quant havells initiating coverage
TRANSCRIPT
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Havells India: gravitating towards consumer business; E-FMCG in the making
January 27, 2011 2
Table of Contents
Investment summary
Business Summary ..
Macro scenario sustainable for long term growth
Strong branding to assist in market share expansion
Revenue and Profitability of Various Divisions
Aggressive future growth strategies
Sylvania turnaround to drive further re-rating
Financial Analysis .
Valuation & Peer comparison .
Key Risks .
Company Background
Financials .
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Investment summary
Pan-India reach + strong international brand = HAVL to shine bright
Havells India (HAVL) is a strong play on construction and consumer spending owning leading bra
across the consumer electrical space in India. After gaining leadership positions (among Top 4) i
its 4 product segments (Switchgears, Cables & Wires, Consumer durables and Lighting equipme
HAVL has gained a strong foothold in Europe and Latin America as well, after the acquisition of
lighting business of Sylvania, the No. 4 lighting brand in the world. A strong distribution marketing nework in addition to aggressive brand building and portfolio addition initiatives
transformed HAVL into a electrical FMCG company, showing consistent q/q growth over the las
quarters. HAVLs industry-leading growth, demonstrated ability to continuously gain market shar
addition to margin expansion, a strong turnaround in Sylvania operations and a strong pipelin
new product launches make us bullish on the stock.
We believe HAVL is in a position to aggressively ramp up its India business given the wide distribu
network and a pan-India presence. It now has 4300 wholesalers/dealers and 35,000 retailers ac
India covering the length and breadth of the country. It is now leveraged to a strong consump
economy like India and other emerging economies in Asia and Latin America through Sylva
Although there were concerns over HAVLs ability initially to successfully turn around a ai
multinational bigger than itself, the management has demonstrated its capabilities by implemen
a rigorous restructuring exercise which has started yielding results starting Q1FY11. HAVL has demonstrated its ability to launch innovative new products and rapidly gain market share and to
holds a Top 4 position in all its product segments.
HAVL has recently launched a water heater product line which is currently a Rs8bn market in In
and has plans to introduce new products like electric irons and ACs in the near future. Ligh
products is another focus area for the company which the company is planning to expand
launching Sylvania products in India. On the international front, the company is targeting L
America and Asia as key growth markets and has able been able to grow topline there consiste
for the last 3 quarters.
Our target price is based on 12x FY12E EV/EBITDA for the domestic business and 7.5x FY
EV/EBITDA for Sylvania, which we believe is reasonable given the expected growth trajectory (
CAGR growth of 129% over FY10-FY12E) and recovery in return ratios, with ROCE expected to re
to 27% and ROE to 48% after falling off significantly in FY09 and FY10 due to the loss making Sylv
operations.
Exhibit 2: Sylvania recovery bringing consol nos back on trackFY09 FY10 FY11E FY12E
Domestic
Reve nue s (Rs mn) 21984 24734 29114 33784
EBITDA (Rs mn) 2033 3053 3490 3994
Ma rgi ns (%) 9.2% 12.3% 12.0% 11.8%
Sylvania
Reve nue s (Rs mn) 27765 24243 25576 27250
EBITDA (Rs mn) 763 -59 1535 1771Ma rgi ns (%) 2.7% -0.2% 6.0% 6.5%
Consol
Reve nue s (Rs mn) 54775 54315 55690 62183
EBITDA (Rs mn) 2886 3222 5225 5995
Margins (%) 5.3% 5.9% 9.4% 9.6%
Source: Company, Quant Global Research estimates
A strong distribution and
marketing nework in addition to
ggressive brand building and
portfolio addition initiatives has
ransformed HAVL into a electricalMCG company, showing
onsistent q/q growth over the last
6 quarters.
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HavellsIndia:gravitatingtowardsconsumerbusiness;EFMCGinthemaking
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BusinessSummaryxhibit3: MarketsharegainshasputHAVLinaleadershippositionacrossproductsegments
DomesticSwitchgears MCB Peers HAVLRank Luminaries Peers HAVLRank
MarketSize Rs 12bn Legra ndMDS #1 MarketSize Rs 20bn Phi l i ps #4
MarketShare 15%(FY06)to20% (F Y10) S cheneider MarketShare 3%(FY06)to10% (FY10) Crom pton
ModularSwitches Crabtree Peers HAVLRank Fans Peers HAVLRank
MarketSize Rs 10bn Ma ts us hita #2 MarketSize Rs 30bn Crompton #3
MarketShare 5%(FY06)to15%(FY10) AnchorRoma MarketShare 6%(FY06)to13% (F Y10) Ori e nt
ndustrialswitchgears Peers HAVLRank ElectricalWaterHeater Peers HAVLRank
MarketSize Rs 20bn L&T #4 MarketSize Rs 8bn Ba ja j New
MarketShare 7%(FY06)to8%(FY10) Siemens Recold
HAVLRank
Cable&Wire Peers HAVLRank World's No.4 64% Europe revenues #4
MarketSize Rs 120bn Pol yca b #2 LightingBra nd 31% LatinAmerica
MarketShare 6%(FY06)to9%( FY10) Fi no le x
CompactFluorscent Lamps Peers HAVLRank
MarketSize Rs 12bn Phi l i ps #2
MarketShare 10%(FY06)to10%( FY10) Os ra m
Sylvania InternationalLighting
ource:Industrydata,QuantGlobalResearch
Exhibit4: Strongmarketsharegainsacrossproductsegments
15%
5%
7%6%
10%
3%
6%
20%
15%
8%9% 10% 10%
13%
0%
5%
10%
15%
20%
25%
DomesticSwitchgears
MCB
ModularSwitches
Crabtree
Industrialswitchgears
Cable&Wire
CompactFluorscent
Lamps
Luminaries
Fans
MarketshareinF Y0 6 Mark etshareinFY10
Source:Company,QuantGlobalResearch
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Macro scenario sustainable for long term growth
Recovery in housing construction and huge power spend to dr
demand
On the industrial side, cables & wires segment which contributes about 42 % to HAVLs standa
revenues and switchgears, which contribute another 28% will benefit from the expected spendin
the power sector. HAVL has been a major beneficiary of Indias industrial capex, including po
capacity additions and augmentation of Transmission and Distribution infrastructure.
xhibit 5: India still has lowest per capital electricity consumption(in kwh per annum)
Exhibit 6: Huge power spending expected in 2011 and 2012
ource: IEA, Quant Global Research Source: Planning Commsission, Quant Global Research
On the retail side, the lighting and consumer durable divisions which contribute around 30%
revenues will benefit from a requirement of residential units in addition to the replacement dem
for consumer goods and increase in brand awareness of domestic consumers. In a country like In
the opportunity for a Pan-India player with strong brand recognition is expected to gradually incre
with the increase is consumer awareness, especially in the Tier 2 and Tier 3 cities.
