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Havells 010612 01

  1. 1. 31 May 2012 4QFY12 Results Update | Sector: Capital Goods Havells IndiaBSE SENSEX S&P CNX16,312 4,951 CMP: INR547 TP: INR614 BuyBloomberg HAVL INEquity Shares (m) 124.852-Week Range (INR) 616/3131,6,12 Rel. Perf. (%) 4/32/44M.Cap. (INR b) 68.2M.Cap. (USD b) 1.2 * Consolidated nos, pre exceptionals  4QFY12 operating performance in-line: Standalone revenues grew 25% (~21% adjusted for amalgamation of Standard Electricals) in-line with our estimates, while Adjusted PAT grew 45% at INR1b, marginally ahead of our estimate of INR983m, up 26% YoY. Forex gains (net INR119m), higher depreciation cost (INR75m for FY12, provided in 4Q pertaining to 3-shift operations of cable business) and increased warranty provisioning (INR260m pertaining to FY12, on several product segments including switchgears and luminaires) have been the key adjustments in 4QFY12. Cables, Lighting and Consumer Durables segments showed strong growth in revenues, while Switchgear segment continue to show sluggish growth impacted by sluggish domestic market and lower exports of MCP to UK.  Sustained performance in Sylvania: Sylvania continues to deliver improved performance on profitability front. The subsidiary delivered an EBITDA margin of 8.5% despite adverse currency movement in Brazilian market. In 4QFY12, adjusted PAT (adjusted for pension liability) stood at EUR4.3m v/s EUR3.4m during 4QFY11.  Guidance - expect 15-20% growth in standalone entity and 5% growth in Sylvania; Margins to be maintained at current level: Management guided for a 15-20% growth in sales in standalone entity on the back of 10-15% growth in Switchgear, 15-20% in Cables and Wires and 20%+ growth in Consumer Durables along with Lighting and Fixtures. EBITDA margins are expected to be maintained at current level 12.5-13% despite adverse currency movement being positively impacted by lower sourcing from China. Sylvania is expected to post a growth of ~5% in euro terms in FY13 while EBITDA margins would be maintained at current level of 8-9%.  Valuation and view: We have cut our consolidated earnings estimate by 3/7% for FY13/14 to factor in slowing domestic market particularly Switchgear segment and also the macro volatility in European markets. We believe Havells is well on track as far as profitability improvement in Sylvania is concerned. We estimate FY12-14 revenue CAGR of 11% and EPS CAGR of 18%. Maintain Buy, with a TP of INR614 (14x FY14E EPS).Satyam Agarwal (AgarwalS@MotilalOswal.com) ; +91 22 3982 5410Deepak Narnolia (Deepak.Narnolia@MotilalOswal.com); +91 22 3029 5126
  2. 2. Havells India Standalone: Operating performance in line; Margins impacted by forex losses and warranty provisioning  Standalone revenues stood at INR10.4b, up 25% YoY, in line with our estimates. Sales were supported by amalgamation of Standard Electricals in the Switchgear segment, adjusted for which growth was 21-22% YoY. All segments, except for Swithgear posted strong growth. Cables revenue grew 32% YoY led by the domestic market, Lighting by 20% and Consumer durables 17%. Consumer Durable division sales were supported by new appliances launched during the year and growth in water heaters over a low base which was launched last year. Consumer appliances including water heater sales was INR250m during the quarter v/s INR40m in FY11. Excluding the positive impact of the same, sales of fans grew by ~4% YoY. Adjusted for Standard Electricals, Switchgears segment sales grew moderately by ~6% YoY impacted by declining exports of MCP to UK.  Contribution margin improved across business segments particularly in Lighting and Fixtures division driven by rationalization of warranty cost especially in the CFL business. EBITDA margins increased by 210bp to 13.8% v/s 11.7% during 3QFY11. The quarter included MTM exchange gain of INR214m vs INR11m gain in 4QFY11 and increase in warranty cost by INR260m driven by additional warranty provisioning on other products (Switchgear and Luminaries) in contrast to the earlier practice of warranty provisioning in CFL and fans business only. Adjusted for this, EBITDA margin stood at 13.6% which is marginally higher that our estimate of 13.4%.  