Havells 201103

ICRA EQUITY RESEARCH SERVICE
HAVELLS INDIA LIMITED

March 14, 2011 Industry: Electrical Equipment
ICRA Online Grading Matrix Valuation Assessment Assessment
Fundamental
Fundamental and Valuation Grades ICRA Online has assigned the Fundamental Grade 4 and the Valuation Grade B to Havells India Limited (Havells). The Fundamental Grade 4 assigned to Havells implies that the company has strong fundamentals relative to other listed securities in India. The grade factors in Havells diversified product portfolio with core focus on the fast growing consumer goods sector, its effective marketing and distribution reach that supports premium pricing, and the significant growth potential of its subsidiary, Sylvania. The grade also takes note of the intense competition that Havells faces across the segments it operates in. The Valuation Grade B assigned to Havells implies that the company is moderately undervalued on a relative basis (as on the date of the grading assigned). Incorporated in 1971, Havells is one of the leading players in the electrical consumer goods industry in India. The companys operations span four broad segments, viz. cables & wires, switchgears, lighting, and electrical consumer durables, in order of their contribution to revenues. Starting primarily as a company dealing in industrial products, the company has gradually shifted its focus onto consumer products over the past one decade and is now considered a well-established brand in the domestic consumer electricals market. Havells has grown both organically and inorganically over the years. Its last major acquisition that of the Frankfurt-based Sylvania in April 2007, has placed Havells on the global map in the lighting industry. Grading Positives Established brand equity along with leading market shares in most areas of operation, diversified product portfolio, presence in consumer products segment with high growth potential and experienced management. The company also has a strong financial profile, characterised by robust profitability and cash generation, with working capital requirements being limited. Potential upsides to our estimates: (1) Higher than expected market share in new product segments; and (2) Better than expected improvement in Sylvanias profitability and cash flow generation capacity backed by growth in emerging economies. Grading Sensitivities Key sensitivities to our estimates include: (1) Further increase in competition resulting in loss of market share, particularly in the intensely competitive electrical consumer durables (ECD) division; (2) Slower than expected revival in Sylvanias profitability and success in emerging markets, particularly new geographies. Key Financials (Consolidated)
2009-10A 2010-11E 2011-12E 2012-13E Operating Income (Rs. Crore) 5,432 5,928 6,462 7,059 EBITDA Margin (%) 5.73% 8.09% 9.73% 10.03% PAT Margin (%) 1.28% 5.95% Fundamental & Valuation Grades: ICRA 4.35% fundamental grade of assigns 5.45% EPS (Rs.) 20.7 28.2 33.7 ?/5 and valuation grade of ? 5.8 MSL. A fundamental grade of ?/5 to EPS Growth (%) N/A 258% 36% 19% indicates MSLs fundamentals are ? relative to the other listed securities 16.8 12.3 10.3 inP/E (x) This grade factors in theN/A India. companies established presence in the P/BV (x) 10.5 7.1 4.7 3.3 seamless and ERW pipes industry and favorable industry prospects over RoE 14% 51% 46% 37% the medium to long term. However, it is constrained by the high RoCE 15% 27% 30% 31% competition from Chinese imports of seamless pipes in 8.4 domestic and the EV/EBITDA 16.9 11.0 7.4
A 5 4 3 2 1
B 4B
Fundamental Grading of 4/5 indicates strong fundamentals Valuation Grading of B indicates moderately undervalued on a relative basis Key Stock Statistics
Current Market Price* (Rs.) Shares Outstanding (crore) Market Cap (Rs. crore) 52-Week High (Rs.) 52-Week Low (Rs.) Free Float (%) Beta P/E on 2011-12 EPS Estimate (x) Bloomberg Stock Code
*As on March 11, 2011
348.25 12.48 4345.28 446.50 257.50 38.4% 1.09 12.3 HAVL IN
381.65 12.48 4762.0 446.50 166.00 35.4% 1.03 17.7 HAVL IN
Havells Shareholding Pattern (December 31, 2010)

Foreign Institutio ns, 2.3% Domestic Institutio ns, 2.4%
Warburg Pincus, 14.0%
NonInstitutio ns, 19.8%
Indian Promoter Group, 61.6%
Havells Share Price Movement (24 months)

900% Havells India Ltd
800% 700%
%change (Price/Points)
S&P CNX Nifty BSE Consumer Durables
600%
500% 400% 300% 200% 100% 0%
Middle East market, vulnerability to raw material prices and concentration Source: Company, ICRA Onlines estimates of MSLs Growth and PE estimates for 2009-10 are not meaningful grade of ? on a Note: EPS sales on the oil and gas sector. A valuation grading scale of A to E indicates that the company is ? valued on sector relative basis and has a ? potential over the next one year from its current market price.
ICRA Equity Research Service
Havells India Limited
SUMMARY
Growth fuelled by increasing focus on consumer electricals; considerable scope for future expansion in related products Starting off as a manufacturer of switchgears in 1971, Havells till the late 1990s was largely involved in manufacturing industrial products. Foreseeing strong growth prospects in the consumer goods category, the company later diversified into products such as fans, compact fluorescent lamps (CFLs), modular switches, and power cables and wires. As these products are used mostly during building construction or renovation, the company benefited from the rapid growth in the real estate sector, reporting a robust compounded annual growth rate (CAGR) of around 40% in its revenues in the last ten years. To further capitalise on the growth potential in the consumer goods category, Havells is now expanding its portfolio, including products such as water heaters.
Figure 1: Trend in Havells' Revenue Growth
3,000 2,500 Rs. Crore 2,000 1,500 1,000 500 0
Source: Companys Annual Reports; ICRA Onlines estimates
Strong growth prospects backed by presence in high-potential consumer goods segment With its main focus being on electrical consumer goods, demand for most of Havells products is driven by consumer spending and power availability. Over the last four years, the top players in domestic electrical consumer goods industry have demonstrated strong revenue growth of 15-18%, driven by rising income levels, increasing urbanisation, and greater rural electrification. Further, with standards of living improving and consumer focus increasing on saving energy, the demand for quality products has been reporting strong growth. The trend is expected to sustain, with the main beneficiaries being companies with established brands and product attributes that stand out in an increasingly cluttered market, high quality standards that neutralise competition from unorganised-sector players, and extensive distribution networks that enable them to reach the high growth centres in Tier-II and Tier-III cities. Given its established track record, Havells is in a favourable position to capitalise on the sectors growth potential. We expect Havells to post a net profit CAGR of around 11% between 2009-10 and 2012-13(E) on a standalone basis.
60 50 40 30 20 10 0 -10 -20
Figure 2: IIP Consumer Durables Index Figure 3: Growth in Disposable Incomes in Last Five Years
50 Rs. ('000s) 40 30 20 10 0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Per capita disposable income Growth in per capita disposable income
IIP Consumer Durable Index
30%
10%
0%
Source: Bloomberg
Source: Central Statistical Organisation; ICRA Onlines estimates
Intense competition across segments The segments in which Havells operates (except cables) are characterised by limited capital expenditure (capex) requirements and availability of outsourcing or imports to meet demand. Consequently, Havells faces intense competition in most of its business segments. Although there is only one large company - Crompton Greaves - that is into similar areas of operation as Havells, low investment requirements have resulted in significant competition from single-product/segment companies (refer Figure 4) and unorganised players. In this scenario, an established brand name and distribution network become critical, as the same cannot be easily replicated. Havells ability to differentiate products (for instance, introducing additional attributes like low power consumption and electric shock prevention), and its effective brand building initiatives, thus, restricts competition from the unorganised sector to some extent.
% change
20%
Figure 4: Havells' Competition Matrix

Category Electrical Consumer Durables Products Havells Crompton Greaves Bajaj Electricals Matsushita Phillips India Osram Surya Roshni Legrand Schneider Finolex Cables KEI Industries Fans Water Heater Irons Kitchen Appliances ICLs FTLs CFLs Lighting LEDs Luminaires Low Voltage Medium Voltage Switchgears High Voltage Switches Motors Copper Cables Aluminium Cables Cables & High Voltage Cables Wires Residential Wires
Havells, Standard, Crabtree
Brands
Bajaj Platini, Morphy Richards
National, Panasonic, Anchor-Roma
Surya
% of revenues contributed by above-mentioned products
100%
31%
67%
N/A
N/A
N/A
30%
N/A
N/A
~62% Copper Rods, PVC Pipes & Sheets, etc.
N/A
Other Areas of Operation
Power Special Healthcare TV, Music Systems, Projects, High Products, Systems, Home Industrial Masts & Poles Television, Appliances, etc. Systems etc. and Towers etc.
ERW Pipes and HR & CR Coils
Stainless Steel Wires
Source: Companies websites and annual reports, ICRA Online Research
Branding and distribution networkthe key differentiators With increasing urbanisation, Tier-II and -III towns are expected to be the key growth drivers over the next few years, which makes extensive distribution network and brand presence critical for consumer goods companies. Havells ability to crossleverage its existing distribution network and its established brand presence give it a competitive edge over smaller companies with limited reach. Havells has established a pan-India distribution network over the years, using which it has been able to gain market share rapidly even for its relatively new products like modular switches, CFLs, and electric fans. Its network compares well with that of the largest electric appliance company in India, Bajaj Electricals, which reaches out through 50,000 retail outlets.
Table 1: Distribution Network of Havells versus Peer Companies Table 2: Havells Regional Sales and Distribution Network
Company Havells Bajaj Electricals Legrand
Distributors/ Dealers 4,300 5,000 600
Retail Outlets 35,000 50,000 3,000
Source: Companies websites
Region North East West South Total
Havells Sales 34% 22% 15% 28% 100%
Havells Dealers 26% 18% 27% 29% 100%
Source: Company
At present, Havells has a network of 4,300 wholesalers/dealers and 35,000 retailers. In terms of brand, the company is particularly strong in North and East India, which together account for around 56% of its total sales and 44% of its total dealer base. While South India has been a major contributor to sales because of the sheer market size; Havells has been traditionally weak in West India (which accounts for around 15% of its total sales), being a late entrant there. The company is however making efforts to increase its market share in the region by expanding its dealer base (which is now comparable in size to its dealer bases in North and South India). To further leverage its presence across product segments, Havells has opened exclusive outlets named Havells Galaxy in several cities across India. These stores, owned by Havells dealers, display and undertake retail sales for the entire product range of the company. At present, there are 80 Havells Galaxy stores across India and the company plans to raise the number to 200 by March 2012. Havells has also been aggressive in its advertising, with its advertisement expense to sales ratio being significantly higher than that of its close peers. The companys advertisements and brand building initiatives have increased its brand visibility among end-consumers. This, together with the acquisition of established brands like Crabtree and Standard over the
Table 3: Advertising Spend of Havells versus Peer Companies
2006-07 Havells Bajaj Electricals Crompton Greaves 1.9% 1.6% 0.4%
2007-08 2.4% 1.5% 0.5%
2008-09 2.1% 1.3% 0.5%
2009-10 3.3% 1.5% 0.4%
Source: Companies Annual Reports, ICRA Onlines estimates
years, has strengthened Havells brand portfolio, enabling it to command a price premium in several products.
Figure 5: Havells Brands in India Brand Segment/ Products Lighting, ECDs, Switchgears, Cables & Wires Switches Domestic Switchgears
Source: Company
Figure 6: Havells International Brands Segment/ Products Complete Lighting Range
Brand
Havells
Sylvania MultiNational Brands
Indian Brands
Crabtree
Concord
Lighting Fixtures Lighting fixtures
Standard
Lumiance
Source: Company
Sylvania turnaround to improve consolidated profits The economic downturn that happened soon after Havells acquired the Frankfurt-based Sylvania in April 2007 led to Havells reporting losses on a consolidated basis in 2008-09 and 2009-10. This in turn kept Havells consolidated earnings per share (EPS) depressed during the two years ended March 2010. Havells initiated a restructuring exercise aimed at reducing fixed cost base at Sylvania that is expected to result in annual savings of 33.5 million, a large part of which would be reflected in its EBITDA in 2010-11. Initially, the company had expected to break even at the net profit level in 2011-12, but the 9M, 2010-11 results of Sylvania indicate that the subsidiary would make a nominal net profit of about 1million in 2010-11 itself. With Sylvania turning around [EBITDA positive in Q4, 2009-10 and net profits from 201011(E) onwards] Havells consolidated EPS is expected to increase significantly over the medium term.
Figure 7: Movement in Net Profits