Gradual shift in consumer preference towards branded products
After the delicensing of manufacture of electrical products, organised players are able to add capa
much faster than the unorganized players. They are also able to provide a much better quality
diversified product portfolio at the same price which is continuously taking market share away fr
the unorganised sector, especially in the consumer durables and lighting space. For example, as
HVEL, the unorganised sectors share of the fan market has declined from 50% in 2006 to 30%
2010. Within the segments as well, we are witnessing a trend of moving towards higher-
premium products.
Awareness towards good quality brands and penetration of organized retailers is fuelling the dem
of electrical consumer goods. We believe that HAVL has captured a larger mind as well as mar
share in the electrical consumer space.
543
2752
8477
23461895
4128
10102
6080
0
2000
4000
6000
8000
10000
12000
India
World
OECD
China
2007 2030E
344 433 546
1569
2892
0
500
1000
1500
2000
2500
3000
3500
FY08
FY09
FY10
FY11+FY12E
11t
hP
lan
Targeted Power T&D expenditure (Rs bn)
We believe that HAVL has captured
larger mind as well as market
hare in the electrical consumer
pace.
per capita e lectricity consumption (KWh)
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xhibit 7: Share of organized sector in home appliances gaining rapidly Exhibit 8: Organised fans segment growing faster than unorganised
ource: Media reports, Quant Global Research Source: IFMA, Quant Global Research
Key beneficiary of rising income levels and increasing retail space, especially in Tier 2 and Tie
cities
A direct impact of rising income levels of consumers is seen in increasing housing activity whshould benfit pan-India players like HAVL. In addition to new demand being created, the replacem
demand from exisiting households (10-15% of HAVL sales) is also expected to remain strong.
robust distribution network spread across Tier 2 and Tier 3 cities in India place HAVL in a str
position to capture a major share of the booming consumer electrical industry.
According to a report titled 'India Organised Retail Market 2010', published by Knight Frank Ind
May 2010 during 2010-12, around 55 mn sq ft of retail space will be ready in Mumbai, natio
capital region (NCR), Bengaluru, Kolkata, Chennai, Hyderabad and Pune. Besides, between 2010
2012, the organised retail real estate stock will grow from the existing 41mn sq ft to 95 mn sq ft.
can potentially fuel the demand for HAVLs consumer products.
50%
35%
50%
65%
0%
10%
20%
30%
40%
50%
60%
70%
FY06
FY10
Unorganised home appliances market (%) Organised home appliances market share (%)
8
10
13
24
0
5
10
15
20
25
30
FY07
FY10
Unorganised Fans market (Rs bn) Organised Fans market (Rs mn)
23% CAGR for organised
n addition to new demand being
reated, the replacement demand
rom exisiting households (10-15%
f HAVL sales) is also expected to
emain strong.
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Strong branding to assist in market share expansionA recovery in the housing market and improvement in industrial activity is expected to aid str
industry growth in FY12, while brand awareness among consumers is likely to increase the ma
share of branded palyers like HAVL. We expect HAVL to continue its leadership position across
product segments, with significant market share increases in consumer durables and lighting.
Significant branding investments paying off for the company
Exhibit 9: Strong S&D investments paying off for the company
887.1
1578.1
2251.9
6872.5
7656.78239.5
84878741
12%
13%
14%
15%
16%
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
S&D expenses (Rs mn) as % of sale s
Source: Company, Quant Global Research estimates
HAVL has always spent 2-4% of its annual revenues on advertising (in line with other consum
durable companies) and building up its brand image, especially in Tier 2 and Tier 3 cities. The ove
selling & Distribution expenses have risen to around 15% of sales, especially since the Sylv
acquisition as the company had to invest heavily in improving its branding and distribution netwo
Latin America and Asia. This has helped create a strong visibility for HAVL s brands across prod
segments. HAVL also has 60 dealer-run retail galleries in the name of Havells Galaxy., w
augment the companys brand popularity initiatives. The company has a target of adding about 30
galleries every year with a aim of reaching as many consumers directly as possible. Apart f
innovative media campaigns, the company is also trying innovative packaging techniques to crea
strong brand image for its products.
Exhibit 10: Gravitatiting toward becoming an Electrical FMCG playerSuccessfully implementing the 7 P's of Marketing
Product Minimal outsourcing, in-house manufacturing and raw material procurement
from primary vendors ha s e nhanced product qual ity
Price Abili ty to charge price premi um due to better product quali ty and complete
product portfolio h elp s i n protecting margins
Place Pan-India presence wi th 35000 retaile rs and 4300 dea lers h as brought HAVL
products nea r the consum er in every region in I ndia
Promotion Significant amounts spent on advertising and brand building have created a
strong brand recall for HAVL products
People Motivated and well trained sales force, product design team encouraged
for continuous i nnovation, libe ral incentive programs
Packaging Innovative and colourful packagi ng and a ttractive product presen tation in retail
gal ler ies has made a strong impress ion of HAVL products i n the retai l s pace
Positioning HAVL has the ima ge of being one of the premium pla yers in cons umer ele ctricals
spa ce with qual ity products, which makes it ea sy to garner market sha re for new products
Source: Company, Quant Global Research
AVL has always spent 2-4% of its
nnual revenues on advertising (in
ne with other consumer durable
ompanies) and building up its
rand image, especially in Tier 2
nd Tier 3 cities.
