final report sm havells

8/9/2019 Final Report Sm Havells

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HAVELLS-SYLVENIA ACQUISITION

A Term Project

Submitted in partial fulfilment of the

requirements for the award of the degree

of

MASTER OF BUSINESS ADMINISTRATION

In

Strategic Management

By

Priya Aggarwal

Puneet Murarka

Achal Jain

Bhanu Rana

Tapmi School Of Business

MANIPAL UNIVERSITY JAIPUR

JAIPUR-303007 RAJASTHAN, INDIA

May/2014


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Table of content

A. Economic environmental setting of the industryB. Business reasons for the strategyC. The strategy

D.

Internal analysis of the firmE. Industry analysisF. Initial reaction to the strategyG. Value creationH. strategy historyI. Comparison with earlier strategies of the firmJ. Comparison to other strategic moves made by major competitorsK. Impact of strategy on the firms financial performanceL. Impact of the strategy on industry structureM.Subsequent performance and appraisal of the strategyN. Looking ahead

O.

Drawing some conclusions


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A. ECONOMIC ENVIRONMENTAL SETTING OF THE

INDUSTRY

1.

Important characteristics of the industry.

2. Challenges faced by the industry over the 5 years prior to the strategy.

1. Shrinking Operating Margins

Global competition and new innovations are driving prices down. Companies must continually

become more cost-efficient to remain profitable.

2. Complex Global Supply-Chain

More and more, companies are having to juggle internal and external resources while staying

within international standards. Issues such as traceability and compliance are increasing


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operational burdens. It is not unusual for components and sub-components to embark on a

journey that touches three or more continents before reaching the end-consumer.

3. Service and Warranty Management

Leveraging the global supply-chain is putting more focus on supplier quality management.

Having a strong quality and traceability system directly affects warranty reserve and post-

production service hours.

4. Short Product Lifecycles

With quickly changing consumer tastes and preferences, EMS companies and contract

manufacturers need to have effective New Product Introduction (NPI) processes in place.Closed-loop communication between sales, manufacturing, and engineering is vital to ensure

product launches hit time, volume, and quality targets.

5. Uncertain Demand

Aggregately, economic volatility and cyclical demand cause fluctuations in production. On a

more granular level, consumer preference can cause spikes in demand for an individual product

or company. Efficient lean capabilities must be in place to keep inventory aligned with demand.

6. Sustainability

Emerging regulations and standards are forcing companies to account more and more for

Corporate Social Responsibility (CSR) in decisions. E-Waste, a popular topic today, is driving

conversations about the disposal of products and their impact on the environment. Companies

must now consider of the complete product lifecycle in decisions.


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3. Industry trends, prior to the strategy.

With a greater environmental awareness about green future, theElectronics and Electrical

goods industry is witnessing increasing demand for energy-saving appliances and energy-

efficient electrical goods from the Consumer and Industrial sectors. In addition, the rising energy

costs have led to the demand for energy-efficient products, thus making the Electronics and

Electrical goods industry a multi-billion dollar market. The players in this market are likely to

seize a good market share by providing various energy-efficient electronic products. Government

regulations and initiatives toward environmental consideration will further drive the demand for

energy-efficient electrical products.

This industry is also witnessing consolidation such as foreign collaborations and mergers and

acquisitions. Thus, a new wave of industrialization is offering several business opportunities for

theElectronics and Electrical goods market players. Other trends such as globalization,

technological advancements, and product proliferation will lead to increase in the growth of this

industry.

4.

Outlook for the industry over next 5-10 years at of time of

strategy.

Developing diverse product lines for one stop shopping for customers

Developing effective and cost-efficient supply chain processes with trading partners

Working closely with partners to conceive and develop products that will allow expansion into

new market segments

Coordinating all departments for speedy NPI and ensured customer service design,

procurement, production, distribution, and customer-facing sales and service

Recognizing and notifying all departments and partners of changes in market demand to ensure

speed of response

Creating smooth new product ramp-ups and obsolete product phase-outs
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End-to-end inventory management to minimize both obsolescence and stock-outs

Book and ship within 24 hours based on high-yield, flexible production, or efficient distribution

Demand-driven replenishment based on vendor managed inventory (VMI)

Collaborative demand planning and sourcing among departments and trading partners

Accurate, responsive worldwide distribution networks

Contract-based procurement, order and billing management to ensure each supplier and

customer and is treated appropriately and shares risk as agreed

Analysis of sourcing and BOMs for compliance, with recertification of suppliers

Managing supplier certificates and proper lot handling and tracking

Redesigning products to eliminate hazardous materials and make them easyto disassemble and

sort into component materials for recycling

Tracking potentially hazardous components across the supply chain

Sorting and labeling inbound materials into compliant and non-compliant stock and ensuring

each group is used only for shipments to appropriate regions

Ensuring manufacturing operations are in compliance with all regulations at all times

Companies that supply the consumer electronics and appliance industry face a need for extreme

speed. The critical success factors for this industry are changing rapidly, and companies must

move at least as fast as their product lines change. While many companies in the segment still

use disconnected and piecemeal systems or spreadsheets, the complexity of regulations, supply

chains,and short product lifecycles makes this an obsolete practice. To gain customers and

cement a place in the consumer market, companies must have integrated enterprise-wide systems

that allow them and their global supply and distribution networks to react quickly and be in a

position to set trends.


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5. Economic and legal conditions of firm and industry in their or

respective countries Socio-Eco context of the strategy

What are the objectives (long term and short term) of the firm?