400 300 200 PAT (Rs. Crore) 100 0 -100 -200 -300 -400 -500 2008-09 2009-10 2010-11 2012-13 Sylvania Havells Standalone Consolidated
Source: ICRA Onlines estimates Note: Sylvania and Consolidated 2009-10 PAT figures are adjusted for amounts charged by the company to Business Reconstruction Reserve
Further, in line with other global majors such as Philips and Osram, Sylvania is looking at increasing its exposure in fast growing developing markets such as India, China, and Malaysia. While bulk of the improvement in Sylvanias profits during the current year are attributable to cost savings from restructuring programmes, increasing revenue contributions from the emerging markets including Latin America and Asia would drive Sylvanias profitability in the long term. Launch of Sylvania products in India to enable Havells serve a wider market, but distribution would be a challenge The size of the market for luminaires and special lamps, the likely focus areas for Sylvania in India, was an estimated Rs. 2,100 crore in 2009, accounting for almost 30% of Indias total lighting market that year. Considering Sylvanias track record of operations and the growth potential of the Indian lighting industry, the scope for the brands growth in India appears significant. With its wider product range and access to the latest technologies such as of light emitting diodes (LEDs), Sylvania will be positioning its products to access the institutional clients thereby mitigating the risk of cannibalisation of Havells existing products. Havells would however need to establish a separate distribution channel for Sylvania products as its current network is targeted primarily at retail customers. Accordingly, it may take some time for growth in Sylvanias products to pick up in India. We expect Sylvanias products to achieve a turnover of around Rs. 50 crore (translating into a market share of around 2%) in its first full year of operations and thereafter grow in line with the estimated industry growth rate of around 25%.
Company Snapshot (Standalone)
Installed Capacity and Utilization Trend

Ckm Per Annum (lakh)
14
70%
12
10
60%
50%
8
6
40%
30%
4
2 0 2005-06 2006-07 2007-08 2008-09 2009-10 Installed Capacity
20%
10% 0%
Capacity Utilisation
* Companies placed in order of their market position Source: Companys Annual Reports, Company data, ICRA Onlines estimates
Capacity Utilization
Lighting
Post-acquisition of Sylvania in 2007, lighting has become the major segment for the company accounting for around 60% of its consolidated revenue base. The acquisition provided the company an access to international markets, Sylvanias premium product-range and its well-established brand name. Although profitability in Sylvania international operations was affected because of global recessionary conditions and overall operational inefficiencies in the last two financial years, domestic lighting segment of Havells continued to be profitable because of favourable market scenario in India and cost-efficient operations. The business dynamics of domestic and international lighting operations of consolidated Havells entity continue to be different and hence have been analysed separately in the following sections.
LightingDomestic
Domestic lighting segment holds significant growth potential In the lighting segment, Havells is involved in manufacturing CFLs and trading in luminaires. Both the categories hold significant growth potential as the demand for the products is strongly correlated with real estate and construction activities in the country. Moreover, the high share of lighting in domestic power consumption (~20% in India), continuing power deficit and mounting pressure on natural resources are factors contributing to the shift in favour of more energy-efficient products, thus acting as key drivers of CFL demand.
Figure 8: Changing Trend in Lighting Industry
Domestic Lighting: Key Drivers and Challenges Growth Drivers Increase in real estate activities backed by strong economic growth High cost of energy, continuing power deficit, and pressure on natural resources Greater focus on energy-efficient products Government initiatives to subsidise energyefficient products Key Challenges Intense competition Keeping pace with changing technology Environmental threat posed by use of mercury in CFLs Significant warranty returns in CFL business Fragmented nature of luminaire business
2009-10 ICLs, 10% FTLs, 16% CFLs, 27% 2008-09 2007-08 2006-07 2005-06 ICLs, 13% FTLs, 24% CFLs, 16%
Luminaires, 22%
Others, 25%
Luminaires, Others, 27% 20%
Source: ELCOMA India, ICRA Onlines estimates Note: Above estimates are for calendar years ICLs: Incandescent Lamps, FTLs: Fluorescent Tube Lights
The domestic lighting industry reported a CAGR of 12% to around Rs. 72 billion over the five years till 2009-10. With personal disposable incomes increasing and market preference shifting towards more energy-efficient products, the CFL segment reported a much faster CAGR of 28% over the same period to account for almost one-third of the total domestic lighting market. Havells, despite its late entry into the segment (in 2003-04) and the presence of large incumbents such as Philips, Osram and Bajaj, has successfully garnered a market share of 8% in the CFL segment and of around 10% in the luminaire segment. Government initiatives expected to spur CFL growth 1 Although CFLs are much more energy efficient than ICLs, CFL penetration is considerably low in the household sector in India (10-15%) largely because of their high price (8-10 times more expensive than ICLs). Government initiatives to enhance rural electrification in the country while simultaneously promoting use of energy efficient lighting systems by providing subsidies (refer Table 4) is expected to boost demand for lighting products, particularly CFLs. The objective is to subsidise the more expensive energy-efficient products, making them affordable for the target market. For instance, successful
CFLs with a luminous efficiency of 50-95 lumens/Watt (lm/W) and offering 6,000-12,000 burning hours consume 75% less energy as compared with ICLs, which have a luminous efficiency of 5 to 20 lm/W and offer 750-1000 burning hours. The luminous efficiency of light emitting diodes (LEDs) is even higher at 100-130 lm/W and they offer around 50,000 burning hours.
implementation of Bachat Lamp Yojana (BLY) will reduce the price differential between ICLs and CFLs to Rs. 3-9 per piece, thus attracting demand from price-sensitive and rural households.
Table 4: Summary of Key Government Initiatives that could boost Demand for Lighting Products in India
Programme Rajiv Gandhi Grameen Vidyutikaran Yojana/ Rural Electrification Policy
Brief overview Launched in April 2005 by merging all existing similar schemes
Objective Has a target of electrifying 125,000 unelectrified villages and giving access to 7.8 crore uncovered rural households by 2012
BLY
Promotes replacement of inefficient bulbs with CFLs by leveraging the sale of Certified Emission Rights (CERs) under the Clean Development Mechanism (CDM) of the Kyoto Protocol
To distribute high quality CFLs at about Rs.15 per piece to households in the country. Balance cost to be recovered by registering the project under CDM. The scheme aims to replace 40 crore ICLs in India with CFLs
Status Although 118,499 villages (95%) have already been electrified, in terms of households only 53% of the target has been achieved, which points to significant demand potential over the next few years Implemented/initiated in Himachal Pradesh, Punjab, Uttar Pradesh, Madhya Pradesh, Kerala, Chhattisgarh and Orissa
Source: Ministry of Power; ICRA Online Research
While the scope of BLY is limited to replacement of 40 crore ICLs (translating into an additional demand of 2% per annum for CFLs), efforts in some developed nations are directed at mandatory replacement of all ICLs with more energy-efficient products. Introduction of similar programmes in India could be a strong demand driver for CFLs, given that ICLs account for roughly 65-70% of the total annual sales of lighting products in India (in terms of volumes). In India, we do not expect any major replacement demand in the short to medium term unless Government implements mandatory phase-out of ICLs while continuing to provide subsidises on CFLs. Industry volumes for CFLs reported a CAGR of 40% during the last four years, with the growth moderating to 28.1% in 200910 partly on account of the higher base effect and partly because of the slowdown in the real estate sector. The growth (CAGR, four years) in value terms has been relatively low at 28% because of declining realisations.
Table 5: Estimation of Potential CFL Market for Havells
2007-08 Industry Sales Growth Total Sales Growth Realisation per CFL Lakh pieces % Rs. Crore % Rs. 1,400 40% 1,162 40% 83
2008-09 1,990 42% 1,510 30% 76
2009-10 2,550 28% 1,900 26% 75
2010-11(E) 3,213 26% 2,410 27% 75
2011-12(E) 4,048 26% 3,036 26% 75
2012-13(E) 5,101 26% 3,775 24% 74
Source: ELCOMA India, ICRA Onlines estimates
Considering the slow implementation of BLY and the uncertainty over Havells participation in the same, we have not factored in any incremental sales that may come from that scheme. While sustaining a high growth rate could be increasingly difficult on a growing base, the CFL industry is likely to enjoy strong demand prospects, considering the currently low penetration levels, the potential replacement demand, and the additional demand likely from increased residential and commercial/retail construction activities over the next few years. Accordingly we expect the CFL market to report a CAGR of 26% over the next five years. Intensely competitive industry; Havells strategy to counter warranty claims to temper market share growth The CFL market in India is intensely competitive, featuring around 20 organised- and several unorganised-sector players. While till around two years back, the unorganised sector used to account for almost 40% of the CFL market, their share is now expected to decline significantly on account of the following factors: Introduction of standards for CFLs by Bureau of Indian Standards (BIS): BIS has mandated that CFLs should carry a high power factor (PF) stamp from October 1, 2009 onwards. According to ELCOMA, 14 companies have acquired licences to manufacture CFLs with >0.85 PF Imposition of anti-dumping duty: This has restricted the import of low-cost CFLs from China to an extent Increasing consumer awareness: As the price differential between products offered by organised and unorganised players is not significant, consumer preference has moved towards products with better quality parameters (such as power factor, and guaranteed hours)
Going forward, we expect the CFL industry to increasingly consolidate away from the unorganised sector as the shift towards higher quality gains further momentum and the benefits of scale economies accrue to the larger players. Assuming a 20% shift in market share from the unorganised to the organised sector over three to five years, the top five players (including Havells) would gain 2.8% to 3.2% in market share, given their extensive distribution network, cost-efficient operations, and strong brand presence. Havells however is following a cautious approach to contain warranty claims, a major concern for the industry. As is the industry norm, CFL manufacturers provide a product warranty varying from six months to one year from the date of 2 purchase . This has been a major concern for CFL makers in India because market malpractices have led to significant claims for returns. In 2007-08, Havells received claims for Rs. 13.62 crore, which was 12.7% of its CFL sales that year. To rectify the situation, the company withdrew its products from certain States where malpractices were rampant, and this led to a 30% decline in its sales to Rs. 84.5 crore in 2008-09. Consequently, the companys market share declined to 6% in 2008-09 from 10% in 2007-08. Subsequently, with operations in other States stabilising, Havells market share reported improvement in 2009-10. Its warranty claims declined significantly in 2009-10 to Rs. 2.86 crore, which was 1.9% of its total CFL sales that year. Although there have been instances of companies withdrawing warranties in the past, the lack of participation from all companies, besides the availability of cheaper alternatives from the unorganised sector, adversely affected sales, prompting the reintroduction of warranties. Given that warranty related malpractices still exist, Havells is now following a conservative strategy of restricting its presence to a few key markets. While this has adversely impacted sales and market share during the last two years, it has also helped protect profitability margins. Considering Havells conservative approach, we expect its market share to stabilise at around 8.5% over 2010-11(E) to 2012-13(E).
Table 6: Movement in Havells' Market Share in CFL Segment
Units Industry Size Market Share Rs. crore %
2007-08 1,162 10%
2008-09 1,510 6%
2009-10 1,900 8%
2010-11(E) 2,410 8.5%
2011-12(E) 3,036 8.5%
2012-13(E) 3,775 8.5%
Source: ELCOMA India, ICRA Onlines estimates
Environmental threat posed by mercury use in CFLs, increasing affordability of solid-state lighting products may affect CFL demand; access to Sylvanias technology for advanced products may help maintain market share Although critical given their importance in saving electricity, CFLs face environment related challenges because of the use of mercury in their manufacturing. The threat is greater for developing nations such as India as CFLs manufactured here have a higher mercury content (up to 13 mg in lower quality lamps); developed nations on the other hand have regulations restricting such content to 1 mg per bulb. Given the environmental concerns, efforts are being made across the world to bring down the cost of solid-state lighting products or LEDs, which are considered significantly superior in terms of energy efficiency and environment friendliness. Although Havells has a single-product offering in the lighting segment (on a stand-alone basis) and a limited presence in LEDs (trading operations), its acquisition of Sylvania provides it with access to a much wider product range including fluorescent lamps, high-intensity discharge (HID) lamps and various special products for institutional clients. Only new products to be launched under Sylvania brand to avoid cannibalisation of revenues Havells is expected to launch Sylvanias products in India this financial year. To ensure that the launch does not lead to cannibalisation of revenues, Sylvanias operations in India will be focused solely on institutional customers and its products will be routed through an entirely different distribution channel. Havells on the other hand will continue with its own product range, which largely serves domestic and retail customers. The launch of Sylvania products would also benefit from a high brand recall, given that Sylvania was earlier operational in India through a joint venture named Sylvania Laxman Limited. Although the joint venture ended in 1993, it was able to establish a strong presence and the brand is still recognised in the industry. Significant scope of growth in luminaire segment Apart from CFLs, Havells also has a presence in luminaires largely through trading. Because of intense competitive pressures from incumbent players such as Philips and Bajaj, Havells currently ranks fourth in terms of market position with a share of 10% in a Rs. 2,000 crore market. Considering the strong prospects for residential, retail and commercial construction in India, the luminaire segment is expected to report a healthy growth rate of around 15% per annum over 2010-11(E) to 2012-13(E). Havells competitive positioning in the luminaire segment is expected to improve further with the launch of Sylvania products, which are largely targeted at institutional clients, including airports and stadiums.
Warranties are not offered on ICLs and FTLs because of their lower cost and lower guaranteed efficiency
LightingInternational (Sylvania)
Leveraged buyout; modest funding support expected, going forward To enter international markets, Havells acquired the lighting business of SLI Sylvania in April 2007 for 234.5 million. Based out of Frankfurt, Sylvania is the worlds fourth largest player in the lighting industry and owns reputed brands: Sylvania, Concord, Marlin, Lumiance and Linolite. Following this acquisition, Havells got access to brand rights of Sylvania worldwide with the exception of the USA, Canada, Mexico, Australia and New Zealand where the brand rights are owned by Osram and some other players. Overall, the acquisition price that Havells paid appears steep, especially in hindsight, given that Sylvanias key markets went into a slowdown post-acquisition. Havells funded the acquisition cost of Sylvania by taking fresh debt in the latters books. Out of the total funding requirement of 200 million, 80 million was funded by a recourse debt that was backed by a guarantee from Havells while the balance 120 million was funded by non-recourse debt.
Sylvania: Key Drivers and Challenges Growth & Profitability Drivers Entry into fast-growing emerging markets Ability to access cheaper manufacturing outsourcing options Key Challenges Ability to garner market share in emerging markets Ability to refinance debt in a timely manner
Table 7: Cost of Sylvania Acquisition and Funding Pattern
Particulars Total cost of acquisition Funding requirement Recourse debt Non-recourse debt
Source: Company
Amount 234.5 million 200.0 million 80.0 million 120.0 million
Remarks ~ Rs. 1273.12 crore at -INR rate prevalent as on April 30, 2007. The cost included 34.5 million of pension liabilities that were not to be funded Debt had recourse to Havells in the event of default. Out of the amount, only 10.0 million was pending as on December 31, 2010
During the last three years, Havells also extended additional financial support to Sylvania via equity infusion, which in turn was used for repayment of recourse debt and to meet cash flow mismatches. Till date, Havells has invested 114 million in the subsidiary. This has depressed Havells return on equity (RoE), as the additional investments have not yielded returns till 2009-10. Going forward, we estimate Havells incremental financial exposure in Sylvania to be lower at around 16 million.
Table 8: Future Funding Support to Sylvania
In mn 1. 2. 3.
Particulars Recourse debt to be repaid over the next one year (by April 2012) Interest to be paid on recourse debt Guaranteed working capital debt TOTAL
10.00 1.60 5.00 16.60
Source: Company
Prospects favourable for Sylvania, given its strong product portfolio, access to latest technologies, and high brand recall value; expansion into newer markets to provide a boost to revenues over the long term Havells acquisition of Sylvania has given it access to the global lighting industry, which is expected to report a CAGR of 710% over the next 10 years. Globally, the lamps industry is highly consolidated, featuring a few large players including Philips, Osram (Siemens), GE, and Sylvania. These players together hold around 65% of the total market for lamps. Although Sylvanias market share is relatively low at around 5% as compared with 29% of Philips, 19% of Osram, and 9% of GE, its wide product range with the latest technologies and strong brands have enabled it to compete with the top three brands of the world and sustain its market share in mature markets such as Europe. In contrast to the lamps industry, the luminaires industry is highly fragmented, with smaller and regional players holding around 80% of the market. As against 7% of Philips, Sylvania holds a 2% share of the luminaires market in countries where it operates.
Figure 9: Estimated Market Shares in International Lighting Market
Figure 10: Estimated Market Shares in International Luminaires Market Phillips, 7% GE, 2% Zumtobel, 11% Sylvania, 2%
Phillips, 29% Others, 38%
Osram, 19% Sylvania, 5% GE, 9%

