in the form of a photon (basic unit of light).

An LED is heat sensitive; to ensure that heat moves away and does not damage the

semiconductor, an aluminum heat sink plate is used to move heat away. The heat

sink plate becomes part of the design of the bulb and from the heat sink plate, the

heat moves into the air surrounding the bulb.

Exhibit 54: LED bulb

The chip constitutes 30% of

the LED lamp’s cost.

An LED bulb has four key components:

1.

LED chip/module:

LED chips come in a wide range of performance standards.

High performance lamps use CREE or OSRAM brand chips. The chip usually

constitutes 30% of the lamp’s cost.

2.

LED driver:

The second key component is the power system, commonly referred

to as the driver. It is the limiting factor in the lamp’s longevity.

3.

Heat sink:

LEDs are temperature-sensitive; hence, a heat sink is required in an

LED bulb. Most products use an aluminum alloy heat sink for its cost efficiency.

4.

Printed circuit board:

The PCB connects the chip to the heat sink. The material

used for the PCB and its design are important. A PCB with low thermal

conductivity results in a hot lamp. Metal and ceramic core PCBs have good heat

transfer coefficient, but most manufacturers choose fiberglass to save money.

Working of an incandescent lamp

Conventional light bulbs have two metal contacts, which connect to the ends of

an electrical circuit. The metal contacts are attached to two stiff wires, which are

attached to a thin metal

filament.

As

electric current

flows from one contact to the

other through the filament, it gets heated. When heated to ~4,000 degree

Fahrenheit (2,200 degree Celsius), the bulb emits a good deal of light. However, only

10% of the energy is converted to light – the remaining goes into heat generation.

June 2016

34

Capital Goods | Change is in the air

Exhibit 55: Incandescent bulb

Source: Industry,

Working of a compact fluorescent lamp (CFL)

Compact fluorescent lamps (CFLs) are designed to replace incandescent lamps

(ICLs). A CFL uses a tube, which is curved or folded to fit into the space of an ICL,

with a compact electronic ballast at the base. The tube contains argon and mercury

vapor. When electric current passes through the vaporous mixture, it excites the gas

molecules and produces ultraviolet light. The ultraviolet light, in turn, stimulates a

fluorescent coating painted on the inside of the tube. As this coating absorbs

energy, it emits visible light. CFLs are more energy efficient than ICLs

.

Exhibit 56: Compact fluorescent lamp

Source: Industry, MOSL

June 2016

35

Capital Goods | Change is in the air

Pumps – weak industrial capex may constrain growth

Government promoting star-rated pumps; move towards energy efficiency





Weak industrial capex a dampener on pump sector growth – accounts for 54% of

industry sales

Governments’ bulk procurement programme targets to replace 20m grid connected

pumps with energy efficient pumps by FY19

Pump sales to grow 8% CAGR in FY16-19e; solar pumps a non starter



Industry growth to remain

subdued at 7-8% over the

next 2-3 years on weak

industrial capex (46% of the

end market)





There are over 800 players in the Indian Pumps industry, with most in the MSME

category. Centrifugal Pumps constitute 95% of the Pumps sold in the country.

The Indian Pumps industry has grown at 6% CAGR over FY11-15 to INR85b, with

2m pumps sold each year. Weak monsoons in the last two years led to a decline

in the sale of Agricultural Pumps (27% of market); with above average monsoon

expectations for FY17, we expect demand to pick up.

We expect the industry growth to remain subdued at 7-8% over the next 2-3

years on weak industrial capex (46% of the end market).

Exhibit 57: Indian Pumps market (INR m) and YoY growth (%)

Pumps(INRm)

8%

6%

6%

6%

8%

YoY(%)

8%

8%

8%

72

FY12

76

FY13

80

FY14

85

FY15

92

FY16

99

FY17e

107

FY18e

116

FY19e

Source: MOSL, Industry



The Industrial segment constitutes 46% of the Pumps sold in India. Pumps for

agricultural use account for 27% of the total Pumps sold.

