BUY. HAVELLS INDIA LTD Electrical Equipments RETAIL EQUITY RESEARCH

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1 COMPANY INITIATING REPORT GEOJIT BNP PARIBAS Research RETAIL EQUITY RESEARCH HAVELLS INDIA LTD Electrical Equipments BUY BSE CODE: NSE CODE: HAVELLS Bloomberg CODE: HAVL IN SENSEX 19,380 CMP 635 TARGET 750 RETURN 18.1% 1 st October 2013 Brighter than before Havells India Ltd s (HAVL) standalone revenue grew at a CAGR of 21% from FY10 to FY13. HAVL has a diversified product profile and global presence. Expansion of its distribution network and aggressive brand spend, led to HAVL s growth. But In Q1FY14, standalone revenue grew by 2% YoY, lowest in the preceding 14 quarters. The impact in revenue was largely lead by near-term and one-off factors. On a positive note, margin has remained stable at 12.7%. Given HAVL s brand appeal and market leadership position, we believe it will overcome these near-term growth vagaries. Sylvania has shown signs of improvement wherein Q1FY14 losses at PAT level has reduced to Euro -0.8mn from Euro -1.4mn and debt has reduced. The recent correction in HAVL stock price provides a good opportunity to BUY. Consistent performance in domestic market... HAVL standalone business has grown at a CAGR of 21% from FY10 to FY13, led by consumer appliances 31%, Lighting & fixtures 23%, cables & wires 19% and Switch gears 15%. Today HAVL has become a household name with diversified product profile and leadership position in segments like MCB (miniature circuit breakers), Fans and LED & Luminaries (Lighting & Fixtures). We forecast domestic business to grow at a CAGR 13% FY13-15E, which is below potential. Normalisation of revenue growth to ~15% is likely by H2FY15E. Advertising and Brand building HAVL spends ~3.4% of sales for brand building and enjoys high brand recall. With ad spends of Rs1,430mn in FY13 and over Rs4,000mn in the last 4 years, HAVL is the largest advertiser in the Indian electrical industry. HAVL has distribution network of 20,000 distributors with 91 offices. In FY10, HAVL introduced GALAXY Stores a unique concept to provide one stop shopping destination for its products. HAVL has opened 200 such stores and plans to double them in the next 2-3 years. Revamp of manufacturing capacity HAVL since FY13 has brought more focus to in-house manufacturing and invested Rs1.4bn to expand capacities. HAVL has doubled its production capacity for Lighting & fixtures to 40mn units per month, which is in line with its plan to become a manufacturing hub for Sylvania. HAVL has signed a JV with Shanghai Yaming to manufacture lighting fixture which has reduced procurement in lighting space from 56% to 43% in FY13. Sylvania turnaround visible In Q1FY14 Sylvania losses reduced at PAT level to Euro -0.8mn from Euro -1.4mn YoY. The drop in EBITDA margins to 3.9% compared to 5.4% YoY is largely due to currency fluctuations in Latin American markets and weak demand in Europe. But lately European and LATAM markets are showing signs of recovery. Reduction in long term debt from Euro 73mn to 67mn YoY is also a positive for Sylvania. We estimate Sylvania s EBITDA margins to marginally improve to 4.75% & 5.0% with revenue in rupee terms to grow at 15% and 7% during FY14E and FY15E respectively. Valuation AT CMP of Rs635 HAVL is trading at P/E of 16.6x and 14.4x on its FY14E and FY15E earnings respectively. We value the stock at 17x on FY15E to arrive at a target price of Rs750. We believe HAVL will trade in a PE band of 15x 20x (1.5yrs P/E range). Given its weak Q1FY14 results we currently value HAVL at the lower end of the range at 17x. Improvement of domestic business in H2FY14 and turnaround in Slyvania will be the key for upside in valuation. We recommend a BUY rating. Company Data Market Cap (mn) Rs 79,290 Enterprise Value (mn) Rs 87,021 Outstanding Shares (mn) Free Float 38% Dividend Yield 1.22% 52 week high Rs week low Rs528 6m average volume 1,96,431 Beta 0.88 Face value Rs5 Shareholding % Q3 FY13 Q4FY13 Q1FY14 Promoters FII s MFs/DII Public Others Total Price Performance 3mth 6mth 1 Year Absolute Return -13.6% 5.6% 1.7% Absolute Sensex 1.4% 6.6% 5.1% Relative Return* -14.7% -0.9% -3.3% *over or under performance to benchmark index HAVL Sensex rebased Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Consolidated Y.E Mar (Rs mn) FY13A FY14E FY15E Sales 72,479 81,634 90,850 Growth (%) EBITDA 6,689 7,592 8,540 Growth (%) PAT Adj. 3,870 4,766 5,504 Growth (%) EPS Growth (%) P/E P/B EV/EBITDA ROE (%) D/E Anil R Analyst Vinod V. Nair Head of Research For Queries: geojitbnppresearch@geojit.com