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Revenue and Profitability of Various Divisions
xhibit 11: Cables & Wires and switchgears were dominant segments Exhibit 12: Lighting and durables contributing more to revenues
28%
45%
13 %
13%
2%
FY09 Revenue Break-up
Switchgears Cables & W ires Lighting Durables Others
28%
41%
15%
15%
1%
FY10 Revenue Break-up
Switchgears Cables & Wires Lighting Durables Others
ource: Company, Quant Global Research Source: Company, Quant Global Research
xhibit 13: Switchgears contributed more than half gross margins Exhibit 14: Durables also start adding significantly to margins
52.6%
16.3%
13.5%
15.3%
2.3%
FY09 Contribution margin break-up
Swi tchge ars Cal es & Wi re s Lighting Durabl es Othe rs
49.3%
16.8%
13.2%
19.3%
1.3%
FY10 Contribution margin break-up
Switchgears Cales & Wires Lighting Durables Others
ource: Company, Quant Global Research Source: Company, Quant Global Research
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1. SwitchgearsSwitchgears is the most profitable segment for HAVL and also the most competitive one with
presence of a number of multinationals. This segment accounts for 28% of HAVL revenues but 50%
its contribution profit. HAVL has become a leading name in the industry by virtue of being the lar
manufacturer of MCBs (miniature circuit breakers) in India and among the Top 10 in the world.
company has a diversified portfolio in this segment with products like MCBs, mini MCBs, R
(residual current circuit breaker), switches, regulators and MCCBs (moulded case circuit breake
with manufacturing facilities at Baddi, Himachal Pradesh and Faridabad, Haryana.
xhibit 15: Strong growth in switchgears industry Exhibit 16: HAVL growing faster than industry despite high competitio
ource: Capitaline, Quant Global Research Source: Company, Quant Global Research estimates
HAVL owns the marketing rights for the #2 brand in modular switches, Crabtree which contrib
about Rs1.5bn to its annual revenues. The company has grown its market share quite aggressiv
from 5% in 2006 to 15% in FY10. Another important category in this segment is indus
switchgears, a premium category dominated by players like L&T, Siemens and Schneider, where H
commands a 8% market share.
Exhibit 17: Swithgears to remain highest margin segment (36-37%)
1277
1779
2062
2611
2990
3363
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
0
500
1000
1500
2000
2500
3000
3500
4000
FY07
FY08
FY09
FY10
FY11E
FY12E
Contri buti on profi t (Rs mn) contri buti on (%)
Source: Company, Quant Global Research estimates
35
45
60
76.480.1
95.8
0
20
40
60
80
100
120
CY05
CY06
CY07
CY08
CY09
CY10
22.3% CAGRRsbn
6686
92409911 10105
11741
13503
0
2000
4000
6000
8000
10000
12000
14000
16000
FY07
FY08
FY09
FY10
FY11E
FY12E
25.1% CAGRsmn
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2. Cables & WiresCables & wires is high volume, low margin business for the company. From its manufacturing fac
in Alwar, Rajasthan, HAVL manufactures a complete range of low and high voltage PVC/XLPE cab
FR/FRLS wires, co-axial TV and telephone cables upto a maximum voltage of 66KV. This segm
accounts for 43% of HAVL revnues but only 17% of its contribution profit, as the value addition is
significant and profitability is dependent on copper prices. The major competitors include Poly
Finolex and KEI industries. HAVL has about 9% market share currently, but does not see this segm
as a future growth driver. All marketing efforts in this segment are aimed at brand building for company and focused towards the consumer end of the cables & wires industry.
xhibit 18: Cables & Wires benefitting from increasing powerexpenditure
Exhibit 19: Not a big growth driver for HAVL , low margin high volume
ource: Capitaline, Quant Global Research Source: Company, Quant Global Research estimates
Exhibit 20: Margins in cables & wires to remain stable around 8%
909969
671
887939
1107
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
0
200
400
600
800
1000
1200
FY07
FY08
FY09
FY10
FY11E
FY12E
Contribution profit (Rs mn) contribution (%)
Source: Company, Quant Global Research estimates
73
103
142
177
195
224
0
50
10 0
15 0
20 0
25 0
30 0
CY05
CY06
CY07
CY08
CY09
CY10
25.1% CAGR
Rsbn
6686
9240
9911 10105
11741
13503
0
2000
4000
6000
8000
10000
12000
14000
16000
FY07
FY08
FY09
FY10
FY11E
FY12E
17% CAGRsmn
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3. Electrical consumer durables (Fans)Till date, the companys presence in the consumer durables space has been limited to fans for w
the company has the largest domestic integrated facility in Haridwar, Uttar Pradesh. With h
Chinese domination in table-top and portable fans, and significant domestic competition in the lo
end domestic fans, HAVL has decided to compete only in the premium segment with Rs1000
price category, which has helped it maintain strong margins. HAVL has rapidly grown its market sh
from 6% in 2006 to 18% in 2010 taking away market share from peers like Crompton Greaves, Ori
and Bajaj Electricals. This segment accounts for 16% of HAVL revenues and 20% of its contribuprofit.
xhibit 21: Slow growth in fans, but shift towards organized industry Exhibit 22: Established premium fan brand, moving into new product
10
11
12 12 12
14
0
2
4
6
8
10
12
14
16
CY05
CY06
CY07
CY08
CY09
CY10
7% CAGRRsbn
1723
2399
2770
3594
4399
5279
0
1000
2000
3000
4000
5000
6000
FY07
FY08
FY09
FY10
FY11E
FY12E
15.1% CAGRRsmn
ource: ELCOMA India, Quant Global Research Source: Company, Quant Global Research estimates
Exhibit 23: Aggressive growth in fans with 30-32% margins
251
517613
1019
1408
1637
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
0
200
400
600
800
1000
1200
1400
1600
1800
FY07
FY08
FY09
FY10
FY11E
FY12E
C ontr ibuti on profi t (Rs m n) c ontr ibuti on (% )
Source: Company, Quant Global Research estimates
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4. Lighting & FixturesHAVL has again positioned itself as a premium CFL and luminaries player to stay away fr
competition and maintain high profitability. The lower end of the market is dominated by Chin
products. HAVL is the second largest player after Philips with a 10% market share. This segm
accounts for 16% of HAVL revnues and 13% of its contribution profit.