MAINTAIN STRONG OPERATING EXCELLENCE

Our commitment to operating excellence guides everything we doit always will. Continuous

improvement in safety, environmental stewardship and cost efficiency is a fundamental

requirement for our company and employees. We employ rigorous training and audit programs

to drive ongoing improvement in both personal and process safety as we strive for zero incidents.

We are committed to protecting the environment and continually seek to reduce our

environmental footprint throughout our operations.

Deliver Profitable Growth

Manufacturing and logistics capacity expansions in Chemicals and Midstream have the potential

to deliver significant growth in earnings and free cash flow. Over the next few years, our

Chemicals joint venture, CPChem, plans to reinvest the majority of its net income to build

additional processing capacity that benefits from lower-cost NGL feedstocks. The need for

additional new gathering and processing, pipeline, storage and distribution infrastructure

driven by growing domestic unconventional crude oil, NGL and natural gas productionis

creating capital investment opportunities in our Midstream business.


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ENHANCE RETURNS ON CAPITAL

We intend to increase ROCE and capital efficiency through greater use of advantaged

feedstocks, a disciplined capital allocation process and portfolio optimization. By processing

lower-cost crude oil and NGL feedstocks, we have improved our gross margins and returns on

capital in Refining and Chemicals. We also expect to drive higher returns by selling finished

products to higher-margin export markets. A disciplined and rigorous capital allocation process

ensures that we focus investments into projects that generate competitive ROCE throughout the

business cycle. We anticipate our portfolio to shift to higher growth and returns businesses as we

redirect capital to our Chemicals, Midstream, and Marketing and Specialties segments and

reduce Refining exposure in regions that generate below-average returns.

GROW SHAREHOLDER DISTRIBUTIONS

We believe shareholder value is created through consistent and ongoing growth of regular

dividends, supplemented by share repurchases. Regular dividends demonstrate the confidence

our management has in the companys capital structure and its capability to generate free cash

flow throughout the business cycle. At the discretion of our board of directors, we plan to

increase dividends annually and fund a share repurchase program while continuing to invest in

the growth of our business.

BUILD A HIGH-PERFORMING ORGANIZATION

Our success is primarily attributed to the contributions of our talented global workforce. We

provide a great place to work where employees can reach their fullest potential, thrive on

delivering results and create shareholder value through individual, team and organization

success. We foster an achievement-based culture that drives accountability and meritocracy

while investing in learning and development.

Havells Objectives


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Reduce CO2 emissions

Develop and manufacture energy efficient products

Improve environmental protection

Reduce hazardous substances and improve waste management

Improve quality of life

Create sense of well-being with a superior quality of light

Offer profitable solutions to market Better efficiency, sustainability and longer product life


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B. BUSINESS REASONS FOR THE STRATEGY

1. Reasons provided by the company stated in SEBI /REGISTRAR OF COMPANIES

or other statutory institutions and Companys documents, filings, annual reports,

and announcements of the transaction.

Ans: The proposed acquisition makes sense for the following reasons: The acquisition of

Sylvania will give Havells access to the wide marketing networks of SLI. It will serve as a good

channel for marketing Havells products in Europe Access to the R&D and engineering

capabilities of SLI Ownership of various brands of Sylvania: Sylvania, Zenith, Linolite,

Claude, Concord and Marlin Exposure to lighting and lighting fixtures segment, as Sylvania

was primarily engaged in this segment whereas Havells had a small presence in the lighting

market.

Fixing Sylvania was their best bet, he reckoned, and the only opportunity to become an

international player

2 reasons in financial press

When electrical goods company Havells acquired Sylvania in 2007, all that it was looking for

was growth and a strong global presence.

SLI was then the world's fourth-largest lighting company and 1.5 times bigger thanHavells. It

took Gupta minutes to make up his mind about buying it,

Qimat Rai was betting on Sylvania's strong 100-year-old brand in about 50 countries, and its

worldwide network of 10,000 distributors and dealers. "My father said we would not be able to

replicate these two things," says Anil.

Their was Havells first overseas acquisition.
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By 2007, the business reached a turning point. Its technology partner for lighting, global

lightings major Sylvania, was struggling, and about to be sold to finance its parent companys

expansion into mobile telephony.

At that time, the worlds lighting market was dominated by four players - Sylvania, GE, Philips

and Osram, each of whom had roughly a quarter of the market. With an outright takeover by any

one of the other three likely to run afoul of competition laws in different markets, the company

was split into two. Havells decided to acquire the Europe, Asia and South America rights to the

company for 227 million, while the North American operations were bought by German

lighting major Osram.

Havells in 2007 created history by acquiring worlds renowned lighting company Sylvania thus

registering itself amongst top 4 lighting companies in the world

3) What is the vision and mission of the firm? Give your comments in terms of its

appropriateness

Vision

"To be a globally recognized corporation that provides best electrical & lighting solutions,

delivered by best-in-class people."

Mission

To achieve our vision through fairness, business ethics, global reach, technological expertise,

building long term relationships with all our associates, customers, partners, and employees


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C. THE STRATEGY

1. How did this particular strategy fit into the broad objectives of the firm?

The main objective of the particular Sylvenia acquisition was to make the Havells brand global

leveraging the Sylvenia brand in 50 countries across 20000 dealers.By acquiring Sylvenias

technology,Havells reached operational excellence and diversified their product line further into

lighting and hope appliances.They wished to become one of the top leading consumable

electrical goods company in the world.

2. Was the strategy related or unrelated to the existing operations of the firm?

Discuss the exact type of strategy of the firm. Has the firm ever invested in this

industry?

