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Annual Report Analysis FY20 Havells believes new opportunities will emerge in a post covid world. It continues to focus on tech, a recurring theme in its annual reports, while enhancing spend on R&D, incurring a 28% higher R&D spend of Rs.1bn in FY20. It has increased its dealer spread and localization in FY20, while employee count fell as part of cost rationalization. The company is debt-free and cash conversion was well managed at 28 days with good working capital management keeping the balance sheet healthy. Covid related challenges Expectedly the AR highlights challenges arising out of new way of running operations due to challenges posed by the pandemic. The impact of covid was visible in the lower asset turns and return ratios in FY20 vs FY19. It has also delved into its covid response plans across stakeholders-employees, vendors, dealers, customers etc. Ex covid, they estimate an additional 2% growth could have happened in FY20 revenues. Havells perceives new habits and behavior of customers to bring new opportunities to innovate while still revolving its core long term strategy of “Deeper into homes”, something consistently stated in past annual reports. Improving tech and R&D focus Technology for internal purpose continues to be running theme this year too-its FY18 annual report talks about automation and Industry 4.0, its FY19 annual report it talked of IT led initiatives in supply chain as well as sales. It’s focuses on digital transformation in the last 2 years in operations and processes, helped it during Covid to maintain business continuity. In FY20, it talks of using AI and augmented reality in shops as well as E-com platforms as social distancing increases, for customers to experience products. With enough manufacturing capacity in place, it is now focusing on strengthening its R&D. In absolute terms, its R&D spend is up 28% to Rs1bn and is 1.1% sales from 0.78% in FY19. It is targeting an R&D spend of ~2% of sales going forward. This is a continuation of its innovation hub that it has set up in Bangalore last year, admittedly for a wider talent pool. Another reason we believe for this R&D spend is that its total product categories have now plateaued at 20 for the past three years. Among new products, it plans to enter fridges under Lloyds in the next 6-9 months. Others It has expanded its dealer network to 11200 from 10500 last year, while also developing suppliers, sourcing 78% of its needs from local suppliers/MSME. They have bolstered their board strength with senior industry people like BP Rao, ex CMD, BHEL and SS Mundra, ex DY Governor, RBI as replacement to board members completing terms. Interestingly, employee strength fell 12%, from 6,536 to 5,781- the first time in 5 years, after a CAGR of 13% from FY16-19, as part of its delayering and cost rationalization. Further observation is that per employee cost (Emp cost/total emp) has gone up 22% with employee spend up 8% to Rs9bn in FY20 (vs Rs8.32bn in FY19 spread over a higher employee base).

CMP Rs 585

Target / Upside Rs 504 / 14%

BSE Sensex 35,231

NSE Nifty 10,383

Scrip Details

Equity / FV Rs 626mn / Rs 1

Market Cap Rs 366bn

USD 5bn

52-week High/Low Rs 807/Rs 447

Avg. Volume (no) 2,742,290

NSE Symbol HAVELLS

Bloomberg Code HAVL IN

Shareholding Pattern Mar'20(%)

Promoters 59.5

MF/Banks/FIs 10.2

FIIs 23.7

Public / Others 6.6

Havells Relative to Sensex

VP Research: Vinod Chari Tel: +91 22 40969776

E-mail: vinodc@dolatcapital.com

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June 29, 2020

June 29, 2020 2

Annual Report Macro View

Particulars

Change in Key Management No change during the year.

Board of Directors

New appointments during the year: Shri Subhash S Mundra, Shri B Prasad Rao and Shri Vivek Mehra were appointed as Additional Independent Directors of the Company for a period of five years effective from 12th May 2020.

Auditors No changes. S.R. Batliboi & Co. LLP continue to be the auditors of the company.

Insider Holdings Number of securities acquired/disposed/pledged during the year:

FY20 13,828,100

FY19 225,646,624

Ratings CARE has assigned AAA to the long-term facilities of the company again and reaffirmed CARE A1+ rating to its short-term facilities.