Source: Company
Others, 78%
Source: Company
Note: The market share is estimated for markets where Sylvania is present
Till now, Sylvania had been focusing primarily on mature markets in Europe. With plans to launch operations in Eastern Europe, Middle East, African and Asian markets, companys revenue growth is expected to recover in the next three years. Global economic slowdown along with high fixed costs adveresely affected profitability during last three years; slowdown impact similar as that on peers After Havells acquired Sylvania in April 2007, the world economy suffered one of the worst recessions in decades, a fallout of which was a significant decline in the revenues of companies across the lighting industry. This together with high fixed costs led to several companies reporting operating losses during that period. Like Sylvania, Philips and Osram also undertook restructuring, which subsequently allowed profit margins to recover to the 2008 levels in CY2010. Sylvania however had weaker margins to begin with because of its higher fixed costs and delay in beginning the restructuring exercise (following change in management), which meant the companys margins started recovering only from Q4, 2009-10.
Figure 11: Quarterly Movement in Revenues of Sylvania & Competition Figure 12: Quarterly Movement in Margins of Sylvania & Competition
Source: Quarterly reports of companies, ICRA Onlines estimates
Source: Quarterly reports of companies, ICRA Onlines estimates
Restructuring packages primarily aimed at correcting high operating leverage, the primary reason for losses
Table 9: Estimated Change in Operating Leverage Post-Restructuring
The primary reason for Sylvania incurring losses following the decline in revenues in 2008-09 was its high operating leverage (refer Table 9). To correct this, the company launched two restructuring programmes costing a total of 32million: Project Phoenix (Jan 2009-Sep
mn Less: Less:
Particulars Sales Variable Costs Contribution (A) Fixed Costs Operating Profits (B) Degree of Operating Leverage (A/B)
2008-09 (A) 508.6 287.4 221.2 209.7 11.5 19.2
2009-10(A) 438.4 279.8 158.6 159.9 -1.4 -
2010-11 (E) 470.1 304.6 165.5 144.6 21.0 7.9
Source: ICRA Onlines estimates
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2009) and Project Prakram (Sep 2009-Sep 2010). The two programmes were primarily aimed at rationalising the companys 3 cost structure . The cost consisted mainly of severance payments made on account of reduction in manpower at the European facilities.
Table 10: Summary of Restructuring Projects implemented at Sylvania
Restructuring Plan Duration of implementation Total cost Estimated annual savings Estimated pay-back period Estimated savings Steps implemented
Phoenix Jan 2009-Sep 2009 12.3 mn 17.5 mn ~ 8.5 months 17.5 mn in 2009-10 Three manufacturing facilities shut down Reduction in employee base by onethird in two other facilities Reduction in administrative costs and improvement in working capital management Use of retained earnings Release of funds from working capital
Prakram Sep 2009-Sep 2010 20 mn 16 mn ~ 15 months ~ 12 mn by September 2010 Increase outsourcing of products from cheaper manufacturing destinations such as India and China Rationalisation of fixed cost base Increase savings in material costs Value engineering and process optimisation Fresh equity infusion by Havells Use of debt funds by deferring principal repayments
Total 32 mn 33.5 mn
Funding
Source: Company
Adverse market conditions together with continued focus of Sylvania on internal restructuring programmes, which also involved closure of certain production units, resulted in a decline in its net sales to 438 million in 2009-10 from 514 million in 2007-08. Although the fixed costs had been pruned to an extent with the implementation of Project Phoenix in 2009-10, the companys profitability continued to decline because of a sharp fall in sales. This resulted in Sylvania reporting an operating loss of 1.4 million in 2009-10.
Table 11: Sylvanias Past Financial Performance
million Gross Sales % change EBITDA EBTDA % Depreciation Interest PBT PBT% PAT Exceptional Items PAT after Exceptional Items /Rs.
2007-08 514 27.5 5.4% 9.8 13.6 5.6 1.1% 3.0 3.0 57.3
2008-09 509 -1% 11.5 2.3% 11.2 13.7 -13.2 -2.6% -16.4 -30.6 -47.0 65.0
2009-10 438 -14% -1.4 -0.3% 8.8 11.9 -21.1 -4.8% -25.8 -43.8^ -69.6 67.0
Source: Company, ICRA Onlines estimates ^ Note: As per reported numbers, the company has adjusted the amount directly from Business Reconstruction Reserve created out of retained earnings
Similar restructuring programmes were launched by some other players including Philips that were aimed at reducing the share of fixed costs in the total cost structure.
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Following successful implementation of Project Phoenix and Project Prakram and with the market reviving, Sylvanias operating profitability started improving in 2009-10.
Launch of Project Phoenix (Jan 09) Conclusion of Project Prakram (Sep 10)
Table 12: Quarterly Performance of Sylvania During and Post-Restructuring
million Revenue Growth (%) EBITDA EBITDA margin (%) Depreciation Interest PBT before Exceptional Items Exceptional items PBT Tax PAT
Q4, 2008- 09 116.2 -9% 2.8 2.4% 3.1 3.1 -3.4 18.6 -22.0 0.6 -22.7
Q1, 2009-10 106.8 -8% 0.5 0.5% 2.5 3.4 -5.4 5.9 -11.3 0.3 -11.6
Q2, 2009-10 105.6 -1% 0.6 0.6% 2.2 3.1 -4.9 6.3 -11.2 -1 -10.2
Q3, 2009-10 114.7 9% -5.4 -4.7% 2.1 0.8 -8.4 25.1 -33.5 0.4 -33.9
Q4, 2009-10 107.9 -6% 1.8 1.7% 2.1 4.8 -5.1 3.1 -8.2 5.2 -13.4
Q1, 2010-11 108.1 0% 4.8 4.4% 2.1 2.9 1.2 0.6 0.6 1.0 -0.4
Q2, 2010-11 117.7 9% 5.5 4.7% 2.1 2.2 2.5 0.0 2.5 1.2 1.3
Q3, 2010-11 125.3 6% 6.6^ 5.3% 2.0 2.7 1.9 1.1 0.4 0.7 -0.3
Gradual improvement in profitability
Source: Companys quarterly reports ^ Normalised EBITDA excludes tax payment made in Brazil for previous years for 2.4 million and treated as other income/ expenditure
Apart from the successful completion of the restructuring programmes and the sales revival in key regions, the launch of operations in emerging markets also contributed to the improvement in Sylvanias margins from Q4, 2009-10 onwards. The established global players in the lighting industry are increasingly focusing on emerging markets for future growth. Already, Philips and Sylvanias share of revenues from emerging markets has increased to ~40% now from around 30% in the quarter ended March 2009. Based on growth trends observed, the share is expected to increase further over 2010-11(E) to 201213(E).
Figure 13: Market-wise Revenue Break-up for Sylvania Figure 14: Market-wise Revenue Break-up for Philips
100% 80%
Developed 60%markets, 72% Developed markets, 64%
100% 80%
Developed Developed markets, 64%
60%markets, 70% 40%
40% 20% Emerging