2 Valuations PE valuation HAVL at CMP of Rs635 is trading at P/E of 16.6x and 14.4x one-year and two-year forward earnings respectively. Historical 10yrs average P/E of HAVL is 18x with a range of 5x 20x. The last 1 year average P/E stands at 18x. HAVL standalone revenue grew at CAGR of 21% and earnings per share grew at a CAGR of 18% to Rs30 from Rs18 during FY10 to FY13 when the economy was facing headwinds. The FII ownership of HAVL as on March 2013 stood at 25.8% compared to 16.5% on March 2011 and 19.8% on March Following which, in H2FY12 its valuation witnessed a significant re-rating. HAVL s P/E expanded to a higher band 15x- 20x compared to 10x-15x. As on June 2013 FII ownership of HAVL stands at 30.7%. In Q1FY14 HAVL standalone top line grew by 2% led by weak demand situation, non-availability of copper due to shut down of plants and early monsoon. Decline of top line growth in Q1FY14 coupled by management lowering the earlier guidance of 14-15% revenue growth to 10%, raises a red flag. But HAVL s continuous effort in rationalization of cost helped it to achieve healthy margin of 12.7% which the management is confident to maintain. We believe that domestic growth will pick up in second half of the year led by government expenditure and rural demand. Sylvania could well become the saving grace while the domestic operations are witnessing headwinds. Losses at PAT level have reduced to Euro -0.8mn from Euro-1.4mn YoY. Management s focus is to reduce Sylvania debt, which was visible in Q1FY14. The long term debt stood at Euro 67mn compared to Euro 73mn YoY. Recent economic data suggest moderate recovery in Euro region, thus providing a fillip to future performance expectations of Sylvania. We currently value HAVL at 17x which is at the lower end of its current P/E band of 15x-20x. We value it at the lower end due to muted earnings growth forecast compared to FY Q1FY14 results gave a negative surprise but growth is likely to pick up by the end of FY14E. A clear sign of improvement in revenue growth and turnaround in Sylvania can take its valuation to the higher end of the band. Given the recent sharp decline in the stock price we recommend a BUY rating with a target price of Rs750. One Year forward PE Valuation Graph PE -price band EPS growth Apr-09 4-Apr-10 4-Apr-11 4-Apr-12 4-Apr % 5.5 EPS EPS growth Source: company,geojit BNP Paribas Peer Group comparison FY13 One year Forward P/E Average - 1 SD % % Average + 1 SD Average 1 Yr Fwd P/E Sales (Rs bn) Sales growth % EBITDA % FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E Bajaj Havells V-Guard PE ROE % Earnings growth % FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E Bajaj (48.0) Havells V-Guard Source: company, Bloomberg % 18% 12% FY10 FY11 FY12 FY13 FY14E FY15E % 320% 270% 220% 170% 120% 70% 20% -30% -80% 10

3 Investment rationale Domestic business to pick-up in H2FY14... HAVL s revenue from domestic business grew at CAGR of 21% from FY10 to FY13. In Q1FY14 the revenue grew by 2% due to weak demand scenario. Revenues from cables and wires segment declined by -6% YoY, due to de-growth in industrial cables -15% and moderate growth in domestic cables by 6% YoY. The non availability of copper due to temporary shutdown of copper plants also led to decline in revenues in this segment. Lighting and fixtures dropped by -1%. On a positive note, due to cost reduction initiatives and modest growth in consumer durables (7%) & switch gear (14%), EBITDA margin expanded to 12.7% from 11.6% YoY. Management has lowered its earlier revenue guidance from 15% to 10% for FY14 but has maintained margin outlook. Management indicated a possibility of passing additional input cost to customers. We estimate HAVL standalone to grow at 9.4% and 13.9% for FY14E and FY15E respectively and stable EBITDA margins of 12.4%. HAVL Standalone (Rs mn) FY12 FY13 FY14E FY15E Revenue 36,156 42,250 47,035 53,570 YOY growth % EBITDA 4,557 5,331 5,832 6,642 margins PBT 3,738 4,572 5,084 5,881 YOY growth % PAT 3,054 3,714 4,118 4,616 YOY growth % EPS YOY growth % Thus, we clearly forecast lower earnings growth of 11%-12% for FY14E-15E in the domestic market. But we understand that the stock price has factored such a scenario. Henceforth we also believe domestic growth to be better than what we experienced in Q1FY14. Importantly, we expect a major part of the financial improvement to come from Sylvania, to provide a better consolidated picture. Sylvania operations showing modest recovery Sylvania revenue dropped in Q1FY14 by 1% to Euro106.7mn as revenue from Europe and Latin America dropped 1% each due to weak economic sentiments and large fluctuations in Latin American currencies. Sylvania losses reduced to Euro -0.8mn compared to Euro -1.4mn YoY. Company is expecting revival