Pledged Shares No pledged shares were held during the year.

Macro-economic factors

FY20 saw multiple challenges with weakening macroeconomic factors, liquidity crunch and slowdown in infra segment impacting the cables and lighting business. Covid-19 added to the woes with channel disruption, slowdown in supply and weakened investment and demand further.

Key Holders

Category of Shareholder (%) FY2020 FY2019

A. Promoters 59.55 59.58

B. Public Shareholding

i. Mutual Fund and Alternative Investment Fund 3.96 4.56

ii. Bank, FIs and Insurance Companies 0.34 0.5

iii. Foreign Portfolio Investors 27.28 24.93

iv. Private Corporate Bodies 1.82 3.17

v. Indian Public 6.41 6.64

vi. NRI 0.47 0.51

vii. Central/State Government(s) 0.16 0.12

C. Employees Welfare Trust 0.01 0.01

Total 100.00 100.00

June 29, 2020 3

Industry Overview FY 2019-20 was a period of significant external challenges, even before the COVID-19 crisis. Weakening macroeconomic environment, sectoral liquidity tightening and slowdown in infrastructure segment impacted the demand for industrial products within cables, professional lighting and switchgear. In addition, muted consumer sentiment impacted the demand for electrical goods.

Strategy Initiatives

The company has 8 objectives in its core focus:

o Brand Reinforcement: expanding brand reach and investing in strengthening brand name across present and potential markets. (20 product categories)

o Product extension and expansion: invest in R&D (10 plants) for quality products with a focus of expanding product reach and innovation. (R&D spend Rs.1bn)

o Proximity to consumer: extend reach in semi-urban and rural markets through expanding dealer network. Under Rural - Vistaar initiatives added 1,700 Rural Distributors covering 18,000 outlets.

o Tie-up with multi-brand outlets, regional retailers and modern format retailers.

o In-House manufacturing: capital expenditure on enhancing capability of manufacturing (14 plants) and better supply chain and quality control. (CAPEX Rs.3.7bn, Rs.3.3 on plant)

o Prudent financial management: maintaining a lean balance sheet with enough cash reserves (Rs.11bn) for emergencies, being alert about organic and inorganic growth opportunities. (Debt Rs.405mn)

o Digitization: digitization initiatives like IoT and creation of new platforms through IT infrastructure to connect various stakeholders of the company.

o Strengthening Lloyd business: establish Lloyd as a mass market premium brand by leveraging its own product capacities to strengthen offerings. Reinforcing the presence of brand through leading modern format retail channels.

o Sustainable business: make products environmentally friendly with least negative impact.

The company is focusing on key government departments like Railways, Airport Authority of India, Metro Rail, Government Housing Projects etc.

FY20 Performance and Developments

Havells achieved a revenue of Rs.94.3bn and PAT of Rs.7.3bn with a continual focus on brand building, growing portfolio through research and development and expanding distribution network with key focus on semi-urban and rural markets.

During FY20 the company hired 1,171 new employees, in line with cost reduction program the total workforce decreased at 5,781 compared to 6,536 in FY19. (employee spend Rs.9bn) Employee stock options of Rs.200,000 were exercised in FY20.

Total dividend for the year was Rs.4 per share as no final dividend was approved.

June 29, 2020 4

Names of Companies which have become or ceased to be Subsidiaries, Joint Ventures or Associate Companies during the year:

o Havells International Limited, a subsidiary of Havells Holdings Limited in Malta wound up operations in Q2FY20.

o Havells Exim Limited, a 100% subsidiary of Havells India Limited based in Hong Kong and the company was deregistered in Hong Kong in Q2FY20.

o Havells Chile a 100% subsidiary of Havells Holding Limited was dissolved in Q3FY20.

o With NCLT order approval: Havells Global Limited, Standard Electrical Limited, Lloyd Consumer Private Limited and Promptec Renewable Energy Solutions Private Limited were dissolved without winding-up and ceased to be subsidiaries of the company.

