havells india - printing

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A DALMIA RESEARCH CENTRE REPORT

Nifty and Stock Movement

Rating: BUY Target Price: ` 449

Upside: 18%

CMP: ` 381

HAVL IN, HVEL.BO

Tushar Das(91-22) 3027 [email protected]

Initiating Coverage | November 2nd, 2011

Havells India Limited

Sylvania Turnaround Story: Havells (HAVL) stock de-rated following the Sylvania acqui-sition on account of concerns pertaining to losses in Sylvania. HAVL put a restructuringprogram in place to turn around Sylvania‗s operations. As a result, Sylvania recently man -aged to break even in Q2 FY2011and we expect margins to improve going forward. Syl-vania continues to deliver improved performance reflected in the last two quarter numbers(Q1FY12 adjusted ebitda margin stood at 7.3% while Q2FY12 stood at 7.4%). Top linerose by 3.4% YoY in Q2 FY12 led by improved performance from Europe (up 4%),whereas LATAM (up 3%) was slowdown due to lower demand from few countries atLATAM. However, Management believes that LATAM will grow by 10-15% in FY12Ewhereas in Europe they might see a flattish growth but they will try to get better profitabilityfrom the European business through optimization of product mix. It has been seen, HAVLmanagement was able to deliver the result in-line with your expectation for last 2 quarter.Hence we expect a Sylvania to grow by 4% in revenue with an EBITDA margin of approxi-mately 7% in FY12E.

Strong domestic consumption trend to drive performance: HAVL‗s will be the big-gest beneficiary of robust demand growth from the domestic market. Over the last fewyear, all the segments where HAVL India is present have grown at a CAGR of 8%-30% andhence we except similar growth to continue in all the segments.

Standalone —Segment wise performance: Q2FY12 revenues for the Cable & wiressegment rose 30% YoY mainly on back of price increase on account of input cost. Whilelighting segment revenues registered a strong growth of 31% mainly on back of increasesale of CFL coupled with its price increase in few product category. Consumer durable seg-ment was up 26% while Switchgear segment sales rose by 13%. Water heater & Domesticappliances division posted revenue of ` 18cr in Q2FY12. We believe growth for consumer business of HAVL should remain strong due to its strong branding efforts and introductionof new products. Management expect ` 200cr revenue from domestic appliances in FY12E.

Strong Distribution Network: HAVL have established a strong pan India distribution

network. It employs both direct and dealer-based distribution strategies. It currently hasmore than 4000 dealers in India, which is looking to increase by about 500 each year inorder to expand its reach. It has more than 30,000 retail outlets. This channels accountsfor about 90% of total sales.

Outlook & Valuation: Driven by robust demand in the domestic market and increasingpenetration in other emerging markets, the company‗s revenues are expected to grow at aCAGR of 13% over FY11-13E. Also, the full effect of restructuring would be seen in thisfiscal (FY12).

At current price of ` 381, stock is trading at 13.2x and 11x P/E and 8.7x and 7.2x EV/EBITDA multiples for FY12E and FY13E respectively. We maintain BUY recommendationwith an target of ` 449 per share.

HAVL 1Yr Fwd P/E Chart

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HAVL 9x

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Financial Performance of the Company ` in mn

Market DataFace Value Market Cap. ( ` Mn) 4Outstanding Shares (Mn) 12Book value/ Share 552 Week High/Low ( ` ) 451/NSE Avg. Volume 201

Shareholding Promoter 6MF/ Banks/ Indian Fis FII/ NRIs/ OCB 1India Public/ Others 19

FY2009 FY2010 FY2011 FY2012E FY2013ENet Sales 54,775 54,315 56,126 63,632 71,430Growth 10% -1% 3% 13% 12%EBITDA 2,886 3,222 5,571 6,404 7,313EBITDA Margin 5.3% 5.9% 9.9% 10.1% 10.2%PAT (1,602) 696 3,036 3,609 4,320PAT Margin - 1% 5% 6% 6%EPS - 5.6 24.3 28.9 34.6P/E - 68.3 15.7 13.2 11.0EV/EBITDA 19.3 17.6 10.2 8.7 7.2

Please refer to the important disclosures and analyst certifications at the end of the document

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HAVL Price NIFT



Particulars Euro in mn Details

Purchase Price 227

Transaction cost 7.5Total 234.5

Pension Liabilities not to be funded 34.5

Funds to be arranged 200 Funded by consortium of Barclays and SBI

Non-recourse debt 120

- Term Loan @ 80 Payable over 6 years from 2009-14 paid so far

- Revolving Loan 40 Fully due in FY13

Recourse debt 80

- Paid so far 63 Mainly funded through shares issue to Warburg Pincus

- Current outstanding # 17

Investment Thesis

Sylvania Turnaround Story: HAVL acquired Sylvania global business (except for brand rights toNorth America, Mexico, Australia and New Zealand) for an enterprise value of €227mn. The acquisi-tion was aimed at expanding HAVL‘ geographical presence and leveraging Sylvania‘s brand to enter emerging markets. Given Sylvania‘s strong pedigree and over 100 years of existence, we believe thechoice of Sylvania was appropriate.

However, post the economic slowdown, HAVL‘s stock de -rated following the acquisition on account of concerns pertaining to losses in Sylvania. HAVL put a restructuring program in place to turn aroundSylvania‘s operations. As a result, Sylvania recently managed to break even and we expect margins toimprove going forward. We believe that a sustained improvement in Sylvania‘s profitability will bodewell for HAVL valuations and will drive a stock re- rating. We estimate Sylvania‘s contribution to con-solidated profits to increase to 14% by FY13E from a negative (-6%) in FY10.

