We assume coverage on Havells with an Underweight rating and March 14 price target of Rs 520. We expect earnings growth over the next two years to be slower than in the past (12% in FY13-15E against 26% in FY09-FY13) on the back of a demand moderation in the consumer segment and weak capex in industrials. An expected tapering off of real estate completions from FY15 does not bode well for the building products industry. Havells’ overseas subsidiary Sylvania’s turnaround will likely take time given weak construction activity in Europe. JPMorgan’s capital goods team expects European construction to remain weak (-3%) in CY13, with a recovery in CY14 tough to predict.
We note that Havells has revised down its FY14 revenue growth guidance to 9-10% (JPMe: 9%) vs 14-16% at the beginning of the year and a CAGR of 22% over the past three years. Recent demand trends and our channel checks point to a more cautious outlook at the margin.
Havells and the building product industry in general have benefitted from a scale-up in new home deliveries and large commercial (malls /hotels /office) completions over the past few years. New completions, however, are expected to come down across both metro and tier 2 cities over FY15/16. This does not bode well for the demand outlook in the medium term. Replacement demand, however, should remain healthy.
Our March-14 SOTP price target of R520 values the standalone business at 14x P/E, a 20% discount to its five-year average given moderation in growth ahead; and Sylvania at 5x EV/EBTDA is line with trading comps for Osram.