Company has ramped up dealer network from 10,500 in FY19 to 11,200 (enhancing Retailers Sampark App) in FY20, with a supplier base of 2,191 and a 78% procurement spend on domestic suppliers with a focus on its ‘Make in India’ plan.

2,232 new products were launched with 123 IPRs being filed in FY20.

The company is currently working closely with 1,500+ end customer accounts and 1,000+ Architects and Consultants registering ~50% growth in customer base over last year.

During FY20, Company accelerated its R&D momentum by increasing 60% more towards central R&D (not including the R&D spend in plant locations). R&D expenses that stood at 0.8% of total revenue for FY19 have grown to 1.1% of revenue for FY20.

Lloyd air conditioners are now being manufactured in-house with high automation and backward integration, ensuring quality products.

Corona Combat

Havells addressed over 9,000 channel partners (Saksham-training and learning app), with a commitment to protect their interests in these tough times and updated them on the steps taken including, prioritizing their payments and starting online product training, in order to support them.

Havells’ approach is to focus on consumers in towns with population ranging from 10,000 to 50. Havells launched building segment, lighting, fans and appliances in these markets last year. Other than the direct channel reach there is opportunity support customers with indirect service network.

Facilities increasingly embedding smart technologies, the need for routine manual work is reducing, giving workforce more time to focus their expertise on critical tasks, leading to improved efficiencies and productivity.

Segment Wise Overview

Switchgears

The Switchgear division registered revenues at Rs.15bn in FY20 vs. Rs.16bn in FY19.

o The momentum gained in 2018 in industrial switchgears slowed down during the year owing to liquidity challenges of contractors and dealers, sluggish infrastructure development and muted electrification initiatives in the country.

June 29, 2020 5

The company strengthened its offering in Control gears in industrial switchgears category through the alliance with Hyundai Electric & Energy Systems Co. Ltd.

Rural retail outreach initiative helped to grow our Domestic switch gear business.

o Havells introduced products like IOT Alexa operated Switches and new Connected Industrial Switchgear range.

Havells R&D has started work on next generation of Circuit Breakers to further expand the market share in B2B market segment.

Cables

The Cables division registered revenues at Rs.30bn FY20 vs. Rs.32bn in FY19.

o Cables and Wire industry has faced challenges during the year due to tepid demand from infrastructure, real estate and industrial segment.

The outlook is positive with new opportunities in B2B cables segment with the stricter RERA norms, increased government infra spend and ‘Make in India’ focus.

Highways and railways infrastructure expansion, increasing the fold of cities under smart city project scheme and push for energy generation will provide much needed impetus to growth.

Lighting and Fixtures

The Lighting and Fixtures Registered revenues at Rs.11bn during FY20 vs. Rs.13bn during FY19.

o Consumer lighting is seeing a huge opportunity due to increased consumer involvement and optimized efficiency under the segment.

Price erosion, availability of low quality/low price products and time-lag in adaptation of new technology by customers are some of the reasons for subdued growth in short-term, especially in B2B business.

B2C saw a good growth in customer reach with prices stabilizing and new norms and restrictions being enforced.

Electrical Consumer Durables The Electronic Consumer Durables division registered revenues at Rs.22bn

crores during FY20 vs. Rs.21bn in FY19.

o Havells launched smart next generation IOT and voice enabled fan and first in the industry filtration-based air purifiers.

o Havells aims to add capacities in Water Heaters and Fans categories.

Havells is the leading brand in Water Heaters and has gained market share in FY20.

o Focus on omni channels especially in Modern Format Retails and E-commerce has helped in categories like Personal Grooming and Small Domestic Appliances.

o Alkaline based Water Purifiers are also making inroads in a highly competitive category.

