Download - Antique - Bajaj Electricals
Amol Rao
+91 22 4031 3435
IND IA RESEARCH
IN IT IAT ING COVER AGE
ELECTR ICALS
Indian Consumer Electricals Sector
Lighting up India
April 2011
Consumer Electricals
Antique Stock Broking Limited 1
INDEXForeword ......................................... 1
Havells India Limited .......................... 7
Bajaj Electricals Limited .................... 15
V-Guard Industries Limited .................23
Consumer Electricals
Antique Stock Broking Limited 1
India: Trend of urban population India: Trend of urban household stock (m. nos)
Source: Crisil Research
FOREWORDThe acceleration in growth of the Indian economy over the last decade is a welldocumented fact. With GDP registering a CAGR of 13% over the last 10 years (on anominal basis), per capita income (on a nominal basis) has trebled, resulting inhigher consumption levels across products and services. This has not only been reflectedin the higher discretionary spending, but also spurred upgrades in purchases of non-discretionary items.
Using this as the backdrop, we are initiating coverage on three companies (viz. HavellsIndia, Bajaj Electricals, and V-Guard) from the consumer electricals space, which webelieve would be outperformers going ahead. We believe that some of ongoingdevelopments at the ground level, will contribute to immense consumption drivengrowth in this sector. We have enumerated the same below:
Structural changes to generate demand
Demand from construction
Urban housing: While the strong correlation between economic growth andurbanisation is well established, rising levels of urbanisation in India are also a resultof the historic low base in the country. Going forward, significant demand for urbanhousing stock is expected to be generated on the back of economic growth, whereingreater portion of the incremental workforce joins the service sector. Additionally, theincreasing nuclearisation of urban families and easy access to housing finance channelsare also expected to spur demand for urban housing units over the following decade.Estimates put the average annual growth in urban housing units at 2m over 2011-15,which lead us to believe that there exists reasonably robust long term demand boundfor household wiring, electricals, electrical appliances and associated equipment likeswitches, switchgears, etc.
40
52
64
76
88
2001 2003 2005 2007 2009 2011e 2013e 2015e
-
300
600
900
1,200
1901 1921 1941 1961 1981 2001
10.0
15.0
20.0
25.0
30.0
Population (m, LHS) Urban pop (% of total)(RHS)
Though relatively smaller thancommercial real estate,housing sector greatlyinfluences electricals sector
Consumer Electricals
Antique Stock Broking Limited 2
Rural housing: The implementation of government programs like the 'Indira AwaasYojana', over the Xth and XIth Plans has been one of the primary reasons for increasingconstruction of permanent (pucca) dwellings in rural India. Additionally, the steadytrend of conversion of semi-permanent (kutcha) houses into pucca units has also resultedin the rise of rural housing stock. This has spurred purchases of basic electricals likebulbs, FTLs and fans.
Rollout of schemes like the 'Rajiv Gandhi Grameen Vidyutikaran Yojana', has boostedconsumption of electricals and associated appliances like UPS and water pumps.Under this scheme, more villages in the rural hinterland are being electrified, whereinelectricity is supplied for a stipulated period every day. This has been the primaryreason for the increased sales of electricals and appliances in rural India.
India: Rural housing stock (m no.s)
Source: Crisil Research
120
135
150
165
180
2001
2003
2005
2007
2009
2011
e
2013
e
2015
e
Number of electrified villages in India (FY10-11) Composition of electrified households (FY10-11)
Source: Rajiv Gandhi Grameen Vidyutikaran Yojana, GoI
Demand Matrix: Electricals and appliancesApplication Product
Household GLS, CFL, FTL, Fans, Switches, Cables & wires
Commercial Luminaires, Hi-power lights, Signages, Hoardings
Industrial HT/LT cables, Luminaires, Motor pumps, Switchgears
Social HT/LT cables, Conductors, Street lightingSource: Industry, Antique
Given the configuration of houses in rural and semi-urban dwellings, our interactionwith dealers and various participants in the electricals industry point out to the immensepotential demand for electricals and appliances in the backdrop of the above mentioneddevelopments.
Standard configuration and requirement of dwellings (800 sq. ft.)Component Units
Cables 250m
Switches (x) 22
Switchgears (x) 2
Fans (x) 3
FTL (x) 4
Bulbs/CFLs (x) 4
Source: Industry, Antique
-
6
12
18
24
North India South India East India West India Central India
Above Poverty Line Below Poverty Line
0
40,000
80,000
120,000
160,000
North India South India East India West India Central India
Already Electrif ied Un- Electrif ied
Consumer Electricals
Antique Stock Broking Limited 3
Higher power generation
The economic transformation of the previous decade has witnessed a huge surge inenergy demand in India. While domestic power generating capacity has been scaledup significantly in the past few years, we still have a peak power deficit of 13%.India's per capita power consumption is estimated to be ~606 units and going forward,is expected to grow at 8-9% pa over the next 24-36 months. In order to keep pacewith the growing demand and partially bridge the supply gap, aggressive capex islined up, wherein 38,000MW of power generation capacity has been lined up forcommissioning over the next three years.
While the improved supply of power in the foreseeable future will largely benefitindustrial and commercial users, we believe that at the household level, incrementalsupply of 19bn units of electricity will be released for consumption pa over the nextthree years. We believe that this improved availability and assured supply of electricitywill spawn demand of electricals and fixtures on account of initial installations fromfirst time consumers and upgrades from existing consumers. We expect purchasing tobe more pronounced in the semi-urban and rural areas of the country, where the bulkof electrification work is being carried out.
Capacity addition targets and estimates
Source: CEA, Antique Research
Transformation in social dynamics to boost consumption
Alteration in income pyramid
India’s GDP is projected to register a CAGR of 7.3% from 2005-2025 (Source: MGI:The Bird of Gold: The Rise of India’s Consumer Market) on back of increasingproductiveness and competitiveness of Indian businesses in conjunction with economicreform. In the background of population growth, it is estimated that by 2015, thiseconomic growth would translate into ~20% of India’s population or 268m people,being economically classified as middle class (v/s 55m people in 2005).
-
75,000
150,000
225,000
300,000
FY07 FY208 FY09 FY10 FY11E FY12E FY13E FY14E FY15E
Improved availability ofelectricity to boost demand forelectricals
Demographic shift to playcrucial role in consumptionpatterns of populous
Consumer Electricals
Antique Stock Broking Limited 4
India’s changing demography (m people)
Source: McKinsey Global Institute, The ‘Bird of Gold’: The Rise of India’s Consumer Market, May 2007
Consequently, this gradual alteration in the country’s income pyramid is reflecting indomestic consumption patterns and increasingly materialising into robust andsustainable demand for housing, consumer durables and similar products. This is alsoreflecting in the offtake of ancillary products like wires, cables, household electricalsand electrical appliances, which are follow-up purchases.
Change in consumer preferences
A variety of factors like increase in literacy, urbanisation and affordability, in conjunctionwith higher standards of living and heightened quality consciousness, have contributedto a gradual change in consumption patterns over the last decade. While this shifthas been more pronounced in urban India, the proliferation of satellite television hasresulted in an emergence of this phenomenon in rural India as well.
We believe that these factors have a direct bearing on the consumption of householdelectricals and appliances, more so in the future, as companies having extensivedistribution, visible brands and appropriately priced products will find favour fromIndian consumers. Increasingly, consumers will opt for brands that offer value formoney and energy efficiency, apart from other utilities like a robust after sales network.
Matrix of consumer preferences
Source: Antique Research
AF
FLU
EN
CE
REALISATION
Low Quality/Unbranded
Local/RegionalBrand
Energy EfficientNational Brand
Premium National/International Brand
0
400
800
1,200
1,600
1985 1995 2005 2015e 2025e
Below Poverty Line Poor Middle / Upper middle Class Rich
Literacy, urbanisation andconsumerism to influencebrand selection
Consumer Electricals
Antique Stock Broking Limited 5
Conclusion
Going forward, we believe that the electricals and electricals appliances segment isheaded for a period of consolidation, with a gradual weeding out of smaller andunorganised players, as scale and branding become paramount for survival. Webelieve that the balance in the industry will gradually tilt in favour of pan-India playershaving a large manufacturing base, well rounded product basket and visibility in themarketplace.
Mindful of the same, we have covered a mix of large and mid-sized players in thisreport. While a balanced product profile, efficient operations and extensive distributionare common threads running through all companies, another salient feature is thepedigree of corresponding managements of all these companies. From innovation tomarket expansion, these companies have demonstrated the hunger for growth andcapability to weather tough market conditions. This inspires confidence in their abilityto emerge at the top of the sector in the face of intense competition and marketconsolidation.
We, at Antique, firmly believe that relatively low elasticity of demand of householdelectricals and the vital nature of their consumption in housing, make the sector aninteresting play on the dual themes of the Indian consumption cycle and rapidurbanisation. We hope our recommendations merit serious consideration as lucrativeinvestment opportunities in FY12e.
Antique Electricals Companies PeersetCompany M. Cap CMP Target Price Upside Rating
(INRm) (INR) (INR) (%)
Havells India Limited 50,534 405 495 22 BUY
Bajaj Electricals Limited 27,200 279 327 17 BUY
V-Guard Industries Limited 5,476 183 241 32 BUYSource: Antique
Scale and branding todetermine level of success inmarketplace
Havells India LimitedAll lit up and ready to shine 18 April, 2011
Investment rationaleHavells India Limited’s (HIL) product profile in the electricals space spans theentire value chain from cables and wires to switchgears. Over the years, ithas kept adding products to its portfolio while maintaining strong focus onquality. These factors have contributed to HIL becoming a ‘One-Stop-Shop’for customers, enabling it to capture a larger chunk of the Indian consumerspend on household electricals.
