Havells India Ltd HAVL IN; HVEL.BO May 13, 2015

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1 Consumer Durables India 4QF15 result review HOLD Current price (13 May) Rs 280 Target price Rs 259 Upside/(downside) % (7) Earning estimate Revised Market data Mkt capitalisation Rs bn Average daily vol ' week H/L Rs 347 / 184 Shares O/S mn Free float mn Promotor holding % 61.6 Foreign holding % 26.0 Face value Rs 1.0 Price performance (%) 1m 3m 6m 1yr Nifty (abs) (6.8) (6.5) (1.5) 15.9 Stock (abs) (4.9) 3.6 (7.1) 46.4 Relative to Index (5.6) 30.5 Performance (Rs) 100 (20) May-14 Aug-14 Nov-14 Feb-15 May-15 Havells India (LHS) Source: Bloomberg, SSL (%) Rel. to BSETCG (RHS) Institutional Equity Research HAVL IN; HVEL.BO May 13, 2015 PAT disappoints but margins compensate s (HAVL) 4QF15 standalone revenues came at Rs13.49bn, 2.9% above SSLe, while its reported PAT stood at Rs1.20bn, 7.1% below SSLe. The company s PAT was primarily down due to higher advertisement and promotion spends, increase in depreciation and higher tax outflow. Despite softening commodity prices, combined with stable volume offtake, HAVL managed to improve EBITDAM by 50bps. The electrical consumer durable segment grew 24% YoY, while the remaining segments witnessed a flat-to-marginal decline. Sylvania s performance remained muted during 4QF15. Adjusting to pension liability, Sylvania s EBIDTAM stood at 4.7%; however, it had to provide Euro6.5mn due to decline in bond yields. Despite these developments, the company still expects Sylvania s EBITDAM to hover ~ %. We anticipate 20% CAGR in APAT (F15 F17e) and assign 23x over our F17e PAT, combined with inorganic growth opportunities. We revise TP upwards to Rs259 and maintain HOLD on the stock. Anticipating healthy growth across segments: In 4QF15, the Electrical consumer durables segment grew 24% YoY (mainly due to acceptability and higher penetration of the Standard brand); however, as margins declined ~200bps YoY, this decline was attributed to higher sales and promotional spends. Going ahead, HAVL is likely to take full leverage of its Standard brand. Its switchgear segment declined 4.6% YoY; this was primarily due to slowerthan-expected demand in the consumer and industrial segments. Despite this, the domestic cable segment grew at a marginal 1.8% (in value terms). Demand for LEDs in the lightning and fixtures segment grew at a humungous 70% (it contributes 27% of lightning), reaping benefits from the government s decision of subsidizing and popularizing its use. With this, HAVL is well positioned to take advantage from the new capacity set up in Neemrana. The Switchgear segment was impacted due to a one-time settlement claim for out-of-court settlement relating to its supplies. Capex in F16e is estimated to be ~Rs1.2bn. EBITDAM improved on the back of a) better product mix, b) cost efficiencies and c) costs rationalization. HAVL did not foresee a fall in its market share due to the slowdown seen in volume off-take. Guidance for F16e: The management is optimistic on the demand environment, as it expects demand to revive by 2HF16e on the back of policy measures introduced by the government. We expect standalone growth for F16e to hover 17 20% on the back of better visibility and business gaining traction. We maintain OPMs over % for F16e for the standalone entity, as we expect moderate volumes to be offset by improvement in margins (due to softer RM prices). Sylvania s F16e margins at ~4.0% due to volatility in European operation; expect gradual recovery in Europe: The management anticipates margins of ~4% for F16e on the back of volatile performance and ebbing currency volatility in Latin and South American countries. However, the company expects recovery in Europe to be very gradual. The company has also slowed down its business in Latin America due to volatile currency. Maintain HOLD: Diverse product offerings and operations in a competitive environment could positively impact HAVL. We believe the steep valuation on the stock is justified, largely attributable to its good market leadership strong brand presence and its balance sheet strength. We expect the margins to sustain ~13.0% at the standalone level. We anticipate the debt level to reduce substantially by F17e, and consequently, contribute to lifting HAVL s bottomline as well. We continue to visualize a 20% CAGR in APAT (F15 F17e) and assign 23x over our F17e PAT, combined with inorganic growth opportunities. We revise TP upwards to Rs259, maintaining HOLD on the stock. Rabindra Nath Nayak rabindra.nayak@sbicapsec.com Aakash Fadia aakash.fadia@sbicapsec.com Financial Summary Y/E Mar (Rs mn) F13 F14 F15 F16e F17e Net sales 72,479 81,858 85,694 92, ,835 growth (%) EBITDA margin (%) Adjusted net profit 4,111 4,463 3,854 5,962 7,020 EPS (Rs) growth (%) (13.6) P/E (x) EV/EBITDA (x) Dividend yield (%) RoE (%) RoCE (%) SBICAP Research on Bloomberg SBICAP <GO>, Please refer to our disclaimer given at the last page.

