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An in depth qualitative and quantitative analysis of Havells India Ltd to ascertain its stock movement in long and medium term.

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  • 1. Global Presence It operates across Europe, Latin America & AfricaRestructuring

2. Quality StandardISO: 9001-2000, Relevant UL , CE, ISI certificationsGrowth Rate Estimated revenue growth at 15% CAGR for FY 11-13EMarket Leadership Strong competitive positioningProfitability Strong CAGR of 26% in FY11-13E periodGlobal Presence It operates across Europe, Latin America & AfricaRestructuring Restructuring exercise aimed at cost savings.Their strategy has paid off with Havells set to realizecost benefits to the tune of 25mn over FY10-CY11Beta0.9 (Showing marginally lower volatility than the market)Future PotentialAggressive expansion plans as seen before ininternational marketsThe Big PictureThe growth in the domestic electrical equipments industry on account of increasing electricity supply 3. ATTRACTIVE!!Rating - BUYTarget Rs. 539 4. Established in 1971Promoted by Qimat Rai Gupta One of the largest & fastest growing ECD, electrical &power distribution equipment manufacturer Owns well known brands like Crabtree, Sylvania,Concord, Luminance, Linolite & SLI Lighting 11 state of the art manufacturing plants in India &operates 7 state of the art manufacturing plantsacross Europe, Latin America & Africa Global network spans 91 branches & offices, with over8,000 employees in over 50 countries backed by astrong global network of 20,000 distributors 5. Share Holding Pattern (%) as on Mar11PromotersFII/NRI InstitutionsPrivate Corp Public2% 2% 7% 27% 62% 6. Revenue Mix over FY11-13E ECDSwitchgear Lighting Cables & Wires 17% 39% 27%17% 7. Share Holding Pattern (%) as on Mar11PromotersFII/NRI InstitutionsPrivate Corp Public2% 2% 7% 27% 62% 8. SegmentsMarket GrowthAverage no. of competitorsCompetitive Positioning RevenueOperating Margin 9. Source : Indiabulls 10. Varied Product Stream diversified revenue stream & aggressive brand-building initiatives resulted in 25% revenue CAGRover the last 5 years on a standalone basis 11. PAT to witness strong CAGR of 26% in FY11-13E periodled by improvement in Sylvania profitability due to itsaggressive restructuring activities in FY10 and FY11 12. Revenue stability & profit growth Sylvania is expected to contribute significantly to profitability from FY12E. Havells is expected to grow its revenue at a CAGR of 15% and PAT at 25% CAGR over FY11-FY13E Restructuring Plan 13. Sylvania operating cash flows to turn positive FY12E onwards Sylvania to generate cash flows of Rs 866mn in FY12E and Rs 1,211mn in FY13E. Restructuring Plan 14. Strong positioning to leverage demand potential 1. Growing disposable income with Indian households2. Preference for premium products due to evolving lifestyle patterns3. Strong sustainable demand for consumer electrical products4. Demand towards energy saving products5. 4,300 wholesalers and 25,000 retailers in India. In addition, it is also setting up unique Havells Galaxies 15. Strong positioning to leverage demand potential 1. Growing disposable income with Indian households2. Preference for premium products due to evolving lifestyle patterns3. Strong sustainable demand for consumer electrical products4. Demand towards energy saving products5. 4,300 wholesalers and 25,000 retailers in India. In addition, it is also setting up unique Havells Galaxies 16. One of the lowest per capita consumption of electricityin the world 17. Significant investments in building power infrastructureby the Govt. of India 18. In FY10, copper accounted for 26% of total domesticbusiness raw material costs and aluminum accountedfor 17% of the domestic raw material costs 19. In FY10, copper accounted for 26% of total domesticbusiness raw material costs and aluminum accountedfor 17% of the domestic raw material costs 20. Every 1% change in copper prices impacts FY12Eearnings by 1.3%, while every 1% change in aluminumprices impacts earnings