1

Havells India Limited

BUY Target price: Rs.612.00 CMP: Rs.532.35 Market Cap. : Rs.32026.18mn.

Date: December 29th, 2009.

Key Ratios:

Particulars FY09

(12 m)

FY10E

(12 m)

FY11E

(12 m)

OPM (%) 9 13 13

NPM (%) 7 9 9

ROE (%) 16 19 17

ROCE (%) 19 24 22

P/BV(x) 3.44 2.80 2.32

P/E(x) 22.05 15.09 13.50

EV/EBDITA(x) 15.66 11.57 11.53

Debt equity ratio 0.08 0.07 0.06

Key Data:

Sector Capital Goods & Engineering Face Value Rs.5.00

52 wk. High/Low Rs.601.00/101.00

Volume (2 wk. Avg.) 974694

BSE Code 517354

SYNOPSIS • We initiated the coverage of Havells India Ltd and

set a target price of Rs.612.00.

• Havells India Limited engages in the manufacture

and sale of electrical and power distribution

equipment in India and internationally.

• The company expects to achieve Rs 500crore from

exports of switchgears within a time frame of three

years. The company has commenced its new

automated manufacturing unit in Baddi, Himachal

Pradesh.

• The company is aiming to attain a turnover of Rs

300core from Kerala this fiscal.

• The company has bagged a $200 million export

order from the West European countries for the

supply of motors and compact fluorescent lamps

(CFLs) for a period of five years.

• CARE assigns `AA` & `PR1+` rating to Havells India.

• The company’s Net sales and PAT is expected to

grow at a CAGR of 10% and 18% over FY08 to

FY11E.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

vsrsastry@firstcallindiaequity.com

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

drsastry@firstcallindia.com

2

Table of Content

Content Page No.

1. Investment Highlights 03

2. Company Profile 07

3. Company products 10

4. Peer Group Comparison 15

5. Key Concerns 15

6. Financials 16

7. Charts & Graph 18

8. Outlook and Conclusion 20

9. Industry Overview 21

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Investment Highlights

• Result Updates (Q2FY10)

For the second quarter, the top line of the company increased 2%YoY and stood at

Rs.5980.00mn against Rs.5875.80mn of the same period of the last year. The bottom

line of the company for the quarter stood at Rs.542.00mn from Rs.443.10mn of the

corresponding period of the previous year i.e., an increase of 22%YoY.

EPS of the company for the quarter stood at Rs.9.01 for equity share of Rs.5.00 each.

4

Expenditure for the quarter stood at Rs.5183.10mn, which is around 2% lower than the

corresponding period of the previous year. Raw material cost of the company for the

quarter accounts for 52% of the sales of the company and stood at Rs.3139.30mn from

Rs.3432.90mn of the corresponding period of the previous year i.e., a decrease of

9%YoY. Employee cost decreased 17%YoY to Rs.188.40mn from Rs.226.30mn. and

accounts for 3% of the revenue of the company for the quarter.

OPM and NPM for the quarter stood at 13% and 9% respectively from 10% and 8%

respectively of the same period of the last year.

5

• Segment-Wise revenue for the quarter

Segment Revenue (Rs. million)

Cable & Wires 2,426.70

Switchgears 1,748.80

Lighting & Fixtures 904

Electrical Consumer Durables 797.4

Others 86.9

Total 5,963.80

Less: Inter Segment Revenue 0.00

Net sales/income from Operations 5,963.80

• Capital Employed for the quarter

Capital Employed (Rs. million)

Cable & Wires 1,730.30

Switchgears 2,593.90

Lighting & Fixtures 1,470.90

Electrical Consumer Durables 421.2

Others 4,745.80

Total 10,962.10

Other Unallocable Items 0.00

Total 10,962.10

6

• Havells eyes export earnings worth Rs.500cr from switchgears in the next 3years

The company expects to achieve Rs 500crore from exports of switchgears within a time

frame of three years. The company has commenced its new automated manufacturing

unit in Baddi, Himachal Pradesh. Due to this, there will 70% increases in production of

switchgears. Havells already has switchgear and main circuit board manufacturing plant

located Baddi. The company is expected to export around 50% of its total production at

Baddi.

It has also planned to invest Rs 100crore in FY 2009-10 to build new plant. Last year the

company garnered export revenue of Rs 150crore. With commencement of new unit,

company expects to raise production to 5crore units from its present 3crore units. Its

industrial switchgears production will increase from 60crore units to 100crore and

electrical wiring accessories will go up to 7crore unit from its present of 2.5crore units.