Exhibit 58: End-market-wise usage of Pumps

Metal and

Mining, 4%

O&G, 8%

Power

Generation, 12%

Water and Waste

water, 17%

Building

Services, 19%

Source: Industry, MOSLe

Others, 13%

Agriculture, 27%

June 2016

36

Capital Goods | Change is in the air













Our views on the key end markets for Pumps over the next few years:

Agriculture:

Demand is subdued following two years of weak monsoon. Hopes

of an above average monsoon in CY16 should provide a boost to Agricultural

Pumps. ABB and KSB Pumps are now targeting Solar Power Pump Sets (KSB

launched in July 2015). EESL wants to replace all existing 20m Agricultural

Pumps with Solar Pumps.

Oil & Gas:

Demand has been subdued in the last few years. However, with new

refineries likely to come up, demand should revive.

Power Generation:

Boiler Feed Pumps are used in power plants. Due to the

slump in power generation orders, the market is subdued. Supercritical Pumps

should witness growth, but these are imported.

Fertilizers:

New fertilizer plants

are being planned. This should boost demand for Pumps.

Water/Wastewater:

Increased government spending on urban infrastructure

and 100 smart cities, and the Namami Ganga Program should give a boost to the

industry.

Pulp/Steel:

We expect both these end markets to decline, though not much

from here.

Power consumption, reliability and service are key differentiating factors





Power costs constitute 70% of the running cost of a Pump. There is a clear

preference for higher star-rated Pumps, which consume less power.

The other key factors are reliability, service and zero downtime for the Pump.

Exhibit 59: Lifecycle costs for a Pump – power costs are the highest

Power costs, 70%

Pump, 15%

Maintaineince,

15%

Exhibit 60: Pump usage by type

Description

Residential/ Domestic pumps

Industrial

Pumps used for EPC projects

HP rating

0.25-20

2- 500

500HP and above

End market

Agriculture, Residential and Commercial buildings

Across industries - Cement, Steel, Oil & Gas

Power plants, Irrigation and Municipal projects

Market share by player





The Pumps market in India is fragmented, with only 56% of the market with the

organized players. The top-5 players control about 44% of the overall market.

Kirloskar Brothers is the market leader in this segment because of its market

leadership in supply of Agricultural Pumps.

June 2016

37

Capital Goods | Change is in the air

Exhibit 61: Market share by player in the Indian Pumps industry

Kirloskar Brothers,

12%

CRI, 11%

Unorganized, 44%

Others,

5%

KSB Pumps, 8%

Crompton

Greaves, 7%

Grundfos, 4%

Texmo, 6%

WPIL, 3%

Government plan to replace inefficient pumps via EESL; big demand driver

for the industry

Energy Efficiency Services

Limited (EESL) intends to

replace 20m grid connected

pump sets with BEE star-

rated energy efficient

agricultural pumps.







EESL targets to replace ~7m

grid-connected pumps in

Maharashtra, Andhra

Pradesh, Karnataka and

Rajasthan in the next two

years.





Under the

National Energy Efficient Agriculture Pumps Program,

Energy

Efficiency Services Limited (EESL) intends to replace 20m grid connected pump

sets with BEE star-rated energy efficient agricultural pumps.

These pumps will

come enabled with smart control panels and SIM cards, giving farmers the

flexibility to remotely control them from their mobile phones.

This will result in energy savings for the DISCOMs, as farmers get electricity

either free or at a subsidized rate. EESL purchases these star-rated energy-

efficient pumps via the competitive bidding route.

EESL replaces the old pumps with new energy-efficient ones free of cost and

also undertakes their repair and maintenance during the project duration. The

DISCOMs save some energy, which is then multiplied with the prevailing power

rates to monetize the same. This is then shared between the DISCOMs and EESL.