Strong brand recall and distribution
Company’s marketing strategy is centered around brand recall. Its ad spendsare on par with multinational peers and designed to showcase individualproducts. HIL has backed this up with a formidable distribution network inTier 1-2 cities and is now focusing on increasing its penetration in the ruralhinterland.
Sylvania bogey exorcised
HIL had acquired the global operations of Sylvania in Apr’07 for Euro227m.After losses incurred during the slowdown of FY09, HIL restructured Sylvania’soperations and headcount. As a result, the latter is now profitable at the PATlevel and its operations and cash flows are expected to improve going forward.
Robust operational cash flows to boost valuations
With steady cash generation from Indian operations and operationalprofitability achieved in Sylvania, we estimate cash flows to improvesubstantially from FY11e onwards. Consequently, debt retirement over thenext few years should reflect in an improved EV on the consolidated level.
Valuation and outlookWhile new product launches and improved penetration into foreign marketswill serve as kickers for earnings, the successful monetisation of its twostrong brands are crucial to improve financial metrics. Given its ability tosuccessfully negotiate challenging situations, we are confident that HIL willaccomplish the same. We recommend a BUY on the stock with a targetprice of INR495.
Amol Rao+91 22 4031 3435
Market dataSector : Consumer ElectricalsMarket Cap (INRm) : 50,534Market Cap (USDm) : 1,122O/S shares (m) : 125Free Float (m) : 4652-wk HI/LO (INR) : 447/264Avg Daily Vol (‘000) : 368Bloomberg : HAVL INReuters : HVEL.BO
Returns (%)1m 3m 6m 12m
Absolute 10 5 (9) 18Relative 4 4 (5) 10
Shareholding pattern
Price performance vs Nifty
Source: Bloomberg
Source: BSE
Source: Bloomberg
Source: Bloomberg
Key financialsYear ended 31st Mar 2009 2010 2011e 2012e
Revenues (INR m) 54,775 54,315 61,229 67,300
EBITDA (INR m) 2,886 3,222 4,851 7,072
EBITDA Margin (%) 5.3 5.9 7.9 10.5
EBITDA growth (%) (16.7) 11.7 50.5 45.8
PAT (INR m) (1,601) 696 2,313 3,998
PAT growth (%) (199.5) (143.5) 232.3 72.9
EPS (INR) (12.8) 5.6 18.5 32.0
EPS growth (%) (199.5) (143.5) 232.3 72.9
P/E (x) (31.6) 72.6 21.9 12.6
P/BV (x) 8.2 12.6 8.6 5.4
EV/EBITDA (x) 11.5 9.7 11.7 7.5
RoE (%) (24.5) 13.7 46.8 52.2
Source: Company, Antique
Promoter62%
DII2%
FII16%
Others20%
70
85
100
115
130
Aug-10 Sep-10 Nov-10 Jan-11 Mar-11
Havells Nifty
RECO : BUYCMP : INR405Target Price : INR495Potential Upside : 22%
Com
pany
Upd
ate
Havells India Limited
Antique Stock Broking Limited 8
Company Profile
Introduction
Havells India Limited (HIL), incorporated in 1983, is promoted by Mr. Q. R. Guptaand one of India's premier electrical equipment companies. It has a comprehensiveand contemporary product profile that encompasses cables and wires, switchgearsand electrical durables like CFLs, fans, water geysers, switches, etc.
Over the years, superior product quality standards, strong distribution reach andaggressive marketing efforts have resulted in HIL being one of the most preferredconsumer electrical brands in the country.
HIL has an international presence through Sylvania, which it acquired in Apr'07 for aconsideration of Euro227m. The primary driver for the same was access to marketslike Europe, L. America and some parts of Asia, where Sylvania's brand was wellestablished to leverage company’s design and development capabilities.
HIL: Standalone revenues and EBIDTA (INRm)
Source: Company, Antique
Sylvania: Revenues and EBIDTA (INRm)
Source: Company, Antique
0
20,000
40,000
60,000
80,000
FY07 FY08 FY09 FY10 FY11e FY12e
0
1,300
2,600
3,900
5,200
Sw itchgears Cables Lighting Electricals Operating Profit (RHS)
0
10,000
20,000
30,000
40,000
FY08 FY09 FY10 FY11e FY12e
0
1,300
2,600
3,900
5,200
Lighting Sw itchgears Operating Profit (RHS)
Product quality and value formoney are key offerings ofHIL’s product basket
Sylvania taken over in Mar’07from private investors
Havells India Limited
Antique Stock Broking Limited 9
Business Summary
Product Portfolio
HIL’s vast product portfolio spans several verticals. Though seemingly diverse, its productsare priced and designed in a manner to encompass the widest possible range ofapplications, enabling it to maximise its grab of consumer discretionary spend onhousehold electricals.
HIL: Business segmentsSegment Products Consumers Revenue Drivers Competitors
Cable and Wires Power Cables, Copper Retail Consumers and Investment in Power Finolex, Polycab, KEICables, Control Cables Power Utilities and Real Estate
Switchgears LV Switchgears and Retail Consumers Real Estate Growth and Legrand, Scnhneider, SiemensModular Switches and Industry Power Distribution
Lighting and Fixtures CFL and Luminaries Retail and Commercial Real Estate Philips, Osram, GE, Wipro
Electrical Consumer Durables Fans (Geysers to be Retail Housing Growth and CG, Orient, Khaitanintroduced) rising aspirations
Sylvania CFL, Luminaries and HID Industry, Commercial Housing Growth in Osram, Philips, GEand Retail Europe and Latam
Source: Company, Antique
Cables and wires: HIL manufactures cables (for industrial applications) and wires(for household applications). Its cable portfolio consists of Low Tension (1.1-11 KV)cables as well as High Tension (11-66 KV) cables. Even though this category is highlycommoditised and extremely price sensitive with intense competition from theunorganised sector, HIL persists with it in order to offer its customers a well-roundedproduct profile.
Interestingly, product quality and brand perception have consistently enabled thecompany to command a premium of 2-3% over peers in this product category. HILderives ~20% of its overall revenues from this vertical, with margins of 8-9%.
HIL: Performance of Switchgears HIL: Performance of Cables &Wires
Source: Company, Antique
1,200
1,500
1,800
2,100
2,400
1QFY08 1QFY09 1QFY10 1QFY11
20.0
25.0
30.0
35.0
40.0
Revenues (INR m) Contribution (%) (RHS)
1,800
2,100
2,400
2,700
3,000
1QFY08 1QFY09 1QFY10 1QFY11
-6.0
-1.0
4.0
9.0
14.0
Revenues (INR m) Contribution (%) (RHS)
Havells India Limited
Antique Stock Broking Limited 10
Switchgears: HIL is a leading manufacturer of switchgears in India. With marketleadership in categories like miniature circuit breakers (MCBs), residual circuit breakers(RCBs) and other associated equipment in the domestic switchgears space, it has amarket share of ~20% in this vertical. It also manufactures industrial switchgears,albeit on a smaller scale. This is due to industry dynamics wherein a majority of salesis direct (B2B) in nature, necessitating a large salesforce. Consequently, it has a ameagre 9% market share in this segment.
As a whole, this vertical contributes ~15% of HIL's revenues in FY10 with rich grossmargins between 32-36%, making it the most lucrative product vertical for the company.
Lighting & luminaires: HIL manufactures CFLs and energy saving FTLs (FluorescentTube Lights) with a wide array of luminaires and fixtures. HIL is one of the top fivedomestic players in this segment. HIL’s domestic lighting and luminaires contribute~7% of overall revenues and command margins of 17-18%.
HIL's international presence in this segment is through Sylvania, which it took over inMar'07. Sylvania enjoys tremendous brand equity, extensive and contemporary productprofile and impressive access to markets in over 40 countries, spanning Europe, LatinAmerica and Far East Asia. Sylvania's lighting and luminaires product portfoliocontributes ~50% of HIL's overall revenues, and its margins have staged a smartrecovery from lows of 1% in FY08 to ~18% in FY10.
Electrical consumer durables: Till recently, this vertical comprised fans, whichHavells launched in CY04. The company currently has a 14% share in this productand is one of the few pan-India players. Recently, HIL launched hot water geysers andhas hit upon the strategy of selectively launching a new product in this vertical every12-18 months.
HIL: Performance of Switchgears HIL: Performance of Cables & Wires
Source: Company, Antique
400
600
800
1,000
1,200
1QFY08 1QFY09 1QFY10 1QFY11
6.0
11.0
16.0
21.0
Revenues (INR m) Contribution (%) (RHS)
200
500
800
1,100
1,400
1QFY08 1QFY09 1QFY10 1QFY11
16.0
22.0
28.0
34.0
40.0
Revenues (INR m) Contribution (%) (RHS)
High margins in switchgearson account of higher portionof retail sales
Products like irons and foodgrinders to be introduced soon
Havells India Limited
Antique Stock Broking Limited 11
Business Model
The solidity of HIL’s business model comes from the three pillars of operations viz.manufacturing, marketing and distribution:
Manufacturing: Since its inception, HIL has maintained a policy of in-housemanufacturing. It has plants for all products except lighting fixtures, which it partlyoutsources. This is due to company’s policy of optimum utilisation of raw material andstringent quality standards. As a matter of policy, HIL has always entered productareas that are sizeable enough to justify in-house manufacturing. Consequently, it hasa contemporary product repertoire coupled with impeccable quality.