Internationally, the company exports its products to majors companies like GE, Eatons,

Siemens-Electrium and Proteus. Havells India sees a huge potential in European market

and stands an advantage in terms of price of labour cost.

• Havells India eyes Rs.300cr turnover from kerala

The company is aiming to attain a turnover of Rs 300core from Kerala this fiscal. The

50% growth in turnover was set in view of the infrastructural and industrial

development in the state which has lead to a growing demand for electrical equipment

for construction activities in the region.

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The company is also planning to introduce new and enhanced electrical and lighting

products and also invest in new ventures.

• Havells India gets $200mn export order

The company has bagged a $200 million export order from the West European countries

for the supply of motors and compact fluorescent lamps (CFLs) for a period of five years.

The company is planning to make India the global manufacturing and export hub and

aims to export half of the total produce of CFLs, motors and switchgears to Europe. The

orders for motors and CFLs would be met from its plants based in Neemrana, Rajasthan.

• CARE assigns `AA` & `PR1+` rating to Havells India

Credit rating agency, CARE has retained the AA rating assigned to the long term bank

facilities and also assigned AA rating to the additional long term bank facilities

aggregating Rs 550 million of Havells India (HIL).

This rating is applicable for facilities having tenure of more than one year. Facilities with

this rating are considered to offer high safety for timely servicing and also this rating

would have strong capacity for timely payment of short term debt obligations and carry

lowest credit risk. In addition, CARE has retained the PR1+ rating assigned to the short

term bank facilities of HIL. Within this category, facilities with relatively better credit

characteristics are assigned PR1+ rating.

• Havells India to invest Rs 4bn

The company will invest Rs 4 billion for increasing its capacity and venturing into a new

segment.

The company is entering the new segment of manufacturing electrical-motors and is

increasing its capacities in lighting and cables segment. It has already spent Rs 2 billion,

of the total budget of Rs 4 billion.

Company profile

Havells India was incorporated in 1983 is a billion-dollar company. It is engaged in

manufacturing of electrical and power distribution equipments. Havells has created brands like

Crabtree, Sylvania, Concord, Luminance, Linolite, and SLI Lighting that are known globally.

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It is among the largest and fastest growing electrical and power distribution equipment

manufacturer in India. The company has been involved in brand promotion by sponsoring

cricket events like T20 World Cup, India-Australia Series and IPL. It has network of 91

branches/representative offices with 8000 employees working across 50 countries. In India,

Havells has 11 manufacturing facilities across the country.

Outside India it has 10 manufacturing units located in Europe, Latin America and Africa. It

clients include big companies like Airtel, DLF, Idea, Infosys, Airport Authority of India, HUL,

Reliance Energy, Ashok Leyland, Café Coffee Day, BSNL, TCS and Unitech among others.

Havells India has set up its first exclusive showroom “Havells Galaxy” in Bokaro. This showroom

provides wide range of electrical products. The company has drawn up plans to unveil similar

showrooms in other parts of the country.

Subsidiaries

• Havell's Cyprus Limited

• Havell's Holdings Limited

• Havells Sylvania Argentina S.A.

• Havells Sylvania Brasil IluminaQao Ltda.

• Havells Sylvania Costa Rica S .A

• Havells Sylvania El Salvador S.A. de C.V.

• Havells Sylvania Guatemala S.A.

• Havells SLI de Mexico S.A. de C.V

• Havells SLI Servicios Generates Mexico S.A. deC.V.

• Havells Sylvania Panama S.A.

• Havells Sylvania Colombia S.A.

• Havells Sylvania Venezuela C.A.

• Havells Sylvania N.V.

• Havells Sylvania Export N.V.

• SLI Lighting Products Inc.

• Havells Sylvania (Guangzhou) Enterprises Ltd

• Havells Sylvania Asia Pacific Limited

• Havells Sylvania Belgium B.VB.A.

• Havells Sylvania Lighting Belgium N V

• Havells Sylvania Finland OY

• Havells Sylvania France S.A.S.

• Havells Sylvania Lighting France S.A.S.

• Havells Sylvania Germany GmbH

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• Havells Sylvania Greece A.E.E.E.

• Havells Sylvania Italy S.p.A.

• Havells Sylvania Norway AS

• Havells Sylvania Portugal Lda

• Havells Sylvania Spain S.A.

• Havells Sylvania Spain Logistics S.L.

• Havells Sylvania Sweden AB

• Havells Sylvania Switzerland AG

• Havells Sylvania Fixtures Netherlands B.V.