HAVL stock currently trades at 13.2x FY12E P/E. We believe that sustained market share gains, roll-out of the consumer durables portfolio, and a pick- up on Sylvania‘s profitability will drive a stock re -rating. Our target value based on sum-of-the-part valuation but it will be 24% discount to its historicaltrading average. While we do not see HAVL trading up to its pre-Sylvania valuations, we believe it can

trade at a premium to global peers given its strong presence in high-growth emerging markets.Currently Europe‘s revenue contribution stands at 60% which is expected to linearly decline to 50%over next two years. We believe the above strategy of geographical diversification will aid Sylvania‘stop line to grow to ` 30603mn by FY13 (growing at CAGR of 6%). Operating margins are set to im-prove to 7% by FY12E due to cost saving as offered by restructuring programs like Phoenix and Prak-ram.

Acquisition Details:

@ Payable half yearly (June & December). Installment of €6mn. However, after the loan covenants were breached., the loan terms were re-negotiated and now the first install-ment of loan have start from FY12.# Recourse debt is payable half yearly. Installment of Euro 3.3mn.

Source: Company, Crisil & Dalmia Research

Sylvania’s operationhave turned arounand margins are likelyto improve going foward

of 19 Dalmia Research Center

Havells India Ltd.

2nd November 2011



Two Restructuring plans:

Source: Company, Crisil, Dalmia Research

Q2FY11 Result Review: Focus on manpower reduction has been limited to production areas. It hascut fixed costs, exited from low margin commodity lighting products, increased outsourcing to China andIndia, and subsequently improved operating margins. Based on above factors Sylvania have deliver im-proved performance reflected in the last two quarter numbers (Q1 FY12 adjusted ebitda margin stood at7.3% while Q2FY12 stood at 7.4%). Top line rose by 3.4% YoY in Q2 FY12 led by improved perform-ance from Europe (up 4%), whereas LATAM (up 3%) was slowdown due to lower demand from fewcountries at LATAM. However, Management believes that LATAM will grow by 10-15% in FY12Ewhereas in Europe they might see a flattish growth but they will try to get better profitability from theEuropean business through optimization of product mix. It has been seen, HAVL management was ableto deliver the result in-line with your expectation for last 2 quarter. Hence we expect a Sylvania to growby 4% in revenue with an EBITDA margin of approximately 7% in FY12E. HAVL management has indi-cated that they are looking to reduce the contribution from the European markets to 50% over the nextfew years.

We believe that continued operational turnaround at Sylvania and growth in Latin America will act aspositive share price catalysts. We assume EBITDA margins of 7% in FY12 and 7.5% in FY13 for Sylvaniain our model, while the company expects to achieve an 8-9% EBITDA margin in FY13.

Region wise Revenue Analysis (Sylvania)

Sylvania reportedan EBITDA margiof 7% in H1 FY12 ascompared with 5%in H1FY11.

Name Project Phoenix Project Prakram

Time Frame January-09 —September-09 September-09 —June-10

Focus geography Latin America & Europe Europe

Total cost (Mn Euro) 12.3 20

Action planned - Reduce 700 people in Latin America - To reduce manpower in Europe

- Reduce 600 people in Europe - Plan to outsource about 60% of the products by FY12to India & China

- Shifting UK‘s manufacturing plant to India - No Proposal to shut manufacturing facilities

- Closure of plants in Brazil & Costa Rica

Result

Estimated Benefits (Mn Euro p.a.) 17.5 16

Manpower Reduced from 3800 to 2500 To reduce manpower from existing 2500

Plants 10 plants reduced to 7 NA

Current status Completed Completed

LATAM continues with its robust growth compared to European market

Favorable realization from LATAM business has helped to post better top line and bottom line

Source: Company, Dalmia Research


Net Revenue Q2 FY2011 Q1 FY2012 Q2 FY2012 Q2 FY2011Europe 66.5 64.0 69.0 66.5

Americas 38.7 36.1 39.7 38.7 Asia / Others 6.5 6.6 6.8 5.9Total 111.7 106.7 115.5 111.7

EBIDTA Europe 1.2 3.9 4.5 1.2

Americas 4.3 3.6 4.1 4.3

EBIDTA MarginEurope 2% 6% 7% 2%

Americas 11% 10% 10% 11%

Havells India Ltd.

2nd November 2011



Sylvania standalone performance

Top line has grown by 3% YoY

EBITDA Margin has improved to 7% from 6% YoY

Source: Company data, Dalmia Research

Sylvania —Key Strategy and Objective: Most of the growth for Sylvania has accrued from theemerging economies in Latin America and emerging market. Management expects emergingeconomies to contribute about 50% of Sylvania‘s earnings in the next one to two years from about30% at present.

Management highlighted that they are very aggressive in LATAM where they expect a growth of 18-19% and EBITDA margins to range 10-11%.

In India, Sylvania will focus on retail oriented brand play, and promote its other brands, Concordand Lumiance, with the architectural segment. In Europe, Sylvania‘s portfolio of brands, especiallyConcord, has provided high-end lighting solutions to places like the Louvre in Paris, Tate Modernand Barbican Centre in London. HAVL own lighting products will continue to be sold under its cur-rent brand.