markets, 28% Emerging markets, 36%
20% Emerging
markets, 30%
Emerging markets, 36%
0% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Source: Companys Quarterly reports
0% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Source: Philips Quarterly reports
Future growth to be driven by emerging markets; profitability vulnerable to adverse movements in foreign exchange With Sylvania planning to launch operations in other emerging markets such as Malaysia and China, growth in its top line is expected to be higher in the next few quarters. Sales from Latin America (LATAM), another developing region, have grown consistently since Q2, 2009-10, which together with the decline in sales from Europe, has led to an increase in LATAMs share in the total sales to 31% in Q2, 2010-11 from 26% in Q1, 2009-10. In 9M, 2010-11, sales from the LATAM region reported an increase of 35% over the corresponding previous, although part of it can be attributed to favourable currency movements. While Sylvania as of now has a limited presence in Asian markets, which account for 5% of its total sales, growth in the region has been healthy. Sylvanias sales in Asian markets increased by 69% in 9M, 2010-11 over the corresponding previous to 11.35 million.
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Table 13: Quarterly Revenue Growth in Sylvania's Markets
million Europe Growth (%) LATAM & US Growth (%) Asia Growth (%) Other Total Growth (%)
Q4, 2008-09 77.72 28.75 3.74 -1.75 108.46 -9%
Q1, 2009-10 70.63 -9% 24.89 -13% 3.62 -3% -1.6 97.28 -10%
Q2, 2009-10 65.48 -7% 25.95 4% 2.93 -19% 1.74 95.88 -1%
Q3, 2009-10 77.33 18% 27.53 6% 2.88 -2% -1.27 106.69 11%
Q4, 2009-10 76.83 -1% 29.04 5% 4.04 40% -1.35 109.01 2%
Q1, 2010-11 64.95 -15% 32.65 12% 5.47 35% 0.82 104.21 -4%
Q2, 2010-11 65.59 1% 37.56 15% 5.88 7% 0.58 109.85 5%
Q3, 2010-11 74.10 13% 35.60 -5% 04.62 -21% 1.59 115.91 6%
Source: Companys Quarterly Reports
Going by the current trends, we expect Sylvanias sales to report a CAGR of 10% in the LATAM region and of 31% in the Asian region (as a result of entry into newer markets); we expect the companys sales in the European region to decline marginally in 2010-11 and stabilise at that level over the next three years. Further, taking into account the cost savings from the restructuring programmes, we expect Sylvania to report an EBITDA of ~ 21 million (EBITDA margin ~4.5%) in 2010-11. The EBITDA margin, however, is exposed to the risk of adverse fluctuations in foreign exchange (forex), given Sylvanias increasing exposure to emerging markets both in terms of outsourcing of manufacturing as well as sales. Thus, a strong appreciation in currencies of countries from where the products are imported or depreciation in currencies of countries of major export can adversely affect the companys earnings. To reduce this risk, the company is focusing at localising sales and procurements in key markets such as LATAM, thereby providing benefit of natural hedge. Further, the company is also increasingly focusing at localising outsourcing and borrowings in countries like India and China that are the key outsourcing destinations for the company. Although this reduces the adverse impact of foreign currency movements to an extent, the companys earnings would continue to be susceptible to the forex risk, given the increasing percentage of sales in new geographies.
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Switchgears
Most profitable segment for company In the switchgears segment, Havells product range includes domestic 4 switchgears, modular switches, and low-voltage industrial switchgears . The domestic/retail segment is a small portion of the total switchgear market (about 15%), but Havells enjoys robust profit margins here because of its leadership position and targeted customer segment. Although sales from industrial switchgears are limited (~30% of total segment sales) at present, Havells is making efforts to expand its presence in the Rs. 7,130 crore low-voltage industrial products category.
Figure 15: LV Switchgears Market in India
Switchgears: Key Drivers and Challenges Growth Drivers Real estate activities in metros, Tier-I and Tier-II cities Increasing personal disposable incomes Increasing consumer awareness Changing lifestyles leading to greater preference for modular switches Key Challenge Establishing market share in new products to be launched in low voltage industrial switchgears, given presence of large players such as L&T, ABB and Siemens.
Switchgears and Electrical Switches

Domestic/ Commercial (Rs. 2,200cr)
ACBs, MCCBs, Switch fuse unit, Changeovers etc. (Rs. 1,200 cr)
LV Industrial (Rs. 7,130 cr)
Modular Switches (Rs. 1,000 cr)
Control gears, starters and panels (Rs. 5,340 cr)
Switchgear (Rs. 1,790 cr)
Source: Company, ICRA Online Research Note: Havells also includes capacitors and motors to calculate revenues from Switchgears segment
About 70% of the revenues in the switchgears segment come from domestic switchgears and modular switches, where Havells is able to price its products at par with international brands such as Legrand and Schneider Electric. Moreover, Havells has a wider distribution reach than its close competitors, which enables it to capitalise on the growth happening in Tier-II and Tier-III cities.
Table 14: Product-wise Break-up of Havells Switchgear Revenues
% of total Industrial Domestic Modular Switches Others (Capacitors & Motors) Total 23% 49% 20% 9% 100%
Currently, Havells is the market leader in the Rs 1,200 crore domestic switchgears market, having increased its market share to about 20% in Source: Company data, ICRA Onlines estimates 2009-10 from 15% in 2005-06. Its market share in modular switches has also improved significantly to 15% from just 5% in 2005-06, helped by Crabtrees premium image and easy availability. The company currently faces limited competition in modular switches, as the only premium brands available are Legrand, Schneider and Anchor Roma. Future growth expected to be driven by construction of new houses and increasing disposable incomes Figure 16: Price- wise Break-up of Proposed Housing Units Domestic switchgear and modular switches are expected to benefit from the current demand for premium urban housing and rising disposable incomes. According to the Ministry of Urban < Rs.15 5 th > Rs. 50 Housing , the total requirement of urban housing during the XI lakh, 37% lakh, 16% Plan period (2007-2012) works out to 2.65 crore dwelling units (combining the housing shortage at the beginning of the Plan period), which would sustain demand for domestic switchgear and switches. Although a large proportion of this shortage involves low-end housing, around 40% of the total housing units would be worth Rs. 25 lakh and morethe target segment for switchgears and switches. Rs.15-25 Rs. 25-50
lakh, 22%
Source: Industry research
4
lakh, 25%
The switchgears industry can be broadly classified in two segments: domestic/ commercial (low voltage) and industrial switchgears (medium and high voltage). However, for Havells, the potential market considered is just the low-voltage segment because of its product focus. 5 Report of the Technical Group constituted by the Ministry of Urban Housing
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The domestic switchgear segment is also expected to benefit from rising consumer awareness, as the expenditure on miniature circuit breakers (MCBs) generally accounts for less than 0.1% of the total cost of a house, but significantly reduces the risk of damage from short circuits and electric current leakages. Moreover, the expenditure on domestic switchgear being a one-time outlay (about Rs. 2,000 for a three bedroom-hall-kitchen house), we believe switchgears would be affordable for a large part of the targeted population. While the size of the domestic market for electrical switches is estimated at Rs. 2,200 crore, only 46% of this is accounted for by modular switches, and just around 10% of households use them because of their higher prices. While the electrical switches market is expected to grow at an annual rate of 9-11% over the next five years, we expect the growth to be faster for modular switches, given the rising disposable incomes. Nevertheless, the high dependence of switchgears and switches on real estate growth, especially premium housing, exposes them to the cyclicality inherent in the sector. Havells revenue growth in this segment slowed down to 7% in 2008-09 because of the economic slowdown, and a repetition of the same cannot be ruled out in case GDP growth falters.
Table 15: Expected Movement in Havells' Market Share
2009-10 Domestic Switchgear Industry Sales Growth Havells Market Share Modular Switches Industry Sales Growth Havells Market Share Rs. Crore % % Rs. Crore % % 1,200 22% 1,000
2010-11(E) 1,380 15% 22% 1,150 15% 16%
2011-12(E) 1,587 15% 22% 1,323 15% 16%
2012-13(E) 1,825 15% 22% 1,521 15% 16%
Source: Company, ICRA Onlines estimates
Company plans to diversify into high-growth industrial switchgears, but benefits would accrue only over long term Havells, which currently caters to only a small part of the total switchgears market, plans to expand its product portfolio so as to be able to address the larger market, consisting of industrial switchgears. The industrial switchgears segment is expected to report strong growth during the next few years on the back of the significant expenditure planned in the power sector and in industrial construction. However, Havells is currently a marginal player in this segment as compared with established companies like Larsen and Toubro (L&T) and Siemens. Although Havells started off as an industrial switchgear company, it reduced the focus on this business over the years to target the high potential consumer electrical market. The company is now building up its product portfolio to re-enter this segment. Given strong competition from players like L&T, we expect the growth in the industrial switchgears segment to be modest in the next two to three years.
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Electrical Consumer Durables