Standalone PAT stood at INR915m up 33% YoY, marginally below our estimate of INR983m due to higher than expected depreciation and interest cost. Interest cost was higher due to ~INR950m MTM loss on ECB while depreciation cost was higher due to additional charge in Cable factory related to additional 3rd shift on which it is currently operating. The total charge of INR75m was taken in the fourth quarter. Adjusted PAT stood at INR1b which is in line with our estimates.  For FY12 sales grew 26% YoY, marginally above our estimate of 25% YoY while PAT was up 26% YoY in line with our estimates. EBITDA margin stood at 12.6% in line with our estimates. All the division posted strong growth except for Swithgear which continue to remain impacted by lower exports (~10% of Swithgear sales) of MCB to UK due to closure of OEM contract. Export of MCB to UK dropped by 16% YoY while domestic sales (adjusted for Standard Electricals) grew by 11% YoY. CableStandalone sales grew strongly across business segments Forex gain mitigated by higher warranty provisoning Source: Company, MOSL31 May 2012 2
  3. 3. Havells India business posted strong growth of 26% YoY on the back of 12% YoY volume growth in Cable (~60% of sales) and 19% YoY growth in Wire (~40% of sales). Growth in Cables business was strongly helped by cost led price increases. The total revenue from domestic appliances (part of Consumer Durable division) including water heater was INR 840m over INR22m achieved last year. The core fans business in Consumer Durable segment grew 9% YoY.Havells India: Standalone Segmental perfromance (INR m) YoY (%) 1QFY11 2QFY11 3QFY11 4QFY11 FY11 1QFY12 2QFY12 3QFY12 4QFY12 FY12 4QFY12 FY12RevenuesSwitchgear 1,858 1,747 1,739 2,000 7,344 1,883 2,218 2,261 2,376 8,962 19 22.0Cables & wires 2,835 2,839 3,036 3,608 12,318 3,564 3,692 3,907 4,767 15,930 32 29.3Electr. consumer durables 1,179 972 999 1,542 4,692 1,342 1,220 1,346 1,813 5,721 18 21.9Lighting 1,003 1,053 1,133 1,258 4,447 1,210 1,374 1,448 1,511 5,544 20 24.7Others 13 3 0 0 15 0Total 6,889 6,613 6,907 8,408 28,816 7,999 8,504 8,962 10,467 36,156 24 25.5PBIT margin (%)Switchgear 38.9 37.0 37.4 34.9 37.0 38.4 37.8 39.5 34.7 37.5 -26bp 50bpCables & wires 7.0 9.6 8.8 4.5 7.3 8.7 9.3 9.9 8.9 9.2 439bp 186bpElect. consumer durables 28.3 27.9 27.8 26.8 27.6 31.1 27.7 28.9 27.9 28.8 111bp 125bpLighting 16.6 18.0 21.1 18.0 18.4 25.6 24.5 26.2 24.9 25.1 690bp 669bpOthers 36.6 37.5 nm nm 40.7 nm nm nm nm nm nm nmRevenue Change % YoYSwitchgear 8.4 -0.1 2.9 9.6 9.1 1.4 26.9 30.0 18.8 20Cables & wires 17.0 17.0 22.2 33.5 25.1 25.7 30.0 28.7 32.1 26Electr. consumer durables 30.4 21.8 42.2 39.1 40.4 13.8 25.6 34.7 17.6 23Lighting 33.7 16.4 21.0 22.9 27.3 20.6 30.6 27.8 20.1 25 Source: Company, MOSL Sylvania: Sustained performance  Sylvania reported 4QFY12 revenue of EUR112m, down 1% YoY. Revenues continue to show slowdown in European and North American market, compounded by adverse currency movement in Brazil. Sales in European market declined 4% YoY while in American market it grew 8% YoY on the back of better performance in Mexico, Columbia and Argentina. Sales in Brazil grew 4-5% in local currency; however, adverse currency movement continued to suppress growth.  EBITDA margins (adjusted for pension benefit/write off) stood at 8.5%, up 50bp YoY. Sylvania has been showing sustained improvement in profitability after turning around in 1QFY11 from the losses in FY10. During 4QFY12, Adjusted PAT (adjusted for pension liability) stood at EUR4.3m, up 26% YoY v/s EUR3.4m during 4QFY11.  Sylvania refinanced its outstanding term loan and working loan facility of Euro102mn. Havells India has raised Euro40 million debt in Havells Holding Limited, Isle of Man, a wholly owned subsidiary for providing equity participation and shareholders loan to Sylvania. This Euro40m debt is repayable in one year (April13 at a cost of EURIBOR plus 190bp). In addition to this, Sylvania has raised Euro77.5m from Standard Chartered Bank, HSBC Bank plc and ICICI Bank, UK PLC at a cost of EURIBOR plus margins 350bp, and is on reducing basis reaching upto 250bp provided Debt: EBITDA < 1.5:1 as compared to current Debt: EBITDA of 2.5:131 May 2012 3