EESL targets to replace ~7m grid-connected pumps in Maharashtra, Andhra

Pradesh, Karnataka and Rajasthan in the next two years. The total energy saved,

assuming most of the pumps replaced are 5HP pumps, is ~25%. The total energy

consumed in these four states through pumps is 60b units; hence, 15b units will

be saved. At the average power rate of INR4.5/unit, it implies annual savings of

INR60b. The cost of procurement of 7m pumps at INR30k/unit works out to

INR200b-230b, which EESL can recover in 2-3 years.

The eventual aim is to replace 10m diesel power pumps with solar power

pumps. However, the cost of one solar pump is INR300k, which makes this

currently unfeasible for EESL.

June 2016

38

Capital Goods | Change is in the air

Switchgear – safety paramount

Share of unorganized segment declining





Weak industrial capex to weigh on industry growth

Increasing focus on safety, durability and reliability reducing share of unorganized

segment in this product category

LV Switchgear sales to grow 7% CAGR in FY16-19e



Switchgear is as an assembly of switching and interrupting devices, providing

control, metering, protection, and power regulating applications. Key

components include (a) switching and interrupting devices used for turning the

power on or off, (b) control devices used for checking and/or regulating the flow

of electric current, (c) metering devices used for measuring the flow of electric

current, and (d) protective devices used to protect power service from

interruption and prevent/limit damage to equipment.

Exhibit 62: MCB constitutes 23% of the market share

Types of LV switchgears

Air circuit breaker

MCCB

Change over switches

Contractors and Relays

MCB

Residual current devices

Distribution board

Application

These are circuit protection devices with air as the insulating medium

These are circuit protection devices, whose current carrying components, mechanisms, and trip circuits are

completely enclosed within a molded case of insulating material

These are meant to move a circuit from one set of connections to another

Contactor is a type of relay that can handle high power required to directly drive an electric motor and a relay is

an electrically operated switch, used where it is necessary to control a circuit by a low-power signal or where

several circuits must be controlled by one signal.

MCB is a small trip-switch operated by an overload and is used to protect an electric circuit, especially, in a

domestic circuit as an alternative to a fuse.

Residual Current devices monitor residual current and switch off the circuit quickly if it rises to a preset level and

can be broadly classified into earth leakage circuit breaker and residual current circuit breakers.

It is a component of an electricity supply system, which divides an electrical power feed into subsidiary circuits,

while providing a protective fuse or circuit breaker for each circuit in a common enclosure with a main switch.

Source: Industry Report, MOSL

Market overview and competitive intensity

Switchgear to have muted

growth at 7% CAGR over

FY16-19 to INR70b led by

sluggish industrial capex,

muted investment across

infrastructure power

utilities projects









As of FY16, the LV switchgear market (residential and industrial) stood at an

estimated INR56b. We expect the market to grow at 7% CAGR over FY16-19 to

INR70b. Muted growth in the segment is on account of factors like sluggish

industrial capex, muted investment cycle and slowdown in investments across

infrastructure power utilities projects.

In terms of region-wise demand, North India accounts for 34%, South India for

29%, West India for 26% and East India for 11%.

The market for LV switchgears is highly competitive, with more than 40

participants operating. The market is dominated by MNCs with domestic

manufacturing capacities. Imports, particularly those from China and Korea, are

less prevalent in this industry.

Competition from unorganized market participants is restricted to a few

products like switching devices and distribution boards due to low technology

intensity. For the larger part of the market, the LV switchgear industry is

comprised of organized participants. L&T is the market leader, with 22% share.

June 2016

39

Capital Goods | Change is in the air

Exhibit 63: Region-wise breakup of switchgear sales in India

West, 11%

North, 34%

East , 26%

South , 29%

Source: Industry, MOSL





L&T, Schneider Electric and ABB are the key players, with presence across all

Consumer segments. Siemens has a strong presence in the Industrial (and Power

Utilities) segment, whereas companies like Havells, Legrand and Anchor have a

presence primarily in the Residential and Commercial segments.