The strategy was unrelated. The exact type of the strategy was

Inorganic-International-Unrelated-Diversification

The mid 1990s was one of the most difficult times for the electronics industy.The liberalization

policy of the Indian Government triggered a wave of entrants from both well reputed

multinational corporations as well as generic imports from China.Havells any many other

companies were being challenged on the low end by Chinese exports and on th high due to

European imports.So Havells knew to grow they had to diversify into new businesses and as

Sylvenia was the leading consumer electrical company with a global presence,it made sense to

Havells to acquire the company even though it was 1.5 times the size of Havells.


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D. INDUSTRY ANALYSIS

1) Rivalry amongst competitors low 1 2 3 4 5 high

a. No of competitors large 2 small

b. Industry growth slow 4 fast

c. Fixed cost high 3 low

d. Differentiation high 2 low

e.

Switching cost low 2 high

f. Openness of terms and secret 4 open

sales

g.

Excess capacity low 2 high

Avg: 2.7

2) Barriers to exit

a. Asset specialization high 2 low

b. Cost of exit high 2 low

c. Govt restriction high 3 low

Avg 2.3

3) Barriers to entry

a.

Economies of scale small 3 large

b. Product differentiation low 4 high

c. Brand identity low 4 high

d. Switching cost low 4 high


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e. Access to channel easy 2 limited

f. Capital requirement small 4 large

g. Access to tech easy 2 restricted

h. Access to RM easy 2 hard

i. Govt protection high 3 low

Avg: 3.1

4) Threat from substitute product

a.

Availability of substitute high 4 low

b. Switching cost low 4 high

c.

Substitute price value better 4 weak

d. Profitability of the products high 4 low

of the Substitute value

avg: 4

5) Bargaining power of buyers

a. No of buyers small 5 large

b. Availability of substitute many 4 less

c. Switching cost low 4 high

d. Buyers threat to backward high 3 low

integrate


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e. Industry threat to backward low 4 high

integrate

f. Contribution to quality low 4 high

g. Contri to cost high 3 low

h. Buyers profitability low 2 high

Avg: 3.6

6) Bargaining power of suppliers

a.

No of suppliers small 4 large

b. Availability of substitute few 1 many

c.

Switching cost high 2 low

d. Suppliers threat to forward high 2 low

integrate

e. Industry threat to forward low 3 high

integrate

f. Contribution to quality high 2 low

g. Contri to cost low 3 high

h. Industry imp to supplier low 3 high

Avg: 2.5


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Overall industry attractiveness low 1 2 3 4 5 high

1) Rivalry amongst competitors 2.7

2) Carriers to exit 2.3

3) Barriers to entry 3.1

4) Threat from substitute product 4

5) Bargaining power of buyers 3.6

6) Bargaining power of suppliers 2.5

Avg 3.03


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E) INTERNAL ANALYSIS OF THE FIRM

1. Describe strengths of the firm.

Global Footprints Domestic Leadership

Expanded global reach through Sylvania acquisition in 2007

Presence across 5 continents, 50 countries with 94 branches and over 5000 professionals

Manufacturing facilities spread across India, Europe and LatinAmerica

Consistent outperformer in domestic business, stabilizing international business

Consistent value creation

Organic growth led by gaining market share in existing products, launch of new branded,

consumer products

Significant brand emphasis to create a strong differentiator with FMCG like packaging,

promotions and advertisements

Consumer pull evenly matched with a well entrenched distribution network

High RoCE and RoE creating shareholder value

Buoyant end user segmentsInfrastructure, power and construction key user segments

Significant investment planned with greater focus oninfrastructure development

Large investment in real estate and power sectors

Structural changes in the underlying buying patterns

Distinctive shift from un-organised to organized segment

Increased brand awareness for hitherto commoditised productswires and cables

Growing protection awareness

Increasing affordability and willingness to pay for quality products Large opportunities for

quality, branded and well distributed product companies like Havells


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Product LeadershipWidest rangeAmongst Top 3- Gained

market share in the last 3 years

Domestic Switchgears

Market Size ~INR 12,000 mn

Competitors Position - Mkt Share

HAVELLS ~ 20%

Industrial Switchgears


HAVELLS ~8%

(7% IN 2006)

Electrical Wire Accessories


CRABTREEHAVELLS ~11%

(8% IN 2006)

Power Cables


HAVELLS ~ 8%

WireMarket Size ~INR 40,000 mn

HAVELLS ~ 9%

(6% IN 2006)

Polycab

Energy Savings Lamp-

Market Size ~ INR 10,000 mn

HAVELLS ~ 9%

Luminaries

Market size ~ INR 20,000 mn

HAVELLS ~ 10%

Fans

Market Size ~ INR 20,000 mn


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premium with customers and discipline with

dealers

Launch product variants with value add features

Comfortable leverage and liquidity position

Debt free balance sheet with negative working capital

Capex to increase capacity in existing products FY 10 bunching effect, FY 11 regular

maintenance capex of Rs 500-700 mn

Capex being funded through internal cashgeneration

Investment in Sylvania acquisition largely funded through equity issue. Outstanding recourse

debt of Rs 1183 million

If non-recourse debt of Rs 8710 million included, leverage stands at 1:1

Focussed promoter group

Promoted by QRG, the current Chairman, himself an electrical dealer, in 1971

Promoter Group owns 60% shareholding

Single business focus since inception

Capital conservative : never issued capital since public issue in 1993 except to CLSA and for

Sylvania acquisition

Issued shares to Warburg Pincus for USD 110 mn in 2008 who now owns 14.5% in the

company

Havells is well positioned for growth in domestic markets through a stronger brand, distribution

network and vast product range

Sylvania would be cost competitive through current restructuring and presents a good platform

for

electrical products having a strong brand lineage and distribution network across Europe and

Americas


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Project Phoenix and Project Prakram

The CEO and three other key executives were removed even as Anil took charge of Europe and

Ameet of Asia and the Americas. They shifted five senior executives from India for threefour

months, and appointed their own CFO

Sylvanias problem was that sales had shrunk and plants operated at half the capacity even as

costs remained high. Layoffs in Europe and the Americas were central to restructuring plans.

the economic recession was claiming victims everywhere.Since the retrenchment was spread

over eight-ten countries with different rules and regulation, Havells engaged a European law firm

to help navigate in each country. The strategy was to convince the local management of the need

to restructure and then let them take chargeThe operations heads were largely left untouched. Intechnical areas like supply chain etc.,

3. How the strategy was financed?

Deal Details:The merger of Sylvania into Havells was a complete merger so that South

American, European and Asian divisions of Sylvania LLC were incorporated into Havells.