xhibit 24: Strong growth in industry led by CFLs Exhibit 25: Growing fast on strong & innovative product portfolio
45
50.3
58.1
65.7
71.7
-5
5
15
25
35
45
55
65
75
85
CY05
CY06
CY07
CY08
CY09
12.4% CAGRRsbn
2239
2844
2768
3667
4532
5392
-500
500
1500
2500
3500
4500
5500
6500
FY07
FY08
FY09
FY10
FY11E
FY12E
19.2% CAGRRsmn
ource: Capitaline, Quant Global Research Source: Company, Quant Global Research estimates
Exhibit 26: Lighting segment margins of around 18-19%
252
37 2
53 3
705
816
998
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0
200
400
600
800
1000
1200
FY07
FY08
FY09
FY10
FY11E
FY12E
C on tr ib uti on p rofi t (R s m n) c on tr ib uti on (% )
Source: Company, Quant Global Research estimates
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Aggressive future growth strategiesAddition of new domestic appliances to drive consumer durable segment growth
HAVLs strong historical growth has been on the back of successful introduction and quick scale-u
new product lines across its product categories. With the cables & wires and switchgear segm
stabilising, HAVL aims to maintain steady growth in these segments near to the market growth r
HAVL has identified the consumer durables segment as the next area where it can generate ab
industry growth given its strong brand image and pan-India distribution network. HAVL has receentered the electric water heater segment, an estimated Rs8bn market where it believes it
generate a turnover of Rs300mn in FY11 and Rs600mn in FY12. HAVL also has plans to enter
electric iron and the AC segments, but has not finalised plans for the same. HAVL plans to leverag
strong distribution network and brand image without committing too much capital as it plan
outsource the product manufacturing.
Launch of Sylvania products in India to drive lighting segment growth
HAVL has plans to launch Sylvania lighting products in India to capitalise on its marketing capabil
and the premium image of Sylvania products in India. These products are expected to be place
the premium category of the lighting segment and should fetch higher margins and also aid
accelerating revenues.
Further leveraging of a well entrenched distribution network
HAVL, since inception has focused on developing strong relations with its distributors and in
process, built up a wide network of dealers across India, particularly strong in North and East In
The company has made it a point to indulge in dealer friendly practices in the past that has b
loyalty among its dealer network. When copper prices crashed during Q3FY09 leading to signific
inventory losses for the dealers, the management decided to share those losses. Another pro
making opportunity it gave to its dealers was deciding not to engage in installation of the cable
wires, and leaving that to the companys dealers.
The company is known for its distributor-friendly practices and a superior field staff who h
received in-house training. As a result of this dominant position in distribution, it has reached the
position in selling consumer electrical goods below Rs5000.
Focus on quality and innovation
HAVL management lays a lot of emphasis on excellent product quality standards which has impro
the quality of its distributor relations. To provide a consistent quality, HAVL tries to manufac
most of its products in-house rather than outsourcing production. The company has been able
achieve continuous product innovation as a result of its captive manufacturing capabilities
expertise in product designing. This has enabled the company fill in any available gaps in the prod
lines of its product segments, like energy saving fans and lamps. The strong distribution netw
enables product launch in a short span of six to nine months.
Acquisition of Standard Electricals to add further to bottomline
Incorporated in the year 1958, Standard Electricals is a well established brand and amongst the
five brands in domestic switchgear market in India. The rationale for acquisition is to cater all
price segments in the domestic switchgear market with multi brand approach. The acquisitio
further value creation for the shareholders of HAVL and is EPS accretive. We believe Standard Elemerger was at a reasonable valuation, at 1.2x EV/Sales and 12x PE multiples. We have val
Standard Electricals at 10x FY12E EBITDA of Rs 230mn.
We believe Standard Electric
merger was at a reasonable
aluation, at 1.2x EV/Sales and 12x
E multiples. We have valued
tandard Electricals at 10x FY12E
BITDA of Rs 230mn
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Sylvania turnaround to drive further re-rating
xhibit 27: Successful restructuring efforts have started bearing fruitsSylvania Restructuring Phase 1 - Phoenix
Start Date Jan-09
Proje ct cos t (Euros mn) 12
Annua l i s ed s a vi ngs (Euros mn) 17.5
End Da te Dec-09Ta rge ts Cl os i ng 3 pla nts , 8 wa rehous e s , l a yi ng off 1200 e mpl oye es a nd re ducing worki ng ca pi ta l
Sta tus Annua l i s e d s a vi ngs a chie ved by Septembe r 2010. Worki ng ca pi ta l reducti on a chie ved by obta ini ng be tter
credi t terms from vendors from l ow cost countries , and inventory reduction
Sylvania Restructuring Phase 2 - Parakram
Start Date Sep-09
Proje ct cos t (Euros mn) 23.0
Annua l i s ed s a vi ngs 22
End Da te Dec-10
Acta ul cos t (Euros mn) 18
Actua l s a vings (Euros mn) 17
Ta rge ts Cl os i ng pl a nt in Hol la nd a nd re duci ng ca pa ci ty i n UK, Fra nce, Gera mny a nd Spa in. He a dcount re duction
of 400 and procurement from low cost countries
Sta tus Achi eve d pla nt cl os ure , ca pa ci ty re duction a nd la yoffs by Se pte mber 2010. Euro 17mn a nnua l i s e d s a vi ngs
to be achieved by Q4FY11.
ource: Company, Quant Global Research
After the substantial derating of HAVLs stock on account of concerns related to Sylvania (world
4 player in lighting and fixtures) acquisition, HAVL put in place a comprehensive restructuring pla
turnaround Sylvania operations. There were concerns related to Sylvanias operating performan
debt service ability and future growth, which have now subsided to a large extent after Sylvan
recent break-even at the net profit level with further improvement expected in operating margins
Exhibit 28: Sylvania margins demonstrate successful turnaround
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Sylvania revenues (Rs mn) % EBITDA
Source: Company, Quant Global Research
HAVL had acquired Sylvanias global business (except for brand rights in North Amercia, Mex
Australia and New Zealand) in 2007 from various private equity players for an EV of 227m Euros.
key rationale behind the acquisition was to acquire Sylanias operations and distribution networ
Europe and leverage Sylvanias brand to enter other emerging markets. After HAVL paid an imp
valuation of 7.5x EV/EBITDA for Sylvania, its operations deteriorated owing to the global econo
slowdown, and HAVL had to carry out a two-stage restructuring program to turn Sylvania around.