Till 2009-10, the Electrical Consumer Durables (ECD) division of Havells had just one productelectric fans. Now it has two, with the recent launch of electric water heaters. One of the fastest growing segments for Havells, benefiting from rapid growth in electric fans demand and increase in market share The revenues of the ECD division reported a sharp increase till 200910 on the strength of high growth in the electric fans industry and the substantial increase in Havells market share during 2006-09. The electric fan industry is now worth about Rs 3000 crore, with Havells controlling around 12% of the market. Despite being a relatively late entrant (the ECD division was started only in 2004), the company has managed to place itself among the top five players in the industry that control about 80% of the market. The company has been able to grow its market share from 6% in 2006 to 12% in 2010 largely on account of its marketing strategy wherein a number of additional product features were offered, while the product was offered at prices almost similar to that of the market leader (Crompton Greaves). Moreover, as Havells fans cater to the premium segment, the growth can be attributed to rising incomes and quality consciousness of Indian consumers. Havells also supported its strategy by aggressive advertising, and a unique energy saving proposition offered in the form of 50W fans.
Electrical Consumer Durables: Key Drivers and Challenges Growth Drivers Increased penetration of electricity in rural areas New product launches Changing lifestyles and disposable incomes
Key Challenges Loss of market share in electric fans Intensifying competition in the electrical appliances market
Moreover, Havells has been able to overtake established, but single-product companies, on the strength of its extensive distribution network. The importance of distribution network in the case of home electronics and kitchen appliances is highlighted by the findings of Technopak (a market research company), which indicates that ~79-85% of customers are willing to travel only up to 2km for the intended purchase. In raising its market share at a brisk pace over the period 2006-10, Havells was also able to capitalise on one of the fastest growth periods of the domestic electric fans industry, which reported a CAGR of 18% between 2003-04 and 2009-10E. The growth was largely driven by the real estate boom and the increase in disposable incomes, as replacement demand for fans has historically been limited, since older generation fans generally had a long life span extending up to 20 years. During 2009-10, the revenues of the key players in the electric fans industry increased by a substantial 30% or so, but the spike may partly be attributed to pent-up demand.
Figure 17: Growth in Indian Electric Fan Industry
2,800 2,400 Rs. Crore 2,000 1,600 1,200 800 400 0 35% Annual Growth rate 30% 25% 20% 15% 10% 5% 0%
Source: CMIE, ICRA Onlines estimates
Healthy growth prospects for domestic electric fans industry The domestic electric fans industry is expected to grow at about 30% in 2010-11 with real estate activities picking up once again; the uptrend is already reflecting in the half-yearly numbers of the major fan manufacturers like Havells and Crompton Greaves. Beyond 2010-11, we estimate a growth rate of 18-20% over the next two years. Thereafter, we expect the growth rate to moderate to less than 15% because of the base effect, but see the industry as continuing to benefit from two additional upsides: increasing availability of power and shorter lifespan of newer generation fans. In rural India, the ownership of fans is closely linked to power availability, especially in States where disposable incomes are high. Although Punjab and Haryana are well-penetrated, Havells can benefit from increased power supply and rising rural incomes in Uttar Pradesh, Rajasthan and Bihar, where higher incomes have not yet fully translated into fan purchases because of power shortages. Although the key beneficiaries of this trend would be companies that manufacture lower-priced fans, we expect Havells to capture the affluent households in these regions. Also, a ceiling fan is almost a necessity in the hotter regions of India. As per the findings of a survey conducted by Max New York Life and NCAER, fan ownership ranks higher than ownership of manual water pumps and steel cupboards among rural households.
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Figure 18: Region-wise Power Availability and Fan Penetration

100% % of households 80% 60% 40% 20% 0%
Figure 19: Ownership of Household Goods in Rural India as per Survey

70% 60% % of households 50% 40% 30% 20% 10%
Power availability % of households earning above Rs 2000 pm Ceiling fan ownership
0%
Ceiling fan Time clock Torch In-house toilet Water Steel Sewing pump cupboard machine
Source: The Max-NCAER Financial Protection Survey
Source: The Max-NCAER Financial Protection Survey
Havells market position in fans expected to remain strong, with growth supported by adequate spare capacities Havells competitive strength in electric fans is indicated by the pricing premium that its fans are able to command in the market, even against the products of other established players like Crompton Greaves and Bajaj Electricals. Moreover, Havells only sells fans priced above Rs. 1,000 each, which shields it from the intense competition from cheaper Chinese products in the lower end of the market. With the size of the Indian middle class growing, we expect the share of high-end fans to increase gradually.
Table 16: Electrical FansPeer Comparison
Amounts in Rs. Crore Company Havells Crompton Greaves Usha International Bajaj Electricals Orient Paper & Industries Khaitan Electricals
Revenue 2008-09 275.3 598.3 357.4 296.5 291.0 195.7 2009-10 357.6 764.5 495.2 379.3 384.0 258.0
Revenue Growth 2008-09 14% 20% 13% 21% -16% -20% 2009-10 30% 22% 37% 28% 36% 32%
Incremental Revenues 2009-10 82.3 166.2 137.8 82.8 88.5 62.3
Realisation 2008-09 1,229 1,068 988 933 914 945 2009-10 1,202 1,176 1,004 943 903 927
Note: Orient Paper exported fans worth Rs. 48 crore out of the revenues mentioned, resulting in a lower share in the domestic market. For calculating incremental revenues in 2009-10, adjustment for export sales has been made Source: Companies Annual Reports, ICRA Onlines estimates
Figure 20: Capacity Utilisation across Major Fan Manufacturers

80 Units in lakhs 60 40 40% 20 0 20% 0% 100% 80% 60%
Installed capacity
Source: Capitaline, ICRA Online
Units sold
Utilisation
The growth in Havells electric fan sales is expected to mirror the growth of the industry over 2010-11(E) to 201213(E). Incremental growth in market share is not expected to be substantial because of intense competition from Crompton Greaves and Bajaj Electricals. The latter, for instance, has a tie-up with China-based Midea (worlds largest fan company), which would help it introduce newer models. Havells however does benefit from having the third largest fan manufacturing capacity in India, with ample spare capacity to service volume growth of 15-20% over the medium term. The companys facility at Haridwar (Uttarakhand) is the largest integrated fan manufacturing factory in India, which allows it to have a cost advantage over other players that outsource production to other smaller units in India.
ECD division displays strong profitability, but full impact on EPS would be felt only after new product launches The profit margins of Havells ECD division are robust because of premium pricing, which makes it the second-most profitable segment for the company. However, the divisions overall contribution to the companys 2009-10 standalone revenues was just around 15% (about 6.6% on a consolidated basis), which limited the impact of the benefit on the EPS. As the ECD division is expected to demonstrate the highest revenue growth (CAGR of 22%) among all segments during 2010-11 to 2012-13(E)
17
because of new product launches while sustaining EBITDA margins close to 22%, it is expected to be the key contributor to Havells future EBITDA growth (on a standalone basis).
Figure 21: Movement in EBITDA Margin for Havells ECD Division Table 17: EBITDA Margin Comparison for ECD Segment
Company Havells Crompton Greaves Bajaj Electricals Orient Paper & industries Khaitan Electricals TTK Prestige
13.4% 11.6% 9.4% 10.8% 3.7% 9.9%
19.8% 14.7% 12.8% 13.5% 6.4% 16.2%
% EBITDA margin
EBITDA margin 2008-09 2009-10
30% 25% 20% 15% 10% 5% 0%

Sudden spurt because of favourable raw material price movement
Note: For Havells, EBITDA margin has been calculated by adjusting the contribution for unallocated expenses that have been apportioned among the four segments on the basis of sales Source: Companies Annual Reports, ICRA Onlines estimates
Source: Companys Annual Reports, ICRA Onlines estimates
While the contribution margins in Havells ECD division improved to 28% in 2009-10 from about 21% in the previous two years, we believe this improvement largely reflects the softening of raw material prices over the last one year (reduction in raw material prices was not reflected in lower MRPs). Nonetheless, over the medium term, the margins would be supported by increasing capacity utilisation and scale benefits when new products are introduced using a common distribution network. Moreover, Havells water heaters are catering to the premium segment, which allows it to earn adequate profits on the same. Future growth to be driven by new products such as water heaters, but company would face intense competition in new categories We expect future profit growth of Havells ECD division to be driven by new product launches such as water heaters. The size of the water heaters market is estimated at Rs. 800 crore, and it is expected to grow at about 20% per annum over the medium term, driven by rising disposable incomes, currently low penetration levels (only about 1.7 crore households own water heaters as of 2009-10). Havells has targeted the premium consumer segment and expects to capture a market share of 5% by 2011-12, which is achievable considering the unique product attributes offered by the company, such as prevention of electric shocks and highest power efficiency (five-star rated). We expect additional revenues of Rs. 50-60 crore from water heaters from next year onwards, which should sustain growth of the ECD division. The various listed players present in the electric appliances industry have reported strong profit growth during the past five years, and since this business is driven by rising disposable incomes and availability of power, we expect the electric appliances industry to grow at a healthy pace over the medium term. However, the electric appliances industry is already cluttered, featuring both premium MNC brands like Philips, Panasonic and Morphy Richards (owned by Bajaj Electricals) and relatively inexpensive brands like Sunflame, Prestige, Usha and Inalsa. Even retail chain owners like the Future Group have launched their in-house brands (Onkyo), which are priced much lower.
Table 18: Product Portfolio and Growth Trend for Domestic ECD Companies
Electric Appliances
Kitchen Appliances
Havells Crompton Greaves Bajaj Electricals Khaitan Electricals Usha International TTK Prestige Philips Panasonic Inalsa Sunflame
Electric Fans
Water Heaters
Irons
Mixer Grinders
Toasters
EBITDA CAGR of ECD Business 2005-06 to 2009-10 13% 39% -24% 114% 32% NA NA NA NA
Revenue CAGR of ECD Business 2005-06 to 2009-10 15% 23% 43% 18% NA NA NA NA
Source: Companies Annual Reports and websites, ICRA Online Research
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Despite intense competition, we believe Havells is well poised to capitalise on the high growth potential of the electric appliances industry, given the companys: established brand image and distribution network; launch of products in less cluttered categories, such as 5-star rated appliances that appeal to energy conscious customers, and targeting of unexplored niches like Residual Current Circuit Breakers (RCCBs) in the case of water heaters, which make the appliance electric shock proof; and ability to command price premium on the strength of differentiated products, established brand and distribution reach, as seen in fans and switchgear, and even in water heaters, which command a significant price premium over competing products of existing players.
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Cables and Wires