Havells Sylvenia is the entity after merger headquatered in India (Noida) and London. The actual

acquisition was undertaken by Havells Netherlands B.V. which was the step subsidiary of

Havells but was not incorporated as such in Europe. Havells Netherlands had been disclosed as a

step-subsidiary of Havells in EU FTC filings. This was most probably a shell company

incorporated for tax purposes. (The actual ownership has not been declared by Havells or

Sylvania).Havells Netherlands B.V. then acquired Sylvania LLC in all three geographies. The

debt recourse of 120mm of the term debt was aimed at this Havells Netherlands B.V with

80mm inrecourse to Havells India Pvt. Ltd. This was renamed as Havells-Sylvania. After the

restructuring program, Havells Sylvania was merged into Havells India Pvt. Limited with no

separate existence. Havells- Sylvania now remains as the only entity with two separate brand

names Havells and Sylvania. Indirect subsidiary (step owned) Havells India Havells

Netherlands B.V. Acquired Sylavnias three divisions Sylvania LLC (Europe, South America


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and Carribean) Merger of equals Merged After restructuring, Havells India and Havells Sylvania

were merged into one entity Havells - Sylvania (subsidiary of Havells India Ltd.)

Deal Structure:

Sylvanias lighting business was acquired by Havells in April, 2007 for a total consideration of

227mn (8.4x FY08 EV/EBIDTA) financed entirely with debt of 200mn. Additionally, there

were pension liabilities worth 27mn in the books of Sylvania.Out of the total debt 80mn was

with recourse to Havells, which was funded by bridge loan of 50mn and term loan of 30mn.

Bridge loan of 50mn was repayable in 18 months. The company repaid this bridgeloan through

the proceeds of private placement to Warburg PincusGroup Company (Seacrest Investment Ltd).

Term loan of 30mn was repayable in 9 semi annual payments of 3.3mn each from April08-

April12. Remaining 120mn of the total debt of 200mn was in the form of 80mn in term loan

while 40mn as revolver facility. The company repaid 4m of the term loan facility in 2008.

However, debt covenants for the remaining payments of term loan had to be restructured as

severe global financial crisis hit the performance of the companysharply. Under the new

agreement, payments were differed till 2013 and the company will pay 12mn/12mn/52mn in

CY11/CY12/CY13. The revolver loan of 40m has to be repaid inbullet payment in April12. 13

Warburg Private Placement:

Havells issued 4.1m equity shares to Warbug Pincus at Rs625/share, aggregating to Rs2.6b,

which it used to repay a bridge loan of EUR50m that it had taken for the acquisition. This allows

it to issue USD110m new equity which diluted existing shareholders by 11.2%. Seacrest

Investment Ltd, a Warburg Pincus group company, has agreed to invest the above amount. Issue

details: 4.16m equity shares of INR5 each at a price of INR625 per share aggregating to

INR2.6bn 2.6m warrants at INR690 per warrant aggregating to INR1.8bn on a preferential

allotment basis Key pointers of Warbug investment: High valuation: The company has

received higher valuation than prevailing trading comps,which is positive. Debt repayment:

The company paid a bridge loan of USD65m which was raised for Sylvania acquisition

Finance capex: Around US$45m has been raised to fund the capacity expansion in India, which


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was used to cater to increasing demand, and eventually shift the manufacturing base of Sylvania

to India.


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Entering new markets

In 2012, we ventured into the home appliances market in India. The sector is expected to grow

and we expect to get benefit from the Havells brand which has huge acceptance in the market.

We have decided to invest further in marketing, research and development in this segment over

the next two t three years.

Reothe revolutionary

game-changer

In 2012, we also launched our breakthrough product, Reo switches. The switches have been

introduced to capture the growing demand for piano switches in tier II and III cities in India.

Priced for the entry-level category of non-modular switches, Reo will provide the same quality,

durability, safety, and service as promised by all Havells products. Through our dedicated efforts

in product innovation and after-sales services, we have emerged as

market leaders in various product categories, enjoying high-level of customer-satisfaction with a

strong support from our channel partners.

Havells introduced Indias first energy-efficient ceiling fans, indigenously designed by the R&D

team. The innovation won the National Energy-Conservation Award three times in a row from

2009 to 2011. Consuming only 50 watts of electricity, the ES-50 model is among the largest-

selling energy-saving fans in India.

Our workforce

As on 31 March, 2013, 2041 employees were on our company payroll at the Head Office and at

our manufacturing locations. During the year, 569710 contractual labourers were employed

across our manufacturing plants.

10 Consolidated data based on 12-month average across seven plant sites.


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F. INITIAL REACTION TO THE STRATEGY

1. Stock market reaction (describe reasons, if any, behind sharp rises or declines in the

equity prices upon announcement of the strategy).

