With a gain of 30% over the past 3 months, Havells has outpaced the Sensex by 28% and is close to its historical high. We believe the stock?s run-up has largely captured the company?s growth potential. The scope for further re-rating appears limited in the face of keener competition and macro risks in Europe. We initiate coverage of Havells with a sell/low risk rating and a target price of R425 (India business valued at R384 and Sylvania at R41). We would turn more constructive on the stock, all else being equal, if it fell below R370.
Havells, a leading player in electrical and consumer goods, enjoys healthy RoEs, a diversified business model, and a wide distribution reach through 4,300 dealers and 35,000 retail points across India. We believe the market has digested these strengths well, and further leg up needs successful new-product launches and a wider lead over the competition.
A larger product basket has enabled Havells to capture a bigger pie of dealer revenues, thereby increasing dealers? dependence on Havells and creating entry barriers. The company?s financial strength has enabled it to invest in brand building. Sylvania turned profitable in FY11, and is focusing on driving growth in the higher-margin Latin America market. Sylvania?s European operations, having stabilised, are now focusing on profitability. But the business faces macro risks in Europe.
Consolidated revenues and EPS will grow at CAGRs of 15% and 22% in FY11E-13, on our estimates, driven by healthy growth in the higher-margin lighting and consumer-durables segment in India and recovery in Sylvania?s margins. Havells stock?s performance captures a lot of these positives, in our view. It has outperformed the BSE Sensex by 173%/198%/35% over the past 5yr /2yr/ 1 yr periods respectively. At the current market price of R430, it trades at a one-year forward consolidated P/E of ~14x. Though the Europe business (33% of consolidated revenue) has stabilised, if the macro environment there deteriorates, it would impact the business adversely.
We value Havells? parent business using 15x Sep12E P/E, supported by a 20% EPS CAGR in FY11-14E and 20% average RoE, and is at a slight premium to its historical average P/E.
? Citi