The India launch was a part of a new-found focus on emerging markets at the $1-billion-plus HAVLgroup. It has set up operations in Malaysia, Indonesia will soon hit Chile and Peru. Next year, thefocus is on Africa, mainly Nigeria, Ghana, Kenya and Tanzania. The company has also opened anoffice in China.

Management expects EBITDA margins torange 7-8%. Target growth ~4-5%

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Around ~ € 92mnlikely to be refinancedafter Dec. 2011 pay-ment


Dalmia Research Center

P&L Summary (In Euro)Particulars Q2FY11 Q2FY12 YoY (%) Q1FY12 QoQ (%)Revenue 111.7 115.5 3% 106.7 8%Expense 105.1 106.9 2% 98.9 8%EBIDTA 6.6 8.6 30% 7.8 10%

EBIDTA Margins 6% 7% 7%

Pension (liabilities)/benefitsDep. 2.1 1.9 -10% 1.9 0%Interest 3.2 3.1 -3% 3.2 -3%MTM (0.7) 0.1 -114% (0.3) -133%

Add: Other Income 0.4 1.9 375% 0.1 1800%

Exceptional items (Foreign Ex- (0.1) 2.6 -2700% (0.2) -1400%

PBT 2.5 2.8 12% 3.3 -15%Tax 1.2 1.1 -8% 0.9 22%PAT 1.3 1.7 -8% 2.4 -29%PAT Margin 1% 1% 2% -35%

in millions of Euro FY2010 FY2011 1QFY12 Q2FY12

1. Term Loan 76.7 78.4 72.8 71.02. Working Capital 35.2 37.2 39.8 36.03. Other short term 24.6 30.0 31.0 28.84. Less: Cash 12.6 18.6 10.0 10.5Total Net debt 123.90 127.00 133.60 125.30

Sylvania’s Net debt structure: Sylvania gross debt stands at €142.5mn (€145mn as on March2011). The term loan has came down from €78.4mn to €71.0mn after Sylvania made the payment atthe end of Q1FY12 while another installment of €6mn would be paid at the end of Dec. 2011. Man-agement has guided remaining term loan of €77mn will go for refinancing in FY13E. Sylvania netDebt stand at €125.4mn as on Sept. 2011. With Sylvania showing improved cash flows and the do-mestic business outlook also looking up, it is likely that HAVL may reduce its debt burden in the nexttwo years.

Havells India Ltd.

2nd November 2011



Sylvania Geographical revenue trends

Source: Company data, Dalmia Research

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We expect HAVL to minimize

European revenue contribution from 60% to 50% within two — three years

Whereas, we except Ameri- can business will have a double digit growth

0%

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30%

40%

50%

60%

70%

80%

FY2009 FY2010 FY2011 FY 2012E FY 2013E

Europe Americas Asia

Sylvania Financial

Particulars (Euro mn) FY09 FY10 FY11 FY12E FY13ENet Sales 509 413 449 467 491Growth(%) -19% 9% 4% 5%EBITDA 12 7 26 33 37EBITDA Margin(%) 2% 2% 6% 7% 8%Depreciation 11 9 8 9 9EBIT 0 (2) 18 24 28Interest 14 12 11 11 12Other Income 0 1 1 1 1

Exceptional Items (Pension) (8) 5PBT (13) (21) 13 14 17Tax 3 5 6 6 7

Adj.PAT (16) (25) 8 8 10EO Expenses (31) (44) (1) - -Reported PAT (47) (69) 7 8 10PAT Margin -9% -17% 2% 2% 2%Source: Company, Dalmia Research


Havells India Ltd.

2nd November 2011



Cables &Wires

8%

LighFix

2

ElectricalConsumerDurables

31%

Switchgears41%

Source: Company, Dalmia Research Source: Company, Dalmia Research

Strong domestic consumption trend to drive performanceWe expect HAVL will be the biggest beneficiary of robust demand growth from the domestic market.Over the last few years, all the segments where HAVL India is present have grown at a CAGR of 8%-30% and hence we expect similar growth to continue in all the segments.

The company has four main segments in its standalone domestic business:

Cables and wires;Electrical consumer durables;Lighting and fixtures; andSwitchgears

In all of these businesses, the proportion of industrial buying is small, and almost all of them aredriven by domestic consumer demand. The company is also a beneficiary of India‘s constructionboom and industrial capex, including power capacity and T&D infrastructure augmentation. As buyersbecome ever more quality-conscious and the market becomes more broad-based (thanks to increas-ing prosperity of tier 2 and 3 cities), the size of the opportunity for a player like HAVL with nationwidedistribution and well-known brands is large.

Rising electrification,real estate growth and a shift toward energy-saving lighting are drivinggrowth for HAVL’s

products


Revenue Mix (FY11)

Cables &Wires16%

Lighting &Fixtures

14%


23%

Switchgears47%

Contribution Margin break-up FY11 Segment wise Contribution Margin FY11


Switchgears26%

Cables & Wires43%

Lighting &Fixtures

15%


16%

Havells India Ltd.

2nd November 2011



Cables & Wires Segment —Lowest Margin: HAVL Cables and Wires division is the biggest reve-nue contributor with 43% of the annual sales in FY11. Revenue breakup of Cable & Wire Segment isCable segment contribute ~55% and Wires contribute ~45% in FY11 revenue. It operates in the lowtension power cables market (upto 33kv), primarily used in industries and in power distribution net-works. The company has expanded the whole range of LT, HT and EHV cables, which has been up-graded from 33 KV grade to 132 KV grade. Post Expansion, the company has increased the capaci-

ties of varied product lines as production of LT cable has increased by 92%, HT cable by 42%, pro-duction of control cable has been doubled, coils of flexible cable increased by 150% and Compoundsby 67%. By this upgrade, the company would be rolling out world-class products at a more muchlower cost while not compromising quality. Clearly this will provides significant competitive advantagesto HAVL going forward.