After the acquisition and onset of Global Financial Crisis in 2008, this management proved to be

a hindrance in restructuring of Sylvania. Declining sales of Sylvania post merger and Corporate

restructuring programe: As the meltdown rocked European markets, Sylvania's sales fell, leading

to net losses of Euro 16.3 million in 2008/09 and Euro 26.1 million in 2009/10. From Euro 515

million in 2007/08, revenues dropped to Euro 438.4 million in two years. 15The global financial

crisis led to the slowdown in the consumption and construction activities in the key geographies

of Sylvania. Decline in demand coupled with high fixed cost structure resulted in sharp declineofEBIDTA by 58.8% in FY09 and loss in FY10 at operating level. Falling operating efficiency of

Sylvania though Havells on a standalone basis remained performing: Sylvania recorded a

revenue decline of 8% (in EUR terms), with EBITDA margin of 4.4% (+440bp YoY). HAVL

spent Rs2bn on restructuring to lower operational costs at Sylvania. It closed the loss making

plants and reduced workforce. The benefits of these steps reflected in FY11 EBITDA which

increased to Rs2.1bn (margin of 7.8%) in FY11 from Rs192m in FY10 (margin of 0.6%).

2.

Security analysts reactions.

Covenant breach in Sept. 2008 and demand for an asset sale by lenders to recover outstanding

loans In September 2008, Sylvania's bankers, led by Barclays Capital, hit the panic button as the

company breached its covenants . Havells has raised EUR200m for the acquisition of Sylvania of

which EUR120m is recourse to its balance sheet. Sylvanias balance sheet had EUR110m-115m

in receivables. Management indicated that it would sell Sylvanias receivables (factoring) and

pay back part of the outstanding debt. This will lower debt to equity ratio and improve balance

sheet. The net debt-equity stood at 1.1x, for the consolidated entity The banks agreed only to atwomonth deferral of repayment of loans, helping Havells with a Euro 24-million cushion for

that period.


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3. Financial press ( Business Week, Forbes, Economic Times, Financial Express,

Business News channel reporting etc.) reactions.

Will the Guptas be able to pull this off? The Havells Sylvania merger is complex. It involves

too many transitions at the same time, says Smith. A first-generation 73-year-old entrepreneur

passing on the baton to his son; a company gobbling another that is far bigger than itself; and all

this even as it tries to globalize. Typically a company does one-two of those things at a time. So

many things at the same timeat least I havent seen it, he says.

Besides, Sylvania and Havells are like chalk and cheese. The former is steeped in a slow, stable,

structured world of processes and hierarchies. The latter is an entrepreneurial powerhouse that is

flexible, ambitious and aggressive, leaning heavily on gut feel. But Havells lacks the managerial

bandwidth to handle Sylvania.

Yet, early signs are encouraging. On a recent Tuesday, a business unit wanted to make a euro

75,000 marketing investment. Three years ago it would have taken Sylvania a month to approve

that. We made the decision in 10 minutes. They talked to me. I set up a call with the COO and

all the country managers and the decision was taken. Thats Havells culture. Leaders are highly

interactive. There is always a sense of urgency hard to miss, says Smith.

Things are changing but it will not be easy. There is tremendous discomfort [about the new wayof working]. But there is a critical mass that has become comfortable, he adds. But there is no

denying that this transition will take several years.

Havells has become an MNC overnight with a presence in 50 plus countries. While absence of

structures and processes bring agility, it will also bring chaos as the company scales up.

Havells is aware of that. The CFO, Rajesh Gupta, says they initiated a program on risk

management where every Havells employee was asked to list the risk they see the organization

faces. They compiled 600 such risks, which vary from operational procurement issues, HR and

accounts. The list is being tackled and is now down to 13. Procurement policies have been

overhauled, inspired by Sylvania systems. Checklists have been prepared for every step in the

procurement process. If there is a slip up at any point the system throws it up automatically.


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Kuldeep Kumar Aggarwal, a Havells dealer, who does Rs. 60 crore worth of business annually

with Havells, says earlier he had to book orders manually. Now everything is automated.

Inventory can be checked, orders placed and tracked in real time on the Havells portal. Inspired

by Sylvania, they have created a central warehouse in Sahibabad in Ghazaiabad district, UP, to

facilitate this.

Nowhere is the challenge more acute then building a leadership pipeline. If we have to buy

Sylvania again we must have enough management bandwidth to manage it, says Anil. From

succession planning to grooming talent by exposing them to difficult assignmentsHavells is

tapping into both India and Sylvania staff for this. The good thing is they listen. And once they

realize it [the problems] they move very quickly, says Smith. Will they be able to maintain the

magic as they scale up and put in place structures and processes?

The answer will hold the key to Havells future.

This article appears in the August 27 issue ofForbes India, a Forbes Media licensee.

G) VALUECREATION

How did the company expect to create value?

Consistent value creation

Consistent profitable growth over the last 10 years 40%CAGR

Sales - 27x and PAT - 58x

30 quarters of consecutive growth*

10-year EBDITA and PAT CAGR in excess of 40%

Organic growth led by gaining market share in existing products, launch of new branded,

consumer products

Significant brand emphasis to create a strong differentiator with FMCG like packaging,promotions and advertisements

Consumer pull evenly matched with a well entrenched distribution network

High RoCE and RoE creating shareholder value


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1 Describe sources of value creation.

1 BrandPillars

Brand Focus Aggressive brand building initiative by patronizing cricket, high brand

visibility on mass media

. Indias Biggest Advertiser in Electrical Industry. over Rs.400cr Ad. Spends in the last

4 years.