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Exhibit 29: HAVLs exposure to Sylvania to reduce from FY12 with debt repayment/refinancingHAVL exposure to Sylvania
in millions of Euros Mar-10 Sep-1
Ini tia l Equi ty i nves tme nt (1) 50 5
Sylvania debt with recourse to HAVL (2)
a ) recours e de bt repa i d 13 1
b) recours e de bt to be rea pi d ove r 2009-2012 17 1c) e s ti ma ted i nteres t pa ya bl e on re cours e debt 10 1
d) a ddi ti ona l worki ng ca pi ta l debt gua ra ntee d by HAVL 14
Tota l ini tia l e xpos ure 104 9
Addi ti ona l equi ty i nve s ted (3) 12 2
Total exposure of HAVL into Sylvania 116 12
Debt position (Sylvania)
in millions of Euros Mar-10 Sep-1
With recourse to Havell s Ind ia (1)
a ) a cqui s i ti on de bt 16.67 13.3
b) other debt
Wi thout recours e to Ha vel l s India (2) 141 161.6
Les s : Ca s h (3) 12.58 13
Total Net Debt 145.09 161
Source: Company, Quant Global Research
Increased outsourcing to help in margin expansion
After the successful achievement of annualised savings from its restructuring programme, HAV
now expecting to run Sylvania operations at a low cost base. We belive that Europe revenues are
likely to remain at current levels with the company not looking at that region as a growth area.
management has also indicated that there will not be any significant capex in Sylvania. After clo
down its high cost plants in Europe, Sylvania has increased outsourcing to cheaper locations China and India for CFL and other lighting products. We are also not factoring in any revenue gro
from Sylvanias Europe operations.
Sylvania growth to be driven by LATAM and Asia regions
A major chunk of the growth for Sylvania has come from emerging markets in Latin America and A
The management expects emerging markets to contribute about half of Sylvaniss earnings by F
from about 30% currently. This change in growth markets has helped Sylvania break even earlier t
expected as emerging markets tend to have higher operating margins. The growth has been due
focus on distribution and new product launches in Latin America. HAVL plans to grow aggressivel
emerging markets by launching innovative products and empowering its local management team
formulate appropriate marketing startegies. High margins will be ensured on account of more t
70% outsourcing from China. HAVL is also planning to lauch Sylvania products in India to leverage
Sylvanias brand recall backed by HAVLs strong distribution presence.
A major chunk of the growth for
ylvania has come from emerging
markets in Latin America and Asia.
he management expects
merging markets to contribute
bout half of Sylvaniss earnings by
Y13 from about 30% currently.
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Exhibit 30: Sylvania to grow aggressively in Latin Amercia and Asia
70.8% 70.9%60.5% 56.8%
24.5% 25.9%
33.4% 36.1%
4.7% 3.1% 5.4% 6.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY09
FY10
FY11E
FY12E
Europe Latin America Asia Others
Source: Company, Quant Global Research estimates
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Financial AnalysisWe expect sales CAGR of 7% over FY10-FY12E on consolidated basis
We expect HAVL to post a sales CAGR of 7% over FY10-FY12E with domestic sales to grow at a CA
of 17% and Sylvania revenues to grow modestly at a 6% CAGR over the same period. The dome
sales growth will be driven by strong growth mainly in the lighting and the Consumer dura
products. On the Sylvania front, with Europe revenues remaining flat, we expect strong growth f
emerging markets in Asia and Latin America.
xhibit 31: HAVL standalone performance remains strong Exhibit 32: Focus on consolidation for now, not aggressive growth
ource: Bloomberg, Quant Global Research Source: Quant Global Research estimates
EBITDA CAGR of 36.4% over the same period led by 370bps margin expansion
We forecast EBITDA margins to expand by 370bps from 5.9% in FY10 to 9.6% in FY12E as Ind
margins remain stable due to continuous operational efficiencies and Sylvania margins reach
optimum level after the turnaround. We expect India business margins to be in the range of 11.8-
and Sylvania margins to reach 6.5% over the next two years.
Exhibit 33: Consol margins to expand further led by Sylvania turnaround
976.0
1458.0
3486.0
2886.0
3222.3
5224.55995.1
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0.0
1000.0
2000.0
3000.0
4000.0
5000.0
6000.0
7000.0
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
Consol EBITDA (Rs mn) margins (%)
Source: Company, Quant Global Research estimates
PAT CAGR of 126% over the same period led significant debt repayment
We estimate consolidated earnings CAGR of 126% over FY10-FY12E driven by significant ma
growth, lower interest payments on account of debt repayment and no new extraordinary expen
realted to the Sylvania restructuring.
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
0
1000
2000
3000
4000
5000
6000
7000
8000
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
H AVL St an dal on e r even ue s (Rs m n) % EB ITD A
11151.315472.2
50029.354774.9 54315.3 55689.7
62183.
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
Consol Revenues (Rs mn)
33.2% CAGR
We expect ROCE to improve to
7.3% in FY12E from 14.3% in FY10
nd ROE to improve to 48.8% in
Y12E from 13.7% in FY10.
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Exhibit 34: PAT growth to show robust growth on completion of restructuring
628.3
1021.2
1609.6
384.4
695.6
2896.6
3550.6
0
500
1000
1500
2000
2500
3000
3500
4000
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
Consol PAT (Rs mn)
33.5% CAGR
Source: Company, Quant Global Research estimates
Capital efficiency levels to gradually return to pre Sylvania acquisition levels
We expect return ratios to improve going forward led by Sylvania turnaround and return to le
that HAVL generated before the Sylvania acquisition. We expect ROCE to improve to 27.3% in FY
from 14.3% in FY10 and ROE to improve to 48.8% in FY12E from 13.7% in FY10.