HAVL has a presence in the cable & wire segment, with a 9% market share, with margin contributionof 7-9%. Margins are very sensitive to commodity (Copper & Aluminum) prices. Given the nature of the power cable business, it is not feasible to pass on raw material cost hikes to end consumers imme-diately, as most of these deliveries are order based. It normally takes two to three months for thehigher costs to reflect in prices. Hence, going we expect margin to stable at 7-8% over the next 2-3years.

HAVL Cable & Wire business is growing by 32% YoY mainly due to i) strong presence in the cable &wire market; ii) change in consumer behaviour, preferring branded products over unbranded ones. iii)strong distribution network.

They compete with leading players like Finolex Cables, Polycab wires & cables, Sterlite Technologies,KEI industries

We estimate Cable & Wire segment revenue to grow by CAGR of 12% over FY11-FY13E, mainlydriven by i) increase in purchasing power of India middle class and rapid urbanization; ii) continuousexpansion of distribution network along with rural penetration; iii) Shift in sales to organized segmentwith the reduction in prices;

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HAVL Cable & Wires sales trend ( ` in mn)



HAVL Cable & Wire segment capacity performance


42%

45% 45% 45%46%

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46%

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400,000

600,000

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1,000,000

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FY2009 FY2010 FY2011 FY12(E) FY13(E)

Installed Capacity Utilization

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-1%

28%

12% 11%

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2,0004,000

6,000

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16,000

18,000

20,000

FY2009 FY2010 FY2011 FY2012E FY2013E

Cables & Wires Growth %

Cable & Wire segment 43% of total Revenue

16% of total contribution

Seg. Cont. Margins:7%

Havells India Ltd.

2nd November 2011



Switchgears —Highest Margin: Switchgear sales contribute 26% of HAVL (standalone) revenueand is the highest margin segment for HAVL, at 35-37%. Margins vary with product mix. HAVL com-mands 25-30% market share in the domestic switchgear market of ` 14bn. HAVL caters to the medium-low voltage switchgear segment only (<1.1 kva), which provides it with an edge in domestic usageand limited play in industrial switchgears, while commanding a market share of 7-8%. The companymanufactures a wide range of products, including MCBs (miniature circuit breakers), mini MCBs,

RCCB (residual current circuit breaker), RCBO (residual current breaker with overload protection),switches, sockets, regulators, MCCBs (moulded-case circuit breakers), rewirable switches; off-loadchangeovers, on-load change-overs and SDFs (switch disconnector fuse). HAVL sells Crabtree modu-lar switches in India. Currently Crabtree holds market share of ~15% in Modular switches.

The company has expanded the whole range of switchgear. With the augmentation of switchgear ca-pacity, the company has divided its switchgear manufacturing in two parts. While the lowered switch-gear products continue to be manufactured at its Faridabad plant in Haryana, all high-end productswill be manufactured at the Sahibabad plant. From this expansion plan, the management expects` 1800 cr revenue in next three years from Switchgear business. The industrial switchgear segment,which currently contributes ` 200 crore per year is also expected to double to ` 400 crore within thenext two years.

HAVL faces stiff competition from Legrand SA, Schneider Electric SA, Indo Asian Fusegear Ltd, andLarsen & Toubro Ltd, among others. The top seven players account for 59% of the industry. Amongthem, while Siemens and Anchor Limited have raised their market share significantly by 4.01% and3.65%, respectively in the last 7 years.

We expect demand for the switchgear to remain strong on the back of rising construction activity, im-proving supply of electricity and preference for branded products. We expect CAGR of 7% over FY11-FY13E, mainly driven by i) increase in purchasing power of India middle class and rapid urbaniza-tion; ii) Introduction of new product portfolios like control gear and panels will add to the growth of the industrial switchgear segment; iii) continuous expansion of distribution network along with ruralpenetration; iv) Shift in sales to organized segment with the reduction in prices; v) increasing consumer awareness; vi) increase investments in real estate.

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Switchgears segment 26% of total Revenue

47% of total contributio

Seg. Cont. Margins: 37%

HAVL Switchgear sales trend ( ` in mn)



HAVL switchgear segment capacity performance

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FY2009 FY2010 FY2011 FY2012E FY2013E

Switchgears Growth (%)

33% 35%

39% 41%43%

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FY2009 FY2010 FY2011 FY12(E) FY13(E)



Havells India Ltd.

2nd November 2011



Lighting & Fixtures —a growth driver: HAVL has a strong presence in the Luminaries and CFLsegments with the second-largest market share in CFL and the fourth-largest share in Luminaries. Thissegment accounts for 15% of HAVL‗s total standalone revenue and 11% of the ` 25bn India market.CFL being a high margin segments, HAVL is enhancing its capacity from 4mn units/month to 8mnunits/month. India consumes 200mn units of CFL and produces about 150mn CFL units annually,while rest of the demand is met through imports. This makes a huge opportunity for the company to

tap.

With Sylvania products likely to be introduced in this segment in India soon, we expect an accelerationin revenue growth and margin expansion. We estimate sales CAGR of 17% for HAVL‗s lighting andfixtures over FY11-FY13E.