• Havells Sylvania UK Limited

• Havells Sylvania Fixtures UK Limited

• Havells Sylvania Europe Limited

• Sylvania Gesellschaft m.b.H.

• Sylvania Lighting International B.V

• SLI Europe B.V

• BadalexLimited

• Concord Lighting Limited

• Marlin Lighting Limited

• Linolite Limited

• Flowil International Lighting (Holding) B.V

• Havells Sylvania Tunisia S A R L

• Precision Materials SARL

• Havells Sylvania Holdings (BVI-2) Ltd

• Havells Sylvania Holdings (BVI -1) Ltd

• Havells Sylvania (Thailand) Limited

• Havell's Netherlands Holding B.V

• Havell's Netherlands B.V

• Havells Holding Inc

• Havells Sylvania Dubai FZCO

• Havells Sylvania (Shanghai) Ltd

• Havells Sylvania Peru S.A.C.

• Havells Sylvania Iluminacion (Chile) Limitada

• Havells Sylvania (Malaysia) Snd. Bhd

• Hampshire Holdings Ltd

• Havell's Malta Limited

Associates

• QRG Enterprises Limited

• TTL Limited

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• Standard Electricals Limited

• Guptajee & Company

• QRG Foundation

• QRG Central Hospital and Research Centre Limited

Company products

Havells manufactures products such as industrial and domestic circuit protection switchgears,

cables and wires, motors, fans, power capacitors, CFL lamps, luminaires for domestic,

commercial and industrial applications, modular switches, and bathfittings covering the

entire range of household, commercial and industrial electrical needs.

• Building Circuit Protection

• Capacitors

• Fans

• Bath fittings and Accessories

• Industrial Circuit Protection

• Lighting

• Modular Plate Switches

• Motors

• CFL

• Cables and Wires

Building Circuit Protection

• Miniature Circuit Breaker

• Isolator

• Changeover Switch

• Residual Current Circuit Breaker

• RCBO

• Distribution Board

• Indicator Light

Capacitors

• Normal Duty

• Heavy Duty

• Super Heavy Duty

• Agriculture Duty

• Motor Run Capacitors

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Fans

• Ceiling Fans

• Table Fans

• Wall Mounting Fans

• Pedestal Fans

• Air Circulator Fans

• Ventilating Fans

Industrial Circuit Protection

• Air Circuit Breaker

• MCCB

• Panel Board System

• Changeover Switch

• By-Pass Changeover Switch

• Automatic Transfer Switch

• Switch Disconnector

• Load Changeover Switch

• Control Gear

• Switch Disconnector Fuse

• Fuse Switch and Switch Fuse

• Chamber System

• Fuse Holder

• Nylon Fuse Base

• Fuse Link and Fuse Base

Lighting

• LED Lighting

• Consumer Lighting

• Commercial Lighting

• Down Lighter

• Landscape-Bunker Lighting

• Industrial Lighting

• Area Lighting

• Road Lighting

• Speciality lamps

• Accessories

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• Aura Lighting

Modular Plate Switches

• Havells Modular Switches

• Crabtree Modular Switches

Motors

• Foot Mounting Flange Motor

• Flange Motor

• Foot Cum Flange

• Inverter Duty Motors with Forced Cooling

• Crane Duty Motors

• Brake Motors

CFL

• Retrofit

• Non Retrofit

• Higher Range

• Liliput

• FPL

Cables and Wires

• Power Cables - Aluminium

• Control Cables - Copper

• Copper Flexible Cables

Clients

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14

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Peer Group Comparison

Name of the

company

CMP(Rs.)

(As on

December

29th,2009)

Market Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E (x) P/BV

(x)

Dividend

(%)

Havells India Ltd 532.35 32026.18 27.20 19.44 3.41 50.00

Finolex Cables ltd 60.85 9306.40 0.39 156.03 1.56 10.00

Sterlite Technologies 349.90 22606.00 27.26 12.84 3.67 25.00

Crompton Greave 422.40 154837.70 12.73 33.18 12.62 10.00

Key Concerns

� Power equipment is highly capital-intensive industry and as of now the competition

within the industry is moderate.

� Fluctuations in exchange rates

� Global economic slowdown.

� Adverse Govt. policies

� Highly competition

� Fastest changing technology in the electrical equipment field.