June 29, 2020 6

Lloyd Consumer

The Lloyd Consumer division registered revenues at Rs.16bn during FY20 vs. Rs.19bn during FY19. Lloyd was disproportionately dependent on imports for all its product categories.

o Increase in customs duty last year and continued weakness in Rupee resulted in increase in product cost relative to the competition.

o LED TV industry experienced onslaught of cheap products being flooded in the market by few foreign brands which triggered industry wide substantial price corrections. Lloyd being a relatively smaller brand for TVs was impacted significantly.

The inhouse manufacturing is in line with the Havells’ philosophy of giving differentiated products with high quality standard.

o Lloyd is expanding its portfolio both vertically and horizontally. The Company also plans to enter Refrigerator category in the coming 6 to 9 months.

o Lloyd has accordingly shifted its LED sourcing from imports to Indian ODMs / OEMs which will now give flexibility in terms of availability and improved costs.

o Lloyd has been expanding its distribution reach both in the traditional channel as well as in the modern format retail.

Outlook

As social distancing becomes a norm, accelerated use of artificial intelligence (AI), augmented reality (AR) and virtual reality (VR) in providing experiences like shop streaming further pushing E-Commerce. As remote working and work from home becomes new normal, demand for home & kitchen gadgets, health and lifestyle products/equipment is expected to increase.

FDI inflow is expected to increase, opening up a lot of opportunities for strategic partnerships. In-house facilities, R&D labs and skilled manpower will assist in expanding business globally and turn this situation into an opportunity.

Havells believes that smarter homes are the future and provides IoT based solutions which give the consumer a more holistic digital experience.

Opportunities

Union Government’s focus on infrastructure development in country is expected to create demand for electrical goods, particularly in products supplied to projects like street lights, cables and switchgears etc.

India has seen rapid growth in providing electricity access even in deeper pockets. Government initiatives like metering of houses and focus on reducing transmission loss of electricity are creating many opportunities in new geographies for supply of electrical products.

Rapid urbanization and migration to cities has given rise to affordable housing concept in India. Government’s initiatives like special funding of stressed projects mainly in affordable and mid-income projects are likely to provide impetus in near future.

Majority of consumer facing products in India have lower penetration vis-à-vis other emerging countries. Increase in per capita income and yearning for comfort could lead to exponential rise in penetration in medium to long term time frame.

June 29, 2020 7

Threats

Slowdown in the infrastructure activities may impact the near to mid-term growth prospects.

Change in consumer preferences post COVID-19 may change their behaviors to spend less.

Any reduction on Government expenditure on electrification might impact the business dynamics of electrical goods industry negatively

Continued slowdown in housing sector is likely to soften the demand in affordable housing segment.

Under penetration could lead to increased competition which may result in pricing disruption.

Risks and Concerns

Short-term growth expected to be adversely impacted due to current economic slowdown.

Electrical goods demand is sluggish and could suffer due to decline in housing sales.

Short-term impact can be intensified with irrational price behavior in the market.

Shortfall in availability of quality electricity will impact demand for electrical products.

Supply chain and demand is expected to be impacted deeply due to Covid-19 situation.

Profit & Loss Analysis

Revenue declined by 6.3% to Rs.94.4bn due to the corona crisis hit which worsened the prevalent economic slowdown and liquidity crunch and COGS dropped by Rs.4.8bn. Gross profit margin was 38.2% versus 37.6% in FY19 led by decrease in cost of material consumed.

Employees cost increased by 7.7% to Rs.9.1bn. Other expenses saw a decrease of 5.3%, as A&P spends, sales promotion expenses and rental income dropped.

EBITDA was down by 13.1% from Rs.11.8bn to Rs.10.3bn. EBITDA margin dipped by 86bps YoY to 11.8% to 10.9%, due to higher employee costs.

Interest expense increased by 21.4% from Rs.162.5bn to Rs.197.2bn as the company applied the Ind AS 116 standards to all lease contracts in retrospect, accruing interest on created lease liability. Property held for rental purposes was transferred to PP&E in FY20, thereby driving other income down by 11.8% YoY.