Market players catering to the Industrial segment have expanded their product

portfolio to include Modular Switchgear Devices, increasing their reach to

capture the Residential market. Further, manufacturers of Wires & Cables

continue to enter the market for Modular Switchgear Devices.

Exhibit 65: 55% of the demand is generated from Retail

segment

Utilities, 17

Exhibit 64: MCB constitutes 23% share of the overall

Switchgear market

RCD, 4

DB, 8

Cos, 2

MPCB, 2

MCB, 23

SD, 6

Retail , 55

Industrial,

28

MCCB, 20

ACB, 15

C&R, 20

Source: Industry Report, MOSL

Source: Industry Report, MOSL

Exhibit 66: Industry to grow at 6% CAGR over FY15-19

Industry Revenue (INR b)

10.6

7.7

3.6

2.2

46

2012

47

2013

52

2014

56

2015

58

2016

61.5

65.3

70.2

6.2

7.5

Growth YoY (%)

Exhibit 67: Market share by player in the switchgear market

Indoasian, 4

C&S

Others, 5

electric, 4

HPL, 5

BCH

Electric, 2

Schneider,

18

Siemens, 11

Source: Industry Report, MOSL

L&T, 22

6.0

Havells, 9

Legrand, 10

ABB, 10

2017e 2018e 2019e

Source: Industry Report, MOSL

June 2016

40

Capital Goods | Change is in the air

Key growth drivers for Switchgear industry



55% of LV Switchgear

demand comes from the

Retail segment (primarily

Residential and Commercial

projects).







Revival of Industrial segment:

Growth in the LV Switchgear segment depends

primarily on revival of the Industrial segment, which accounts for 28% of LV

Switchgear demand. Government initiatives to address issues plaguing Industry

and Infrastructure should benefit Manufacturing. Additionally, focus on

initiatives such as ‘Make in India’ is likely to further propel Manufacturing and

Industrial segment growth, whetting demand for LV Switchgear.

Growth in Residential segment:

55% of LV Switchgear demand comes from the

Retail segment (primarily Residential and Commercial projects). Over the last

few years demand from this segment has remained muted due to weak demand

for Residential and Commercial projects on weak economic activity. However,

recent initiatives – allowing 100% foreign investment in Real Estate, tax benefits

for foreign investors, focus on establishment of smart cities – should contribute

to higher growth in the Residential segment over the next decade. Further,

increasing urban population and growing household income are among the

major factors that influence demand for Residential Real Estate. Moreover,

increasing construction in tier-II and tier-III cities and increasing awareness

among end users for protective devices are expected to have a positive impact

on the LV Switchgear market over the medium to long term.

T&D reforms and augmentation of Power Generation capacity:

The

government is planning significant investment in Power Distribution to increase

access to reliable power supply and reduce AT&C losses through schemes such

as

Deendayal Upadhyaya Gram Jyoti Yojana

and

Restructured Accelerated

Power Development and Reform Program.

Modernization of the existing

network will also boost demand for LV Switchgear. Besides, additional

generation capacity will increase the requirement for evacuation devices for

additional power, driving demand for LV Switchgear.

Increased demand from Renewable Energy segment:

Government incentives,

favorable foreign investment policy and vast untapped potential will drive

Renewable Energy generation in India. The government plans an installed

capacity of 175GW for Renewable Energy by 2022, up from the current installed

base of 26GW. As a result, demand for LV Switchgear, especially for MCCB and

MCB products, is expected to increase significantly.

June 2016

41

Capital Goods | Change is in the air

Wires & Cables – revival in the offing

Hardening of copper prices to buoy sales growth





FY16 industry sales hit by sharp decline in copper prices which offset the strong

volume growth

Growth to be driven by revival in demand from Real Estate segment

Wire and Cable sales to grow 8% CAGR in FY16-19e





The Electrical Wires & Cables market in India is estimated at INR200b (FY16), of

which Low Tension Wires & Cables constitute ~40% (INR80b). Unorganized and

regional market players account for ~30% of the Low Tension Electrical Wires &

Cables market.