Strong Brand Association with Cricket

New TV Commercials across Product Categories every year

First electrical co. to enter social media space

BrandInnovative

First in the Industry to create a Galaxy conceptretail initiativeGalaxy - One Stop Shop

for Havells & Crabtree Products - 130 Galaxies opened in different cities - Target to

reach 200 by year end

First in the Industry to create a Havells World concept Retail initiativeHavells World -

Unique Concept of Displaying Entire Havells Range in Wholesale Markets -Havells

World in Delhi & Mumbai BrandMediaRecognition Gen Next The Hidden LeadersBusiness Today Among

Indias Most Valuable Companies Business Today Among Indias Most Investor

Friendly CompanyBusiness Today Among Top 20 Stocks for 2010Dalal Street

Fastest Growing Electric CompanyConstruction World Havells on 43rd position

among Top 1000 companies in IndiaBusiness Standard Havells on 55th position

among Top 500 companies in IndiaIndustry 2.0


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2 Manufacturing , R&D

Baddi Alwar Manufacturing (3 Units)Manufacturing Domestic Switchgear(2) Power

CablePlants -India Switches Wire 15 Plants

Neemrana Haridwar 8 Locations (4 Units) (2 Units) Motors Lighting -CFL -CMI

Lamps Fans - Fixtures

Sahibabad Sahibabad Industrial Capacitors Switchgear

Noida FaridabadManufacturing LightingPlants -India - Ballasts Industrial Switchgear

Haridwar 15 Plants (Standard) 8 Locations Domestic & Industrial Switchgear

Germany Belgium Manufacturing LampsManufacturing LampsPlants-Abroad U.K.

France 6 Plants Concord IC Fixtures 6 Locations Fixtures Costa Rica Columbia

Fluorescent tubes Fixtures Fixtures France. Paris Warehouse

R&D

QRG Tower NoidaWorld class

Plant R&D at Alwar, Faridabad, Baddi, Haridwar,NeemranaInfrastructure

Global R&D centre at Noida - Switchgear, Fans. Lighting, Cables

100+ Engineers

3 Quality

Delivering on our promises

Understand customers expectations

Understand perceived quality

Capitalise on quality No compromises on quality!

4 Service

All functions Critical Differentiator must be customer oriented

Product availability


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Supply Chain Customer

Speed of delivery R&D Service

e-business Finance

After sales service Marketing

Was the desired value created? Describe.

HIL has gained market share across all the segments because of the value they bring to their

customers.The surge in market share is mainly attributed to a strong dealer network which helps

the company adopt a dealer push strategy. HIL has also been aggressively promoting its products

thereby increasing the brand recall. These two factors, we believe, would help the company

further increase its market share over the next few years


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H)STRATEGY HISTORY

a. What was the earlier strategy of the firm?

Havells had a track record of five successful acquisitions, and high growth in its

Indian operations. o o o In 1983, it bought the loss-making Delhi-based Towers

and Transformers Ltd and turned it around in a year Between 1997 and 2001,

Havells also bought ECS, Duke Arnics Electronics and Standard Electricals

Established a 50:50 joint venture with UK-based Crabtree. Havells later acquired

Crabtree's stake in the JV in 2007 for a consideration of INR 2,100 crores.

b.

Describe why the firm has to change its strategy?

The mid 1990s was one of the most difficult times for the electronics

industy.The liberalization policy of the Indian Government triggered a wave

of entrants from both well reputed multinational corporations as well as

generic imports from China.Havells any many other companies were being

challenged on the low end by Chinese exports and on th high due to European

imports.

c. Trace out the historical strategic moves of the firm for last two decades


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I) COMPARISON WITH EARLIER STRATEGIES OF THE FIRM

1. How did this strategy compare to others, if any, made by the firm in last 10 years

with respect to size and results?

Current valuation 7248 crores

2. Does this strategy break the strategic pattern of usual approach of the firm? Discuss

Yes earlier Havells used to only acquire companies dealing with motors,meters and cables.After

observing the industry trends they shifted to the international market acquiring firms of the same

nature.But in 2007,they broke their strategy pattern by acquiring sylvenia which was a lighting

manufacturer to diversify their business in lighting and to make a global presence by leveraging

sylvenias network of 50 countries and over 20000 dealers.


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J) .COMPARISON TO OTHER STRATEGIC MOVES MADE BY MAJOR

COMPETITORS

1. Select two or three key competitors of the firm and compare the recent strategic

moves (During last 2-10 years) of these companies to that of the selected firm.

1.Philips

Philips acquired companies like Amprex,Magnavox,Signetics,Mullard,VLSI,Agilent

Healthcare Solutions Group etc.Philips also believed in the external growth strategies just

like Havells and acquired diverse companies to expand their product line.

2.Osram

It has consistently expanded its global presence through acquisitions and joint ventures.It

was established by the merger of 3 organizations AEG,Siemens &HAlske AG.It took

over LCS from Siemens and did a series of acquisitions to have a presence worldwide.

2.

Is the purpose of strategy (size, type, and objectives) similar for each of the 2 or 3 majorfirms studied? Do the competitors rely more on internal or external growth? If, yes why?

If not, discuss any differences.

Osram and Philips are similar to Havells in terms of size,type and objectives as all deal in

electrical and electronic equipment and consumer electrical goods.The competitiors rely

on external growth for expansion and global presence.Since liberalization laws have been

eased in most countries and globalization is key to success these companies rely on

acquisitions and mergers and joint ventures for their growth.