  4. 4. Havells IndiaSylvania Financials (Euro m) 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 Gr %Revenues 105.4 111.7 118.8 113.4 106.7 115.5 113.9 112 (1.2)EBITDA 5.7 6.6 6 9.1 7.8 8.6 11.1 9.5 4.4 Margin (%) 5.4 5.9 5.1 8.0 7.3 7.4 9.7 8.5 naDepreciation 2.1 2.1 2.1 2.1 1.9 1.9 1.8 1.9 (9.5)Interest 2.9 2.5 2.7 2.3 2.9 3.2 2.7 2.1 (8.7)Other Income/ (loss) 0.1 0.4 -0.1 1.4 0.3 1.9 0.6 1.3 (7.1)Forex gain/(loss) 0.1 0.1 -2.6 -0.9 nmPBT 0.8 2.5 1.2 6.1 3.3 2.8 6.3 6.8 11.5Tax 1 1.2 0.7 2.7 0.9 1.1 1.1 2.5 (7.4)Adj PAT -0.2 1.3 0.5 3.4 2.4 1.7 5.2 4.3 26.5Less exceptional gain/(loss) 0 0 3.4 2.9 0 (3.3) 0 nmNet Profit -0.2 1.3 3.9 6.3 2.4 1.7 1.9 4.3 (31.7) Source: Company, MOSLSylvania geographical performance (Euro m) 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12Europe 70.6 65.5 74.5 75.0 65.7 66.5 75.2 73.2 64.0 69.0 71.8 70.3 Growth (%) (20.2) (21.0) (12.8) (3.5) (7.0) 1.6 0.9 (2.4) (2.6) 3.8 (4.5) (4.0)America 24.9 26.0 27.5 29.7 33.4 38.7 37.4 35.5 36.1 39.7 35.8 38.2 Growth (%) (21.8) (23.8) (13.0) 3.3 34.2 49.1 35.9 19.5 8.1 2.6 (4.3) 7.6Others 2.0 1.2 4.4 5.4 6.3 6.5 6.2 4.8 6.6 6.8 6.3 3.5Total 97.5 92.6 106.5 110.1 105.4 111.7 118.8 113.5 106.7 115.5 113.9 112.0 Source: Company, MOSL Expect 15-20% revenue growth in Standalone sales in FY13; Sylvania to register 5% growth in Euro terms  Management guided for a 15-20% growth in sales in standalone entity on the back of 10-15% growth in Switchgear, 15-20% in Cables and Wires and 20%+ growth in Consumer Durables along with Lighting and Fixtures. Sales is growing strongly in Consumer Durable segment on the back of encouraging response for consumer appliances. Management stated that the strategy going forward would be to penetrate into B and C class cities through aggressive expansion of distribution network. Fans business has been showing strong performance beginning FY13 in contrast to last year in which it was muted due to weaker summers. Management is deliberately reducing sourcing from China to counter adverse currency movement. As of now the total sourcing from China is around 7-8% of the cost of sales which is expected to decline and will help margins. The company is confident of maintaining its margin levels at current level.  Sylvania is expected to post a growth of ~5% in euro terms in FY13 while EBITDA margins would be maintained at current level of 8-9%.  Dividend payout ratio increased significantly during FY12 to 20% from earlier 10%. Management stated that with re-financing of Sylvania debt over and no major capex plan in the forthcoming future, dividend payout has increased. Payout ratio is likely to be at this level for the next 2-3 years.31 May 2012 4
  5. 5. Havells India Valuation and view  We have cut our consolidated earnings estimate by 3/7% for FY13/14 to factor in slowing domestic market particularly Switchgear segment and also the macro volatility in European markets.  Our EPS estimate for FY13 stands at INR38.1 (up 21%) and for FY14 at INR43.8 (up 15%). We believe Havells is well on track as far as profitability improvement in Sylvania is concerned. We estimate FY12-14 revenue CAGR of 11% and EPS CAGR of 18%. The stock trades at 14.3x FY13E and 12.5x FY14E consolidated EPS. We maintain Buy, with a target price of INR614 (14x FY14E EPS). Change in estimates (INR m) Revised Old Change (%) FY13 FY14 FY13 FY14 FY13 FY14 Standalone Sales 42,937 50,047 43,208 51,820 (0.6) (3.4) Growth (%) 18.8 16.6 20.1 19.9 EBITDA 5,496 6,306 5,747 6,944 (4.4) (9.2) Margin (%) 12.8 12.6 13.3 13.4 -50bp -80bp PAT 3,846 4,445 3,980 4,934 (3.4) (9.9) Growth (%) 25.9 15.6 30.5 24.0 EPS (INR) 30.8 35.6 31.9 39.5 (3.4) (9.8) Growth (%) 25.9 15.6 30.5 24.0 Consolidated Sales 72,769 80,392 73,626 83,759 (1.2) (4.0) Growth (%) 11.6 10.5 13.3 13.8 EBITDA 7,984 8,767 6,881 8,345 16.0 5.1 Margin (%) 11.0 10.9 9.3 10.0 163bp 94bp PAT 4,757 5,472 4,885 5,891 (2.6) (7.1) Growth (%) 20.9 15.0 31.0 20.6 EPS (INR) 38.1 43.8 39.1 47.2 (2.5) (7.2) Growth (%) 20.9 15.0 31.0 20.6 Source: Company, MOSL31 May 2012 5