The PBT for the company declined by 21.2% from Rs.11.5bn to Rs.9.0bn in FY20.

PAT has declined by 6.6% YoY to Rs.7.3bn, mainly due to lower corona impaired sales mainly in the Q4FY20. Q4FY20 sales was by corona crisis with impact of 19.5% on sales. Effective tax rate dropped significantly to 18.7% in FY20 compared to 31.3% in FY19.

Cash EPS for the year was higher by 17.3% at 15.6 as against 15.0 in FY19.

DPS decreased from Rs.4.5 in FY19 to Rs.4.0 in FY20.

June 29, 2020 8

Balance Sheet Analysis

Havells is a debt-free company on a net basis but has a long-term loan principal payment due worth Rs.405mn, for which it has availed a moratorium of 15 months with 8 quarterly installments.

Havells adopted the Ind AS 116 “Leases” where in it classified Rs.1.8bn of leasehold land under ‘Right of Use Asset’. Net block shot up by 32.5% as CWIP component relating to assets under construction were adjusted under PP&E. As a result, CWIP saw a drop from Rs.2.3bn to Rs.0.8bn.

With the amalgamation of multiple subsidiaries, the value of investments amounting to Rs.400mn in subsidiaries was cancelled out with company’s equity-share capital and book value has been transferred to general reserve.

The group and its JV partner with regards to ‘Jiangsu Havells Sylvania Lighting Co. Limited’ have applied for liquidation with an amount of $2.5mn receivable recorder in books as ‘Non-Current Assets Held for Sale and Discontinued Operations’ as per Ind AS 105.

Inventories dropped marginally by 2.9% at Rs.1.9bn due to Q4FY20 slow moving inventory with a decline in 35.7% goods purchases.

Trade receivables significantly dropped by 41.3% to Rs.2.5bn as the group has availed receivables buyout facility against Rs.4bn and has also arranged channel finance facility for its customers against Rs.6bn, the trade receivables have been reduced by said amount.

Trade payables for FY20 dropped by 9.4% to Rs.1.4bn with principal dues to MSME doubling from Rs.557mn to Rs.1.1bn compared to FY19.

Cash and bank balances declined by 13.6% to Rs.11.3bn as the company availed its Rs.2.4bn working capital limits and paid its dues of Rs.10.8bno in timely installments. The company paid an additional interim dividend including DDT at Rs.3bn in FY20.

Cash Flow Analysis

Cash flow from operating activities was up to Rs.8.3bn as compared to Rs.5.1bn in FY19, due to better working capital management. Company paid taxes of Rs.2.4bn in FY20.

The company has done a capital expenditure of Rs.3.7bn as compared to Rs.4.8bn in FY19, a drop of 23% compared to previous year.

Cash flow from investing activities has decreased from negative Rs.5.0bn to negative Rs.5.2bn in FY20.

The net profit margin for the company was flat at 8% in FY20.

The cash conversion cycle stayed stable at 28 days for FY20, with the inventory cycle up from 70 days to 73 days in FY20.

The net WC days for FY20 reduced to 44 days from 51 days in FY19.

The EBITDA/OCF decreased to 1.0 in FY20 from 2.2 in FY19. RoE for the company stood at 17.3% in FY20 compared to 19.9% in FY19 and RoCE came at 20% from 27% in the previous.