Electrical Durables: HAVL entered the fans business in 2003 and is currently one of the fastestgrowing fans brands in the Indian market. In this segment, table-top and portable fans are currentlyalmost entirely a Chinese-imports market, and even the lower-value ceiling –fan segment is intenselyprice-competitive. HAVL has chosen to be present in only the ` 1,000+ price category, thereby main-taining healthy margins. Growth in this business remains strong, given the broad-based consumptiongrowth in India. The company has launched innovative products with its energy efficient fans(consuming only 50W) making it the largest energy efficient fan in the country. The company hasmoved into consumer-durables business, with new categories such as water storage geysers and other home implements.

HAVL has also entered into the ` 5200 cr small home appliance business by introducing new productslike mixers, irons, hand blenders, cooking and brewing appliances. HAVL intends to position its prod-ucts in the premium segment, which contributes a fifth to the total small home appliance businessmarket size and is growing even faster at 30-35%. The company had outsourced 70% of manufactur-ing to local vendors and the rest to its partners in China. The company also plans to export theseproducts to Latin America and Thailand.

The fans market in India is estimated at ` 20bn, and HAVL currently has about 18% market share —arapid scale-up from its FY06 market share of 6%. The leading players are Crompton Greaves andOrient Fans, followed by Bajaj Electricals. Local players like Polar and Khaitan are also forces toreckon with in their own geographies.

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HAVL Lighting & Fixtures sales trend ( ` in mn)



HAVL lighting & fixtures segment capacity performance

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33%

28%

16% 18%

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1,000

2,000

3,000

4,000

5,0006,000

7,000

FY2009 FY2010 FY2011 FY2012E FY2013E

Lighting and fixtures Growth %

33%37%

46% 48% 50%

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60%

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20,000,000

30,000,000

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90,000,000

FY2009 FY2010 FY2011 FY12(E) FY13(E)



Lighting segment 15% of total Revenue

14% of total contributionSeg. Cont. Margins: 18%

Electrical durable seg.16% of total Revenue 23% of total contribution

Seg. Cont. Margins: 28%

Havells India Ltd.

2nd November 2011



HAVL‗s has entered in the Geyser segment and expects this to contribute ` 400mn - ` 500mn to topline in FY12E. Water heating segment market size in India is estimated at ` 6bn, of which electricalheaters account for ` 4.5bn. This market is further divided into instant and storage geysers, which ac-count for 35% and 65% respectively.

We expect demand for the electrical durable to remain moderate on the back of rising constructionactivity, improving supply of electricity and preference for branded products. We expect CAGR of 28% over FY11-FY13E, mainly driven by i) increase in purchasing power of India middle class and rapidurbanization; ii) Introduction of new product portfolios; iii) continuous expansion of distribution net-work along with rural penetration; iv) Shift in sales to organized segment with the reduction in prices;v) increasing consumer awareness; vi) increase investments in real estate.

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Strong Distribution Network: HAVL have established a strong pan India distribution network.It employs both direct and dealer-based distribution strategies. It currently has more than 4000dealers in India, which is looking to increase by about 500 each year in order to expand its reach.It has more than 30,000 retail outlets. This channels accounts for about 90% of total sales.

In addition, it has rolled out exclusive brand outlets under the name of ―Havells Galaxy‖. It oper-ates about 60 stores that exclusively sell HAVL product. It also helps to build company visibility of the HAVL brand in addition to widening the distribution network. HAVL‘s investment in these storesis limited only to display products and these stores are owned by the dealers. The company plansto expand this network to about 100 stores in FY11 and to about 200 by FY12. It accounts for almost 5% of its total sales.

HAVL’s has a network of ~4000 dealers across the country

Source: Havells



57%

48%

62% 63% 64%

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60%

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1,000,000

2,000,000

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FY2009 FY2010 FY2011 FY12(E) FY13(E)

Installe d Capacity Utilization

HAVL Electrical Consumer durable sales trend ( ` in HAVL Electrical Consumer durable capacity performance

14%

30%

40%

27% 29%

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1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY2009 FY2010 FY2011 FY2012E FY2013E

Ele ctri cal consumable durables Growth %


Havells India Ltd.

2nd November 2011



Strong advertising spends have helped HAVL’s build strong brand: Over the last fewyears, HAVL has transformed into a strong branded player by investing in brand building throughincreased advertising – its advertising budgets are highest amongst its peer group. As a result,HAVL has been able to increase its market share, given its high brand visibility. HAVL‘s spends 2 -4% of its annual revenue on advertising. Going forward, we believe that this investment will helpHAVL as it rolls out new products in the electrical durables segment.

Company spends 2-4% ofits annual revenue on advertising

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HAVL Advertisement expense trends


2%

2%2% 2% 2%

3%2%

0%

1%

1%

2%

2%

3%

3%

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200

400

600

800

1,000

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FY05 FY06 FY07 FY08 FY09 FY10 FY11

Adver tisement and Sales promotion % on net sales


Havells India Ltd.

2nd November 2011


http://slidepdf.com/reader/full/havells-india-printing 12/19 of 19

Financial Outlook

Strong revenue growth expected on the back of tremendous opportunities: Top line stoodat ` 56126mn in the year ended March 2011 as against ` 54315mn during the previous year endedMarch 2010, up 3% YoY. We believe revenue will grow at a CAGR of 13% over FY11-FY13E.

Consolidated revenues trends


Operating & PAT Margin to stabilizeWe expect HAVL operating margins to stabilize at 9.9% - 10.2% over FY11-FY13E. Going forward,management remains cautious in European business. Hence, we believe HAVL‘s margin could comeunder pressure due to intense competition and rising commodity prices. However, we are optimisticthat HAVL would be able to maintain PAT margins of around 5.4-6% by FY13E.

