it’s all about money, honey!content.indiainfoline.com/wc/archives/sect/have.pdfin 1992. havell’s...

IT’S ALL ABOUT MONEY, HONEY!

Prajakta Pradhan 5675 4478([email protected])

DealingSandeepa Arora 5669 3200Biren Patel 5677 5900

October 2004

Havell’s India Ltd

Has power to do well

October 09, 2004 2

Havell’s India Ltd: Has power to do well

Share Price Chart

Recommendation BUYBSE 517354CMP Rs16952 week H/L Rs174/88Market Cap Rs1.96bnFace Value Rs5Market Lot 1

Shareholding patternKey Financials (Rs in million)

We are initiating coverage on Havell’s India Ltd with a BUY recommendation. Thecompany is one of the world’s top ten switchgear manufacturers and has recentlydiversified into consumer durables to expand its brand portfolio and to leverage on itsdistribution network. In view of its past performance and aggressive growth plans,we expect the company’s earnings to increase by 42% in FY05 and by 48% inFY06. The stock is currently trading at a P/E of 4.5xFY06E, which is at a significantdiscount to its peers.

(Rs mn) FY02 FY03 FY04 FY05P FY06P(12) (12) (12) (12) (12)

Sales 1,935 2,525 3,629 5,623 7,872EBITDA 242 270 447 608 831EPS (Rs) 14.8 15.5 18.1 25.6 37.8BV per share 58.6 70.8 51.2 73.4 106.8EV/PBIDT 6.5 6.6 6.1 4.8 3.5P/E 10.7 10.2 8.7 6.2 4.2Source: India Infoline estimates

Share Holders % holdingPromoters 69.74Institutional Investors 1.98Other Investors 15.68General Public 12.59

2003 Jun Jul Aug Sep Oct Nov Dec 2004 Feb Mar Apr May Jun Jul Aug Sep Oct

100002000030000400005000060000

x10

5060708090

100110120130140150160170180Havell's (I) (166.350, 173.500, 166.000, 170.250, +4.05000)

Peer comparisonSales Net profit OPM EPS CMP P/E Mkt Cap ProductsFY04 FY04 (%) (Rs) (Rs)

Crompton 17264 708 8.1 13.5 238.7 17.7 12507.9 Switchgears,fans, light fittings

ABB * 14684 1242 9.4 29.3 732.5 25.0 31043.4 Switchgears,light fittings

Indo Asian 837.3 16.0 7.31 1.71 39.0 22.8 364.3 Switchgears, light fittings

Finolex Cables 5182 295.6 5.49 9.66 140.9 14.6 4308.6 Cables & wiresHavells 3629 210 10.2 18.1 169.4 9.4 1965.0 Switchgears,

Cables & wires,meters, fans,light fittings

* ABB is a December year ending company and the figures are as of Dec’ 03.

October 09, 2004 3


Investment Rationale

Strong growth prospectsHavell’s being a leading power distribution equipment manufacturer is set to benefitfrom the emerging opportunities in the power sector especially in the transmission &distribution (T&D) segment. It has a dominant position in the switchgear segmentwith a market share of approx. 26%. In cables & wires segment, the company ranksamongst the top five manufacturer in the country with a market share of 14% in cablesand 15% in wires. Currently, these divisions contribute to more than 75% of the totalturnover and the balance is contributed by meters and consumer durables divisions.Increased investments in the T&D sector on account of the Accelerated PowerDevelopment and Reform Programme (APDRP) will drive the demand forswitchgears, cables & wires, meters. Till March 2004, projects worth Rs166bn wereinitiated by various states under the APDRP scheme. Besides this, buoyancy inconstruction, manufacturing and housing sectors will also drive the demand for thecompany’s products. In the current fiscal switchgears and cables & wires divisionsare expected to witness 40% and 70-80% growth respectively. The company is alsoaggressively focusing on increasing its exports and is targeting exports of Rs1bn byFY06 from Rs211mn in FY04.

Leveraging on its strong marketing network to foray into consumerdurablesThe company diversified into electrical consumer durables - manufacturing of fans,light fittings and compact fluorescent lamps (CFL) in FY04, as a strategy to enablebrand expansion and to leverage the vast distribution network. Its strong marketingnetwork in the country with more than 20 offices, 400 marketing professionals, 1,000dealers and 25,000 retail hardware stores, enabled it to diversify in consumer durablesbusiness without incurring further cost to develop a new marketing network. It acquiredfacilities to manufacture these products. For manufacturing fans, it acquired a factoryfrom T-series, and aims to acquire 10% of the market share in the organized sectorby end of this fiscal. It entered into an agreement with Gurgoan based company, GSLighting to manufacture lamps & luminaries and also set up state-of-the-art plant tomanufacture CFLs. The company is also planning to expand this product line throughexports. In the first six months of operation itself in FY04, these divisions registered aturnover of Rs257.3mn and are expected to achieve a turnover of Rs1.5bn and Rs2.2bnin FY05 and FY06 respectively.