Going forward, the company has decided to outsource the manufacturing of selectednew products in order to cut down on the lead time to markets. By opting to monitorquality standards and focus on advertising and distribution, HIL is slowly adopting an‘Asset-Light’ model. We believe this will be beneficial for balance sheet and operatingmetrics as it will enable the company to leverage its core competencies to the hilt andsimultaneously boost return ratios.
Marketing: Over the years, HIL has built a strong brand for itself through aggressivenational advertising. With ad spends comparable to some FMCG players, HIL’s productsare marketed as technologically superior and ‘Value-for-Money’ propositions.Consequently, HIL is currently amongst the ‘Top Five’ consumer electricals brands inthe country.
Distribution: The cornerstone of HIL’s spectacular growth in revenues over the pastsix years has been the successful leveraging of its distribution network. With over4,300 distributors and 35,000 retailers spread the country, HIL has one of the mostextensive setups in the industry. Over the years, the company has cultivated its dealersthrough trade friendly practices, enabling to launch a wide variety of products inseemingly different verticals. The efficiency and reliability of its distribution channelsare borne out from its market share in most product categories and improved revenuesand operating profits which have registered a CAGR of 17% and 29% over the pastfour years (FY07-10).
For its domestic operations, HIL securitises its receivables through a consortium ofbanks. With near-zero delinquencies from its domestic dealers, the company getsattractive rates for the same. As a result, on the domestic front, HIL almost operates ona negative working capital cycle.
Despite the size and scale of Sylvania’s operations, which spans numerous countries,HIL’s consolidated working capital cycle is near zero. From FY09, the company hasmaintained inventory levels and receivables at less than 60 days and 50 daysrespectively, while liberal terms from creditors (~110) have resulted in a comfortableworking capital cycle.
Manufaturing locationsLocation Product
Alwar Cables & wires
Noida Capacitors, Lighting & Fixtures
Baddi Switchgears
Haridwar Fans
Neemrana Motors, Lighting &Fixtures
Sahibabad Switchgears
Source: Company, Antique
HIL: India Marketing Spend (INRm)
-
250
500
750
1,000
FY05 FY07 FY09
Source: Company, Antique
Havells India Limited
Antique Stock Broking Limited 12
Sylvania - International operations turning a corner
HIL acquired Germany-based SLI Sylvania for an enterprise value of Euro227m.Sylvania’s operations were a part of OSRAM, a division of Siemens. Post restructuringof the Siemens group, SLI's ownership rested with financial investors.
The SLI acquisition was routed through a 100% SPV i.e., Havells’ Netherlands BV withthe following objectives:
Capitalising on Sylvania’s design and engineering capabilities
Monetising Sylvania's brands, viz. Sylvania, Concord marlin, Luminance, SLILighting, Zenith and Linolite and expanding breadth of product offerings in Indiaand globally.
Entering new geographies in Europe and Latin America and parts of Far EastAsia and leveraging Sylvania’s distribution network in Europe to propel the growthof its switchgears business.
The total consideration for the acquisition routed through HIL’s subsidiary HavellsNetherlands was Euro227m. Of this, pension liability amounted ~Euro35m, whichwas to be paid when it arose. Thus, against an immediate liability of Euro192m, HILraised debt which was a mix of non-recourse (Euro120m) and recourse type (Euro72m).Of the latter, ~Euro50m was funded through equity infusion, by way of ~4.2m sharesissued to Warburg Pincus at INR625/sh.
Sylvania Acquisition(Euro m)
Equity Value - (i) 105
Debt - (ii) 87
Cash Outflow (i+ii) 192
Pension Liabilities 35
Total Enterprise Value 227Source: Company, Antique
However, things turned sour when Sylvania started bleeding operationally during theeconomic downturn of FY09. The company defaulted on a couple of monthly repaymentsof working capital borrowings to a consortium of international banks. Consequently,HIL undertook a two phased restructuring program.
Restructuring programmes(Euro m) Cost Savings Objectives
Phoenix 12 18 Headcount reduction (1,200 people), closure of 3 plantsand 8 warehouses, reduction in working capital
Parakram 18 17 Headcount reduction (400 people), outsourcing fromChina & India
Source: Company, Antique
Consequently, Sylvania has posted an EBIDTA and PAT of INR939m and INR53mrespectively for 9MFY11 (v/s EBIDTA loss of INR402m and net loss of INR3.8bn in9MFY10).
Products like irons and foodgrinders to be introduced soon
Havells India Limited
Antique Stock Broking Limited 13
Our viewHIL’s Indian operations have always been on a firm footing, with the company clockingconsistent improvement in revenues over the past four years. Backed by an aggressiveadvertising campaign and new product launches, HIL’s monthly revenues currentlyhover between INR2-2.5bn. The increase in volumes and tight controls over costs haveensured a steady increase in HIL’s OPM from 9% in FY07 to 12.6% in FY10.
Till recently, Sylvania’s operations and financials were proving to be a drag on overallvaluations for HIL. The efficacy of measures like higher focus on sales in emergingmarkets in L. America, outsourcing of production and right-sizing of the workforce isevident from last quarter’s results and we expect these to continue contributing towardsimprovement in operating metrics. Additionally, we feel that Sylvania’s brands haveyet to be monetised to the fullest and that the foray into L. America and the Far Eastwill help fetch richer realisations and margins.
Going forward, we expect HIL’s consolidated revenues at INR61bn, with an EBIDTAof 8% and PAT of INR2.3bn. The crucial factor is the generation of sustainable cashflows with which HIL will retire Sylvania’s debt. In FY12e, we expect the company tomaintain its growth trajectory, with revenues of INR67bn, OPM of 10.5% and PAT ofINR4bn.
At the CMP of INR405, HIL is trading at a PER and EV/EBIDTA multiple of 12.6x and7.5x respectively, discounting its FY12e numbers. We have valued the company usingthe ‘Sum-of-Parts’ method and have assigned EBIDTA multiples to HIL’s and Sylvania’sprofits.
HIL: ValuationHavells (Stand-Alone) Sylvania
EBIDTA (INRm) 4,433 EBIDTA (INRm) 2,639
EBIDTA multiple (x) 12 EBIDTA multiple 7
EV (INRm) 53,195 EV (INRm) 19,527
Net Debt (INRm) 1,200 Net Debt (INRm) 9,765
Equity Value 51,995 Equity Value 9,762
Value/sh (INR) - (A) 417 Value/sh (INR) - (B) 78
Havells India Ltd. (Consolidated) (A+B): Value /sh (INR) 495Source: Antique
We are optimistic about the overall operations of HIL and believe that the gradualreduction in Sylvania’s debt over the next few years coupled with the buoyancy inIndian operations will trigger a re-rating in the stock. We recommend a BUY with aprice target of INR495, which reflects an upside of 22% from current levels.