Exhibit 35: Capital efficiency levels seen gradually returning to pre acquisition levels
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
ROACE ROAE
Source: Company, Quant Global Research estimates
Margins remain sensitive to copper and aluminium prices
The key raw materials for the company are copper and aluminium, which have displayed signific
volatility in the past. But despite that, HAVL has been able to maintain its margins by passing on
price hikes in input prices. In FY10, copper accounted for 26% of total domestic raw material cand aluminium accounted for 17% of of the domestic raw material costs. Going forward, we exp
the company to have a lower impact of rising commodity prices than the past as the quality of HA
products places it in a stronger position than peers to pass on raw material price increases.
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xhibit 36: Copper prices in the middle of strong uptrend Exhibit 37: Aluminium prices also showing strength
ource: Bloomberg, Quant Global Research Source: Quant Global Research estimates
Strong free cash flows to deleverage consol balance sheet
We expect HAVL to incur a capex of around Rs3bn over FY10-FY12E mainly on domestic capa
expansions. The investments in Sylvania will not be huge except some increase in working caplimits and maintenance capex of Euro2-2.5m annually. As per our calculations, HAVL should be
to generate about Rs7.8bn of operating cash flows to take care of this capex and utilise the res
reducing its debt levels to about Rs10bn in FY12E from Rs12bn currently. As a result, D/E ratio
expected to fall from 2.7x in FY10 to1.2x in FY12E.
Exhibit 38: Strong cash generation to help bring down leverage
1528.0
3935.9
3528.7
4316.3
0.00
0.50
1.00
1.50
2.00
2.50
3.00
0.0
500.0
1000.0
1500.0
2000.0
2500.0
3000.0
3500.0
4000.0
4500.0
5000.0
FY09
FY10
FY11E
FY12E
CFO (Rs mn) Gross de bt to e quity (x)
Source: Company, Quant Global Research estimates
Exhibit 39:
Strong working capital management leads to robust cash flowsDays FY06 FY07 FY08 FY09 FY10 FY11E FY1
Inventory days 62 56 76 53 55 60
Receiva bl e da ys 42 7 60 50 47 45
Payable days 69 59 107 93 105 105 1
Working ca pi ta l da ys 35 5 29 11 -2 0
Source: Company, Quant Global Research estimates
0
2000
4000
6000
8000
10000
12000
Jan-0
6
Apr-0
6
Ju
l-06
Oct-0
6
Jan-0
7
Apr-07
Ju
l-07
Oct-0
7
Jan-0
8
Apr-08
Ju
l-08
Oct-0
8
Jan-0
9
Apr-0
9
Ju
l-09
Oct-0
9
Jan-1
0
Apr-10
Ju
l-10
Oct-1
0
LME Copper Spot (US$/tonne)
0
500
1000
1500
2000
2500
3000
3500
Jan-0
6
Apr-06
Ju
l-06
Oct-0
6
Jan-0
7
Apr-07
Ju
l-07
Oct-0
7
Jan-0
8
Apr-08
Ju
l-08
Oct-0
8
Jan-0
9
Apr-09
Ju
l-09
Oct-0
9
Jan-1
0
Apr-10
Ju
l-10
O c t 1
0
LME Aluminium Spot (US$/tonne )
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Valuation & Peer comparisonWe initiate HAVL with a BUY rating and a 12-month PT of Rs455 based on our SOTP valuation.
have valued the domestic businesses of HAVL and Standard Electricals at 12x and 10x FY
EV/EBITDA respectively and the Sylvania business at 7.5x FY12E EV/EBITDA. Based on histo
trends before the Sylvania acquisition, HAVL used to trade at a mean forward EV/EBITDA of ab
12x against a mean ROCE of about 25-30%. Going forward, we expect the domestic business to tr
again at those multiples given that core ROCE will be moving higher as domestic business keeps
doing well.
Although there is no exact comparable for HAVLs standalone business in India, we still compare
Indian consumer durable manufacturers, who address similar markets. We have also compared H
to international consumer durable manufacturers catering to different geographies.The dome
peers for HAVL like Crompton Greaces and Bajaj Electricals are trading between 6-13x FY
EV/EBITDA. The international peers for HAVL like Schneider and Philips are trading between 6-
FY12E EV/EBITDA.
We belive that HAVL deserves a premium to Indian peers on account of its strong presence in
higher margin consumer electrical space and its strong brand image. On the international fron
deserves to trade at a premium on account of its presence in high growth emerging markets like I
and Latin America.
International peers for Sylvania are Philips, Fagerhult and Acuity which are trading between 6FY12E EV/EBITDA. Hence, given our estimated operating margin of Sylvania of around 6-7% alongw
the business transforming into a free cash flow generating entity, we believe a target multiple of
FY12E EBITDA is fair and reasonable.
We have also tried to value HAVL using the DCF methodology which gives us a value of Rs480/sh
but we are being a bit conservative and taking the lower of the two valuation methodologies to ar
at our target price.