  6. 6. Havells IndiaHavells India: an investment profileCompany description Key investment risksHavells India (HAVL) is one of the largest electrical and  Rising domestic competition: Most of HAVLs marketspower distribution equipment manufacturers with over are prone to price wars, especially cables and CFL,billion dollar sales. The company offers products ranging where there is considerable competition.from industrial & domestic circuit protection switchgear,  Prolonged slowdown in European region: HAVL hascables & wires, motors, fans, power capacitors, CFL significant operations in Europe through itslamps and luminaires for domestic, commercial and subsidiary Sylvania. Any prolonged slowdown in theindustrial applications. The company owns global brands region will have adverse impact on earnings.like Crabtree, Sylvania, Concord, Luminance, Linolite and  Forex risk: Appreciation of other currencies againstSLI Lighting. the EUR will impact earnings estimates. Recent developmentsKey investment arguments  Osram Sylvania Inc (Osram) filed a complaint in a US Domestic business: Strong macro fundamentals, district court against HAVL and its associated nine rising income levels and demographic changes will entities for infringement of the Sylvania brand and keep demand for consumer electrical robust. unfair competition in North America. The court A turnaround story: Sylvania continue to show dismissed the complaint against all the entities impressive performance after its turnaround in the except Havells USA, citing lack of jurisdiction. Havells second half of FY11 from losses in FY10. Although USA is resisting the complaint and the matter is European market continue to show sluggish demand subjudicial. trend however an uptick in demand can provide Valuation and view significant upside to profitability while cost  Our EPS estimate for FY13 stands at INR38.1 (up 21%) competitiveness and improvement in profitability and for FY14 at INR43.8 (up 15%). We estimate FY12- will drive HAVLs growth in Europe. 14 revenue CAGR of 11% and EPS CAGR of 18%. The New products: HAVL new products in consumer stock trades at 14.3x FY13E and 12.5x FY14E cons. EPS. durables are showing encouraging response. The We maintain Buy, with a TP of INR614 (14x FY14E EPS). company expects ~ INR2b sales from new products Sector view in FY13 over INR860m achieved in FY12.  We remain Neutral on the sector.Comparative valuations EPS: MOSL forecast v/s consensus (INR) Havells India Crompton L&T MOSL Consensus VariationP/E (x) FY13E 14.3 12.8 13.8 Forecast Forecast (%) FY14E 12.5 9.5 13.5 FY13 38.1 36.9 3.4P/BV (x) FY13E 5.5 1.8 2.6 FY14 43.8 43.4 1.0 FY14E 3.7 1.6 2.3EV/Sales (x) FY13E 1.0 0.6 1.4 Target price and recommendation FY14E 0.9 0.5 1.3 Current Target Upside Reco.EV/EBITDA (x) FY13E 9.2 6.9 11.8 Price (INR) Price (INR) (%) FY14E 8.0 5.4 11.3 547 614 12.2 Buy Stock performance (1 year)Shareholding pattern (%) Mar-12 Dec-11 Mar-11Promoter 61.6 61.6 61.6Domestic Inst 1.1 1.2 2.4Foreign 30.6 30.0 27.4Others 6.7 7.3 8.731 May 2012 6
  7. 7. Havells IndiaFinancials and Valuation31 May 2012 7
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To enhance transparency, MOSt has incorporated a Disclosure of InterestStatement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement Havells India 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered NoAnalyst CertificationThe views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, orwill be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsiblefor preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.Regional Disclosures (outside India)This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary tolaw, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.For U.K.This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (FinancialPromotion) Order 2005 (referred to as "investment professionals"). 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