October 09, 2004 4


Capacity expansionsThe company invested heavily into capacities and certification during the last twoyears to avail the major opportunity for outsourcing and to meet the increased demandin the domestic market. Recently it commissioned three new plants in Noida (fans),Faridabad (lighting) and Himachal Pradesh (switchgear). Besides this, Havell’s alsoexpanded capacities in two locations for miniature circuit breakers (MCBs) and cables& wires as it expects significant growth for these products. This will take its totalcapacity of MCBs to 20mn units from the present 12mn units. It is already amongstthe world’s top ten manufacturers and with the additional capacity being commissioned,the company will move higher in the ranks. It plans to augment the capacity of MCBsfurther to 30mn units by FY06. In FY04, the company spent Rs250mn on capex andin the first six months of the current fiscal it has incurred a capex of Rs300mn.

Low cost manufaturing to aid growth in outsourcingOver the years, Havell’s entered into strategic alliances with foreign partners likeGeyer, Electrium and gradually absorbed the technology fully. This enabled it to emergeas a low cost manufacturer and tap the outsourcing opportunity, which is estimated tobe US$1bn. It has recently bagged US$15mn contract to supply miniature circuitbreakers (MCBs) to Electrium Group, which commands 45% market share in MCBsand which is one of Havell’s technology partners.

Aggressive strategies to increase exportsBesides outsourcing, the company is also focusing on direct sales and is trying toexpand its presence in the overseas markets. It is primarily focusing on making Havell’san international brand. It has recently opened a new subsidiary in UK. This subsidiarywill be a marketing arm, catering to the European markets, which presently accountsfor nearly 30% of the total exports. In future, it may also cater to the African markets.The company is also open to acquisitions and to form alliances abroad to enablebetter penetration in the overseas markets.For the current fiscal, the company is targeting an export turnover of Rs600mn asagainst Rs211mn in the FY04 with direct sales and outsourcing contributing 50%each. Presently, Havell’s is exporting to 45 countries including, Germany, Belgium,Netherlands, UK, Yugoslavia, Middle East Countries etc. In the next six months, thecompany is also planning to enter the North American markets.

October 09, 2004 5


Strong financialsIn FY04, the company witnessed 44% yoy growth in sales and net profit also morethan doubled. The company expects to sustain the growth momentum in the comingyears. OPM is also expected to remain stable in spite of increasing raw materialprices on account of operational efficiencies. The meters division, which is showingdegrowth in the past few years is expected to show a further decline in this fiscal.However as the business is still profitable, the company is not considering the sale ofthis division. It is expected that this division will pick up once the State ElectricityBoards are unbundled. Decline in metering business has reduced the pressure onworking capital in respect of high receivables, however the impact may not be significantas the company has forayed into consumer durables, which requires high trade support.

Attractive valuationsWe expect the company to gross sales turnover of Rs6.5bn and Rs9.1bn in FY05and FY06 respectively. Expected EPS for FY05E and FY06E is Rs25.6 and Rs37.8respectively. The stock is currently trading at a P/E of 6.6xFY05E and 4.5xFY06Eearnings. This is available at a cheaper valuation as compared to its peers, thus makingit a value BUY. The company paid 40% dividend in FY04 and we expect dividendpayout to increase in line with the rise in profits.

ConcernsLow margins in consumer durables to impact profitabilityThe foray in consumer durables business may impact overall margins. This business ischaracterised as low margin and high competition business. The margins of this businessare much lower at 7%, as compared to its other divisions such as switchgears whichearn higher EBIT margin of 24%.

October 09, 2004 6


Havell’s India Ltd was incorporated in 1983. It is the flagship company of the Rs7bnQRG (Qimat Rai Gupta) group, which was established in 1958. The company wasinitially formed as a private limited company, but was converted into a public companyin 1992. Havell’s has five divisions namely switchgear division, cable division, meterdivision, CFL division and fan division. Its product offering includes building circuitprotection equipment, industrial switchgears, cables & wires, energy meters, fans,compact flourescent lamps (CFLs), light fittings and bath fittings. Over the years, thecompany entered into strategic alliances with foreign partners and has now fullyabsorbed the technology. It has a wide product portfolio and has now emerged asone of the low cost manufacturers of electrical products. It is now, one of India’sleading electrical products’ company.The company is also increasing its presence in the international markets. Presently, itexports to 45 countries.

Company background

Manufacturing unitsPlants ProductsBadli plant (North Delhi) Miniature circuit breakers (MCB), residual current circuit

breakers (RCCB), distribution boards (DB) and highrupturing capacity fuses (HRC).

Faridabad plant (South Delhi) Contactors, relays, CFL and motor starters(controlgear).