Although a major contributor to Havells revenues, this division displays the weakest profitability The cables and wires segment is the largest business segment for Havells in terms of revenues, and accounted for 41% of its 2009-10 standalone sales. Havells presence in the wires business is strategic in nature, as the business complements its efforts to offer the entire range of products that a customer would require while setting up the electrical system of a new or upgraded house. However, this segment suffers from relatively low and volatile contribution margins (less than 10%) on account of low value addition, the commodity nature of the product, a concentrated customer base, and intense competition in a fragmented market that has several small players. About 43% of Havells revenues in this segment come from wires, which are also used by retail customers, and are therefore less exposed to business cycles and margin pressures. The business however continues to be dependent on real estate activity.
Cables and Wires: Key Drivers and Challenges Growth Drivers Large investments planned in power sector Foray into new segments in cables business Key Challenges Increasing copper prices, which can exert pressure on margins Competition from larger players
Revenues in cables and wires are largely driven by the prices of copper and aluminium which typically account for 72-75% of the total cost. The realisation is therefore dependent on the underlying raw material cost, which is normally passed onto customers with a time lag (the 9% decline in sales during 2008-09 was because of the softening of copper prices). During 2009-10 Havells volumes in this segment increased by 25%, but revenues remained flat due to a fall in copper prices. Havells however attempts to keep the impact of commodity price fluctuations on margins under control by minimising inventory. Profit growth in Havells cables and wires division is likely to remain muted as compared with that in its other divisions. This in turn would gradually reduce the divisions contribution to the companys EPS in the long term. Demand outlook favourable, given the generation and transmission and distribution (T&D) capacity proposed over th the XI Plan period; however, Havells not planning to focus on this segment Havells volume sales of cables and wires reported a CAGR of 12% from 2005-06 to 2009-10, and the growth rate is expected to sustain, given the large capex planned in the power sector. Havells operates primarily in the segment consisting of lowmedium voltage cables and domestic wires, which are used mainly in power generation plants, distribution of power, and in electrical systems within premises. The company has stayed away from the high-voltage (HV) cables used in transmission because of its continued focus on consumer products. Also, players like KEI and Polycab, helped by their established track record and experience in this domain, are better placed to capitalise on the growth in the HV cables business.
Table 19: Cables & WiresPeer Comparison
Company Havells Finolex Cables KEI Industries Polycab
EBITDA Margin 2008-09 2009-10 6.4%* 8.8%* 0.5% 16.6% 9.0% 6.3% NA NA
Installed Capacity 000 km 1,150.00 2,135.97 65.60 NA
Capacity Utilisation 2009-10 45.0% 53.9% 65.2% NA
Note: Contribution margin mentioned in the case of Havells Source: Companies Annual Reports, ICRA Onlines estimates
The size of the cables and wires industry was estimated at ~ Rs. 15,000 crore, of which about Rs. 10,000 crore would be cables and the rest wires. Driven by the investments in the power sector and growth in real estate, the industry reported a CAGR of 8% over the period 2000-08. The industrys future growth would be supported by the significant increase in power generation capacity over 2011-12(E) to 2016-17(E), with the expected capacity addition being much higher than the 42,452 MW of capacity added during the last eight years.
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Table 20: Demand Estimation for Power Cables
Generation capacity planned over 2012-17 Expected achievement of the target Estimated backlog from XIth Five Year Plan Expected capex on generation at Rs. 5 crore per MW Percentage spend on cables Demand for cables from new generation Capex on Distribution Percentage spend on cables Demand for distribution Demand for cables from distribution
Source: Central Electricity Authority, ICRA Online Research
100,000 MW 60,000 MW (60%) 20,000 MW Rs. 400,000 crore 3.0% Rs. 12,000 crore Rs. 250,000 crore 10.0% 957,302 cable kilometres Rs. 25,000 crore
Globally, the expenditure on T&D and generation has been equal in proportion, as against the ratio of 0.5:1 in India. Hence, the expenditure on distribution can far exceed the intended target over the long term. Between 2000-01 and 2006-07, distribution lines witnessed a CAGR of 2.5% in volume terms. The growth is expected to be sustained over the medium term, aided by a number of new governmental initiatives, but a higher growth rate would be contingent on T&D expenditure catching up with the global norm.
We believe the Cable industry would continue to face pressure on margins because of rising raw material costs and competition from China. As China accounts for 67% of Asias total cable consumption, Chinese companies enjoy significant economies of scale. Being a relatively commoditised product segment, overcapacities or slowdown in demand in China could possibly result in Chinese cable companies diverting their products to India. Till now however, China cable demand has been fairly robust, and was up 15% in 2009-10 as against a demand growth of around 5% in India.
21
Financial Outlook
Sales volume growth expected to be healthy over the medium term Havells operating income reported a healthy CAGR of 23% over the period 2005-06 to 2009-10, backed by the companys entry into newer segments, cross-leveraging of its brand and extensive distribution network, and a healthy increase in consumer demand following the rise in personal disposable incomes. The inorganic growth by way of acquisition of Sylvania has contributed significantly to Havells scale of operations. On a consolidated basis, Sylvanias operating income accounted for 54% of Havells total operating income in 2009-10. Going forward, Havells revenue growth is expected to be driven by sustained demand for consumer durables, launch of new products (such as electric water heaters), backed by established brand and distribution network, and Havells entry into newer markets with the Sylvania brand. In our opinion, Havells distribution reach and established brand should help the company sustain its market share in most segments and fetch business in new ones, given its approach of diversifying its offerings within consumer product categories, its performance track record, increasing consumer awareness, and the perceptible shift in preference for quality products. Overall, we expect Havells standalone revenues to report a CAGR of 14-15% between 2009-10 and 2012-13(E) and its consolidated revenues to grow at 11-12% during the same period. Consolidated profit margins to improve from 2010-11 onwards on account of successful implementation of restructuring programmes at Sylvania; adverse fluctuations in raw material prices and entry into new segments to put minor pressure on standalone margins in 2010-11 In 2009-10, Havells standalone operating profit margins (OPM) were at a five-year high of 12.35%, supported by benign raw material prices. However, in 9M, 2010-11, the company posted a margin contraction of 141 basis points (y-o-y) because of input cost pressures, largely in its cables division. Following the completion of restructuring programmes in September 2010, the EBITDA margins of Sylvania reported significant improvement to 5.3% in H1, 2010-11 from 0.63% in the corresponding previous. Going forward, with the contribution from emerging markets increasing, Sylvanias margins are expected to improve further. We expect Sylvania to report an EBITDA margin of 4.5% in 2010-11(E), which should improve further to 7.4% in 2011-12(E), and to 7.6% in 201213(E). Given the decreasing proportion of revenues from the cables segment, the impact of margin fluctuations on Havells profitability is likely to decline over time. This apart, the company has surplus capacities across all segments, which are expected to be adequate for growth over the next three years. With increase in capacity utilisation, Havells is expected to benefit from economies of scale, which should reflect favourably in its operating margins. We expect Havells to report operating margins of 11.4% in 2010-11(E), which would improve to around 11.7% by 2012-13(E). On a consolidated basis, the EBITDA margins are expected to improve from 5.7% in 2009-10 to 8.1% in 2010-11(E) and thereafter gradually to 10% in 2012-13(E). Robust EPS growth expected over medium term, largely driven by Sylvanias turnaround and healthy growth in ECD division We expect Havells consolidated EPS to post a CAGR of 80% over the period 2009-10 to 2012-13(E). While the standalone profits are expected to report a moderate CAGR of about 11% during 2010-13 (E), Sylvanias profits would increase at a CAGR of 260% during 2011-13(E), becoming the key growth driver of consolidated EPS. Hence, we believe the companys stock should command a higher valuation than the stocks of similar players in electric appliances and switchgears, as Havells would benefit not only from domestic growth, but also from the additional net profit growth of Sylvania, which till recently was a drag on the EPS. Havells has a consistent track record of paying dividend, and declared a dividend of Rs. 3 per share in 2009-10, maintaining its historical payout ratio of about 11%. The company has indicated that it would maintain its Dividend Per Share (DPS) going forward, which appears feasible, considering the sharp increase in profits during 2010-11. However, at the current market price, the dividend yield on Havells stock is negligible at about 0.86%. Capital structure to improve on a consolidated basis; however refinancing risk persists Erosion of Sylvanias net worth because of accumulated losses together with the larger debt taken for the purpose of acquisition and restructuring resulted in Havells consolidated gearing increasing to 2.66 times as on March 31, 2010 from 2.00 times as on March 31, 2009. As Sylvania starts posting net profits from 2010-11(E) onwards, we would expect rapid improvement in the capital structure of the consolidated entity, going forward. Although Sylvanias overall debt is expected to remain high on account of increasing working capital requirements, an improved net worth would allow the consolidated gearing to be at a comfortable level of less than one time by 2012-13.
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The debt coverage indicators of Havells are also expected to improve significantly from 2011-12(E) onwards, with consolidated Debt/EBITDA falling below 2 times. However, Sylvanias debt obligations of around 40million that are due for repayment in 2012-13 would need to be refinanced.
Figure 22: Movement in Havells (Consol.) Capitalisation Indicators
1,600 1,400 1,200 Rs crore 800 600 400 200 0 2009-10 2010-11(E) 2011-12(E) Debt 2012-13(E) Gearing Net Worth Source: ICRA Onlines estimates 0.50 10 0 2010-11(E) Cash accruals Source: ICRA Onlines estimates 2011-12(E) 2012-13(E) 1.50 1.00 Million (times) 1,000 2.00 3.00 2.50
Figure 23: Sylvanias Debt Repayments vs. Cash Accruals

60 50 40 30 20
Principal repayments
Return ratios expected to improve considerably as investments in Sylvania start yielding returns Havells return ratios have remained subdued during the past two years because of the substantial investments in Sylvania that are yet to yield returns. The standalone Return on Capital Employed (RoCE) of the company stood at a moderate 15.28% in 2009-10 largely because the investment in Sylvania did not yield any returns till last year. Adjusting for the equity investment in Sylvania, Havells standalone ROCE was significantly higher at 34.5% in 2009-10.
Table 21: Estimated RoCE for HavellsStandalone and Consolidated
2009-10 Standalone ROCE ROCE adjusted for Sylvania Investment Consolidated ROCE
Source: ICRA Onlines estimates
2010-11(E) 23.79% 32.57% 27.12%
2011-12(E) 24.14% 32.56% 30.45%
2012-13(E) 24.43% 31.68% 31.15%
26.36% 34.50% 15.28%
Havells Return on Equity (RoE) would also improve substantially from 13.71% in 2009-10 to 37.4% in 2012-13(E) following Sylvanias turnaround. The company has limited capex requirements in the near future, other than a possible expansion of capacity in electric fans to meet increasing demand. Havells expansion plans in the other segments, on the other hand, would be contingent on the growth that these segments achieve. As of now, Havells has adequate surplus capacities available to meet the expected sales. For new products such as water heaters, the company initially plans to test the market by outsourcing production, and later set up a facility in case it is able to elicit a favourable market response. Overall, the incremental funding requirements of Havells (on a standalone basis) are expected to be low, given the limited capex and working capital requirements.
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Company Profile
Incorporated in 1971, Havells is a manufacturer of electrical consumer goods. The companys operations can be broadly clubbed under four heads: lighting, switchgears, electrical consumer durables (ECDs), and cables & wires. Each of the product categories is recognised as a separate vertical and is led by an independent head.
Figure 24: Segment-wise Product Profile
Lighting
CFLs Luminaires for Domestic, Commercial & Industrial Applications
Switchgears
Domestic Switchgears Modular Switches Industrial Switchgears Motors Capacitors
ECDs
Fans (Ceiling and Pedestal)
Cables & Wires