HAVL (consolidated) - Operating margins


Consolidated revenues mix trends

0%10%20%30%40%

50%60%70%80%90%

100%

FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY

Switchgears Cables

Light ing and fixtures Electrical consumable dura


HAVL (consolidated) - Profit Margin



9.5%

-0.8%

3.3%

13.4%12.3%

-2.0%0.0%2.0%4.0%

6.0%8.0%10.0%12.0%14.0%16.0%

-

10,000.00

20,000.0030,000.00

40,000.00

50,000.00

60,000.00

70,000.00

80,000.00

FY2009 FY2010 FY2011 FY2012E FY2013E

Net Sales Growth (YoY)

5.3%

5.9%

9.9% 10.1% 10.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY2009 FY2010 FY2011 FY2012E FY2013E

EBITDA EBITDA Margin

-2.9%

1.3%

5.4% 5.7% 6.0%

-4.0%-3.0%-2.0%-1.0%0.0%1.0%2.0%

3.0%4.0%5.0%6.0%7.0%

FY2009 FY2010 FY2011 FY2012E FY2013E

PAT PAT Margin

Havells India Ltd.

2nd November 2011



Return ratios set to improve

HAVL‘s domestic business is expected to keep pace with the strong growth expected in each of thesegments. Sylvania turnaround will help HAVL to post better return on equity ratio. Hence, We expectsHAVL to maintain its ROE(%) at around 31% going forward.

Return on equity (RoE) trends


Raw material under pressure

Copper and aluminum are key raw materials used in manufacturing of cables and wires. In FY11,copper accounted for 31% of total domestic raw material costs and aluminum accounted for 21% of the domestic raw material costs. Copper and Aluminum prices have been fluctuating over the pastyear and our outlook on copper prices remains bullish which could put pressure on operating mar-

gins.

Source: Bloomberg Source: Bloomberg


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LME Aluminum Price LME Copper

Commodity price trends on LME Commodity price performance…

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-26%

17%

46 %37% 31%

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0%

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60%

FY2009 FY2010 FY2011 FY2012E FY2013E

Havells India Ltd.

2nd November 2011



The company has started repaying its debt frCY11. Sylvania term loan has came down fr€78.4mn to €72.8mn after Sylvania made the pament at the end of Q1FY12 while another instment of €6mn would be paid at the end of De2011. It is likely to look at possible refinanoptions and thus benefit from lower interest coswell. Hence, Debt/Equity will come down FY11 onwards.

Debt —Equity Chart

With reduction in outstanding debt of the company, we expect interest coverage ratio to improve over FY10 to FY13E.

Interest coverage ratio chart

of 19




1.882.00

2.66

1.71

1.10

-

0.50

1.00

1.50

2.00

2.50

3.00

FY2009 FY2010 FY2011 FY2012E FY2013E

1.6

2.4

5.35.7

7.1

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

FY2009 FY2010 FY2011 FY2012E FY2013E

Havells India Ltd.

2nd November 2011



Key Risks & Concern

Slower topline growth for SylvaniaWe believe that Slower topline growth for Sylvania may drag the consolidated profitability in the cur-rent and next year. Hence, the company may fall short of our margin expansion expectations.

Raw material pricesHAVL earnings are vulnerable to raw material price volatilities. Although, HAVL has pricing power for most of its products, any sudden jump in key input prices for its wire business (copper and aluminum)is likely to lead to near-term margin compression and could adversely impact our estimates.

Huge competition intensity Entry of new global players like Legrand and Schnider in the electrical market in India has increasedthe competitive intensity. We believe that HAVL would be able to maintain its market share despite ris-ing competitive intensity. However, any sharp decline in the market share or larger-than-expectedspend on selling & promotion expenses to maintain market share could adversely impact our earningsestimates.

Slowdown in domestic consumption

Although we think it is unlikely, any slowdown in domestic consumption is bound to have an adverseeffect on the revenue traction of the standalone business.

Source: Company, Bloomberg, Dalmia Research


FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13Domestic PeersCrompton Greaves 10.8 13.8 8.2 6.5 2.4 2.0 19% 2Bajaj Electrical Ltd. (Dalmia est.) 15.8 19.9 7.5 6.0 2.7 2.2 21% 22

V-Guard Systems Ltd. 16.9 22.6 8.0 6.2 3.1 2.4 26% 28Havells India Ltd. (BB est) 28.6 34.4 9.1 7.8 4.8 3.5 43% 38

Havells India Ltd. (Dalmia est.) 28.0 36.1 8.6 6.7 4.7 3.3 36% 33

International PeersKoninklijke Philips Electronics NV 89.2 114.7 5.7 5.1 1.0 1.0 8% 1Schneider 271.0 298.0 7.8 7.2 1.5 1.4 13% 13Legrand SA 139.0 148.0 7.7 7.3 2.1 1.9 17% 17Zumtobel AG 88.3 104.3 6.1 5.5 1.4 1.3 14% 15

ROE(%)

EPS EV/EBITDA PRICE TO BOOK

Peer Comparison

Havells India Ltd.

2nd November 2011



HAVL India 1-Yr forward P/E Bands

Outlook & ValuationWe initiate HAVL with a BUY rating with a target price of ` 449 based on sum-of-the-part valuation. Atcurrent market price of ` 381, stock is trading at 13.2x and 11x P/E and 8.7x and 7.2x EV/EBITDA multiples for FY12E and FY13E respectively.