Tilak Nagar plant (West Delhi) Three phase energy meters (meters).

Alwar plant (Rajasthan) PVC/XLPE, low tension underground cables, telephoneand co-axial cables, control cables, domestic wires.

Noida plant (East Delhi) Havell’s fans and MCB.

All the manufacturing units are ISO 9001 certified.

Strategic alliancesGeyer To manufacture miniature circuit breakers or MCBs and meter boards.

Schiele To manufacture earth leakage circuit breakers. This tie-up wasextended to cover the complete range of control-gear products ofHavell’s contractors, overload relays and motor starters.

Crabtree To manufacture crabtree modular plate switches & accessories.

Dorman Smith To manufacture switchgear products both industrial and domestic,particularly moulded case circuit breakers.

DZG To manufacture energy meters.

October 09, 2004 7


Sale of stake in subsidiaryThe company held 100% stake in Standard Electricals Ltd, however in FY04, thecompany sold off its stake to QRG group. Since both Havell’s and Standard are twostrong and competing brands, the stake in Standard Electricals was sold off to promotehealthy growth and competition between these two companies.

ManagementThe Company is professionally managed and is headed by Mr. Qimat Rai Gupta,who has been chiefly instrumental for the success of this company. He is assisted bya team of directors, which include Mr. Surjit Gupta and Mr. Anil Gupta.

Mr. Qimat Rai Gupta Chairman & Managing DirectorMr. Surjit Gupta DirectorMr. Anil Gupta DirectorMr. Rajesh Gupta Director- FinanceMr. P.K. Kaul DirectorDr. Abid Hussain DirectorMr. N.S. Vasant DirectorMr. Tarun Banga DirectorMs. Sabine Geyer Director

Board of directors

October 09, 2004 8


Industry backgroundThe retail electrical industry is divided into two sub segments namely the powerdistribution equipment segment and consumer durables segment, which include fans,light fittings, etc. Power distribution equipments segment includes products such asswitchgears, cables and wires, energy meters etc. The growth of this segment is primarilytied up to the growth of the power industry. It has now started picking up aided by thepower sector reforms like APDRP and the Electricity Act, 2003 in addition to theoverall industrial recovery and increasing opportunities for exports. However forMCBs, power industry is not the only market as the residential and commercial marketalso offers huge potential. The market size for MCBs is estimated to be Rs5bn, cables& wires to be around Rs20bn each and meters to be around Rs10bn.The consumer durables industry faces cut throat competition and is a low marginbusiness. Though there is a presence of large players in this industry, there are veryfew which cater to all the products in this segment. The market size of lighting and fansindustry is estimated to be around Rs30bn and Rs12bn respectively.

October 09, 2004 9


Q1 resultsPeriod to 06/04 06/03 Growth 03/04 03/03 Growth(Rs mn) (3) (3) (%) (12) (12) (%)Sales 1,160 715 62.2 3,629 2,525 43.8Expenditure (1,047) (645) 62.4 (3,258) (2,297) 41.8Operating profit 114 71 61.2 371 227 63.3Other income 6 12 (49.6) 76 42 80.1Interest (27) (28) (4.3) (120) (104) 14.7Depreciation (8) (6) 27.0 (26) (23) 13.8PBT 85 48 76.5 301 142 112.2Tax (32) (17) 83.8 (92) (52) 75.3PAT 53 31 72.4 210 90 133.7OPM (%) 9.8 9.9 - 10.2 9.0 1.22Equity 58 58 - 58 58 -EPS (Rs) 18.3 10.6 - 18.1 7.7 -

In Q1 FY05, the company has shown a robust increase in sales aided by 44% and61% yoy growth in sales of switchgear and cables & wires divisions respectively.Infact, the company has grossed around one third of FY04 sales in the first quarteritself. OPM margins remained flat. Net profit increased by 72.4% yoy aided by volumegrowth.

October 09, 2004 10


Projected Income Statement

Projected Balance Sheet

Particulars FY02 FY03 FY04 FY05E FY06E(Rs in mn) (12) (12) (12) (12) (12)Net Sales 1,935 2,525 3,629 5,623 7,872Operating expenses (1,719) (2,297) (3,258) (5,061) (7,089)Operating profit 216 227 371 562 783Other income 26 42 76 46 48PBIDT 242 270 447 608 831Interest (93) (104) (120) (125) (132)Depreciation (19) (23) (26) (40) (45)Profit before tax (PBT) 130 142 301 443 654Tax (44) (52) (91) (146) (216)Profit after tax (PAT) 86 90 210 297 438

Particulars FY02 FY03 FY04 FY05E FY06E(Rs in mn) (12) (12) (12) (12) (12)SourcesShare Capital 58 58 58 58 58Reserves 282 352 536 794 1,167Net Worth 339 410 594 852 1,225Loan Funds 705 946 1,018 1,255 1,445Def Tax liability 41 47 43 50 65Total 1,086 1,403 1,655 2,157 2,735