2 Sequentially, other expense is higher, mainly due to advertisement and promotional expenses Quarterly Financials Y/E March (Rs mn) 4QF15 4QF14 YoY (%) 3QF15 QoQ (%) 4QF15e Var (%) Net sales 13,493 13, , , Cost of goods 8,263 8,064 7,523 8,111 Employee benefits exp Other Expenses 2,631 2,705 2,363 2,380 EBITDA 1,796 1, , ,951 (7.9) EBITDAM (%) Depreciation and amort EBIT 1,584 1, , ,716 (7.7) EBITM (%) Other income Forex (Loss)/Gain Interest expenses Extraordinary/Exceptional Profit before tax 1,713 1, , ,793 (4.5) Tax expense Effective tax rate (%) PAT 1,219 1,369 (11.0) 1, ,299 (6.2) Non-recurring items Adj. net profit 1,206 1,297 (7.0) 1, ,299 (7.1) NPM (%) EPS (Rs) (7.0) (7.1) Lighting and Fixtures growth has been affected due to ongoing transition from CFL to LED Consumer durables growth was mainly on account of acceptability and higher penetration of Standard brand. Consumer durables margins were hit on account of higher sales and promotional expenses Quarterly Segmental Performance Segment (Rs Mn) 4QF15 4QF14 YoY% 3QF15 QoQ% Swithgears 3,055 3,204 (4.6) 3,275 (6.7) Cable and Wires 5,690 5, , Lightening and Fixtures 1,880 1,993 (5.7) 1,940 (3.1) Electrical Consumer Durables 2,867 2, , Total 13,493 13, , PBIT Swithgears ,125 (19.4) PBIT % Cable and Wires PBIT % Lightening and Fixtures (13.6) 535 (9.6) PBIT % Electrical Consumer Durables PBIT % Total PBIT 2,896 2, , Interest (82.2) 72 (83.2) Non Allocable Exp. 1, , PBT 1,713 1, , May 13,

3 We expect 17.5% CAGR in standalone revenues over F15e F17e Annual Segmental Performance Segment (Rs Mn) F14 F15e F16e F17e Switchgear 12,192 12,790 14,709 16,768 % of Total Cables 19,264 21,904 26,285 29,965 % of Total Lighting and Fixtures 7,207 7,410 8,150 8,965 % of Total Electrical Consumer Durables 8,534 10,283 12,340 14,067 % of Total Others Total 47, , , ,765.5 EBIT Switchgear 4,032 4,390 4,854 5,533 % of Total EBIT Cables 2,110 2,657 2,891 2,996 % of Total EBIT Lighting and Fixtures 1,787 1,969 1,956 2,152 % of Total EBIT Electrical Consumer Durables 2,304 2,580 3,208 3,939 % of Total EBIT Others Total 10,233 11,595 12,910 14,620 Un allocated Expenses 4,105 4,984 4,664 4,878 % of Total Revenue Operating EBIT 6,127 6,611 8,246 9,743 Interest on Debt PBT 5,951 6,462 7,968 9,450 Revision of estimates We have revised our growth assumptions for F16e. a) We marginally increased Switchgear growth to 15% b) We maintain flat growth in the Lighting and fixtures segment c) We maintain growth in the Electrical consumer durables segment at 20% Estimate Revision (Rs mn) Revised Old Change (%) F16e F17e F16e F17e F16e F17e Sales 92, ,835 95, ,201 (2.8) (3.1) EBITDA 10,470 12,182 9,490 11, EBITDA margin (%) bps 107 bps Adj PAT 5,962 7,020 5,579 6, EPS (Rs/Share) Source: SSLe May 13,

4 Key Assumptions Y/E Mar F16e F17e Growth (%) Switchgears Cables & Wires Lighting & Fixtures Electrical Consumer Durables Margins (%) Switchgears Cables & Wires Lighting & Fixtures Electrical Consumer Durables Slyvania Sales in Euro (Mn) EBITDA Margin (%) Rs vs Euro Source: SSLe 1-year forward P/E Currently trading at 24.9x F17e; expect a F15 F17e APAT CAGR of 20% (x) May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Source: Bloomberg, SSLe May 13,