HAVL revenue will be mainly driven by robust demand in the domestic market and increasing penetra-

tion in other emerging markets, we expect company‘s standalone revenues to grow at a CAGR of 14%over FY11-13E. Whereas, consolidated revenue to grow at a CAGR of 13% over FY11-FY13E mainlyon back of full effect of restructuring plan applied on Sylvania.

We have compared HAVL standalone business with Indian consumer durable manufacturers, who ad-dress similar markets. The domestic peers for HAVL like Crompton Greaves, V-Guard and Bajaj Elec-tricals are trading between 13-16x FY12E P/E. Whereas, the international peers like Schneider, Legardand Philips which are trading between 6-8x FY12E EV/EBITDA. Hence, we expect Sylvania businesswill trade at 7.5x EV/EBITDA FY13E and for HAVL standalone business to trade at 15x P/E FY13.


of 19

HAVL India 1-Yr forward EV/EBITDA Bands

0

10000

20000

30000

40000

50000

60000

70000

Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Ap

HAVL EV/EBITDA-6 EV/EBITDA-7

EV/EBITDA-8 EV/EBITDA-9 EV/EBITDA-10


Source: Dalmia Research


HAVL Price TargetHavells India Domestic businessEPS (FY13E) 25P/E Multiple 15Domestic business Value per share ( ` ) 375

Sylvania (International business of Havells IndiaFY12E EBITDA (` mn) 2,266EV / EBITDA Multiple 8EV (` mn) 16,998

Net Debt ( ` mn) as on Q2FY2012 7,816Sylvania Equity Value (` mn) 9,182Sylvania Value Per share ( ` ) 74

Total Value 449

-

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Apr-07 Apr-08 Apr-09 Apr-10 Apr-11

HAVL 9x 11x 13x 15x 17x

Havells India Ltd.

2nd November 2011



Company and business Overview

In 1971, with the acquisition of the Havells brand, Mr Qimat Rai Gupta, Promoter Chairman andManaging Director, founded the company which is currently headquartered in Noida. Right now, It isa billion-dollar-plus organization, and is one of the largest & India's fastest growing electrical andpower distribution equipment manufacturer with products ranging from Industrial & Domestic Circuit

Protection Switchgear, Cables & Wires, Motors, Fans, Power Capacitors, CFL Lamps, Luminaires for Domestic, Commercial & Industrial applications, Modular Switches, the entire gamut of household,commercial and industrial electrical needs.

Havells owns some of the prestigious global brands like Crabtree, Sylvania, Concord, Luminance,Linolite, & SLI Lighting.

Company Milestones

Source: Company Report

of 19

Year Milestones

1958 Promoter, Mr Qimat Rai Gupta, started trading operations in Delhi1971 Acquired brand "Havells"1976 Set up first manufacturing plant for renewable switches and changeover switches

1979 Set up facility for HBC fuses1980 Started manufacturing high-quality energy meters1987 Started manufacturing MCBs in a JV with Geyer, Germany1990 Facility for changeover switches set up1993 Facility for control gear products set up in UP1996 ■ Entered in power & cables market by acquiring a manufacturing plant at Alwar

■ Entered into a JV with Electrium, UK for manufacturing Dorman Smith MCCBs and Crabtree Modular Plate switches1997 Acquired electric control & switchboards for manufacturing customised packaged solutions2000 ■ Acquired controlling stake in Duke Arnics Electronics (P) Ltd

■ Acquired controlling interest in Standard Electricals Ltd2004 ■ Set up plant at Baddi for domestic switchgears

■ Set up facility for CFL at Faridabad■

Plant set up for manufacturing of Ceiling fans at Noida2005 Set up fan manufacturing plant at Haridwar 2006 Crabtree India Limited merged with Havells2007 ■ Set up capacitor manufacturing plant in Noida with capacity of 6,00,000 kVAr per month

■ Acquired Frankfurt based Sylvania■ Warburg Pincus, a global PE firm, invested USD110 million in Havells

2008 Entered into motor market2009 Set up a fully automatic switchgear manufacturing facility2010 Acquired 100% interest in Standard Electricals


Havells India Ltd.

2nd November 2011



Unique Business Model

Source: Company Presentation

Management Team

Source: Company


Name DesignationQimat Rai Gupta Chairman & Managing Director

Anil Gupta Joint Managing Director Surjit Gupta Director

Rajesh Gupta Director (Finance Director)S B Mathur Director

Particulars Sep-11 Jun-11 Mar-11 Dec-10 Sep-10Promoter Holding 61.56% 61.56% 61.56% 61.56% 61.56%

Indian 61.56% 61.56% 61.56% 61.56% 61.56%Foreign -- -- -- -- --

Public Holding 38.44% 38.44% 38.44% 38.44% 38.44%Institutions 18.71% 18.84% 18.86% 18.68% 19.41%

FII 16.79% 16.17% 16.48% 16.29% 16.77%DII 1.92% 2.67% 2.38% 2.39% 2.64%

Non Institutions 19.73% 19.60% 19.58% 19.76% 19.03%Bodies Corporate 1.65% 1.54% 1.73% 1.73% 1.40%

Custodians -- -- -- -- --Total 100% 100% 100% 100% 100%

HAVL Share holding patterns

Source: BSEindia, Dalmia Research

Havells India Ltd.