UsesGross Block 344 408 555 825 960Accd Depreciation (91) (114) (119) (159) (204)Net Block 253 295 436 666 756Capital WIP 5 5 28 10 12Total Fixed Assets 258 300 463 676 768Investments 175 157 32 38 45Total Current Assets 913 1,397 1,944 2,608 3,448Total Current Liabilities (262) (451) (784) (1,164) (1,526)Net Working Capital 652 946 1,160 1,443 1,922Miscellaneous expenditure 1 0 0 0 0Total 1,086 1,403 1,655 2,157 2,735Source: India Infoline estimates

October 09, 2004 11


Projected Cash Flow StatementYear to (Rs m) 03/03 03/04 03/05P 03/06PNet profit before tax and extraordinary items 142 301 443 654Depreciation 23 26 40 45Interest expense 104 120 125 132Interest income (4) (5) (6) (8)Dividend income (0) (0) (1) (2)Operating profit before working capital changes 266 442 601 822Add: changes in working capital(Inc)/Dec in(Inc)/dec in sundry debtors (353) (251) (490) (539)(Inc)/dec in inventories (108) (209) (240) (277)(inc)/dec in other current assets 2 (1) 1 (1)Inc/(dec) in sundry creditors 126 (5) 174 201Inc/(dec) in other current liabilities 63 338 207 160Net change in working capital (269) (128) (349) (456)Cash from operating activities (4) 314 253 366Less: Income tax (52) (91) (146) (216)Inc/Dec in Def Tax Asset/liability 6 (4) 7 15

Misc expenditure w/off 1 0 0 0Net cash from operating activities (49) 218 113 166Extraordinary inc/(exp) 0 0 0 0Cash Profit (49) 218 113 166

Cash flows from investing activities(Inc)/Dec in fixed assets (65) (189) (253) (137)(Inc)/Dec in Investments 18 126 (6) (7)Interest received 4 5 6 8Dividends received 0 0 1 2Net cash from investing activities (43) (59) (251) (136)

Cash flows from financing activitiesInc/(Dec) in debt 241 72 237 190Inc/(Dec) in equity/premium 0 0 0 0Direct add/(red) to reserves (3) (0) 0 0Interest expense (104) (120) (125) (132)Dividends (16) (26) (39) (65)(inc)/dec in loans & advances (13) (76) 29 (13)Net cash used in financing activities 104 (149) 102 (20)

Net increase in cash and cash equivalents 12 10 (36) 10Cash at start of the year 44 56 66 30Cash at end of the year 56 66 30 40Source: India Infoline Research

October 09, 2004 12


Ratios

Ratios FY02 FY03 FY04 FY05E FY06E(12) (12) (12) (12) (12)

Per share ratiosEPS (Rs) 14.8 15.5 18.1 25.6 37.8Div per share 2.2 2.5 2.0 3.0 5.0Book value per share 58.6 70.8 51.2 73.4 106.8

Valuation ratiosP/E 11.5 11.0 9.4 6.6 4.5P/BV 2.9 2.4 3.3 2.3 1.6EV/sales 0.8 0.7 0.8 0.6 0.4EV/ PBIT 7.4 7.6 6.9 5.6 4.3EV/PBIDT 6.8 6.9 6.5 5.2 4.1

Profitability ratiosOPM (%) 11.2 9.0 10.2 10.0 10.0PAT % 4.4 3.5 5.8 5.3 5.6ROCE 21.3 18.2 26.1 27.0 29.3RONW 25.3 21.8 35.3 34.9 35.4

Liquidity ratiosCurrent ratio 3.5 3.1 2.5 2.2 2.3Debtors days 99 127 113 105 100Inventory days 46 51 56 52 50Creditors days 51 71 47 50 52

Leverage ratiosDebt / Total equity 2.1 2.3 1.7 1.5 1.2

Payout ratiosDividend Payout Ratio 14.6 18.2 12.5 13.2 14.8Source: India Infoline Research

Published in September 2004. All rights reserved. © India Infoline Ltd 2003-4.This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intendedas an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of theinformation contained herein is your responsibility alone and India Infoline Ltd (hereinafter referred as IIL) and its subsidiaries orits employees or directors, associates will not be liable in any manner for the consequences of such action taken by you.We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do notrepresent that it is accurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any wayresponsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in thispublication. The recipients of this report should rely on their own investigations. IIL and/or its subsidiaries and/or directors,employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report.India Infoline Ltd, 24 Nirlon Complex, Off Western Exp. Highway, Goregaon(E). Mumbai -63. Tel 2685 0101 / 0505. Fax 2685 0585

it’s all about money, honey!

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