Sylvania has turned a cornerpost restructuring
Lower multiple for Sylvania onaccount of lower profitability
FinancialsProfit and loss account (INRm)Year ended 31st Mar 2008 2009 2010 2011e 2012eRevenues 50,029 54,775 54,315 61,229 67,300
Expenses 46,563 51,889 51,093 56,378 60,228
Operating Profit 3,466 2,886 3,222 4,851 7,072
Other income 250 86 222 100 100
EBIDT 3,716 2,972 3,444 4,951 7,172
Depreciation 694 905 837 892 1,072
Interest expense 1,036 1,253 979 867 696
Profit before tax & excp. Items 1,986 814 1,628 3,191 5,403
(+) Exceptional items - (1,986) - (66) -
Profit before tax 1,986 (1,172) 1,628 3,125 5,403
Taxes incl deferred taxation 377 429 932 813 1,405
Profit after tax 1,610 (1,601) 696 2,313 3,998
Diluted EPS (INR) 12.9 (12.8) 5.6 18.5 32.0
Balance sheet (INRm)Year ended 31st Mar 2008 2009 2010 2011e 2012eShare Capital 290 301 301 624 624
Reserves & Surplus 6,433 5,821 3,690 5,253 8,814
Networth 6,723 6,122 3,991 5,877 9,437
Debt 12,962 12,278 10,664 9,739 6,639
Deferred Tax Liability (76) (97) 266 266 266
Minority Interest - 2 2 2 2
Capital Employed 19,609 18,304 14,923 15,884 16,345
Gross Fixed Assets 27,262 28,961 26,963 27,440 27,940
Accumulated Depreciation 19,944 20,427 18,089 18,982 20,054
Net Assets 7,318 8,534 8,874 8,458 7,886
Capital work in progress 1,005 308 336 300 300
Goodwill 3,346 3,579 3,212 3,212 3,212
Investments 32 - - - -
Current Assets, Loans & Advances
Inventory 10,419 7,947 8,246 9,396 10,038
Debtors 8,227 7,573 6,982 7,824 8,599
Cash & Bank balance 2,429 2,473 1,481 2,563 3,355
Loans & advances and others 2,124 2,141 1,578 1,578 1,578
Other assets 29 79 102 102 102
Current Liabilities & Provisions
Creditors 14,652 13,934 15,555 17,227 18,403
Other liabilities & provisions 490 373 321 321 321
Net Current Assets 8,087 5,907 2,512 3,914 4,947
Miscellaneous Exp (not w/o) 1 1 0 0 0
Application of Funds 19,789 18,328 14,934 15,884 16,345
Per share dataYear ended 31st Mar 2008 2009 2010 2011e 2012eNo. of shares (m) 58 60 60 125 125
BVPS (INR) 116.1 101.8 66.3 47.1 75.6
CEPS (INR) 39.8 (11.6) 25.5 25.7 40.6
DPS (INR) 2.5 2.5 3.8 3.0 3.0
Source: Company, Antique
Cash flow statement (INRm)Year ended 31st Mar 2008 2009 2010 2011e 2012ePBT 1,986 (1,172) 1,628 3,125 5,403
Depreciation & amortisation 694 905 837 892 1,072
Interest expense 939 1,084 871 867 696
Interest / Dividend Recd (32) (18) (16) (100) (100)
Other Adjustments 62 (369) (2,252) - -
(Inc)/Dec in working capital (3,498) 2,168 2,543 (320) (241)
Tax paid (391) (400) (699) (813) (1,405)
CF from operating activities (239) 2,199 2,913 3,652 5,426
Capital expenditure (7,725) (1,676) (1,077) (441) (500)
(Purchase) / Sale of Investments - 33 - - -
Income from investments 32 18 16 100 100
CF from investing activities (7,693) (1,626) (1,061) (341) (400)
Inc/(Dec) in share capital 2,779 1,397 - - -
Inc/(Dec) in debt 7,487 (684) (1,761) (925) (3,100)
Dividends & Interest paid (275) (1,229) (1,035) (1,305) (1,134)
CF from financing activities 9,991 (515) (2,796) (2,230) (4,234)
Net cash flow 2,059 57 (944) 1,081 792
Opening balance 299 2,358 2,415 1,471 2,553
Closing balance 2,358 2,415 1,471 2,553 3,345
Growth indicators (%)Year ended 31st Mar 2008 2009 2010 2011e 2012eRevenue 223.3 9.5 (0.8) 12.7 9.9
EBITDA 137.8 (16.7) 11.7 50.5 45.8
PAT 57.6 (199.5) (143.5) 232.3 72.9
EPS 57.6 (199.5) (143.5) 232.3 72.9
Valuation (x)Year ended 31st Mar 2008 2009 2010 2011e 2012ePE 31.4 (31.6) 72.6 21.9 12.6
P/BV 7.3 8.2 12.6 8.6 5.4
EV/EBITDA 9.1 11.5 9.7 11.7 7.5
EV/Sales 0.7 0.6 0.6 0.9 0.8
Dividend Yield (%) 0.6 0.6 0.9 0.7 0.7
Margins (%)Year ended 31st Mar 2008 2009 2010 2011e 2012eEBITDA 6.9 5.3 5.9 7.9 10.5
EBIT 6.0 3.8 4.8 6.6 9.1
PAT 3.2 (2.9) 1.3 3.8 5.9
Financial ratiosYear ended 31st Mar 2008 2009 2010 2011e 2012eRoE (%) 33.8 (24.5) 13.7 46.8 52.2
RoCE (%) 26.2 10.8 15.7 26.3 37.9
Debt/Equity (x) 1.9 2.0 2.7 1.7 0.7
EBIT/Interest (x) 2.9 1.6 2.7 4.7 8.8
Source: Company Antique
Antique Stock Broking Limited 14
Havells India Limited
Bajaj Electricals LimitedCharge of the old guardInvestment rationaleBajaj Electricals Limited (BEL) is one of the largest and the most renownedIndian players in the consumer electricals space, with a vast portfoliocomprising household electricals and consumer appliances. It also undertakesengineering projects on a turnkey basis, which includes street lighting,illumination solutions for commercial facilities and rural electrification.
Robust business model
More than 75% of BEL’s electrical products are outsourced from small scaleunits, as BEL concentrates on design and development, in addition to sales anddistribution. This ‘Asset-Light’ model helps curtail capex requirement, which issignificant considering the short lifecycle of consumer electricals and appliances.
Projects division leverages expertise in electricals
It has successfully leveraged its expertise in electricals by venturing into turnkeyengineering projects in the illumination space. Its projects range from streetlighting to solutions for sporting and industrial facilities. More importantly, cashflows from the electricals business are invested in the working capital intensiveprojects business, thereby minimising the need for external borrowings.
Favourable macro factors generate positive headwinds
A slew of government projects ranging from upgradation of urban infrastructureto electrification of India’s rural hinterland provide a rosy backdrop forimpending buoyancy in the electricals and projects space. This, coupled withBEL’s ability to easily scale up both businesses, generates a scenario for animminent improvement in company’s earnings.
Valuation and outlookA track record of consistent growth, management pedigree and excellentexecution capabilities, inspire our confidence in BEL’s prospects. It trades ata P/E of 16.3x and EV/EBIDTA of 9.3x, discounting FY12e earnings. Weinitiate coverage with a BUY recommendation and price target of INR327with a 12-month perspective, which represents an upside of 17%.
Key financialsYear ended 31st Mar 2009 2010 2011e 2012e
Revenues (INR m) 17,658 22,286 26,313 29,765
EBITDA (INR m) 1,799 2,434 2,435 2,882
EBITDA Margin (%) 10.2 10.9 9.3 9.7
EBITDA growth (%) 23.8 35.3 0.0 18.4
PAT (INR m) 894 1,253 1,340 1,666
PAT growth (%) 22.3 40.1 7.0 24.3
EPS (INR) 9.2 12.8 13.7 17.1
EPS growth (%) 22.3 40.1 7.0 24.3
P/E (x) 30.4 21.7 20.3 16.3
P/BV (x) 11.1 5.5 4.6 3.7
EV/EBITDA (x) 13.8 11.4 11.2 9.3
RoE (%) 42.6 33.9 24.6 25.2
Source: Company, Antique
Initi
atin
g Co
vera
ge
Amol Rao+91 22 4031 3435
Market dataSector : Consumer ElectricalsMarket Cap (INRbn) : 27,200Market Cap (USDbn) : 604O/S shares (m) : 99Free Float (m) : 3752-wk HI/LO (INR) : 347/188Avg 6m Vol (‘000) : 119Bloomberg : BJE INReuters : BJEL.BO
Returns (%)1m 3m 6m 12m
Absolute 26 34 (13) 32Relative 18 33 (9) 23
Shareholding pattern
Price performance vs Nifty
Source: Bloomberg
Source: BSE
Source: Bloomberg
Source: Bloomberg
Others15%
FII8%
DII12%
Promoter65%
70
85
100
115
130
Aug-10 Sep-10 Nov-10 Jan-11 Mar-11
BEL Nifty
RECO : BUYCMP : INR279Target Price : INR327Potential Upside : 17%
18 April, 2011
Bajaj Electricals Limited
Antique Stock Broking Limited 16
Company Profile
Introduction
Bajaj Electricals Limited (BEL), promoted Mr. Shekhar Bajaj, is one of India’s oldestconsumer electricals companies. Incorporated in 1938 as Radio Lamp Works Limited,it was renamed Bajaj Electricals in 1960. Around this time, BEL started marketingelectrical appliances sourced from small scale industries (SSIs). While retaining thispractice over the years, the company has tied-up with international brands like MorphyRichards and Nardi to market their products in India. BEL’s distribution reach is extensiveconsidering its wide network of 1,000 distributors, 3,000 dealers and 250,000 retailoutlets in India.
BEL also undertakes engineering projects (EP), having executed lighting projects forairports, stadia, factory complexes. It is also involved in two other verticals viz. streetlighting and electricity transmission infrastructure, whereby it designs, supplies, erectsand integrates electric masts and poles, transmission and telecom towers, etc.
In FY10, BEL raised INR1.6bn through a QIP in order to retire some high cost debtand meet the spurt in working capital funds for its EP business.
Revenues from Consumer Electricals & Appliances (INRm)
Source: Company, Antique
Revenues from Engineering Projects (INRm)
Source: Company, Antique
-
6,000
12,000
18,000
24,000
Mar'06 Mar'07 Mar'08 Mar'09 Mar'10 Mar'11e Mar'12e
Lighting Luminaires Fans Consumer Appliances
-
3,000
6,000
9,000
12,000
Mar'06 Mar'07 Mar'08 Mar'09 Mar'10 Mar'11e Mar'12e
BEL has one of the widestdistribution networks in theindustry
Bajaj Electricals Limited
Antique Stock Broking Limited 17
Business Summary
Product portfolio
Consumer Electricals and Appliances
Over its seven decades of operations, BEL has continuously strived towards garneringa larger portion of consumer spends on electricals and appliances. Consequently, thecompany has opted to concentrate wholly on the design and development of productsand monitoring of quality. Its outsourcing model has enabled it to routinely introducenew products in various verticals while cutting the lead time to the market. It hasleveraged its brand and customer service initiatives over the years to emerge as one ofthe most trustworthy consumer brands in the country.