Low-tension Cables Wires
Source: Company, ICRA Online
Figure 25: Trend in Havells' Revenues and Profits
Rs. Crore
Havells has grown at an annualised rate of around 40% over the past one decade, through the organic as well as inorganic route. At present, it has 11 manufacturing locations across India. Some details on the major manufacturing facilities that have been set up by the company since incorporation are summarised in Figure 26.
3,000 2,500 2,000 1,500 1,000 500 0
2578.29
228.16
Turnover
PAT
Figure 26: Major Greenfield Expansions undertaken by Havells since Incorporation
1987: Started manufacturing MCBs at Badli, Delhi, in joint venture with Geyer, Germany
1993: Set up manufacturing plant at Faridabad, Haryana ,for Control Gear Products
2005: Set up fan manufacturing plant at Haridwar (Uttarakhand)
2007: Set up capacitor manufactur ing plant at Noida (UP)
1990: Set up a manufacturi ng plant at Sahibabad (UP), for changeover switches
2004: Set up manufacturing plant for domestic switchgear at Baddi, for CFLs at Faridabad (Haryana), and for fans at Noida (UP)
2006: Added CFL manufacturing unit at Haridwar (Uttarakhand)
2009: Set up second switchgear manufacturing unit at Baddi (Himachal Pradesh)
24
Apart from the new manufacturing setups, Havells made several acquisitions in its areas of operations to expand its capacities as well as to augment its distribution network and brand portfolio.
Figure 27: Major Acquisitions by Havells over the Years
Acquired Towers and Transform ers Ltd. and turned it into a 1983 profitably manufactu ring Energy Meters Company
1997
Acquired Electric Control & Switchb oards
Acquired controlling stake in Duke Arnics Electronics (P) Limited and 2000 controlling interest in an industry major a Standard Electricals Ltd.
2001
Acquired business of Havells Industries Limited, MCCB of Crabtree
2007
Acquired lighting business of Frankfurt based Sylvania
2010
Acquir ed Standa rd Electric als Limited
The Sylvania acquisition is the largest by Havells so far. Although the purchase was funded largely by debt, Havells has also extended financial support to the entity over the last three years (refer Table 22).
Table 22: Havells' exposure in Sylvania
In mn 1.
Particulars Fund-based exposure Equity invested
As on Dec 31, 2010 85.00
Remarks Includes 50 million infused initially at the time of acquisition, funded by equity infusion received from Warburg Pincus in 2007-08. Funds have been used for: Repayment of recourse debt Partial funding of restructuring plans Improvement in net worth, which got eroded on account of losses Part of 80 million recourse debt
2. 3.
Recourse debt repaid Estimated interest paid TOTAL (Fund-based)
20.00 8.40 113.4
6.
Non-fund based exposure Additional working capital guaranteed by Havells TOTAL (Non-Fund-based)
debt
5.00 5.00
Source: Company, ICRA Onlines estimates
Segment Overview
On a stand-alone basis, the cables and wires segment accounts for a major proportion of Havells total revenues. However, the segments share declined from around 46% in 2006-07 to 42% in 2009-10, primarily on account of the increase in the revenue shares of the switchgears and ECD divisions that have registered a much higher CAGR during the last four years.
Table 23: Segment-wise Trend in Revenues
Segment Switchgears Cables & Wires Lighting & Fixtures ECDs Others Total
2006-07 Rs. Cr 428.87 777.99 238.73 169.88 71.01 1,686.48 % of total 25% 46% 14% 10% 4% 100%
2007-08 Rs. Cr 568.18 1,064.29 289.44 240.02 83.78 2,245.71 % of total 25% 47% 13% 11% 4% 100%
2008-09 Rs. Cr 623.37 1,106.58 280.46 276.92 54.05 2,341.38 % of total 27% 47% 12% 12% 2% 100%
2009-10 Rs. Cr 724.44 1,094.88 374.34 362.48 36.88 2,593.02 % of total 28% 42% 14% 14% 1% 100%
CAGR 19% 12% 16% 29% -20%
25
With the acquisition of Sylvania, the share of the lighting division in the total revenues of Havells on a consolidated basis is much higher at around 60% as compared with the 14% on a standalone basis. The ECDs (or fans) segment has been the fastest growing segment for Havells (registering a CAGR of 29% over 2007-10), backed by rising sales volumes. In terms of profitability, the switchgears segment has the highest contribution margins of 36%, followed by ECDs with 28%, lighting & fixtures with 19%, and cables with 8%.
Table 24: Segment-wise Trend in Contribution Margins
Segment Switchgears Cables & Wires Lighting & Fixtures ECDs
2006-07 30% 12% 11% 15%
2007-08 31% 9% 13% 22%
2008-09 33% 6% 19% 21%
2009-10 36% 8% 19% 28%
Source: Company Annual Reports; ICRA Onlines estimates
Havells financial performance during the first nine months of the current financial year as compared to corresponding previous is summarised in Table 25.
Table 25: Havells' Performance in 9M, 2010-11 as compared to 9M, 2009-10
Particulars Net Revenue EBITDA PBT Tax PAT
9M, 2009-10 1773.4 226.4 211.4 49 162.4
9M, 2010-11 2129.4 242.6 224.6 51.6 173
Change 20% 7% 6%
7%
Source: Companys Quarterly Reports
26
Havells segment-wise performance and ICRAs estimates for 2010-11 are summarised in Table 26.
Table 26: Segment-wise Performance in 9M, 2010-11
9M, 2009-10 Switchgears Revenue Contribution Contribution margin (%) Cables & Wires Revenue Contribution Contribution margin (%) 733.6 69.6 9.5% 515.2 190.3 36.9%
9M, 2010--11 562.7 202.2 35.9%
Remarks
2010-11(E) 765
892.2 73.7 8.3% Decline on account of adverse movements in raw material prices
1,231
Lighting & Fixtures Revenue Contribution Contribution margin (%) 259.1 51.2 19.7% 334.6 59.4 17.7% Decline on account of increase in outsourcing work for Sylvania 445
ECDs Revenue Contribution Contribution margin (%) Others Revenue
240.3 68.0 28.3%
338.2 88.2 26.1%
463
25.2
1.7
Source: Companys Quarterly Reports, ICRA Onlines estimates
Governance and Management Structure

Havells is managed by an 11-member Board, which includes six Independent Directors. While the promoter group holds 61.56% equity stake in the company, the rest is widely held and includes institutional investors. The disclosures by the company through its Annual Reports and Quarterly Results are adequate. The accounting policies followed by Havells are in line with standard practices and there has been no material auditor-qualification in recent periods. Mr. Qimat Rai Gupta, the Chairman and Managing Director (CMD) of Havells, is a first-generation entrepreneur. While the promotersthe CMD and Mr. Anil Gupta (the second generation)are hands-on in the business, the company has an experienced management team. Each of its four business segments is headed by experienced professionals, who manage the operations independently under the broad guidance of the top management and the Board.
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Valuation Grading
In assessing a company's valuation, various parameters are looked at including the company's earnings and growth prospects, its ability to generate free cash flows, and its capacity to generate returns from the capital invested. The valuation is also benchmarked against an appropriate peer set or index. The opinion on a company's relative valuation is expressed using the following five-point scale as follows:
Table 27: ICRA Equity Research ServiceValuation Grades
Valuation Grade A B C D E
Grade Implication Significantly undervalued Moderately undervalued Fairly valued Moderately overvalued Significantly overvalued
While assessing a company's relative valuation, the historical price volatility exhibited by the stock, besides its liquidity, is also taken into account. The extent of overvaluation or undervaluation is adjusted for the relative volatility displayed by the stock.
Table 28: Havells India LimitedRelative Valuations (vis-a-vis peer companies)
Havells India Limited* Market Cap (Rs. crore) CMP (Rs.) 4,345.28 348.3 2010-11 2011-12 E E 16.8 11.0 0.7 7.1 12.8 12.3 8.4 0.7 4.7 9.9 Bajaj Electricals Limited# 2,249.2 227.6 2010-11 2011-12 E E 15.2 9.4 0.8 3.7 15.0 11.6 7.4 0.7 2.9 12.5 Crompton Greaves Limited# 16,989.9 264.9 2010-11 2011-12 E E 18.7 12.3 1.7 5.2 16.1 16.1 10.6 1.5 4.1 14.6 Asian Paints (India)# 24,251.8 2529.7 2010-11 2011-12 E E 27.2 17.6 3.1 10.9 25.4 22.4 14.6 2.6 8.6 19.9 TTK Prestige Ltd# Finolex Cables Limited# 728.8 47.7 2010-11 E 7.0 5.6 0.4 1.0 8.1 2011-12 E 6.8 5.1 0.4 0.9 3.9
2,217.8 1959.1 2010-11 2011-12 E E 27.1 18.4 3.1 12.2 NA 21.3 14.6 2.4 8.7 NA
Price/ Earnings EV/ EBITDA Price / Sales Price / Book Value Price/ Cash Flow
Source: Bloomberg, ICRA Onlines estimates * ICRA estimates based on share price as on 11 March 2011 on NSE;
# Bloomberg Consensus estimates as on 11 March 2011
For valuation, we have compared Havells with other consumer durable companies (Bajaj Electricals, Crompton Greaves and TTK Prestige), Asian Paints (which has similar demand drivers viz. urbanisation and investments in housing) and Finolex Industries (cables and wires segment). Havells current valuations are at a discount to its closest peer - Crompton Greaves. We believe Havells valuations have been impacted by the significant loss reported by Sylvania till 2009-10. The premium that Crompton Greaves enjoys can be explained by the companys large size, well-known brand and presence in the high-growth power systems business (although the segment posted weak results in Q3 2010-11). For TTK Prestige, the high valuations are partly driven by a jump in profits caused by robust growth in sales and fall in input costs in 2009-10 (net profits more than doubled). The valuation premium that Havells commands over Finolex Cables can be attributed to latters presence only in the cables business where valuations are lower because of the low profitability and earnings volatility in the sector. Asian Paints premium valuations are partly explained by its strong brand name and market position. However, Havells is currently trading at a slight premium to Bajaj Electricals on 2011-12 forward P/E basis.
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Table 29: Havells India LimitedRelative Valuations (vis-a-vis indices) Havells India Limited* Market Cap (Rs. crore) CMP (Rs.) Price/Earnings EV/EBITDA Price /Sales Price /Book Value Price/Cash Flow 16.8 11.0 0.7 7.1 12.8 4,317.8 346.1 2010-11E 2011-12E 12.3 8.4 0.7 4.7 9.9 16.5 12.1 1.8 2.7 11.8 S&P CNX 100# 5,426.0 2010-11E 2011-12E 13.7 9.5 1.6 2.3 10.1 11.7 8.7 0.9 1.5 8.5 BSE Midcap# 6,604.7 2010-11E 2011-12E 9.3 6.9 0.8 1.3 7.1 20.8 17.8 1.1 5.0 28.3 BSE Consumer Durables# 5,791.4 2010-11E 2011-12E 16.4 14.0 0.9 4.1 32.1 Historical Avg. Havells (5-Yrs) 13.15 8.51 0.47 4.07 -
Source: Bloomberg, ICRA Onlines estimates * ICRA estimates based on share price as on 11 March 2011 on NSE;
# Bloomberg Consensus estimates as on 11 March 2011
Havells current valuations are at a discount to broader index S&P CNX 100 and BSE Consumer Durables Index, though it is quoting at a premium to the BSE Midcap Index. Havells EBITDA is expected to grow at a robust CAGR of 21.5% during 2011-13 period. The P/E of the company on estimated 2010-11 earnings is currently about 16.8 times, which is modest considering the estimated EPS growth of 36% and 19% in 2011-12(E) and 2012-13(E) respectively.
Havells India Limited: Stock Performance over last three years