2nd November 2011



Consolidated Financial Statements Rs in M


Profit & Loss Statement FY2009 FY2010FY2011FY2012E FY2013E Cash Flow Statement FY2009 FY2010FY2011FY2012E FNet Sales 54,77554,315 56,126 63,632 71,430 PBT (1,172) 1,628 4,066 4,817 5 Growth (%) 10% -1% 3% 13% 12% Op. profit before W.C changes 431 1,377 5,439 6,663 7 - Cost of Materials 30,07029,180 32,556 36,779 41,161 - (Increase)/Decrease in stocks - - - - Trade & Other Receivables 414 1,152 (564) (853) - Purchase of Traded goods 2,6663,250 3,197 3,627 4,200 Inventories 2,472 (139) (2,751) (1,218) (1 - Selling & Distribution 7,6578,240 5,577 6,168 7,036 Loans & Advances - - (231) - Employee Cost 8,4527,602 6,319 7,310 8,041 Other Current Assets - - (18) - Managerial Renumeration 25 43 86 97 107 Current Liabilities (1,232) 131 1,923 1,544 2 - Operating & Other Exp 3,0192,779 2,822 3,247 3,572 Other Liabilities 514 1,225 (621) 59 PBDIT (Ops) 2,8863,222 5,571 6,404 7,313 Cash generated from operations 2,599 3,746 3,426 5,947 7 (% of Total Net Sales) 5% 6%10% 10% 10% Direct Taxes (400) (659) (851) (1,204) (1 Interest & Fin. Charges 1,253979 902 968 894 Net cash from operating activities 2,199 3,087 2,575 4,742 5 PBDT (Ops) 1,6332,243 4,669 5,436 6,420 Depreciation 906 837 804 878 940 Net Cash used in investing activities(1,626) (961) (1,719) (2,149) (1 PBT (Ops) 728 1,406 3,865 4,558 5,479 Other Income 86 222 237 260 286 Net Cash used in financing activity (515) (3,130) (572) (1,753) PBT (Before Ext. Items) 8141,628 4,102 4,817 5,765 Exceptional Items 1,986 - 36 Net increase in cash & cash equivalent57 (1,005) 285 841 3

PBT (1,172) 1,628 4,066 4,817 5,765 Tax Provisions 429 932 1,031 1,204 1,441 Cash & Cash equivalents (Op Bal) 2,358 2,415 1,472 1,779 2

Profit after Tax (1,601)696 3,035 3,613 4,324 Cash and Cash Equivalents taken over aser scheme of arran ement

- 62

Minority Interest 0 0 4 4 4 Restricted Cash 23

Add: Extraordinary Income - - 5 - - Cash and Cash Equivalents transferred inpursuance of sale of bath fitting division

(1)

Adj PAT (1,602) 696 3,036 3,609 4,320 Closing Cash balance 2,415 1,472 1,779 2,619 5

Balance Sheet FY2009 FY2010FY2011FY2012E FY2013E Key Ratios FY2009 FY2010FY2011FY2012E FYSOURCE OF FUNDS Leverage Ratios

Equity capital 301 312 624 624 624 Debt : Asset 0.7 0.7 0.6 0.5 Share warrants 24 - - - - Interest Coverage Ratio 1.6 2.4 5.3 5.7 Reserves & surplus 5,821 3,690 5,914 9,158 13,113 Debt Equity (X) 2.0 2.7 1.7 1.1 Shareholder's funds 6,146 4,002 6,537 9,782 13,737 Total debt 12,278 10,664 11,173 10,753 11,172 Dupont Analysis-ROE DecompositionDeferred tax (97) 266 559 559 559 PAT/PBT (Tax Efficiency) 1.40.4 0.7 0.8 Minority Interest 2 2 6 9 13 PBT/EBIT (Interest Burden) (0.7)0.7 0.9 0.9 Total liabilities 18,328 14,934 18,275 21,103 25,481 EBIT/Sales (OPM) 0.0 0.0 0.1 0.1 APPLICATION OF FUNDS Sales/Total Assets (Asset Turnover) 3.03.6 3.1 3.0 Goodwill on consolidation 3,579 3,212 3,354 3,354 3,354 TA/NW (Financial Leverage) 3.03.7 2.8 2.2 Net block 8,534 8,874 9,955 11,226 12,185 ROE (%) -26% 17% 46% 37Capital WIP 308 336 249 249 249 ROCE (%) 10% 14% 26% 26Inventories 7,947 8,246 10,860 12,078 13,557 Other current assets 79 102 100 118 130 Valuation RatiosSundry debtors 7,573 6,982 7,724 8,577 9,431 Diluted EPS (13.3) 5.6 24.3 28.9 Cash & bank balance 2,473 1,481 1,779 2,619 5,792 Book Value (BV) 51.132.1 52.4 78.4 1 Loans & advances 2,141 1,578 1,615 1,845 2,071 P/E (28.6) 68.3 15.7 13.2 Total current assets 20,215 18,389 22,077 25,237 30,981 P/BV 7.5 11.9 7.3 4.9 Total current liabilities 14,308 15,876 17,361 18,964 21,289 EV/EBIDTA 19.317.6 10.2 8.7 Net current assets 5,907 2,512 4,717 6,274 9,692 EV/Sales 1.0 1.0 1.0 0.9 Miscellaneous Expenses (to the ext1 0 - - - M-Cap/EBIDTA 15.914.8 8.5 7.4 Total Assets 18,328 14,934 18,275 21,103 25,481 M-Cap/sales 0.8 0.9 0.8 0.7

Havells India Ltd.

2nd November 2011

havells india - printing

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