BEL’s consumer electricals business can be segregated in the following manner:BEL: Verticals and PeersetVertical Product % of Rev Competitors
Lighting GLS Lamps, Fluorescent Tube Lights, CFLs, Ballasts & Starters, 12% Philips, Crompton, Wipro, Osram,LED Torches, Miniature Lamps Havells
Luminaires LEDs, Industrial / Commercial / Decorative Luminaires, 12% Philips, Crompton, Wipro, ThornStreet / Flood Lighting
Fans Ceiling Fans, TPW Fans, Industrial / Exhaust Fans, 17% Crompton, Polar, Havells, Orient, KhaitanCommercial Air Circulators
Consumer Appliances Iron, Ovens / Toasters / Grillers OTG), Water Heaters, Mixers Grinders, 26% Philips, Kenstar, Black & Decker,Juicers, Food Processors, Blenders, Water Purifiers & Filters, Microwave Crompton, Usha,Ovens, Gas Stoves, Electric Kettles, Coffee Makers, Tea Makers
Source: Company, Antique
Lighting: The domestic market for lighting products is estimated at INR36bn, withgrowth pegged at 10% pa. It consists of primarily general lighting service (GLS)bulbs, fluorescent tubelights (FTL), and compact fluorescent lamps (CFL), with specialisedlamps (torches, LED lamps, etc.) accounting for a small portion of offtake.
BEL is a leading domestic player in lighting products, with a presence and a topbrand recall across all major product categories. It sources GLS and FTL products fromits sister concern Hindustan Lamps Ltd., U.P., while CFLs are sourced from anothersister concern, Starlite Lighting Ltd, Nashik. This segment accounted for ~12% ofcompany’s revenues in FY10.
India: GLS Market India: CFL Market
Source: Company, Elcoma, Antique
Crompton5%
BEL8%
Surya12%
Philips26%
Others49%
Others43%
Oreva6%
Philips26%
Surya12%
BEL8%
Crompton 5%
Bajaj Electricals Limited
Antique Stock Broking Limited 18
Luminaires: This vertical consists of lighting products with specialised applicationsfor industrial and decorative use, street and flood lighting, LED, etc. This market isestimated at INR25bn, with a robust growth of ~8% pa.
BEL has almost four decades of operating experience in this vertical, which accountedfor 12% of revenues in FY10. Its market share of 17% in this segment is second onlyto Philips. The company has a distribution agreement with Trilux Lenze of Germany forhigh-end technical lighting. BEL has supplied luminaires for a number of large projects,including Indira Gandhi Stadium, Jawaharlal Nehru Stadium, and TCS’ green-buildingprojects in Chennai.
Through tie ups with leading international players, BEL has recently added BuildingManagement Systems (BMS) and Fire Detection Systems (FDS) to its product basket,whereby it is looking to monetise its existing relaionships with builders and architectsand simultaneously build an all-encompassing service profile. While this business isstill in a nascent stage, we believe that BMS and FDS have tremendous scalability andcould be a significant money spinner after three to four years from now.
Fans: Organised players control 60-65% of the domestic market for fans, with annualsales of INR19bn. The remainder is made up for by the unorganised players andimports from China. A combination of factors like revival of the housing industry,replacement demand and a gradual shift towards branded players has resulted in agrowth of 25% p.a. in this industry.
BEL is one of the market leaders in this vertical, deriving 17% of its revenues from thesales of fans. 75% of its sales is from fans manufactured in-house at its facility inChakan, Maharashtra while the remainder is procured from Midea, China, which isone of the world’s largest manufacturers of TPW (Table, pedestal, Wall-mounted)fans. BEL is now focussing its efforts on increasing its sales of industrial fans and otherpremium end products in this vertical viz. designer and premium end fans
Consumer appliances: Consumer appliances in India form a very large marketand lucrative market (~INR60bn) and include products like irons, ovens-toasters-grillers(OTG), microwave ovens, food processors, tea/coffee makers, etc. This market islargely organised due to the consumers’ preference for branded products and warrantyissues. Simultaneously, the reduction in prices of branded products, either due toimports from China or due to manufacturing efficiencies and benefits of economies ofscale for domestic manufacturers, have contributed to the shift towards the organisedsegment. Lastly, demographic changes coupled with the increasing pace of urbanisationare leading to increasing use of electrical appliances in day-to-day life.
In addition to selling products under its own brand, BEL has a technical collaborationand brand licensing agreement with UK’s leading home appliances company, MorphyRichards, to sell its products in India. The company has also tied up with Nardi, Italyto sell gas based cooking ranges/ hobs. Consumer appliances are the second largestrevenue generator for BEL, with ~25% of income coming from this segment. Its marketshare ranges in a bracket of 15-30% across products. It outsources manufacturing ofall its products from dedicated vendors across the country, in addition to outsourcingfrom China.
India: Luminaires Market
Source: Company, Antique
BEL has enjoyed tremendoussuccess with Morphy Richardbrand
Others38%
BEL17%
Crompton 13%
Wipro9%
Philips23%
Bajaj Electricals Limited
Antique Stock Broking Limited 19
Engineering and Projects
BEL has a sizeable Engineering and Projects (EP) business, which has registered aCAGR of 30% over the last four years on the back of the heightened spend on domesticinfrastructure. It operates in three arenas viz. towers for power and telecom, specialprojects for facilities lighting and high masts & poles, which collectively accounted fora third of its revenues in FY10.
Towers: BEL’s towers business caters to the telecom and power transmission segments.Its operations include the manufacture and setting up for transmission towers, forwhich the company has manufacturing facilities at Ranjangaon.
Company’s clientele comprises marquee clients like PGCIL, Tata Power and variousSEBs in the power transmission space in addition to several large telecom and towercompanies like GTL, Ericsson, Nortel, Bharti, BSNL, Reliance, etc.
Special Projects: Under this segment, the company undertakes lighting andelectrification work. This includes rural electrification projects under the Rajiv GandhiGram Vidyutikaran Yojana (RGGVY), whereby it provides last mile connectivity in therural hinterland of the country, in addition to installation of electrical fixtures in thetargetted households.
BEL has also executed projects for lighting solutions of power plants, industrialcomplexes, retails formats and sports stadia like those used in the recent ‘2010Commonwealth Games’ in New Delhi.
High Masts & Signages: BEL’s operation under this vertical include the design,erection and installation of streetlights under the Jawaharlal Nehru Urban RenewalMission (JNNURM). Additionally, it erects corporate signages and manufactures highmasts and poles for installation in factories and industrial complexes.
Business Model
Consumer Electricals and Appliances
BEL has long relied on an outsourcing model, whereby ~75% of its products aresourced from dedicated vendors. This has helped it focus on product developmentand design, simultaneously freeing BEL’s management to focus on developing anextensive sales and distribution network. The outsourcing model is advantageous, asit has helped BEL rationalise capex requirement in the electricals space. This assumessignificance given the increasingly shortening of consumer electricals lifecycle.
Over the last four years, BEL’s revenues from electricals and appliances have risen ata CAGR of 25%, on the back of its formidable sales network and contemporaryproduct portfolio. Currently, this division accounts for ~67% of BEL’s revenues, withproducts being sold through a network comprising 1,000 distributors and 3,000dealers in addition to 25,000 retailers, backed by 235 service centres. To its credit,the company has steadily improved its OPM in this segment from ~7% in FY07 to 10%in FY10, through measures like improvements in supply-chain management andcompetitive sourcing.
BEL has leveraged itsreputation and technicalcompetence in the EP business
Bajaj Electricals Limited
Antique Stock Broking Limited 20
BEL’s consumer electricals and appliances business operates on a negative workingcapital cycle of ~20-30 days, as the company monetises the goodwill it enjoys amongstits suppliers. While it enjoys 90 days of credit from its suppliers, its collection cyclefrom distributors is ~60 days.
Engineering and Projects
BEL ventured into the EP space nearly five years ago, with a view to broadbase itsrevenue stream and leverage its supplies of project based, high end electricals andluminaires. These operations are supported by in-house manufacturing facilities formanufacturing high masts, poles, etc., and a highly qualified team of ~250 engineersfor project design and execution.
As mentioned earlier, its operations encompass a wide range of government andprivate projects, which range include rural electrification, industrial complex lighting,electric signages, electrical fitouts of installations and buildings etc. Revenues in thisvertical make for a third of BEL’s revenues and have expanded at a CAGR of 30%over the past 4 years. On a blended basis, the OPM of this division is stable between11-12%, depending on the nature of the order. On the flipside, the working capitalcycle of this vertical is long, with payables at 120 days and receivables in excess of180 days. However, BEL deploys cash from its electricals business for EP operations,thereby minimising the need for short term borrowings.
As of Dec’10, the EP division’s order book stood at INR10.75bn, to be executedwithin 15 months.
Quarterly segmental revenue and margin trend
Source: Company, Antique
-
900
1,800
2,700
3,600
Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
-
4.0
8.0
12.0
16.0
Lighting (INR m) Cons Dur (INR m)
Lighting PBIT (%) (RHS) Cons Dur PBIT (%) (RHS)
-
750
1,500
2,250
3,000
Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
-
5.0
10.0
15.0
20.0
E&P (INR m) E&P PBIT (%) (RHS)
EP Order book (Dec-10)Vertical INRm
High Masts & poles 1,200
Transmission Towers 5,150
Rural electrification 3,200
Lighting 1,200
Total 10,750Source: Company
Bajaj Electricals Limited
Antique Stock Broking Limited 21
Our ViewWith the imminent confluence of several macro-level factors such as jump in powergenerating capacity, increased spending on transmission infrastructure andheightened execution of social infrastructure projects, we believe the addressablemarket for electricals, luminaires and associated goods and services is on the verge ofexpanding significantly. In such a scenario, we expect BEL to be one of the largestbeneficiaries by virtue of being one the foremost players in this arena.
