Electrical consumer-goods major Havells is a beneficiary of robust demand growth based on upgrading consumer preferences and increased construction activity in its key verticals?switchgears, lighting fixtures, consumer durables (fans) and cables/wires. Strong brands built through an aggressive advertising strategy and extensive distribution networks are its sustainable growth drivers. Havells consolidated leverage is set to decline, with its European lighting-fixtures acquisition of Sylvania looking to break even in FY12, post-restructuring.
The stock?s current P/E of 13.7x on FY12E is reasonable, and our TP (target price) of Rs 950 (ascribing zero equity value to Sylvania) indicates a 20% upside. We initiate with BUY. Domestic business is a good play on the consumption theme: Havells?s fastest-growing domestic businesses (growing at over 30% annually) are consumer businesses such as fans, lighting fixtures, and CFLs (compact fluorescent lamps). The company?s most profitable segment, switchgears, registered a 16% revenue growth, while the least profitable cables business reduced in importance. We assume 14.4% CAGR (compound annual growth rate) in standalone revenues over FY10-13E, driven by higher growth rates in consumer businesses. Fittingly, the company spends 2-4% of its revenues on advertising, and has about 2,000 distributors in India who in turn reach out to about 25,000 retail points.
Havells India acquired Sylvania for an EV (enterprise value) of euro 227m in April 2007. Annual savings of euro 39m from this would be fully visible in FY12, when the company should break even. With the breakeven in Sylvania and strong cash flows of domestic business, leverage should reduce to about 1.1x. Our target of Rs 950 is based on 19xFY12 earnings per share (standalone). Key risks are a delay in Sylvania?s breakeven and sudden spikes in raw-material costs.
Havells has four main business segments, cable & wires; electrical consumer durables; lighting & fixtures and switchgears. Sylvania makes only lighting & fixtures. In FY10, cables & wires business accounted for about 20% of Havells?s revenues (1% decline, 8.1% contribution margin), electrical consumer durables about 6.6% (31% growth, 28.1% contribution margin), lighting & fixtures (standalone) about 6.8% (33% growth, 20.5% contribution margin), switchgears 13.2% (16% growth, 36.0% contribution margin) and Sylvania 52.7% (14% decline, -2.7% contribution margin).
In all these businesses, industrial buying is minimal; almost all are driven by domestic consumer demand. The company is also a beneficiary of India?s construction boom and industrial capex, including power capacity and T&D infrastructure augmentation. As buyers become more quality-conscious and the market more broad-based (thanks to rising prosperity of tier-2 and 3 cities), the size of opportunity for Havells is large.
The company?s presence in the consumer-durables segment has been limited to fans. The company?s production facility for this product in located in Haridwar and is India?s largest integrated fan manufacturing capacity. Havells has chosen to be present in only the Rs1,000+ price category, thereby maintaining healthy margins. Growth in this business remains strong, given the broad-based consumption growth in India. The company is now moving into other consumer durables, such as geysers and other home implements. The fans market in India is estimated at Rs20bn, and Havells currently has about 18% market share?a rapid scale-up from its FY06 market share of 6%.
Havells owns prestigious global brands like Crabtree, Concord and Luminance, and has 91 branches and representative offices in 50 countries. The company has 11 manufacturing plants in India, and Sylvania has eight manufacturing plants across Europe, Latin America and Africa.