June 29, 2020 9

Sales and Growth (%) Margins (%)

Source: Company, DART Source: Company, DART

Ad spends and Ad % to Sales RoE and RoCE (%)

Source: Company, DART Source: Company, DART

EBITDA/OCF and EBITDA/FCF Inventory, Debtors, and Creditors Days

Source: Company, DART Source: Company, DART

(30)

(20)

(10)

0

10

20

30

40

50,000

60,000

70,000

80,000

90,000

100,000

110,000

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

Sales - LHS Growth (%) - RHS

(10)

(5)

0

5

10

15

0

5

10

15

20

25

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

EBITDA Margins- LHS PBT Margins - RHS

Net Profit Margins - RHS

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

1,500

2,000

2,500

3,000

3,500

4,000

FY14 FY15 FY16 FY17 FY18 FY19 FY20

Ad spend in (Rs mn) - LHS Ad to % of sales - RHS

0

5

10

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25

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35

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10

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FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

RoE (%) - LHS RoCE (%) - RHS

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25

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1.0

2.0

3.0

4.0

5.0

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

EBITDA to OCF - LHS EBITDA to FCF - RHS

01020304050607080

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

Inventory Days Debtor DaysCreditor Days

June 29, 2020 10

DuPont Analysis

Source: Company, DART

8.0

5.5

4.5

17.1

10.0

10.1

7.8 7.8 6.4

4

6

8

10

12

14

16

18

20

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

PAT/Sales

2.2 2.3 2.8

5.7

4.1

2.6 3.0

2.3

1.7

1.5

2.5

3.5

4.5

5.5

6.5

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

Asset TO

1.6

1.5

1.2

1.1 1.1 1.1 1.1 1.1 1.1

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

Asset to Equity

June 29, 2020 11

4- Quarter ConCall Trend Analysis

Q1 FY20 Q2 FY20 Q3 FY20 Q4 FY20

Financial Performance

Proportion of revenue from LED TV and washing machine over the entire year is 25%. It increases in the 2nd and 3rd quarter as air conditioning volume comes down in these quarters, but then 15% to 18% in the 1st and the 4th quarter.

•Contribution margins have been sustained despite sluggish sales or environment •Demand remains a bit sluggish, more so in the real estate, industrial and infrastructure segment, which has impacted growth in industrial switchgears, industrial cables and professional luminaires, which have experienced very muted growth

• Despite softness in revenues, EBITDA margins have been maintained owing to cost rationalization and increased cost consciousness. • November-December, push into the trade for the incoming season did not happen because of the credit situation. • B2B business portfolio contributes to 25%, 30% of mix. 70% of the business was flattish and 30% is contributing to this year. • Sales contribution coming from rural areas and small towns in the entire year is expected at 1.2bn to 1.3bn.

• Havells saw a dip in gross margin largely due to product mix and operating leverage in Q4FY20. • Economic activity started on 4th May, with urban areas opening up very slowly while major demand coming in from rural and semi-urban areas. • Prior to the lockdown, company had sufficient cash balance, with dues timely paid to stakeholders. The year-end incentive schemes for dealers were settled and paid on 31st March itself. • Q4FY20 especially Lloyd, saw a double-digit growth in Jan, Feb and was gaining momentum in March; however, loss of last 15 days had a deep impact. • Channel inventory is normal, due to slow replenishment of dealer stocks and more liquidation focus by dealers.

Segments

•ECD segment has grown by 24% YoY. The compounded growth is close to 26%, which is higher than industry, but margins were hit due to product mix change •In Lighting, Professional Luminaires were affected by slow government uptake because of election results. The prices went down 13-15% and volumes by 10-12%. However, the impacts were offset by B2B growth. Consumer Luminaires witnessed high volume growth, despite fall in LED prices •Despite housing slowdown, wires business has been holding steady, reflecting some gains from the unorganized sector •LED segment will suffer disruptions in the next few quarters •Switchgears post 26% growth, and has been affected by construction slowdown, liquidity squeeze for realtors, contractors and an almost stifling of new builds •Lloyd witnessed 8% fall in sales YoY and marginal decline in AC sales, the LED panels sales were majorly impacted due to Chinese competition.