Over the last few years, the company has steadily built competencies in bothbusinesses viz. electricals and EP, which should stand in good stead. As both businessesgather traction, we expect cash flows from the electricals and appliances division tobe pumped into the EP business. Going forward, we expect revenues from electricalsand appliances to register a CAGR of 17% over the next 2 years. We estimaterevenues from the EP division to rise at a CAGR of 18% over the next 24 months as thecompany executes a significant portion of its order book of INR11.5bn.
We estimate BEL to clock sales of INR26bn (+18%) in FY11 with an OPM of 9.3%.This would primarily be on account of higher sales across all categories of electricals(+18%) while the EP division clocks growth of 17%. We expect EBIDTA and profits tosettle at INR2.4bn and INR1.3bn respectively.
In FY12e, we expect revenues of INR30bn (+13%) with BEL’s electricals and EP divisionsregistering growth of 14% and 12% respectively. We estimate OPM to improve 40bpsas long tailed projects near completion. We estimate company’s EBIDTA and netprofits to surge to INR2.9bn and INR1.6bn respectively for FY12e. We believe thatthe jump in working capital requirement in the EP business will be met entirely throughcash flows of the electricals business. This coupled with the absence of capex andbetter asset sweating should see the company FCF positive in FY12e.
We are convinced that BEL’s brand equity and track record will enable it maintain thetempo of revenue growth over the next couple of years. We strongly believe that thereexists high visibility of revenue and profit growth, making BEL the most attractive playin consumer electricals, appliances and projects sectors.
At the CMP of INR279, BEL trades at a P/E of 16.3x and EV/EBIDTA of 9.3x discountingits FY12e earnings. Assigning an EBIDTA multiple of 11x to its FY12e numbers, wearrive at a target price of INR327. Hence, we initiate coverage with a BUYrecommendation and a price target of INR327 with a 12-month perspective, whichrepresents an upside of 17%.
We initiate coverage with aBUY recommendation and aprice target of INR321
FinancialsProfit and loss account (INRm)Year ended 31st Mar 2008 2009 2010 2011E 2012ERevenues 13,745 17,658 22,286 26,313 29,765
Expenses 12,292 15,859 19,852 23,878 26,883
Operating Profit 1,453 1,799 2,434 2,435 2,882
Other income 29 57 29 40 40
EBIDT 1,482 1,856 2,463 2,475 2,922
Depreciation 75 85 92 106 118
Interest expense 293 370 314 255 176
Profit before tax & excp. Items 1,114 1,401 2,056 2,114 2,628
(+) Exceptional items - - (50) - -
Profit before tax 1,114 1,401 2,006 2,114 2,628
Taxes incl deferred taxation 383 507 754 774 962
Profit after tax 731 894 1,253 1,340 1,666
Diluted EPS (INR) 7.5 9.2 12.8 13.7 17.1
Balance sheet (INRm)Year ended 31st Mar 2008 2009 2010 2011E 2012EShare Capital 173 173 195 195 195
Reserves & Surplus 1,575 2,277 4,749 5,748 7,073
Networth 1,748 2,450 4,944 5,943 7,268
Debt 2,367 2,139 1,518 1,030 730
Deferred Tax Liability 41 31 (5) (5) (5)
Capital Employed 4,156 4,620 6,457 6,967 7,993
Gross Fixed Assets 1,440 1,545 1,700 1,836 1,999
Accumulated Depreciation 524 599 683 790 908
Net Assets 916 946 1,016 1,047 1,091
Capital work in progress 3 25 1 100 100
Investments 224 316 366 366 366
Current Assets, Loans & Advances
Inventory 1,622 1,777 2,094 2,520 2,838
Debtors 4,253 5,592 7,507 8,904 10,073
Cash & Bank balance 320 538 612 489 874
Loans & advances and others 890 1,131 1,777 1,812 1,882
Current Liabilities & Provisions
Creditors 3,645 5,192 6,273 7,628 8,588
Other liabilities & provisions 426 513 643 643 643
Net Current Assets 3,013 3,334 5,074 5,455 6,436
Application of Funds 4,156 4,620 6,457 6,967 7,993
Per share dataYear ended 31st Mar 2008 2009 2010 2011E 2012ENo. of shares (m) 86 86 98 98 98
BVPS (INR) 20.2 28.3 50.7 60.9 74.5
CEPS (INR) 9.3 11.3 13.8 14.8 18.3
DPS (INR) 1.6 2.0 2.4 3.0 3.0
Margins (%)Year ended 31st Mar 2008 2009 2010 2011E 2012EEBITDA 10.6 10.2 10.9 9.3 9.7
EBIT 10.2 10.0 10.6 9.0 9.4
PAT 5.3 5.1 5.6 5.1 5.6
Source: Company, Antique
Cash flow statement (INRm)Year ended 31st Mar 2008 2009 2010 2011E 2012EPBT 1,114 1,401 2,006 2,114 2,628
Depreciation & amortisation 75 85 92 106 118
Interest expense 338 413 370 255 176
Interest / Dividend Recd (0) 0 (0) (40) (40)
Other Adjustments 48 98 56 - -
(Inc)/Dec in working capital (577) (99) (1,506) (504) (596)
Tax paid (378) (542) (912) (774) (962)
CF from operating activities 619 1,356 106 1,157 1,325
Capital expenditure (252) (174) (392) (236) (162)
(Purchase) / Sale of Investments 0 (92) (50) - -
Income from investments 1 0 0 40 40
CF from investing activities (251) (266) (442) (196) (122)
Inc/(Dec) in share capital - - 1,598 - -
Inc/(Dec) in debt (5) (291) (618) (488) (300)
Dividends & Interest paid (337) (580) (570) (596) (517)
CF from financing activities (342) (871) 410 (1,085) (817)
Net cash flow 26 218 74 (123) 385
Opening balance 294 320 538 612 489
Closing balance 320 538 612 489 874
Growth indicators (%)Year ended 31st Mar 2008 2009 2010 2011E 2012ERevenue 27.4 28.5 26.2 18.1 13.1
EBITDA 67.1 23.8 35.3 0.0 18.4
PAT 89.3 22.3 40.1 7.0 24.3
EPS 89.3 22.3 40.1 7.0 24.3
Valuation (x)Year ended 31st Mar 2008 2009 2010 2011E 2012EPE 37.2 30.4 21.7 20.3 16.3
P/BV 15.6 11.1 5.5 4.6 3.7
EV/EBITDA 17.6 13.8 11.4 11.2 9.3
EV/Sales 1.9 1.4 1.2 1.0 0.9
Dividend Yield (%) 0.6 0.7 0.9 1.1 1.1
Financial ratiosYear ended 31st Mar 2008 2009 2010 2011E 2012ERoE (%) 50.2 42.6 33.9 24.6 25.2
RoCE (%) 36.2 40.3 42.8 35.3 37.5
Debt/Equity (x) 1.4 0.9 0.3 0.2 0.1
EBIT/Interest (x) 4.8 4.8 7.5 9.3 15.9
Source: Company Antique
Antique Stock Broking Limited 22
Bajaj Electricals Limited
V-Guard Industries LimitedBound northwards 18 April, 2011
Investment rationale
V-Guard Industries Limited (VGIL) is a leading player in electrical and electro-mechanical products viz. wires, cables, stabilisers, geysers, etc., withdominance in Tier 2, 3, and 4 cities in southern India.
Robust business model
VGIL follows an ‘Asset-Light’ business model, wherein it outsourcesmanufacturing of 65-70% of its products to small scale units, enabling it tofocus on the design and development of new products, in addition to salesand distribution. This minimises company’s capex requirement, which issignificant in the backdrop of short lifecycle of consumer electricals.
Superior reach in southern India
More than half of VGIL’s network, comprising 177 distributors and 1,200direct dealers, is located in southern India with a significant brand equity inTier 2, 3, and 4 cities. Moreover, this region accounted for 85% of company’srevenues in FY10.
Geographical expansion to boost revenues
The company has steadily been expanding its operations into northern India,in an effort to de-risk the geographical concentration of revenues as well asboost utilisation of its recently established facilities in the region.
Valuation and outlook
VGIL is an interesting play on the front facing consumer electricals space inIndia. Its push into northern India would provide the backdrop for increasedrevenues and profits. Simultaneously, minuscule capex and higher assetsweating coupled with improving operational profitability should ensure thatthe company turns FCF positive in FY12e. At the CMP of INR183, VGILtrades at a P/E of 10x and EV/EBIDTA of 6.3x discounting its FY12e earnings.We initiate coverage with a BUY recommendation and a price target ofINR241 with a 12-month perspective, which represents an upside of 32%.