The Retail segment – primarily Domestic Electrical Wires – is the major end user

segment, where building strong brands and distribution reach is essential. The

Retail segment primarily caters to electrical contractors and builders, who

execute electrical projects across Residential and Commercial segments.

Exhibit 68: Electrical Wires & Cables market at INR200b

LT cables , 40%

HT Cables, 60%

Source: MOSL, Company

Growth to be driven by revival in demand from Real Estate segment





Low Tension Electrical

Wires & Cables market to

grow at a CAGR of 5% and

reach INR100b by FY19.







We expect the Low Tension Electrical Wires & Cables market to grow at a CAGR

of 5% and reach INR100b by FY19.

The Low Tension Electrical Wires & Cables market in India is primarily driven by

growth of the end-user segments – Residential/Commercial Real Estate,

Industries, Utilities and Infrastructure.

The Low Tension Electrical Wires & Cables market has been witnessing subdued

growth over the last few years due to unfavorable market sentiment, muted

investments, and weak macroeconomic environment. These trends have

especially impacted the growth of Industry-driven Power Cables.

Though the Residential and Commercial segments have witnessed flat growth,

increased awareness for safety and reliability has prompted healthy demand for

Domestic Electrical Wires, especially Copper Wires.

To kickstart revival in capex activity, the government has initiated programs like

Make in India and Smart Cities, and is increasing infrastructure spending.

Growth is likely to be moderate in the next two years, post which it should

improve, with fresh investments and better macroeconomic performance.

June 2016

42

Capital Goods | Change is in the air

Exhibit 69: Domestic Wires & Cables industry FY12-19 (INR m)

Domestic Wires and Cables

11%

63

5%

3%

FY12

FY13

FY14

FY15

0%

FY16

FY17e

FY18e

FY19e

65

72

11%

80

80

84

5%

88

5%

YoY Growth(%)

97

10%

Source: MOSL, Industry

Market share by players



The Wires & Cables market in India is quite concentrated, with ~71% of the

market with organized players. The top-5 players control ~61% of the market.



Polycab is the market leader in the Wires & Cables segment, with 24% market

share. Havells stands third, with 12% market share.

Exhibit 70: Polycab is the market leader, with 24% share

The Wires & Cables market

in India is quite

concentrated, with ~71% of

the market with organized

players. The top-5 players

control ~61% of the market.

Unorganised, 29

Polycab, 24

RR kabel, 5

Other organised,

10

KEI, 6

Finolex cables,

14

Havells, 12

Source: Industry Report,MOSL

Key drivers and triggers







Revival of Industrial segment:

The government’s focus on “Make in India” and

increasing “ease of doing business” is likely to propel Manufacturing / Industrial

growth.

Growth in Residential segment:

Real Estate plays an important role in the

Indian economy. With various reforms such as allowing 100% FDI, tax benefits

for foreign investors, smart cities, and Atal Mission for Rejuvenation and Urban

Transformation, the segment is likely to grow at ~30% over the next decade. The

revised National Electrical Code, which emphasizes use of certified Copper

Electric Wires, will ensure strong demand for Electrical Wires & Cables.

T&D reforms and augmentation of Power Generation capacity:

To provide

access to reliable power supply and to reduce technical and commercial losses,

the government intends to increase investments at the Distribution level

through schemes such as

Deendayal Upadhyaya Gram Jyoti Yojana

and

Restructured Accelerated Power Development and Reform Program.

In addition,

under the 13

th

Five-year Plan, the government intends to add ~100GW to meet

43

June 2016

Capital Goods | Change is in the air

the ever-growing demand for power. This will require evacuation of power

through additional investment in T&D infrastructure.