in its revenue once the lighting festive season starts in coming quarters. Positive economic data from Euro region and green shoots of growth in select European economies improves the chance of a turnaround in Sylvania in the near term. The management s focus on debt reduction is positive. About Euro 6.6mn long term debts has been paid, also there is considerable reduction in interest cost to Euro 1.2mn in Q1FY14 versus Euro 2.1mn YoY. Management has guided for 5.5% EBITDA margin, and has indicated to increase prices on the back drop of increase in raw materials prices. With HAVL likely to become a manufacturing hub for Sylvania, the capacity expansion in Neemrana plant for lighting & fixtures has been completed. Management targets Rs500mn to 600mn revenues through exports of lighting fixtures to Sylvania from this plant for FY14. Sylvania financials (Euro mn) FY12 FY13 FY14E FY15E Revenue YOY growth % EBITDA Margins % PAT Rural demand might change the fortunes On the backdrop of favourable monsoon and good agriculture season, rural demand for consumer durables goods is expected to improve in H2FY14. With the focus on rural market HAVL has introduced REO brand switches in switch gear segment, which is estimated to contribute Rs 1,000mn in revenues. Focused and Innovative brand building HAVL had a focused approach towards expansion of its brand and distribution channels. This led to acquisition of Sylvania in 2007 for expanding its business in international markets. Apart from Sylvania, HAVL has 4 other international brands Crabtree (switches & Switch gears), Standard (switch gears, electric cables & CFL), Concord and Luminance for lighting and fixtures. Opening up of HAVL Galaxy showrooms is with the idea to bring all its products under one roof. Currently, company has 200 such showrooms covering 130 towns and contributing 12% of the non industrial cables business. Management plans to expand it to 400 stores covering 250 towns. In FY13, HAVL introduced a programme for electricians named Havells Connect for making them brand ambassadors by conducting seminars and a special promotional scheme Power plus for these electricians. HAVL spends ~3.4% of its revenues for advertising. The ad spends for Q1FY14 was at Rs436mn versus Rs411mn YoY. HAVL is largest advertiser in Indian electric industry with ad spend of Rs 4,000mn for the last 4 years.

4 Diversified product portfolios... HAVL has a diversified products portfolio which include switch gears, cables &wires (includes industrial & domestic), lighting and fixtures and consumer durables (Fans, water heaters and domestic home appliances). HAVL enjoys leadership position in segments like MCB, Fans and LED & Luminaries (Lighting & Fixtures) space. HAVL Revenue Mix 40% 16% 19% 25% Shifting focus to In house manufacturing... With an intention to reduce import cost and to meet customer satisfaction (by continuous R&D), HAVL is strategically shifting focus towards in-house manufacturing. Company has setup a plant for manufacturing Lighting & Fixtures in FY13. 50% of production from this plant is earmarked for exports to Sylvania. HAVL invested US$3mn for JV (50:50) with Shanghai Yaming Lighting Co with a focus to manufacture energy efficient and green lighting solutions. The initial production has commenced for HID lamps, HID outdoor fixtures, CFL lamps and LED outdoor fixtures and has generated revenue of US$3mn for FY13. Manufacturing Locations (India) Products Switch Gears Lighting & Fixtures Capacitors Cables Fans Motor Electrical consumer durables switch gears Lighting & fixtures cables Locations Baddi,Himachal Pradesh Neemrana, Rajasthan Sahibabad, Uttar Pradesh Alwar, Rajasthan Haridwar, Uttaranchal Neemrana, Rajasthan Apart from these it has lighting & fixtures manufacturing units for Sylvania in Germany, Belgium, UK, France, Colombia, Costa-Rica and Tunisia. Prime focus on debt reduction Management continues to focus on reducing the debt of Sylvania operations, from Euro 126mn in CY11 to Euro 73mn in CY12. Sylvania s debt stood at Euro 67mn as on 30th June. Interest cost in HAVL standalone reduced to Rs23mn in Q1FY14 compared to Rs79mn YoY. Keeping this trend in view, we estimate consolidated net debt to reduce to Rs2,140mn in FY14E from Rs4,101mn in FY13. Rupee deprecation to benefit exports HAVL s exports for FY13 stood at Rs2190mn up by 28% from Rs1730mn YoY. With India becoming a manufacturing hub for its global operations, rupee depreciation will be a major positive. Company s long term strategy to manufacture all its products inhouse will lower imports and bring cost efficiency. HAVL has started launching Sylvania brands in Africa and ASEAN markets were HAVL