Key financialsYear ended March FY08 FY09 FY10 FY11e FY12e
Revenues (INR m) 2,781 3,168 4,541 6,717 8,436
EBITDA (INR m) 298 314 504 772 1,025
EBITDA Margin (%) 10.7 9.9 11.1 11.5 12.2
EBITDA growth (%) 13.7 5.3 60.4 53.2 32.8
PAT (INR m) 374 173 255 400 550
PAT growth (%) 104.9 (53.6) 46.9 57.0 37.4
EPS (INR) 12.5 5.8 8.5 13.4 18.4
EPS growth (%) 104.9 (53.6) 46.9 57.0 37.4
P/E (x) 14.7 31.6 21.5 13.7 10.0
P/BV (x) 4.6 4.3 3.9 3.2 2.5
EV/EBITDA (x) 17.7 16.2 12.0 8.4 6.3
RoE (%) 47.9 14.2 19.0 25.6 28.4
Source: Company, Antique Research
Initi
atin
g Co
vera
ge
Amol Rao+91 22 4031 3435
RECO : BUYCMP : INR183Target Price : INR241Potential Upside : 32%
Market dataSector : Consumer ElectricalsMarket Cap (INRm) : 5,476Market Cap (USDm) : 122O/S shares (m) : 30Free Float (m) : 952-wk HI/LO (INR) : 216/92Avg 6m Vol (‘000) : 100Bloomberg : VGRD INReuters : VGUA.BO
Returns (%)1m 3m 6m 12m
Absolute 15 9 (6) 78Relative 8 8 (1) 65
Shareholding pattern
Price performance vs Nifty
Source: Bloomberg
Source: BSE
Source: Bloomberg
Source: Bloomberg
Promoter67%
DII6%
FII2%
Others25%
90
105
120
135
150
Aug-10 Sep-10 Nov-10 Jan-11 Mar-11
V-Guard Nifty
V-Guard Industries Limited
Antique Stock Broking Limited 24
Company Profile
Introduction
V-Guard Industries Limited (VGIL), promoted by Mr. Kochouseph Chittilapilly,commenced operations in 1977 for manufacturing stabilisers.
Over the years, the company steadily expanded its product profile by introducingnew products viz. wiring cables, water heaters, UPS and several other electricalappliances like solar and gas water heaters, fans, etc.
Company’s brand ‘V-Guard’ is well known in south India and well entrenched in Tier2/3/4 cities in this geography.
The company raised INR656m in FY08 through an IPO (issue price of INR82/sh of FVINR10) to set up new manufacturing facilities in Himanchal Pradesh and Tamil Naduas well as two distribution centres.
The company also has two windmills at Coimbatore with a generation capacity of230KW operating at a PLF of ~33%.
Revenue composition (INRm)
Source: Company, Antique
Over a period of time, VGIL’s product basket has evolved in such a manner that itencompasses the entire gamut of household and semi-industrial requirements. Thishas enabled the company to capture a larger chunk of consumer spend on householdelectricals, thereby capitalising on its brand image.
LT Cables3%
Solar Water Heaters
4%
Water Heaters8%
Others13%
Pumps17%
Stabilisers27%
Pumps2%
PVC Cables 26%
VGIL’s operations are wellentrenched in southern India
Outsourced products form amajor part of product profile
V-Guard Industries Limited
Antique Stock Broking Limited 25
Business Summary
Product portfolio
VGIL operates on a lean manufacturing model, whereby it manufactures cables, wiresand solar water heaters (~30% of revenues). It designs and outsources the manufacturingof other products like stabilisers, UPS, water heaters, pumps and other electricalappliances like fans to ~95 small scale units spread across the country.
Manufacturing facilitiesManufactured Outsourced
Products Facilities Location Products Facilities Location
PVC Wiring Cables 2 Coimbatore, Kasipur Stabilizers 60 Across India
LT Cables 1 Coimbatore Pump 11 Across India
Pumps & Motors 1 Coimbatore Fan 6 Across India
Fans & Water Heaters 1 Kala Amb (H.P) UPS 12 Across India
Solar Water Heaters 1 Coimbatore EWH 6 Across India
Source: Company, Antique
Given below is a brief summary of VGIL’s extensive product profile:
PVC Insulated Cables: The domestic market for insulated cables/ wires is~INR40bnpa., with growth pegged at ~13%. These cables are used in residential complexes,buildings, households etc. This segment is characterised by stiff competition from theunorganised sector, which accounts for ~60% of the market.
VGIL manufactures household cables at its facilities in Coimbatore and Kashipur andhas continuously been ramping up its output over the years, with revenues registeringa CAGR of 44% over the last 4 years. In FY10, VGIL operated its capacities of310,000km at 70%. This vertical is the largest revenue contributor for the company(~26%) with an OPM of 7% as of FY10.
Low Tension (LT) Power & Control Cables: LT cables are used for low voltagetransmission of electricity and are typically used for last mile connectivity from thestep-down transformer onwards. It has industrial and household applications and themarket size of this segment is estimated at ~INR80bn, with the technologicaldependence inhibiting the presence of the unorganised sector.
VGIL set up its LT cables line towards the end of FY09 and ended FY10 with a CUF of~60%, which resulted in a negligible operating loss. Going forward, higher utilisationon back of a heightened sales and consequent lower per unit freight cost shouldenable it improve profitability at the operational level for the vertical.
Solar Water Heaters: The solar water heater (SWH) market in India is nascent at~INR3bn pa with small unorganised players catering to the household market and theindustrial demand being met by the larger organised players like VGIL, Tata BP Solarand Racold.
VGIL’s SWH unit is located in Coimbatore. It caters to a healthy mix of householdsand industrial users (~3:1) and registered revenues of INR163m (~4% of total revenues)with a robust OPM of 17% in FY10.
Sales (INRm): PVC & LT Cables
Source: Company, Antique
0
300
600
900
1,200
Mar
'06
Mar
'07
Mar
'08
Mar
'09
Mar
'10
PVC Insulated Cables
LT Pow er & Control Cables
Sales (INRm): Solar water heaters
Source: Company, Antique
0
25
50
75
100
125
150
175
Mar
'06
Mar
'07
Mar
'08
Mar
'09
Mar
'10
V-Guard Industries Limited
Antique Stock Broking Limited 26
Stabilisers: The growth of the stabiliser market in India is a direct fallout of the growingpenetration of consumer white goods like refrigerators and televisions. A fragmentedmarket of ~INR21bn, the organised sector accounts for ~50% of the market share.
VGIL is one of the pioneer companies in this segment, with a pan-India presence andmarket share of ~15%. The company started operations in 1977 by manufacturingstabilisers and has achieved such proficiency that presently it concentrates solely ondesigning and developing variants of the product, while outsourcing production of thesame. The company earned ~26% of revenues in FY10 from this segment, with anaverage OPM of ~20%, making it the most lucrative vertical.
Pumps & Motors: The water pumps and motors market in India is ~INR40bn, withthe agriculture and infrastructure sectors acting as primary drivers. Offtake of pumpsis also heavily dependant on agricultural output and buoyancy in crop prices. Overthe years, various factors like governmental programs in the form of agricultural schemesand increasing standardisation have resulted in the organised sector having 70%market share in this segment. Off lately, civic infrastructure has also been giving rise todemand for water pumps and motors, which are used for in urban agglomerationswhere piped water supply is erratic.
VGIL’s product basket in the pumps and motors vertical is comprehensive, consistingof 150 models which range from 0.25HP to 25HP. It manufactures the higher HPmotors, outsourcing the rest. This is one of the largest revenue contributors to VGIL’stopline, constituting ~19% of its revenues, with an OPM of ~11%. in FY10.
Water Heaters: The offtake of electric water heaters (geysers) has been growingsteadily at ~20% over the last 4-5 years on account of increasing electrification andincrease in disposable income. Estimated at INR8bn, this market is dominated by theorganised sector and is characterised by heavy advertising.
VGIL has been present in this segment since 1996, with a dominant presence insouthern India. Its entire product range is outsourced and accounted for ~9% ofrevenues, with an OPM of 15%.
Others: In addition to the above, VGIL also products like UPS, inverters and fans inits repertoire. These account for ~14% of its overall revenues and command an averagemargin of 8-10%.
Sales (INRm): Stabilisers
Source: Company, Antique
700
810
920
1,030
1,140
1,250M
ar'0
6
Mar
'07
Mar
'08
Mar
'09
Mar
'10
0
200
400
600
800
Mar
'06
Mar
'07
Mar
'08
Mar
'09
Mar
'10
Pumps Water Heaters
Sales (INRm): Pumps, Water heaters
Source: Company, Antique
Product profile and market scenarioIndustry VGIL
Mkt Size Mkt sh. of Mkt gr Competitors % of Revenues OPM (INRbn) Org. players (%)
PVC Insulated Cables 40 60% 13% Finolex, Polycab, Havells, KEI 26% 6%
LT Power & Control Cables 80 85% 15% Polycab, Havells, RPG, Unicab 3% N.A.
Solar Water Heaters 3 40% N.A. Tata BP Solar, Racold 4% 17%
Pumps 40 70% 18% Texmo, UML, Kirloskar, CG, Havells 17% 12%
Stabilisers 21 50% 15% Blue Bird, Premier 27% 20%
Water Heaters 8 60% 20% Bajaj Electricals, Racold, Venus 8% 16%
Fans 20 50% 15% CG, Bajaj Electricals, Orient, Havells 9% 4%
UPS 20 80% 15% Numeric, Su-Kam, APC, Emerson 11%
Source: Company, Antique
V-Guard Industries Limited
Antique Stock Broking Limited 27
VGIL: Geographical spread ofRevenue
Source: Company, Antique
Business Model
As mentioned previously, VGIL outsources ~70% of its product profile, whileconcentrating on product design and aesthetics. Given the shortening lifecycle ofconsumer electricals, its design capabilities coupled with outsourcing operations. Thishas helped it rationalise its capex requirement and simultaneously branch out intonew product lines.