xhibit 40: HAVL deserves a premium on account of presence in growth markets and retail productsMkt Cap
(US$ mn) 2011E 2012E 2011E 2012E 2011E 2012E 2011E 20
V-Guard Industries Ltd VGRD IN Equity 112 25.0 28.6 8.2 6.2 13.2 9.4 3.0 2
Crompton Greaves Ltd CRG IN EQUITY 3,923 31.4 28.3 13.0 11.2 19.9 17.0 5.6 4Bajaj Electricals Ltd BJE IN EQUITY 477 25.7 26.9 9.5 7.5 14.6 11.3 3.6 2
Voltas Ltd VOLT IN EQUITY 1,544 32.1 31.8 12.7 9.9 17.5 13.8 5.0 3
Blue Star Ltd BLSTR IN EQUITY 782 29.8 38.4 14.0 9.0 21.7 13.3 6.7 5
Havells India Ltd HAVL IN EQUITY 960 57.7 48.8 10.0 8.3 15.1 12.3 7.3 5
Schneider Electric SA SU FP EQUITY 43,194 15.4 15.7 8.8 7.9 13.9 12.7 2.1 2
Leoni AG LEO GY Equity 1,333 20.6 21.4 5.3 4.6 10.5 8.4 2.0 1
Legrand SA LR FP Equity 10,943 18.3 18.0 8.8 8.2 15.4 14.4 2.7 2
Everlight Electronics Co Ltd 2393 TT Equity 1,259 17.2 18.2 7.8 7.0 13.3 12.4 2.3 2
Koninklijke Philips Electronics NV PHIA NA Equity 31,751 11.2 11.7 5.9 5.2 12.4 11.2 1.4 1
Acuity Brands Inc AYI US Equity 2,398 14.7 17.0 10.7 8.3 21.7 17.2 3.0 2
Fagerhult AB FAG SS Equity 348 21.0 21.3 8.3 7.1 12.5 10.5 2.4 2
Hubbell Inc HUB/B US Equity 3,592 16.7 17.3 7.9 6.7 14.6 12.9 2.4 2
Zumtobel AG ZAG AV Equity 1,254 14.3 15.9 8.7 7.3 17.7 13.7 2.3 2
Company nameReturn on Equity (%) EV to EBITDA (X) Price to earnings (X) Price to book (X)
Ticker
ource: Bloomberg consensus estimates, Quant Global Research Estimates ; Note: Pricing data as of 27 January 2010
We have valued the domestic
usinesses of HAVL and Standard
lectricals at 12x and 10x FY12E
V/EBITDA respectively and the
ylvania business at 7.5x FY12E
V/EBITDA.
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xhibit 41: Expect trading multiples to move back to pre acquisition level Exhibit 42: Our SOTP target gives 30% upside from current levels
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Rol. EV/EBITDA Me an EV/EBITDA
(Rs mn)
FY12EEBITDA
Target EV/
EBITDA (x)
Target
EV
Sta nda lone EBITDA 3994 12.0 47926
Syl va nia EBITDA 1771 7.5 13284
Sta nda rd EBITDA 230 10.0 2300
Cumul ati ve EV 63510
Consol Net Debt 6800
Consol Equi ty Va l ue 56710
Di l uted equi ty sha res (mn) 125
Price target per share (Rs) 455
ource: Bloomberg, Quant Global Research Source: Quant Global Research estimates
xhibit 43: Our DCF calculations come out with a better valuation Rs 480 compared to our EV/EBITDA valuation of Rs 455
ource: Company, Quant Global Research Estimates
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Key Risks Raw material price volatility, especially on copper and aluminium prices remains a key risk
HAVL. Although it tries to pass on any increase in input prices to customers, significant volat
in prices can sometimes lead to inventory losses or margin erosion. But this impact would ma
be felt in the cables & wires segment which contributes about 40% to HAVLs domestic busine
Although we have not assumed any growth in Sylvanias revenues from Europe, we do factostability. A higher than anticipated weakness in European operations can significantly impactprojections on Sylvania as Europe contributes more than 60% of Sylvania revenues curre
which in turn contributes about 31% of consolidated revenues.
Increasing competition, especially in the institutional/commercial space can bring down HAexpected growth both in india and outside. HAVL faces competition in India from aggres
players like L&T, Crompton, Bajaj Electricals and Schneider. Sylvania also competes with Ph
Lighting, Siemens-Osram and GE Lighting in the global space. Although HAVL is expected to
well in the consumer space which is its stronghold, some margin erosion can be there on
commercial side due to high competition.
HAVLs has consistently followed a policy of launching new products to aggressively gain mashare. With its plans to launch new consumer durable products in India and Sylvanias plan
launch new products in India and Latin America, a slower than expected scaling up of th
products due to intense competition can have an impact on our earning estimates.
Adverse currency movements can also affect our margin estimates has HAVL has increasedoutsourcing for Sylvania from China and India. An appreciation of these currencies against
euro can impact Sylvania margins. On the other hand, an appreciation in euro can impact
strong growth expected from Latin America.
A higher than anticipated
weakness in European operations
an significantly impact our
projections on Sylvania as Europe
ontributes more than 60% of
ylvania revenues currently, which
n turn contributes about 31% of
onsolidated revenues.
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Company BackgroundHavells India Ltd.(HAVL) is a billion-dollar-plus organization, and is one of the largest & India's fas
growing electrical and power distribution equipment manufacturer with products ranging fr
Industrial & Domestic Circuit Protection Switchgear, Cables & Wires, Motors, Fans, Power Capacit
CFL Lamps, Luminaires for Domestic, Commercial & Industrial applications, Modular Switches,
entire gamut of household, commercial and industrial electrical needs. The company was founde
Mr Qimat Rai Gupta, who is the current chairman of the company. The promoter group is know
QRG Industries, and is owned my Qimat Rai Gupta and family.
Havells owns some of the prestigious global brands like Crabtree, Sylvania, Concord, Luminan
Linolite, & SLI Lighting. With 91 branches / representative offices and over 8000 professionals in o
50 countries across the globe, the group has achieved rapid success in the past few years. Its
state-of-the-art manufacturing plants in India located at Haridwar, Baddi, Noida, Sahibab
Faridabad, Alwar, Neemrana, and 8 state-of-the-art manufacturing plants located across Euro
Latin America & Africa churn out globally acclaimed products. Havells is a name synonymous w
excellence and expertise in the electrical industry. Its 20000 strong global distribution networ
prompt to service customers.
The company acquired global lighting fixtures major Sylvania in April 2007 for an EV consideratio
227m, funded through debt of 200m. Of this amount, 120m was with recourse to Havells,
there was a residual pension liability of 27m.
The company has acquired a number of International certifications, like BASEC, CSA, KEMA, CB,
ASTA, CPA, SEMKO, SIRIUM (Malaysia), SPRING (Singapore), TSE (Turkey), SNI (Indonesia) and
(Bahrain) for various products. In an attempt to transform itself from an industrial product comp
to a consumer products company, Havells launched consumer electrical products such as CFLs, F
Modular Switches & Luminaires. The company has also taken the initiative to reach directly to
consumers through "Havells Galaxy" a one stop shop for all electrical and lighting needs.