has strong presence. Strong cash flows HAVL has exhibited strong cash flows at the consolidated level. Free cash flow to firm grew at CAGR of 44% to Rs 4,595mn FY13 from Rs 1,551mn FY10. Through factoring arrangement with banks and financial institutions, company was able to accelerate its debtor collections. Management is utilizing the cash in Sylvania to reduce debt. Management has indicated that it is also open to acquisitions, if it leads to accessing new markets. Well thought CAPEX initiatives. HAVL shifted its focus to in-house manufacturing for all its products from FY13 to reduce the dependence on procurement. The construction of Lighting and Fixtures plant at Neemrana was with view of creating HAVL as a manufacturing hub for exporting its products to Sylvania. HAVL CAPEX plans for FY14 is Rs1000mn and Euro 3-5 mn for Sylvania for next 2 years. Additional CAPEX is expected in water heater division. Company Description Havells India was incorporated in 1983 founded by Mr. Qimat Rai Gupta (CMD). The company is dominant across a wide spectrum of products industrial and domestic switchgears, cables & wires, motors, fans, power capacitors, CFLs, luminaries for domestic and industrial applications, and modular switches. The company acquired global lighting major Sylvania in April 2007 for an EV consideration of 227mn. HAVL also owns global brands like Crabtree, Standard, Concord and Luminance.

5 Product Profile Switch Gears HAVL switch gears segment include domestic and industrial switch gears. Market for Domestic MCB is Rs 17,000mn and the market share of HAVL is ~29%. Other major players in this segment are Legrand and Schneider. Market for conventional switches is Rs 15,000mn and the market share of HAVL is ~16%. Major competitors are Panasonic (Anchor), Legrand & Schneider. Cables and wires Market size of Domestic cables is estimated to be at Rs 65,000mn, HAVL has ~14% market share. Main competitors are Polycab and Finolex. Market size of Industrial Cables is estimated to be at Rs 100,000mn with a market share ~9% and competitors in this segment are Polycab, KEI. Lighting and Fixtures Market size of CFL is estimated to Rs 23,000mn and market share of HAVL ~12%, competitors for HAVL in these segments are Philips & Osram. Market size of Luminaries is estimated to be at Rs 29,000mn and market share of HAVL 13% and competitors for HAVL in this segment are Philips, Bajaj, Crompton & Wipro. Consumer durables Appliances Domestic appliances market size is estimated to be at Rs 50,000mn and the major competitors of HAVL are Bajaj and Philips. Fan Market size for Fan is estimated to be at Rs 45,000mn and the market share of HAVL~15%. Major competitors in this segment for HAVL are Crompton, Usha & Orient. Pumps (mono block) - Newly Launched Market size of mono block pumps segment is Rs 1,000mn. HAVL introduced 0.5 & 1 HP capacity pumps in Uttar Pradesh (UP) targeting Rs 1,000mn in revenues by the end of FY15E. Risk Factors Copper availability and cost... a concern Major raw material for HAVL is copper. Due to shortage of copper Q1FY14 revenue got impacted. The recent rupee deprecation will also increase the import cost and affect the margins of HAVL. We understand that this is a temporary situation and the supply constrains have eased. Delay in recovery of Sylvania operations. Dip in margin of Sylvania during Q1FY14 to 3.9% compared to 5.4% YoY and 6.1% QoQ is a sign of continuous weakness. If this situation continues it will impact the profitability of HAVL as we have assumed marginal improvement in sales and margins based on recovery in Europe. Sylvania s debt still higher Even though the management continues to reduce the debt in Sylvania, the net debt of Sylvania stood at Euro 66.7mn, which is still high. The total exposure of HAVL in Sylvania is Euro156mn which includes Euro125mn as equity and Euro 23.5mn as debt. LATAM currency fluctuation impacts margins The large currency fluctuations in Latin American economies also impacted the Sylvania margins in Q1FY14, as the import cost of products from China and India increased which were not subsequently passed on. Conclusion In a nutshell, HAVL standalone revenue grew at healthy pace during FY11-FY13 in spite of macro headwinds. This growth came into question on a weak Q1FY14 results. But we understand that Q2FY14 will end on a relatively positive note and growth is likely to pick up in H2FY14. Though domestic growth may not be robust, but will be consistent enough to generate 10%-12% earnings growth. Along with the turnaround in Sylvania the consolidated performance will be construed positive to maintain healthy valuation in the range of 15x-20x one year forward P/E.