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K) IMPACT OF STRATEGY ON THE FIRM FINANCIAL PERFORMANCE

CREDIT RATING

CARE

Credit Analysis & Research Limited (CARE) is a full service rating company that offers a wide

range of rating and grading services across sectors. CARE's Credit rating is an opinion on the

relative ability and willingness of an issuer to make timely payments on specific debt or related

obligations over the life of the instrument. CARE rates rupee denominated debt of Indian

companies and Indian subsidiaries of multinational companies.

During the year, CARE has reaffirmed the CARE A1+ [A One Plus] rating assigned to the short-

term facilities of your Company. This rating is applicable to facilities having a tenure upto one

year. Instruments with this rating are considered to have very strong degree of safety regarding

timely payment of financial obligations.

Further, CARE has also reaffirmed the rating of CARE AA [Double A] assigned to the long-term

facilities of your Company. This rating is applicable to facilities having tenure of more than one

year. Instruments with this rating are considered to have high degree of safety regarding timely

servicing of financial obligations.


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L) IMPACT OF THE STRATEGY ON INDUSTRY STRUCTURE

1. Was the firms announcement followed by other large strategic moves

in the same industry? List these strategic moves and whether you

believe they were motivated or a result of the firms strategy under

study.

Beacon Electric Supply,* San Diego Gexpro (IESCO), Dallas

Robson Electric Supply,* Johnson City, N.Y. Friedman Electric/Sonepar USA

ESSCO Wholesale Electric,* Chandler, Ariz. Sonepar USA, Philadelphia

Hagemeyer North American operations,*

Charleston, S.C. Sonepar USA, Philadelphia

Total Supply Solutions Anixter Inc., Glenview, Ill.

Eurofast SAS, Collegien, France Anixter Inc., Glenview, Ill.

Minnesota Electric Supply Co., Willmar,

Minn.Border States, Fargo, N.D.

US Electrical Services Inc. LLC, Exton, Pa.Consolidated Electrical Distributors Inc., Westlake

Village, Calif.

McNaughton-McKay Electric Co., Madison

Heights, Mich.ESOP

Breva, Zonhoven, Belgium

Hagemeyer, Naarden, Netherlands

These firms decided to acquire companies for forward intergartion and diversification as these

firms realized to keep pace with the changing trends in the electrical industry it was

imperitive to diversive or move forward.Some of these companies came in joint ventures

to cut costs and to increase productivity and share production.Some of these companies

leveraged the other brand to expand their customer base.


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Do you believe the strategy under study will/had cause/caused more strategic moves in the

industry? Why or why not?

3. What impact do you believe the strategy under study will have on the firms market

share, on firms competitive advantage, growth and profitability.

The acquisition would help them leverage new production bases for these products in India and

Brazil while premium products where Havells had no presence would be available for them in

Europe Vertical consolidation up the value chain: The acquisition of Sylvania would give

Havells a foothold in the fixtures and Energy efficient markets in Europe where they had no

earlier expertise and depended on imports from Europe itself even for the smaller market in

India. There will be a thrust on emerging technologies such as CFL and LED that address energy

and environmental issues . The European market for energy efficient lighting in Europe was

$930 million in 2007, of which CFLs alone were $883 million. This market is expected to touch

$1.6 billion by 2014, estimated Frost & Sullivan. Expansion strategy in new markets: With a

combined 2007-08 turnover of Rs 5,000crore (of which Rs 3,000crore is contributed by SLI

Sylvania) HavellsSylvania would become a serious contender in the $29 billion global lighting

market. This includes expansion and new business in Eastern Europe, Middle East, South

America and Asia. It also wanted to address the professional lighting business in a big way,where Chinese products weren't a serious threat. Cheap valuation of a premium brand: The fact

that Sylvania was being offered at a modest premium of 5%-10% which virtually negated any

control premium for the proposed deal meant that Havells can aspire to undertake a debt funded

deal for a purchase consideration of US$ 300million at an initial target for US$60-70million. The

fact that Havells had a low gearing ratio of 14% (March 2006) meant that there was sufficient

financial headroom for the acquisition


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M) SUBSEQUENT PERFORMANCE AND APPRAISAL OF THE STRATEGY

1. Initial changes made after the strategy (e.g., layoffs, divestitures, changes

in management, leadership, structure, market, technology, customer orientation

etc.).

After the acquisition and onset of Global Financial Crisis in 2008, this management proved to be

a hindrance in restructuring of Sylvania. Declining sales of Sylvania post merger and Corporate

restructuring programe: As the meltdown rocked European markets, Sylvania's sales fell, leading

to net losses of Euro 16.3 million in 2008/09 and Euro 26.1 million in 2009/10. From Euro 515

million in 2007/08, revenues dropped to Euro 438.4 million in two years. 15The global financial

crisis led to the slowdown in the consumption and construction activities in the key geographiesof Sylvania. Decline in demand coupled with high fixed cost structure resulted in sharp declineof

EBIDTA by 58.8% in FY09 and loss in FY10 at operating level. Falling operating efficiency of

Sylvania though Havells on a standalone basis remained performing: Sylvania recorded a

revenue decline of 8% (in EUR terms), with EBITDA margin of 4.4% (+440bp YoY). HAVL

spent Rs2bn on restructuring to lower operational costs at Sylvania. It closed the lossmaking

plants and reduced workforce. The benefits of these steps reflected in FY11 EBITA which

increased to Rs2.1bn (margin of 7.8%) in FY11 from Rs192m in FY10 (margin of 0.6%).

Security analysts reactions.Covenant breach in Sept. 2008 and demand for an asset sale by

lenders to recover outstanding loans In September2008, Sylvania's bankers, led by Barclays

Capital, hit the panic button as the company breached its covenants . Havells has raised

EUR200m for the acquisition of Sylvania of which EUR120m is recourse to its balance sheet.