•Consumer demand is slow, but still residential switchgear, consumer luminaire, domestic wires and the Havells ECD business has sustained growth, which is because of market share gains and new product launches •A lot of traction from large-format retail and regional retailers was seen •Company experienced flattish growth in AC sales •On projects completion on residential side, the company has seen a significant slowdown as compared to last 3-4 years where NBFC crisis is the major reason, cash has dried up in the hand of small traders and also the sentiments of purchasing has led to this downfall •ECD, water heater and PG has ended at top 3 in the list •Slowdown inside the industrial segment resulted in slowdown in the professional Luminaire business •Premium segment business market share of the company remained between 25-40%

• Slowdown in infra segment has impacted demand for Cables, Professional Lighting and Switchgears. • ECD segment gained market shares in the second and third quarter. • Dealers reduced inventory of fans due to tightening liquidity situation. • Water heaters has below estimated sales in November due to delayed winters. • Lighting saw a low single digit growth. Margins have continued to remain quite stable in lighting, but there is a significant reduction in the offtake of the professional luminaires on the infrastructure and the government side.

• Seasonal products like fans, air conditioners, also shows that the dealers are picking up at this time. • Lloyd growth in the first two months was 45% and even with a poor March month company had a 33% growth. Loss of sales for March was 17 days at Rs.2.5bn. • Switchgear and Havells ECD saw a 15% and 24% growth respectively in Jan and Feb itself. • Sales was mainly contributed by consumer segments like lighting and domestic cables, as the government capex and infra sector witnessed a major slowdown. • AC witnessed a 46% growth in Jan and Feb, being hit hard in March 2020 due to covid-19. • Due to speculation of supply disruption from China, multiple players picked up excess inventory.

June 29, 2020 12

Q1 FY20 Q2 FY20 Q3 FY20 Q4 FY20

Tailwinds / Headwinds

•The Company's focus on rural distribution expansion is spreading lighting footprint, auguring well for future growth plans •Fans continue to grow and consolidate its premium positioning. Also, ECD is expected to anchor superior growth mantle for Havells. •The brand recognition of Llyod has notably increased.

•The major disruption has been in LED panels. Prices of LED panels declined across the industry by 25.0% •The online channels launched via 2 Chinese players, coupled with swift reaction from some leading LED brands further aggravated the pricing and volumes

• The level of backward integration and level of automation in the AC factories has helped boost the trade confidence for the upcoming season. • LED TV disruption has impacted the performance in Lloyd, there has been improvement of growth in ACs. • Lost some market share in our category of air conditioners because of very high-cost inventory from China. • Currently facing Liquidity issues, the government not releasing the payments, electrical contractors facing challenges.

• Saw collections starting in first 7 to 8 days of April despite of near zero collections in the last 45 days. • Provided major channel financing to dealers; prepared to offer dealers a long line of credit. • Company does not plan to provide any extensive discounts. • 30% to 40% retail touchpoints are open in the orange and green zones. • Lost Rs.8bn of sales in 15 days in March itself mainly with Lloyd and ECD and Switchgear.

New Products and Innovations

•Production has already started in Lloyd's AC unit and it is making smaller batches. The Company is accommodating the domestic inventory now

•Launch of refrigerators is expected at the first quarter of next year •The factory has put to in use and by next year first quarter company will start experiencing cost benefits

• Developed heavy-duty air conditioner in-house, which works at 60- degree ambient temperature and does not deviate even at 48 degrees, launching in competition with the imported brands, have a huge cost advantage because it has been developed and manufactured in India. • Changed the distribution model from large wholesalers to smaller ones in Lloyd.

• Havells is prepared with all new models in order to tackle any circumstances in the market. • Company has capability in Switchgear, air conditioners, fans, with in-house manufacturing and can take operating leverage advantage and start looking at export businesses.

