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BONANZA WEALTH MANAGEMENT

RESEARCH

CMP : Rs.589
Target Price : Rs.725
15 October 2018 Upside : 22%+
Havells India–BUY Stop Loss : Rs.512(Closing basis)

Investment Thesis Stock Data

Recently, the stock price of Havells India Ltd. (Havells) corrected by ~18% Market Cap (Rs. Mn) 371,594
from 52-week high of Rs.729despite reporting good set of numbers in the
recent quarter. Market Cap ($ Mn) 5,132.5

Havells is one of the fastest growing fan brands in the Indian market with Shares O/S (in Mn) 625.5
market share at ~17% while in the switchgear market, it is the market
leader in the low voltage segment with ~28% market share. Over the Avg. Volume (3 month) 1,668,000
period, Havells has established a network of ~7,500 dealers spread across
52-Week Range (Rs.) 729/ 450
the four regions servicing ~100,000 retailers/touch points in India. It is
highly successful in augmenting market share of existing products along
with launching new products, which have received good response
driven by high brand visibility. Recently, Havells has acquired the
consumer segment of Lloyd Electricals, which gave Havells access to
Lloyds' strong distribution network with 10,000 touch points along with Shareholding Pattern
leadership in room AC segment with 12-14% market share. Havells is well
placed to benefit from pick up in the construction sector and rising Promoters 59.55%
premiumization owing to its dominant position in core business. FIIs 24.83%
Lloyd electrical has completely different product portfolio which includes
ACs, washing machines and TVs.It also has plan to enter into refrigerator Institutions 5.21%
segment in the next couple of years. For Lloyd’s products, Havells has
Others (incl. body corporate) 10.41%
adopted a modern style of reaching to its customers by tying with retail
stores like, Reliance and Croma. Havells is also setting up an integrated
manufacturing facility for room ACs in Gehlot, Rajasthan in FY19E along
with scaling up other products like washing machines and LED TVs over
the long-term. The company is willing to do a capital expenditure of
Rs.3,600mn for setting up a manufacturing facility with an annual Performance (%) 1M 6M 1Yr
capacity of 600,000 units. The integrated manufacturing facility will help
Absolute -17.0% 21.9% 25.9%
the Lloyd(INR
Consol. business
Mn) to improve
CY12Havells margin CY14
CY13 going ahead.
CY15E CY16E
BSE CD -11.8% -14.1% 10.3%
Financials
Revenue 113,582 111,501 117,388 126,779 136,921
EBITDA 21,966 16,225 14,956 16,153 17,445
During the past 5 years, revenue of Havells grew at a CAGR of 14.0%
% growth -26.1 -7.8
while PAT grew at a CAGR of 13.9% in the same period. 8.0 8.0
PAT 10,593 10,947 11,618 12,548 13,551
Standal. (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
EPS (INR) 56.4 58.2 61.8 66.8 72.1
Revenue
P/E (x) 53,783
26.0 61,353
25.2 81,386
23.7 93,594
21.9 1,07,633
20.3 Key Ratios
RoE (%)
EBITDA 7,549
14.4% 8,241
14.0% 10,493
14.1% 12,067 14.2%
14.2% 13,877
Div Yield 0.7%
% growth 8.0 9.2 27.3 15.0 15.0
PAT 7,120 5,390 7,125 8,201 9,439 TTM PE 46.4x

EPS (INR) 11.4 8.6 11.4 13.1 15.1 ROE 19.7%

P/E (x) 52.1 68.9 52.1 45.3 39.3
TTM EPS (Rs.) 12.8/-
RoE (%) 24.1% 16.5% 19.1% 20.0% 20.9%
Havells has reported 31.0% YoY growth in revenue (including Lloyd) to
Rs.25,963mn in Q1FY19 led by strong performance of ECD and lighting
& fixtures segment.Revenue from Lloyds was Rs.7,080mn in Q1FY19.
 Havells’ cable andswitchgear segment has recorded strong sales
growth of 18% and19%, respectively, led by a price hike (~9% in
cables segment) and export demand revival, respectively. Graphs & Charts
EBITDA margin of Havells has increased by 333bps YoY to 12.0% in Figure 1: Net Sales Trend
Q1FY19 owing to a marginal improvement in lower overhead
expenditure to sales.
Havells’ PAT improved by 73.3% YoY to Rs.2,104mn in Q1FY19 on
account of bettermargins in the Lighting and Electrical business.

Key Business Highlights

Havells is one of the top Indian brands in electrical and power
distribution equipment manufacturer, with products ranging from
industrial and domestic circuit protection switchgear, cables, lighting
and fixtures and small fast moving electrical goods.
Havells has emerged as major players for household, commercial
and industrial electrical needs with its 40 branch offices and ~7,500
dealer networks in India.
Havells has 12 state-of-the-art manufacturing facilities situated in Figure 2: EBITDA & EBITDA Margin Trend
India. It products are available in 40 countries across globe.

Valuation
Consumer durable companies like Havells are key beneficiary of GST
implementation as lower indirect tax rate for electrical and consumer
durables along with benefit of input tax credit has resulted in price
cuts across segments. As a result, lower price helped organized
players to boost its volume. Havells has also created a strong brand in
electrical consumer products in India, which was traditionally a low
involvement product category. Its advertisement expense is always
remained at ~3-4% of net sales to build brand image and awareness
in tier-I and tier-II cities. We believe, improvement in power
availability, increase in disposable income and shift towards branded
products will help Havells to grow at over 20% CAGR in FY19-20E.
Havells’ switchgear segment recorded revenue CAGR of ~10% in Figure 3: PAT Trend
FY11-18largely on the back of new product launch, a gradual shift in
branded product and sustained demand from rural markets. This has
helped Havells increase its market share aggressively from 15% in 2006
to 28% in FY18. The switchgear segment is the most profitable business
as it commands ~40% margin. We believe a recovery in demand of
industrial products led by higher government spending will improve
power infrastructure spending leading a healthy double-digit growth
in switchgear and cable & wire division sales in FY19-20E.
We expect Havells to post over 14-15% EBITDA in FY19-20E supported
by change in product mix, revival in industrial and consumer products
through acquisition of Lloyd’s consumer business. Acquisition coupled
with launch of premium products in the domestic market is expected
to nullify the impact of higher commodity prices in the long run.
With fastest growing fan brands in the Indian market, well established Figure 4: Segment-wise Revenue (Q1FY19)
dealers network, acquisition of consumer segment of Lloyd Electricals,
setting up a manufacturing facility for ACs, brand recognition due to
advertisement expenditure and recovery in demand for switchgear
and cable & wire,we value Havells at 48.00x FY20E EPS of Rs.15.10 to
arrive at target price of Rs.725.00, an upside of ~22%.

Risk & Concern

All the segment of Havells is highly competitive, which may put
pressure on the topline and margins of the company.
Any adverse movement in the metal prices, which is key raw
material, may put negative impact on the margins of the company.
Major revenues of Havells come from export, any negative economic
development in these regions may hamper growth of Havells.
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