Figure 28: Havells versus CNX 100
600%
CY2008: Slowdown in world economy; Sylvania business reports losses
100 90
Restructuring measures undertaken at Sylvania to reduce operating leverage Jun 10: Sylvania turns around postrestructuring
500% % Change (Price/ Points)
Apr 07: Acquisition of Sylvanias lighting business
80 70 60 50 40 Volume (Mn) 29
400%
Havells reports loss at consolidated level in 2008-09
300%
200%
30 20 10
100%
0%
Volume in Mn
Source: Bloomberg, ICRA Onlines estimates
Havells
CNX100 Index
Mar 07Mar 08: Havells acquired the lighting business of the Frankfurt-based Sylvania, the worlds fourth largest player in the lighting industry, for 234.5 million. Of the total funding requirement of 200 million, 80 million was funded by a recourse debt that was backed by a guarantee from Havells while the balance 120 million was funded by non-recourse debt. The initial impact of the acquisition on the stock price was positive, with Havells outperforming the CNX100 index until Mar 08. 2007-08 and 2008-09: Havells had to extend additional financial support to the subsidiary by way of equity infusion, which was used for repayment of recourse debt and to meet cash flow mismatches during the slowdown beginning mid-2008. Till date,
the company has invested 101.4million (~Rs.636 crore) in the subsidiary. This suppressed the RoE of Havells, as additional investments have not yielded returns till 2009-10. Havells significantly underperformed the CNX100 index during this period. Mar 09 Onwards: Havells identified high operating leverage as the key cause of losses and has undertaken various measures to reduce manpower at the European facilities. 9M, 2010-11: Sylvania reports profits at the standalone levels for the first time since its acquisition by Havells. Havells current valuations are at a discount to most of its domestic competitors (Crompton Greaves, Asian Paints, and TTK Prestige), as well as the S&P CNX 100 on 2011-12 PE basis. The company is also trading at marginal discount to its own fiveyear-average historical multiples. Considering the expected upside from Sylvania and increasing share of profits expected from the high-margin consumer electrical business, ICRA has assigned a Valuation Grade of B on a grading scale of A to E to Havells, which indicates that the company is moderately undervalued on a relative basis.
30
Annexure I: Index Comparison

CNX100 Index
Figure 29: Havells vs. CNX 100: Price Movements % change (Price/ Points) 500% 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% 17 16 Forward P/E Havells
Figure 30: Havells vs. CNX 100: Forward P/E Ratios
15 14 13 12 11 10
CNX100 Index
Havells India Ltd
CNX100 Index
We have compared the performance of Havells stock with the CNX100 index since November 2005, and compared the forward P/E estimates of the stock and the index. While Havells has outperformed the index over the last five years, it is currently trading at a forward P/E of 12.3x, 10% discount in comparison to CNX100 which currently has a Forward P/E of 13.7x. However, Havells can be expected to register a stronger earnings growth over the next three years.
BSE Mid-Cap Index

Figure 31: Havells vs. BSE Mid-Cap Index: Price Movements % Change (Price/ Points) 600% 500% 400% 300% 200% 100% 0% 1 Year Forward P/E Havells BSE Mid-Cap Index Figure 32: Havells vs. BSE Mid-Cap Index: 1-Yr Fwd P/E Ratios 18 16 14 12 10 8 6 4 2 0
Havells India Ltd
BSE Mid-Cap Index
In comparison to BSE Mid-Cap Index, Havells 1-year Fwd P/E is at a premium of 32% at 12.3x, against 9.3x for the index. This premium can be explained by the higher earnings growth expectations for Havells as compared to the broader BSE Mid-Cap Index constituents.
31
Annexure II: Havells (Consolidated)P&L Estimates

Table 30: Key Financial Indicators P&L Estimates (Consolidated)
Rs. Crore Operating Income EBITDA Depreciation EBIT Interest Expenses Other Income Extraordinary Items PBT PAT No. of shares* (Cr.) DPS EPS CEPS
2008-09A 5,477.5 271.7 90.5 189.8 108.4 8.6 -198.7 -117.3 -160.2 12.0 2.5 -
2009-10A 5,431.5 311.4 83.7 249.9 87.1 22.2 0.0 162.8 69.6 12.0 3.0 5.8 12.74
2010-11E 5,928.2 479.8 81.7 433.1 82.9 35.0 0.0 350.1 257.9 12.5 2.5 20.7 27.22
2011-12E 6,462.3 628.7 85.9 541.6 80.9 -1.2 10.4 471.0 352.0 12.5 2.5 28.2 35.09
2012-13E 7,058.9 708.1 88.5 623.1 57.0 3.5 0.0 566.2 420.2 12.5 2.5 33.7 40.76
Source: Companys Annual Reports, ICRA Onlines estimates * Adjusted
Annexure III: Havells (Consolidated)Balance Sheet Estimates

Table 31: Key Financial Indicators Balance Sheet Estimates (Consolidated)
Amounts in Rs. Crore Assets Net Fixed Assets Capital Work-in-progress Total Net Fixed Assets Cash and Bank Balances Receivables Inventories Loans & Advances Other Current Assets Total Assets Liabilities Net Worth Total Debt Deferred Tax Liability Trade Creditors Other Current Liabilities and Provisions Total Liabilities
2008-09A 1,211.3 30.8 1,242.1 247.3 757.3 794.7 120.6 120.8 3,282.9
2009-10A 1,208.6 33.6 1,242.2 148.1 698.2 824.6 106.7 61.2 3,081.0
2010-11E 1,241.4 75.0 1,316.4 117.0 772.6 1,136.9 146.2 40.5 3,529.9
2011-12E 1,288.2 80.0 1,368.2 123.5 799.5 1,275.0 155.5 46.5 3,768.3
2012-13E 1,342.2 50.0 1,392.2 146.7 838.9 1,450.4 165.2 52.5 4,046.3
614.7 1,227.8 -9.7 622.2 827.9 3,282.9
400.2 1,066.4 26.6 649.4 938.2 3,081.0
612.8 1,169.1 27.0 730.4 990.5 3,529.9
930.6 1,014.2 27.0 790.4 1,006.1 3,768.3
1,314.1 817.3 27.0 863.8 1,023.9 4,046.3
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Annexure IV: Havells (Consolidated)Cash Flow Estimates

Table 32: Key Financial Indicators Cash Flow Estimates (Consolidated)
Rs. Crore PBT Taxes Paid Depreciation Change in Net Working Capital Cash Flow from Operating Activities Investments Capital Expenditure Cash Flow from Investing Activities Equity Raised/ (Buyback) Loans Raised/ (Repaid) Others (including Extra-ordinaries) Dividend Cash Flow from Financing Activities Opening Cash Balance Closing Cash Balance
2008-09A -117.3 42.9 90.5 240.6 170.9 3.2 -165.7 -162.5 137.3 79.0 0.0 34.3 44.6 242.9 247.3
2009-10A 162.8 93.2 83.7 241.0 394.3 0.0 -83.8 -83.8 0.0 -11.2 2.4 26.9 -38.2 247.3 148.1
2010-11E 350.1 92.2 81.7 -307.5 32.1 -0.3 -155.9 -156.2 9.6 146.7 386.2 0.3 146.4 148.1 117.0
2011-12E 471.0 119.1 85.9 -104.7 333.2 0.0 -137.7 -137.7 0.0 -37.6 0.0 36.5 -74.1 117.0 123.5
2012-13E 566.2 146.0 88.5 -139.2 369.4 0.0 -112.5 -112.5 0.0 23.3 0.0 36.5 -13.2 123.5 146.7
Annexure V: Havells (Consolidated)Key Financial Ratios

Table 33: Key Financial Ratios (Consolidated)
2008-09A Profitability Indicators Sales Growth EBITDA Growth EPS Growth Cash EPS Growth EBITDA Margin EBIT Margin PAT margin RoE ROCE Liquidity Ratios Debtor Days Inventory Days Net Working Capital/ Sales Capitalization Ratios Total Debt/ Equity Interest Coverage Total Debt/ EBITDA Valuation Ratios Price/ Sales Price/ Earnings Price/ Book Value EV/ EBITDA 9.5% -22.2%
2009-10A -0.8% 14.6% 5.7% 4.6% 1.3% 13.7% 15.3%
2010-11E 9.1% 54.1% 257.6% 113.6% 8.1% 7.3% 4.4% 50.9% 27.1%
2011-12E 9.0% 31.0% 36.5% 28.9% 9.7% 8.4% 5.4% 45.6% 30.4%
2012-13E 9.2% 12.6% 19.4% 16.2% 10.0% 8.8% 6.0% 37.4% 31.2%
5.0% 3.5% -2.9% -
49.4 71.1 0.1
46.2 75.8 0.0
47.6 97.5 0.1
45.2 101.7 0.1
43.4 106.1 0.1
2.0 2.5 4.5
2.7 3.6 3.4
1.9 5.8 2.4
1.1 7.8 1.6
0.6 12.4 1.2
0.8 6.8 19.4
0.8 10.5 16.9
0.7 16.8 7.1 11.0
0.7 12.3 4.7 8.4
0.6 10.3 3.3 7.4
33
ICRA Limited
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MUMBAI Mr. L. Shivakumar Mobile: 9821086490 3rd Floor, Electric Mansion, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025 Ph : +91-22-30470000, 24331046/53/62/74/86/87 Fax : +91-22-2433 1390 E-mail: shivakumar@icraindia.com
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AHMEDABAD Mr. L. Shivakumar Mobile: 9821086490 907 & 908 Sakar -II, Ellisbridge, Ahmedabad- 380006 Tel: +91-79-26585049/2008/5494, Fax:+91-79- 2648 4924 E-mail: shivakumar@icraindia.com
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Havells 201103

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ICRA EQUITY RESEARCH SERVICE

HAVELLS INDIA LIMITED

348.25 12.48 4345.28 446.50 257.50 38.4% 1.09 12.3 HAVL IN

381.65 12.48 4762.0 446.50 166.00 35.4% 1.03 17.7 HAVL IN

Havells Shareholding Pattern (December 31, 2010)

Warburg Pincus, 14.0%

NonInstitutio ns, 19.8%

Indian Promoter Group, 61.6%

Havells Share Price Movement (24 months)

S&P CNX Nifty BSE Consumer Durables

ICRA Equity Research Service

Havells India Limited

3,000 2,500 Rs. Crore 2,000 1,500 1,000 500 0

Source: Companys Annual Reports; ICRA Onlines estimates

IIP Consumer Durable Index

Source: Central Statistical Organisation; ICRA Onlines estimates

ICRA Equity Research Service

Havells India Limited

Figure 4: Havells' Competition Matrix

Havells, Standard, Crabtree

Bajaj Platini, Morphy Richards

National, Panasonic, Anchor-Roma

% of revenues contributed by above-mentioned products

~62% Copper Rods, PVC Pipes & Sheets, etc.

Other Areas of Operation

ERW Pipes and HR & CR Coils

Stainless Steel Wires

Source: Companies websites and annual reports, ICRA Online Research

Company Havells Bajaj Electricals Legrand

Distributors/ Dealers 4,300 5,000 600

Retail Outlets 35,000 50,000 3,000

Source: Companies websites

Region North East West South Total

Havells Sales 34% 22% 15% 28% 100%

Havells Dealers 26% 18% 27% 29% 100%

2006-07 Havells Bajaj Electricals Crompton Greaves 1.9% 1.6% 0.4%

2007-08 2.4% 1.5% 0.5%

2008-09 2.1% 1.3% 0.5%

2009-10 3.3% 1.5% 0.4%

Source: Companies Annual Reports, ICRA Onlines estimates

ICRA Equity Research Service

Havells India Limited

Figure 6: Havells International Brands Segment/ Products Complete Lighting Range

Sylvania MultiNational Brands

Lighting Fixtures Lighting fixtures

Figure 7: Movement in Net Profits

ICRA Equity Research Service

Havells India Limited

Company Snapshot (Standalone)

Installed Capacity and Utilization Trend

ICRA Equity Research Service

Havells India Limited

Luminaires, Others, 27% 20%

ICRA Equity Research Service

Havells India Limited

Programme Rajiv Gandhi Grameen Vidyutikaran Yojana/ Rural Electrification Policy

Source: Ministry of Power; ICRA Online Research

2008-09 1,990 42% 1,510 30% 76

2009-10 2,550 28% 1,900 26% 75

2010-11(E) 3,213 26% 2,410 27% 75

2011-12(E) 4,048 26% 3,036 26% 75

2012-13(E) 5,101 26% 3,775 24% 74