5 Consolidated Financials Income Statement Balance Sheet Y/E Mar (Rs mn) F13 F14 F15 F16e F17e Y/E Mar (Rs mn) F13 F14 F15 F16e F17e Net sales 72,479 81,858 85,694 92, ,835 Cash & Bank balances 4,736 8,819 6,758 8,577 8,574 growth (%) Other Current assets 23,984 27,251 26,243 28,526 31,735 Operating expenses 65,735 74,433 78,483 82,628 92,243 Investments EBITDA 6,744 7,425 7,211 9,908 11,592 Net fixed assets 10,925 11,277 14,136 16,637 18,980 growth (%) (2.9) Goodwill & intangible assets 4,076 4,727 4,727 4,727 4,727 Depreciation &amortisation 1,097 1,155 1,387 1,445 1,603 Other non-current assets 997 1,301 1,317 1,483 1,660 EBIT 5,647 6,269 5,825 8,463 9,989 Total assets 44,718 53,375 53,180 59,949 65,676 Other income Interest paid 1, Current liabilities 16,428 21,398 21,584 23,285 25,958 Extraordinary/Exceptional items (1,944) PBT 6,638 5,941 5,690 8,320 9,935 Borrowings 9,785 10,506 7,655 7,875 5,022 Tax 824 1,478 1,836 2,358 2,915 Other non-current liabilities 4,084 4,809 4,667 4,867 5,067 Effective tax rate (%) Total liabilities 30,297 36,714 33,906 36,027 36,047 Net profit 5,814 4,463 3,854 5,962 7,020 Minority interest Share capital Reported Net profit 5,814 4,463 3,854 5,962 7,020 Reserves & surplus 13,797 16,036 18,649 23,298 29,004 Non-recurring items (1,703) Shareholders' funds 14,420 16,660 19,273 23,922 29,627 Adjusted Net profit 4,111 4,463 3,854 5,962 7,020 Minority interest growth (%) (13.6) Total equity & liabilities 44,718 53,375 53,180 59,949 65,676 4,866 Key Financials ratios Cash Flow Statement Y/E Mar F13 F14 F15 F16e F17e Y/E Mar (Rs mn) F13 F14 F15 F16e F17e Profitability and return ratios (%) Pre-tax profit 6,638 5,941 5,690 8,320 9,935 EBITDAM Depreciation 1,097 1,155 1,387 1,445 1,603 EBITM Chg in working capital (1,392) 1,719 (369) (163) (364) NPM Total tax paid (1,225) (1,336) (1,836) (2,358) (2,741) RoE Other operating activities 1,260 1, RoCE Operating CF 6,377 8,681 4,872 7,245 8,851 RoIC Capital expenditure (1,750) (1,764) (4,246) (3,946) (1,000) Per share data (Rs) Chg in investments - - (16) (166) (247) O/s shares (mn) Other investing activities 350 2, EPS Investing CF (1,401) 427 (4,262) (4,112) (1,247) FDEPS FCF 4,977 9, ,133 7,604 CEPS BV Equity raised/(repaid) DPS Debt raised/(repaid) (423) 728 (1,431) - - Dividend (incl. tax) (943) (1,826) (1,241) (1,314) (1,314) Valuation ratios (x) Other financing activities (1,155) (524) - - (418) P/E Financing CF (2,521) (1,621) (2,672) (1,314) (1,731) P/BV EV/EBITDA Net chg in cash & bank bal. 2,456 7,487 (2,062) 1,819 5,872 EV/Sales Closing cash & bank bal 4,736 8,819 6,758 8,577 8,574 Other key ratios D/E (x) DSO (days) Du Pont Analysis - RoE NPM (%) Asset turnover (x) Equity Multiplier (x) RoE (%) May 13,

6 Recommendation History 350 BUY Stock Price HOLD SELL Target Price Date Stock Price TP Rec. 29-May HOLD 31-Jul HOLD 31-Oct HOLD 30-Jan BUY 5-Jun HOLD 28-Jul HOLD 22-Oct HOLD 29-Jan HOLD 300 (Rs) Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May May HOLD Source: Bloomberg, SSLe SBICAP Securities Limited Corporate Office: Mafatlal Chambers, A-Wing, 2nd Floor, N. M. Joshi Marg, Lower Parel, Mumbai Tel.: /01 Fax: KEY TO INVESTMENT RATINGS (w.e.f. February 2013) Guide to the expected return over the next 12 months. 1=BUY (expected to give absolute returns of 15 or more percentage points); 2=HOLD (expected to give absolute returns between -10 to 15 percentage points); 3=SELL (expected to give absolute returns less then - 10 percentage points) DISCLAIMER We, Rabindra Nath Nayak, M. Sc. 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