6 Consolidated Financials Profit & Loss Account Sales 56,126 65,182 72,478 81,634 90,850 % change EBITDA 5,570 6,573 6,689 7,592 8,540 % change Depreciation EBIT 4,766 5,625 5,592 6,389 7,276 Interest 902 1,281 1,232 1, Other Income PBT 4,070 4,757 6,638 5, % change Tax 1,031 1, ,091 Tax Rate (%) Reported PAT 3,036 3,699 5,814 4,582 5,129 Adj* (32) 0.0 (1,944) Adj PAT 3,067 3,699 3,870 4,766 5,504 % change No. of shares (mn) EPS (Rs) % change DPS (Rs) CEPS (Rs) Balance Sheet Cash & Bank 1,306 2,305 4,730 5,589 6,565 A/C receivable 7,721 8,905 8,623 10,065 11,947 Inventories 10,860 13,677 13,184 15,098 17,060 Other Cur. Assets Loans & advances 1,595 2,144 2,662 3,131 3,485 Gross fixed assets 27,509 26,453 28,634 30,074 31,674 Net fixed assets 9,629 9,863 10,932 11,285 11,743 CWIP Intangible assets 3,680 4,045 4,069 3,952 3,830 Def. tax net (558) (556) (480) (419) (346) Other assets Total assets 35,077 41,198 44,099 49,086 54,684 Cur. liabilities 8,187 10,699 9,329 11,391 13,450 Provisions 3,904 5,013 4,792 5,144 5,476 Debt funds 9,705 8,939 8,831 7,731 6,531 Other liabilities 6,746 6,990 6,726 6,726 6,726 Equity capital Reserves 5,913 8,932 13,796 17,468 21,877 Total Equity 6,537 9,556 14,420 18,092 22,501 Total liabilities 35,077 41,198 44,099 49,086 54,684 BVPS (Rs) Cash flow Ratios Net inc. + Depn. 3,844 4,648 6,911 5,969 6,768 Non-cash adj Changes in W.C (1,998) (1,234) (1,419) (1,419) (1,824) C.F.O 2,530 4,519 6,345 5,304 5,469 Capital exp. (1,647) (1,511) (1,440) (1,441) (1,600) Change in inv. (186) Other invest.cf C.F - investing (1762) (1,053) (1,395) (1,091) (1,200) Issue of equity Issue/repay debt 454 (924) (423) (1,100) (1,200) Dividends paid (207) (363) (943) (1,095) (1,095) Other finance.cf (902) (1,184) (1,155) (1,159) (998) C.F - Financing (654) (2,470) (2,521) (3,354) (3,293) Chg. in cash , Closing cash 1,306 2,301 4,730 5,589 6,565 No. of shares(mn) Return ratios EBITDA margin (%) EBIT margin (%) Net profit mgn.(%) ROE (%) ROCE (%) W.C & Liquidity Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) T/O & Leverage. Gross asset T.O (x) Total asset T.O (x) Int. coverage. (x) Adj. debt/equity (x) Valuation ratios EV/Sales (x) EV/EBITDA (x) P/E (x) P/BV (x)

7 Corporate Office Geojit BNP Paribas, 34/659-P, Civil Lane Road, Padivattom, Kochi Toll Free Number: / Paid Number: id: customercare@geojit.com Recommendation Criteria: The recommendations are based on a 12 month horizon, unless otherwise specified. The recommendations are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term there could be a temporary mismatch between the analyst recommendation and the actual absolute returns based on the current market price. BUY - Absolute return of more than 18%. Accumulate - Absolute returns between 10% - 18%. Hold - Absolute returns between 0% - 10%. Sell - Absolute returns of less than 0%. * Accumulate is a better rating than SELL and HOLD, but lower than BUY recommendation. Clients are advised not to sell their holding in the stock and buy the stock whenever the stock provides a suitable price correction. 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