Sylvanias balance sheet had EUR110m-115m in receivables. Management indicated that it

would sell Sylvanias receivables (factoring) and pay back part of the outstanding debt. This will

lower debt to equity ratio and improve balance sheet. The net debt-equity stood at 1.1x, for the

consolidated entity The banks agreed only to a twomonth deferral of repayment of loans, helping

Havells with a Euro 24-million cushion for that period


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However Sylvania was adversely impacted during the economic crisis in Europe and reported a net loss

of EUR24 million and EUR73 million during CY08 and CY09 respectively which consequently had a

negative impact on HIL. There has been a medium term financial impact on HIL by a maiden covenant

breach with lenders group in October 2008. As a result, a restructuring agreement was signed with

lenders in August 2009 with new covenants. HIL took immediate steps to counter the crisis and

initiated two major restructuring plans:

This restructuring again required an extra amount of debt and HIL refinanced its outstanding debt of

EUR102 million, which was payable in two tranches by the end of April 2012 and April 2013. Under

the new proposal, EUR40 million has been guaranteed by Havells India repayable in one year i.e. up to

April 2013 while the balance EUR77.5 million is on the book of Sylvania and will be repaid over the

next four years (i.e. up to May 2016). Going forward we expect Latin American and other markets to

post strong growth on the back of these restructuring activities. We expect Latin American markets to

grow at 10% CAGR and other Asian markets to grow at 15% CAGR over FY13 over FY13-15E.

However European business is likely to remain under pressure as European markets are still reeling

under the slowdown fueled by the European Sovereign Debt Crisis. We have estimated a flat growth

for the European business for the next two years on the back of flat GDP projections for most of the

European markets.


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N) LOOKING AHEAD

1. Has the firm positioned itself wisely in relation to its industry for future value creation?

Discuss your reasoning.

Yes the firm has positioned itself wisely in the consumer electrical business.they have

diversified into home appliances and fans and opened retail stores by the name of Havells

Galaxy to be in contact with the customers directly.They have Brand Focus Aggressive brand

building initiative by patronizing cricket, high brand visibility on mass media

. Indias Biggest Advertiser in Electrical Industry. over Rs.400cr Ad. Spends in the last 4

years.

Strong Brand Association with Cricket

New TV Commercials across Product Categories every year

First electrical co. to enter social media space

3 Manufacturing , R&D

Baddi Alwar Manufacturing (3 Units)Manufacturing Domestic Switchgear(2) Power

CablePlants -India Switches Wire 15 Plants

Neemrana Haridwar 8 Locations (4 Units) (2 Units) Motors Lighting -CFL -CMI Lamps

Fans - Fixtures

Sahibabad Sahibabad Industrial Capacitors Switchgear

Noida FaridabadManufacturing LightingPlants -India - Ballasts Industrial Switchgear

Haridwar 15 Plants (Standard) 8 Locations Domestic & Industrial Switchgear

Germany Belgium Manufacturing LampsManufacturing LampsPlants-Abroad U.K. France 6Plants Concord IC Fixtures 6 Locations Fixtures Costa Rica Columbia Fluorescent tubes

Fixtures Fixtures France. Paris Warehouse

R&D

QRG Tower NoidaWorld class


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Plant R&D at Alwar, Faridabad, Baddi, Haridwar,NeemranaInfrastructure

Global R&D centre at Noida - Switchgear, Fans. Lighting, Cables

100+ Engineers

2. What are some major changes in strategic direction the firm under study could make to

improve its current performance and prospects?

They should cut costs by shutting down plants which are not operational or through which there is not

enough yield generated.They should open plants in geographic locations where it is easier to produce

the desired products and where labour costs are low like China.they should collaborate with

international manufacturers to keep the quality high and demand met.

s


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O)DRAWING SOME CONCLUSIONS

1. Which of the companies studied (the firm and 2-3 key competitors) seemed to have

followed the best strategy and its execution?

The Havells and the Sylvenia strategy was the best in its execution as it was Havells instinctive

decision to acquire Havells as it wanted to become a global leader in the electrical industry.It incurred

debt too but this acquisition was required for it to achieve its objective of becoming a global leader.

They executed this strategy very calmly and structured everything properly and had an effective

management to handle the crisis.The experienced mgmt. of Havells made it easier for Sylvenia and

Havells to restructure the company easily.

2. Does one company appear to be consistently better than the others?

No, most of these companies are on the same lines producing and delivering the same quality and

products.

3. What is the source of its superiority?

Source of its superiority is its early establishment in the indian market and a continuously innovating

team to keep pace with the changing environment.


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stry.pdfhttp://www.econ.kyoto-u.ac.jp/~kurosawa/caris/fujicon/abstract/NISHIMURA,%20Shigehiro%20__Fuji_Kyoto_2013%20Sep._Abstract%28long%29_Electrical%20equipment%20industry.pdfhttp://www.indiainfoline.com/Markets/Company/Fundamentals/Management-Discussions/Havells-India-Ltd/517354http://www.indiainfoline.com/Markets/Company/Fundamentals/Management-Discussions/Havells-India-Ltd/517354http://www.havells.com/Admin/SiteMedia/AnnualReport/Annual%20Report%202013.pdfhttp://www.business-standard.com/article/markets/havells-pay-back-time-for-sylvania-114031700069_1.htmlhttp://www.business-standard.com/article/markets/havells-pay-back-time-for-sylvania-114031700069_1.htmlhttp://www.forbes.com/2010/08/26/forbes-india-havells-managed-sylvania-acquisition.htmlhttp://businesstoday.intoday.in/story/smart-turnaround-strategy-helped-havells/1/197235.html

final report sm havells

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