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Financials Results Update

12 months ended Profit and Loss A/C (Standalone):

Value(Rs. in million) FY08 FY09 FY10E FY11E

Description 12m 12m 12m 12m

Net Sales 20548.60 22047.60 24693.31 27656.51

Other Income 145.40 11.60 12.76 14.04

Total Income 20694.00 22059.20 24706.07 27670.55

Expenditure -18694.30 -20014.50 -21606.65 -24199.45

Operating Profit 1999.70 2044.70 3099.42 3471.10

Interest -206.50 -193.40 -92.77 -102.05

Gross Profit 1793.20 1851.30 3006.65 3369.05

Depreciation -130.70 -178.60 -214.32 -246.47

Profit before Tax 1662.50 1672.70 2792.33 3122.59

Tax -227.10 -220.40 -670.16 -749.42

Net Profit 1435.40 1452.30 2122.17 2373.16

Equity Capital 289.60 300.80 300.80 300.80

Reserves 6200.80 9018.30 11140.47 13513.64

Face Value (Rs) 5.00 5.00 5.00 5.00

Total No. of Shares 57.92 60.16 60.16 60.16

EPS (Rs) 24.78 24.14 35.28 39.45

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Quarterly ended Profit and Loss A/C (Standalone):

Value(Rs. in million) 31-Mar-09 30-Jun-09 30-Sep-09 31-Dec-09E

Description 3m 3m 3m 3m

Net Sales 5770.30 5898.50 5980.00 6189.30

Other Income 1.50 4.10 2.30 2.53

Total Income 5771.80 5902.60 5982.30 6191.83

Expenditure -5111.40 -5174.10 -5183.10 -5384.69

Operating Profit 660.40 728.50 799.20 807.14

Interest -53.20 -16.30 -19.00 -19.38

Gross Profit 607.20 712.20 780.20 787.76

Depreciation -51.50 -53.90 -55.20 -56.86

Profit before Tax 555.70 658.30 725.00 730.90

Tax -67.50 -165.70 -183.00 -184.49

Net Profit 488.20 492.60 542.00 546.41

Equity Capital 300.80 300.80 300.80 300.80

Face Value (Rs) 5.00 5.00 5.00 5.00

Total No. of Shares 60.16 60.16 60.16 60.16

EPS (Rs) 8.12 8.19 9.01 9.08

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Charts

• Net sales & PAT

• P/E Ratio (x)

19

• P/BV (X)

• EV/EBITDA(X)

20

1 Year Comparative Graph

Outlook and Conclusion

• At the market price of Rs.532.35, the stock is trading at 15.09 x and 13.50 x for FY10E

and FY11E respectively.

• On the basis of EV/EBDITA, the stock trades at 11.57 x for FY10E and 11.53 x for FY11E.

• Price to book value of the company is expected to be at 2.80 x for FY10E and 2.32 x for

FY11E respectively.

• EPS of the company is expected to be at Rs.35.28 and Rs.39.45 for the earnings of FY10E

and FY11E respectively.

• The company’s Net sales and PAT is expected to grow at a CAGR of 10% and 18% over

FY08 to FY11E.

• The company expects to achieve Rs 500crore from exports of switchgears within a time

frame of three years. The company has commenced its new automated manufacturing

unit in Baddi, Himachal Pradesh. Due to this, there will 70% increases in production of

switchgears. Havells already has switchgear and main circuit board manufacturing plant

located Baddi. The company is expected to export around 50% of its total production at

Baddi.

• The company is aiming to attain a turnover of Rs 300core from Kerala this fiscal.

Havells India Ltd BSE SENSEX

21

• The company has bagged a $200 million export order from the West European countries

for the supply of motors and compact fluorescent lamps (CFLs) for a period of five years.

• Credit rating agency, CARE has retained the AA rating assigned to the long term bank

facilities and also assigned AA rating to the additional long term bank facilities

aggregating Rs 550 million of Havells India (HIL).

• We recommend ‘BUY’ with a target price of Rs.612.00 for long term.

Industry overview India's engineering industry is highly competitive with a number of players in each segment.

The engineering sector has been growing, driven by growth in end user industries and the new

projects being taken up in the power, railways, infrastructure development, and private sector

investments fields amongst others. The industry attracted FDI inflows of US$ 1,196.7 million

from August 1991-July 2006

India's exports of engineering goods are valued at US$ 27 billion during 2006-07 which

represents a 6 per cent growth over the exports for 2005-06 (US$ 20 billion). The engineering

sector accounted for 14 per cent of the country's total exports. It is also noteworthy that 40 per

cent of India's engineering export is from the small and medium enterprises (SME) sector.