by 0.7% 21. Delay in restructuring of Sylvania Sylvania is expected to turn PAT positive in FY11as against loss reported in FY10 Delay in complete turnaround of Sylvania,continued weakness in European markets andslow growth in LATAM and Asia has adverselyimpacted revenues and profits 22. Delay in restructuring of Sylvania Sylvanias debt obligations of around 40millionthat are due for repayment in 2012-13 would needto be refinanced 23. Rise in domestic competition Competition in the form of technologyupgradation Price wars in certain segments like industrialswitchgears, fans, cables & wires, CFL New segments like water heaters andappliances are highly competitive markets Heightened competition from unorganizedsector or Chinese players 24. Adverse movements/fluctuations in F/X Sylvania operates in Asia, Europe and LATAMmarkets, exposing it to multiple currency risk Havells has increased the outsourcing ofcomponents of Sylvania from emergingmarkets like India and China 25. 1.61.411.4 1.271.33 1.261.2 1.15 1 0.85 0.750.740.780.8 0.630.60.40.2 0 FY09 FY10FY11 FY12E FY13ECurrent RatioQuick Ratio 26. High debtor collection ratio Speedy and effective mechanism in place showingextremely efficient operations Reduce dependence on short term loans50 43.2540 29.7431.46 28.8330 19.4220100 FY07FY08FY09FY10 FY11 Debtor Turnover ratio 27. Debt/Equity to decline from 2.3x in FY10 to 0.4x byFY13E No further investments in Sylvania areexpected except for maintenance capex 28. Capital Efficiency to improve with Sylvania turnaround ROCE to improve from 7.6% in FY10 to 26.8% inFY13E and ROE to improve from 17.4% in FY10 to45.7% in FY13E 29. Price in 5 years =Estimated Dividends in 5 YearsD1 = 2.50 D2 = D1 x (1.20) = 3 D3 = D2 x (1.20) = 3.6 30. Current mkt price is Rs. 425 per share, an expected dividend per share next year of Rs 2.50, an EPS of Rs 20, expected EPS growth of 20% per year, and a P/E ratio of 17. Target rate is 10%. Investment Horizon is five years. Payout is Constant.Price in 5 years = P/E x EPS x (1+g)^5 = 17x20x(1.20)^5 = 846 Estimated Dividends in 5 YearsD1 = 2.50D2 = D1 x (1.20) = 3 D3 = D2 x (1.20) = 3.6D4 = D3 x (1.20) = 4.32 D5 = D4x (1.20) = 5.18 Po = 2.50 + 3.00 + 3.6 + 4.32 + 5.1+846 = 5391.10 1.10^2 1.10^3 1.10^41.10^5 Hence, the current intrinsic value is Rs. 539 giving a MOS of (539-425=114). MOS% of 27% 31. Current mkt price is Rs. 425 per share, an expected dividend per share next year of Rs 2.50, an EPS of Rs 20, expected EPS growth of 20% per year, and a P/E ratio of 17. Target rate is 10%. Investment Horizon is five years. Payout is Constant.Price in 5 years = P/E x EPS x (1+g)^5 = 17x20x(1.20)^5 = 846 Estimated Dividends in 5 YearsD1 = 2.50D2 = D1 x (1.20) = 3 D3 = D2 x (1.20) = 3.6D4 = D3 x (1.20) = 4.32 D5 = D4x (1.20) = 5.18 Po = 2.50 + 3.00 + 3.6 + 4.32 + 5.1+846 = 5391.10 1.10^2 1.10^3 1.10^41.10^5 Hence, the current intrinsic value is Rs. 539 giving a MOS of (539-425=114). MOS% of 27% 32. Current mkt price is Rs. 425 per share, an expected dividend per share next year of Rs 2.50, an EPS of Rs 20, expected EPS growth of 20% per year, and a P/E ratio of 17. Target rate is 10%. Investment Horizon is five years. Payout is Constant.Price in 5 years = P/E x EPS x (1+g)^5 = 17x20x(1.20)^5 = 846 Estimated Dividends in 5 YearsD1 = 2.50D2 = D1 x (1.20) = 3 D3 = D2 x (1.20) = 3.6D4 = D3 x (1.20) = 4.32 D5 = D4x (1.20) = 5.18 Po = 2.50 + 3.00 + 3.6 + 4.32 + 5.1+846 = 5391.10 1.10^2 1.10^3 1.10^41.10^5 Hence, the current intrinsic value is Rs. 539 giving a MOS of (539-425=114). MOS% of 27% 33. Havells FY13 PEG Ratio > 9.8/20 = 0.49Crompton FY13 PEG Ratio > 17.5/15 = 1.16 -Bajaj FY13 PEG Ratio > 10.5/15 = 0.7 -Philips FY13 PEG Ratio > 10.7/15 = 0.7- 34. Havells FY13 PEG Ratio > 9.8/20 = 0.49Crompton FY13 PEG Ratio > 17.5/15 = 1.16 -Bajaj FY13 PEG Ratio > 10.5/15 = 0.7 -Philips FY13 PEG Ratio > 10.7/15 = 0.7- 35. Havells Crompton Bajaj PhillipsFY11E 0.7 1.36 1.730.75FY12E 1.591.42 2.340.72FY13E 2.061.52.450.84 36. By:Ankesh PanjwaniMadhav SudNikhil MarwahNitin BhallaP. SrivastavaRidhika Seth