Increased demand from Renewable Energy segment:

Power generation from

renewable sources is rising, with the share of Renewable Energy in India’s total

energy mix rising from 7.8% in FY08 to 12.3% in FY15. Government incentives,

favorable foreign investment policy, and vast untapped potential will drive

Renewable Energy generation in India over the next few years.

June 2016

44

Capital Goods | Change is in the air

Consumer Appliances – new entrants aplenty

Distribution a challenge







Slew of new players have entered the home and kitchen appliances segment over last

few year

Building distribution network key challenge for new entrants

Low penetration to drive growth in coming years

Consumer appliances sales to grow 15% CAGR in FY16-19e





A clear trend in Consumer Appliances is increasing number of new entrants over

the past few years. These players intend to use their existing brand strength to

increase presence in this segment. Since most companies outsource

manufacturing to Chinese vendors, entering this category is relatively easy.

With no or little R&D requirement and low capital investment, Consumer

Appliances offers an attractive market for Light Electricals players.

Exhibit 71: Consumer Appliances market growth FY11-16

Consumer Appliances Sales(INRm)

50

10%

YoY (%)

55

10%

65

18%

65

41

45

10%

0%

FY11

FY12

FY13

FY14

FY15

FY16

Source: Company, MOSLe

Exhibit 72: Recently entered product categories by player

Company

Orient Electric

Finolex

Anchor

Eveready

Surya Roshni

V-Guard

Crompton Greaves

Havells

Luminous

Polycab

Core Product

Fans

Cables

Switches

Batteries

Lighting

Voltage Stabilizers, Inverters

Fans, Lighting, Pumps

Switchgear, Lighting, Fans

Invertors

Wires

New product categories

Consumer Appliances, Switchgear, Lighting

Lighting, Switches, Fans

Lighting, Switchgears, Fans, Wires and cable

Lighting, Consumer Appliances

Fans, Consumer Durables

Fans, Switchgears, Kitchen Appliances

Consumer Appliances, Air Cooler,

Consumer appliances, Coolers, Pumps

Fans, Switches, Lighting, Switchgears

Fans, Lighting, Switches

Source: MOSL, Industry, Company

Building distribution network key challenge for new entrants



For most companies that have recently entered the Consumer Appliances

business, the challenge is to develop the appliance network since their existing

electricals dealer network is not suited for the same.

June 2016

45

Capital Goods | Change is in the air

Exhibit 73: Dealer-wise sale of products

Product category

Fans

Lighting

Switches

Pumps

Cable and Wires

Iron

Mixer/Grinder

Cookware

Water Heater

Electricals

Store

Y

Y

Y

N

Y

N

N

N

Y

Appliance

Store

Y

Y

N

Y

N

N

N

N

N

Multi Brand

retail

Y

Y

Y

N

N

Y

Y

Y

Y

E

Commerce

Y

Y

Y

Y

Y

Y

Y

Y

Source: MOSL, Industry

1. We estimate the industry would grow 15% CAGR over FY16-19e. Low

penetration rates compared to other product categories, rising disposable

income and focus on aesthetics would drive this growth.

Exhibit 74: Low penetration of home/kitchen appliances to drive growth

Description

Fans

Water Heaters

Mixer - Grinder

Induction cooktop

TV

Fridge

Air Cooler

Washing machine

Air Conditioner

% penetration

80%

10%

35%

<2-3%

77%

33%

8-10%

13%

3-4%

Source: MOSL, Industry

Competitive intensity is high – Bajaj the undisputed market leader





Bajaj Electricals is the clear market leader in Consumer Appliances. It has been

present in this market for over 75 years and has an extensive distribution reach.

We highlight that this is an extremely competitive market, with a large number

of players, both Indian and multi-national.

Exhibit 75: Market share of players in Consumer Appliances segment (%)

100%

75%

50%

25%

0%

FY12

FY13

FY14

FY15

FY16

CG

Orient

Bajaj

Havells

Murphy

Others

June 2016

46