According to Engineering Exports Promotion Council (EEPC), engineering exports could touch

US$ 30 billion by 2008-09. In such a scenario, India, driven by the engineering sector, will

emerge as a key global manufacturing hub

Industry demand is driven by investments in core sectors

The demand from this sector depends largely on GDP growth, which in turn is a function of

expenditure in core segments like power, railways, and infrastructure development, private

sector investments, and the speed at which projects are implemented. The power sector is the

largest contributor to the revenues of engineering companies. Engineering majors like Bharat

Heavy Electricals Limited (BHEL) and ABB Limited derive a significant chunk of their revenues

(69 per cent and 60 per cent, respectively) through the supply of equipment to the power

sector.

Infrastructure is another key area of operation. Larsen & Toubro Limited, for example, garners

around 35 per cent of its sales from infrastructure activities like engineering, design and

construction of industrial projects, social and physical projects like housing, hospitals,

information technology (IT) parks, expressways, bridges, ports, and water/effluent treatment

projects. The industrial segment contributes to around 30 per cent of the total revenues of the

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engineering sector. While India’s engineering industry has capabilities in manufacturing the

range of machinery required by the different user sectors, the rapid rise in demand has led to a

large part of the machinery requirements being met through imports. This indicates the size of

opportunity for investment in the engineering and capital goods sector in India. The

engineering industry has attracted FDI inflows of US$ 1,196.73 million from August 1991-July

2006.

Engineering Sector: Market & Opportunities

Indian Engineering goods are gaining acceptance in overseas markets

India’s exports of engineering goods are valued at US$ 27 billion during 2006-07 which

represents a 36 per cent growth over the exports for 2005-06 US$ 20 billion). The engineering

sector accounted for 14 per cent of the country’s total exports. It is also noteworthy that 40 per

cent of India’s engineering export is from the small and medium enterprises (SME) sector. A key

driver for increased engineering exports is the trend towards shifting of global manufacturing

bases to countries like India that offer lower costs and good engineering talent. This trend is

expected to continue and boost exports of engineering goods from India over the next 5 years.

According to Engineering Exports Promotion Council (EEPC), engineering exports could touch

US$ 30 billion by 2008-09. In such a scenario, India, driven by the engineering sector, will

emerge as a key global manufacturing hub. The nature of Indian engineering exports is also

changing with time. India is fast moving from exporting low value goods to developing countries

to more sophisticated goods targeted at developed countries. Capital goods account for 27 per

Engineering sector

Heavy Engineering Light engineering

Transport

Capital goods

Other machinery/

Equipment

Low-tech items like

castings, forgings and

Fasteners

Highly sophisticated

Microprocessor-based

Process control

Equipment, diagnostic

Medical instruments

23

cent of total engineering exports. Exports to European Union countries and North America

accounted for 19 per cent and 17 per cent respectively, of total engineering exports in 2005-06.

Engineering goods worth US$ 3.34 billion were exported to USA alone in April – Feb 2006-07

Growing Demand

Capacity creation and transformation in sectors such as infrastructure, power, mining, oil & gas,

refinery, steel, automotive, consumer durables are driving growth in the engineering industry.

The framework below captures some of the key factors that are contributing to domestic and

international demand for engineering goods from India. Restructuring of the state electricity

boards in different states, growth of private sector players and focus on capacity creation have

driven growth in the power sector.

Conclusion

The Engineering sector’s future outlook is promising. Drivers like power projects, other

infrastructure development activities, industrial growth and favorable policy regulations will

drive growth in manufacturing. The Indian engineering industry has been witnessing significant

level of capability enhancement over the years. As export markets open up, this will help India

develop a strong presence in global engineering exports. Power sector contributes the largest

to the engineering companies’ revenues. Major players in this sector like ABB and BHEL derive

60 per cent and 69 per cent of their revenues from supplying equipments to the power sector.

Going forward, with the Government clearing the blueprint for adding 100,000 MW in the tenth

(2002-07) and eleventh 2007-12) a five-year plan, the potential is high for the engineering

majors. Emerging trends such as outsourcing of engineering services can provide new

opportunities for quantum growth. Engineering and design services such as new product

designing, product improvement, maintenance and designing manufacturing systems are

increasingly getting outsourced to countries like India and China. India’s engineering sector has

significant potential for future growth, in manufacturing as well as services. With development

in associated sectors like automotive, one of the largest evolving markets for engineering and

industrial goods, and a well developed technical human resources pool, India is poised to make

significant strides in all segments of engineering.

___________________________________________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but we do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

24

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

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