Exhibit 44: On track to become an electrical FMCG player
Source: Company presentation
Plant Locations
Exhibit 45: Major facilities in North-West IndiaLocation Product
HAVL
Ha ridwa r, UP Fa ns , CFL
B a dd i, H im ach a l Pra d es h MCB , S wi tch es
Sa mi pur Ba dl i , De l hi MCB, DB
Noi da , UP Ca pa ci tors
Alwa r, Ra ja s tha n Ca bl es & Wires
Fa rida ba d, Ha rya na CFL, Indus tri al products
Ne e mra na , Ra ja stha n Motors , CFL
Bhiwa ndi , Ra ja s tha n Acce s s orie s
Sylvania
Europe - 4 pla nts 4 l i ghts & l umi na rie s ma nufa cturing uni ts
La tin America 2 l i ghts & l umi na rie s ma nufa cturing uni ts
Source: Industry data, Quant Global Research Estimates
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Financials
xhibit 46: HAVL deserves a premium on account of presence in growth markets and retail productsncome Statement FY09 FY10 FY11E FY12E Balance sheet FY09 FY10 FY11E FY
Net revenues 54,775 54,315 55,690 62,183 Equity capital 301 312 624 6
Expenditure Reserves and surplus 5,847 3,692 5,408 7,8
Raw materials 30,070 29,180 27,185 31,123 Deferred tax liability (97) 266 330 3
Selling, General & Admin expenses 10,676 11,019 11,544 12,104 Total Equity 6,050 4,271 6,362 8,8
Employee expenses 8,452 7,602 8,362 9,198 Secured loans 10,624 9,963 11,463 9,4
Other expenditure 2,691 3,292 3,375 3,763 Unsecured loans 1,654 700 700 5
EBITDA 2,886 3,222 5,225 5,995 Total borrowings 12,278 10,664 12,164 9,9
Non-operating income 86 222 350 400 Total capital 18,328 14,934 18,525 18,8
Depreciation 905 837 869 899 Cash 2,473 1,481 3,840 3,8
EBIT 2,067 2,607 4,706 5,496 Inventory 7,947 8,246 9,154 10,2
nterest expense 1,253 979 791 697 Debtors 7,573 6,982 6,866 7,6
Adjusted pre-tax profits 814 1,628 3,915 4,799 Other current assets 2,221 1,679 1,637 1,8
Unusual or infrequent items (1,987) (0) - - Total current assets 20,215 18,389 21,498 23,6
Reported pre-tax profits (1,172) 1,628 3,915 4,799 Current liabilities 14,308 15,876 16,390 18,3
Taxes 429 932 1,018 1,248 Net Current Assets 5,907 2,512 5,108 5,2
Reported net income (1,601) 696 2,897 3,551 Gross block 28,961 26,963 28,963 29,9
Adjusted net income 384 696 2,897 3,551 Less: cumulative depreciation 20,427 18,089 18,958 19,8
Capital WIP 308 336 200 2EPS (Rs), Fully diluted 3.1 5.6 23.2 28.5 Net block 8,842 9,210 10,205 10,3
Year-end shares outstanding (mn) 124.8 124.8 124.8 124.8 Liquid investments - - -
Year-end Fully Diluted shares (mn) 124.8 124.8 124.8 124.8 Misc Exp. 1 0 0
Goodwill 3,579 3,212 3,212 3,2
Growth numbers (%) Total assets 18,328 14,934 18,525 18,8
Yoy growth in revenues 9.5 (0.8) 2.5 11.7 - - -
Yoy growth in ebitda (17.2) 11.7 62.1 14.7 Cash flow statement FY09 FY10 FY11E FY
Yoy growth in net income (76.1) 81.0 316.4 22.6 Cash flow from operating activity
PBT (1,172) 1,628 3,915 4,7
Ratios (%) FY09 FY10 FY11E FY12E Add: Depreciation 905 837 869 8
Effective tax rate (36.6) 57.2 26.0 26.0 Add: net interest - - -
EBITDA margin 5.3 5.9 9.4 9.6 Less: taxes paid (429) (932) (1,018) (1,2
PAT margin 0.7 1.3 5.2 5.7 Add: other adjustments - - -
ROACE 10.4 14.3 26.0 27.3 Less: working capital changes 2,224 2,403 (237) (1ROAE 5.9 13.7 57.7 48.8 Total operating cash flows 1,528 3,936 3,529 4,3
Gross debt to equity (x) 2.0 2.7 2.0 1.2 Cash flow from investing activity
Total asset turnover ratio 3.0 3.6 3.0 3.3 Capital expenditure (1,002) 1,970 (2,000) (1,0
nventory turnover ratio (x) 6.9 6.6 6.1 6.1 Change in investments 32 - -
Debtors turnover ratio (x) 7.2 7.8 8.1 8.1 Investment in companies - - -
PE Ratio (x) 113.9 63.0 15.1 12.3 Flows in others (147) 589 -
Total investing cash flow (1,117) 2,559 (2,000) (1,0
Per share numbers (Rs)
Reported earnings 3.1 5.6 23.2 28.5 Cash flow from financing activity
Cash earnings 10.3 12.3 30.2 35.7 Share issuances (142) (13) 312
Free cash 4.2 47.3 12.3 26.6 Change in borrowings (684) (1,615) 1,500 (2,2
Book Value 48.5 34.2 51.0 70.9 Changes in others 657 (6,027) (176)
Dividend paid (176) (195) (869) (1,0
Valuations (x) Interest payment (22) 364 64
Price to diluted earningas 113.9 63.0 15.1 12.3 Total financing cash flow (367) (7,486) 831 (3,2
EV / EBITDA 18.6 16.4 10.0 8.3 Net change in cash 44 (992) 2,359
Price to book 7.1 10.9 7.3 5.1 Opening cash & CE 2,429 2,473 1,481 3,8
Closing cash & CE 2,473 1,481 3,840 3,8
ote: We have assumed an average EURINR rate of 58.7 for our calculations for Sylvania
ource: Company data, Quant Global research est imates
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BUY. We expect the stock to deliver >15% absolute returns.
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