Our recent meeting with management and factory visit leave us increasingly confident about the success of Havells? new business initiatives in driving 26% EPS CAGR in FY12-15e in India, and also in improving Sylvania ROE to over 20% soon. We have raised our PO (price objective) by 28% to R800, driven by an expected re-rating of the stock by 25% to a P/E of 16.3x owing to 1) EPS CAGR of 26% in FY12-15e, and 2) a likely 15% upgrade to consensus earnings estimate in FY14e.
Our price objective is based on sum of the parts, with (1) India unit valued at R702/sh based on P/E of 17.5x FY14E EPS of R40, which is at 7% premium to peers and (2) Sylvania valued at R98/sh, at a P/E of 11x FY14E, in line with peers. Expansion of group ROCE to 28% by FY15E and a 26% EPS CAGR through FY12-15E is key to a re-rating, with the other drivers being strong FCF and dividend growth.
Visibility of Havells India unit?s profit growing at 26% CAGR in FY12-15E has risen owing to recent measures, including (1) launch of low-end electrical switch that will double the firm?s target market (2) the launch of an incentive scheme for electricians that will strengthen its relations with end users and (3) huge ramp of lighting fixtures manufacturing in India that will help it to supply better products.
Net debt to equity of Sylvania, Havells? global business unit contributing to 45% of consolidated sales, is likely to decline to 1.6x by end-FY13E compared to 6.5x at end-FY12. This deleveraging is being driven by earnings of US$38mn from OSRAM following settlement of an old dispute in Havells? favor. Decline in debt and planned increase in transaction with India unit are set to boost ROE to 20%.
BofAML