Over the last 4 years, VGIL has registered an enviable CAGR of 28% in revenues andprofits, the key to which is its formidable sales network. Currently, the company’sproducts are sold through 177 distributors, 8,000 retailers and 235 service centres,with 85% of sales concentrated in four southern Indian states of Andhra Pradesh,Karnataka, Kerala and Tamil Nadu.
In FY10, ~15% (~INR680m) of VGIL’s revenues came from the northern India, whichis a steep improvement from INR139m in FY08. The company plans to replicate itsbusiness model in northern India in an effort to leverage its brand and also reduce therisk arising from geographical concentration of revenues. Going forward, we estimatethis figure to double to INR1.7bn, as VGIL expands its dealer network and taps intothe northern hinterland.
Typically, VGIL matches out its receivables and payables’ cycles of 60 days andmaintains an inventory position of ~80 days. In FY11, as it forays into northern India,we anticipate a stretching of its working capital cycle on account of increased creditto distibutors. We expect this heightened need for working capital to be met byimproved cash flows from sales in southern India, in addition to some amount ofborrowings.
VGIL: Distribution Network (in no.)FY08 FY09 FY10
Zone Distributor Direct Dealer Distributor Direct Dealer Distributor Direct Dealer
South 78 53 90 265 100 610
West 16 9 26 83 24 303
North 8 - 21 103 37 157
East 10 5 12 43 16 186
112 67 149 494 177 1,256
Source: Company, Antique
0%
25%
50%
75%
100%
FY08 FY09 FY10
North India South India
V-Guard Industries Limited
Antique Stock Broking Limited 28
Our ViewWe expect 2HFY11 and 1HFY12 to be crucial quarters for VGIL as it enhances thescope of its operations. We foresee stretching of the working capital cycle as VGILleverages the cash flows from its existing operations to fund the expansion of itsdistribution network in the northern hinterland. We estimate sales to pick up over thenext 12 months as VGIL develops its brands and points of presence in northern India.We expect significant traction to emerge from sales of its manufactured products asthe company targets higher utilisation of its cables and wires capacities. While wehave factored in higher selling and distribution expenses into our calculations, we feelthat higher utilisation of manufacturing capacities could generate a slight improvementin operational profitability in FY11 with significant improvement visible in FY12e, poststabilisation of operations.
We estimate VGIL to clock sales of INR6.7bn (+48%) in FY11 with an OPM of 11.5%.This would primarily be on account of higher sales of manufactured products (+66%)viz. wires and cables, SWH and pumps as it breaks new ground in northern India.We estimate the share of manufactured products in total sales to stand at 40% (v/s36% in FY10). With an OPM of 11.5%, we expect EBIDTA and profits to settle atINR772m and INR400m, respectively.
As the company is set to gain a firm foothold in north India over the next 12 months,we expect it to focus on sales of manufactured products. We estimate revenues ofINR8.4bn (+26%) with VGIL maintaining a mix of manufactured and outsourcedproducts. The apportioning of fixed costs over a wider base of revenues should reflectin VGIL’s operational numbers in FY12e, as OPM improves to 12.2%. We estimatethe company’s EBIDTA and net profits at INR1bn and INR550m respectively in FY12.We believe that the jump in sales will not entail any additional working capitalrequirement. This coupled with the absence of capex and better asset sweating shouldsee the company turn FCF positive in FY12e.
We are convinced that VGIL will continue to successfully monetise its brand equity insouthern India while building up the same in the northern parts, which will enable it tosuccesfully tap the existing buoyancy in addressable markets. This imparts high visibilityto revenue growth, making VGIL an attractive play on the increasing spend of Indianconsumer class and industrial sector.
At the CMP of INR183, VGIL trades at a P/E of 10x and EV/EBIDTA of 6.3x discountingits FY12e earnings. Assigning an EBIDTA multiple of 8x, we initiate coverage with aBUY recommendation and a price target of INR241 with a 12-month perspective,which represents an upside of 32%.
Northern expansion to be thekey
Macro developments to boostVGIL’s chances of success innorth India
FinancialsProfit and loss account (INRm)Year ended 31st Mar 2008 2009 2010 2011E 2012ERevenues 2,781 3,168 4,541 6,717 8,436
Expenses 2,483 2,854 4,037 5,945 7,410
Operating Profit 298 314 504 772 1,025
Other income 10 36 14 15 15
EBIDT 308 351 518 787 1,040
Depreciation 35 40 71 75 79
Interest expense 46 47 51 101 120
Profit before tax & excp. Items 227 263 395 612 841
(+) Exceptional items 297 - - - -
Profit before tax 524 263 395 612 841
Taxes incl deferred taxation 151 89 140 212 291
Profit after tax 374 173 255 400 550
Diluted EPS (INR) 12.5 5.8 8.5 13.4 18.4
Balance sheet (INRm)Year ended 31st Mar 2008 2009 2010 2011E 2012EShare Capital 298 298 298 298 298
Reserves & Surplus 880 966 1,116 1,412 1,857
Networth 1,178 1,265 1,415 1,710 2,156
Debt 359 263 805 1,205 1,205
Deferred Tax Liability 42 44 57 57 57
Capital Employed 1,579 1,571 2,277 2,973 3,418
Gross Fixed Assets 590 901 1,379 1,486 1,538
Accumulated Depreciation 153 188 256 331 410
Net Assets 438 713 1,123 1,155 1,128
Capital work in progress 155 258 29 100 100
Investments 150 114 46 46 46
Current Assets, Loans & Advances
Inventory 434 359 985 1,404 1,750
Debtors 379 488 756 1,213 1,523
Cash & Bank balance 386 41 74 57 82
Loans & advances and others 289 63 89 124 159
Current Liabilities & Provisions
Creditors 327 354 690 991 1,235
Other liabilities & provisions 324 110 134 134 134
Net Current Assets 836 487 1,080 1,672 2,144
Application of Funds 1,579 1,571 2,277 2,973 3,418
Per share dataYear ended 31st Mar 2008 2009 2010 2011E 2012ENo. of shares (m) 30 30 30 30 30
BVPS (INR) 39.5 42.4 47.4 57.3 72.2
CEPS (INR) 13.7 7.2 10.9 15.9 21.1
DPS (INR) 5.4 2.5 3.0 3.0 3.0
Margins (%)Year ended 31st Mar 2008 2009 2010 2011E 2012EEBITDA 10.7 9.9 11.1 11.5 12.2
EBIT 9.8 9.8 9.8 10.6 11.4
PAT 13.4 5.5 5.6 6.0 6.5
Source: Company, Antique
Cash flow statement (INRm)Year ended 31st Mar 2008 2009 2010 2011E 2012EPBT 524 263 395 612 841
Depreciation & amortisation 35 40 71 75 79
Interest expense 46 47 51 101 120
Interest / Dividend Recd (3) (26) (4) (15) (15)
Other Adjustments (297) 0 6 - -
(Inc)/Dec in working capital (151) (6) (585) (609) (447)
Tax paid (165) (78) (125) (212) (291)
CF from operating activities (11) 241 (191) (49) 287
Capital expenditure 70 (418) (253) (178) (52)
(Purchase) / Sale of Investments (150) 36 68 - -
Income from investments 3 26 4 15 15
CF from investing activities (77) (356) (181) (163) (37)
Inc/(Dec) in share capital 609 - - - -
Inc/(Dec) in debt (2) (95) 542 400 -
Dividends & Interest paid (147) (135) (137) (205) (225)
CF from financing activities 459 (230) 405 195 (225)
Net cash flow 371 (345) 33 (17) 25
Opening balance 14 386 41 74 57
Closing balance 386 41 74 57 82
Growth indicators (%)Year ended 31st Mar 2008 2009 2010 2011E 2012ERevenue 25.1 13.9 43.3 66.0 25.6
EBITDA 13.7 5.3 60.4 53.2 32.8
PAT 104.9 (53.6) 46.9 57.0 37.4
EPS 104.9 (53.6) 46.9 57.0 37.4
Valuation (x)Year ended 31st Mar 2008 2009 2010 2011E 2012EPE 14.7 31.6 21.5 13.7 10.0
P/BV 4.6 4.3 3.9 3.2 2.5
EV/EBITDA 17.7 16.2 12.0 8.4 6.3
EV/Sales 2.0 1.8 1.4 1.0 0.8
Dividend Yield (%) 3.0 1.4 1.6 1.6 1.6
Financial ratiosYear ended 31st Mar 2008 2009 2010 2011E 2012ERoE (%) 47.9 14.2 19.0 25.6 28.4
RoCE (%) 23.2 19.7 23.2 27.1 30.1
Debt/Equity (x) 0.3 0.2 0.6 0.7 0.6
EBIT/Interest (x) 5.9 6.6 8.7 7.1 8.0
Source: Company Antique
Antique Stock Broking Limited 29
V-Guard Industries Limited
Antique Stock Broking LimitedNirmal, 2nd Floor, Nariman Point, Mumbai 400 021.Tel. : +91 22 4031 3444 • Fax : +91 22 4031 3445
www.antiquelimited.com
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Analyst ownership in stock No