Management Guidance

•Lighting segment is expected to grow in Q2FY20 after stabilization in demand of government professional luminaires •Cables Segment will likely benefit from the government iniatives to develop highways and metro from H2FY20 •Llyod is expected to gain traction from the latter part of the year. Advertisement spend in Llyod will likely normalize at about 5-5.5% over the next year

•The ECD business is achieving a meaningful size and to keep expecting a very high-growth from those businesses on a larger base is difficult •Company expects little bit of positivity on the festive month (October) •In ECD segment, the company expects to be on the top 3 to 4 players in this industry providing premium quality products •Company expects Cables margins to be between 15-17%

• Offtake can come back in Q4FY20 with demand picking up since 3 to 4 weeks. • ACs will bounce back in Q4FY20 with better control on supply chain and backward integration. • Might be forced to take a premium due to high cost in previous year. • Refrigerators will be like ODM approach, with in-house design and specification, most of it developed domestically and remaining imported. • Lloyd to ramp up capacity to 60% to 70% after next three quarters, but could a take year plus.

• Grooming has a pent-up demand which is being catered to. Appliances are expected to have a pent-up demand in May and June. • R&D expenditure is in place with plans to introduce new products, there might be a few weeks or a month of delay. • Lloyd and Havells ECD are expected to propel company growth with customers focusing on improving their home and kitchen with the lockdown situation. • The management expects to see a dip in inventory over a few more days, but believes this to not be an issue as inventory is at normal levels.

June 29, 2020 13

Q1 FY20 Q2 FY20 Q3 FY20 Q4 FY20

Dividends and Buyback Dividend pay out has gone up by 40-45%

Reach

•Havells has targeted 60000 retail outlets in rural areas, the present number is 25000. The total of stores in semi-urban and urban areas has reached to 117,000 from 85000 in Q1FY19 •The Company has set up a separate team over the last 1.5 years who are focusing on taking product to a completely new channel of rural distribution through superstores and retail distributors. Further, within some semi-urban towns the Company's footprint on electrical outlets has grown by 30%.

•The Distribution Realignment is almost in its final stages

• Around 30% of sales come from B2B to government and industrial customers majorly through dealers. • Expanded distribution network into rural, lighting is doing extremely well in the Havells brand. • Appointed close to about 1,800 distributors in the rural areas with target to take it up to 3,000 distributors in FY21.

• The company has strengthened its traditional channel network over the past 3 to 4 years, it has focused on diversifying reach to modern format channels which now form over 40% of total sales. • Industries contribute to 30% to 32% of channel mix in terms of modern retail. • Havells is expected to widen its local sourcing with solidifying of India’s anti-China stance with already producing 93% of components within India.

Cost

•Costs were incurred to increase distribution reach, feet on ground, brand salience, R&D, digitization and technology. Sensitive on managing the nonessential cost

•Setting up of the factory resulted in better control on costs as well as inventories •After the change in distribution channel, the first year of operation with them has been positive •3.0% of A&P for the company as a whole •The demand outlook remained benign, there was focus on improving the profitability through better pricing and cost control and materials in SG&A

• Company’s cost rationalization program aims to cut down overheads and employee costs. • A&P was about 15% lower Y-o-Y, has been some reduction depending upon the volume reduction. • Employee expenses during the quarter were considerably lower in comparison to Q1 and Q2, rationalization happened at the company's end and run rate is likely to sustain from here on. • Sales and employee costs are trimmed with R&D expense already in place.

• Factory, office and sales costs are being evaluated closely with a rationalization outlook. Automation, digitization, virtualization will help reduce the cost, which is already in the works. • There is no pay cut for last year, as well as no new announced pay cuts as of now. • Marcom coming down in the fourth quarter because of let’s say the seasonal products advertising not happened, when things come back to real normal. • Ad spend, there was a sharp drop in Q4, because of some planned reduction, with delayed IPL season and the delayed season coming up in the northern part of the country.

June 29, 2020 14

Q1 FY20 Q2 FY20 Q3 FY20 Q4 FY20

CapEx

•Rs.1.4 billion were spent in Q1FY20 and a total of Rs.5 billion CapEx is planned for FY20 •Plant commissioned for Lloyd will provide 75% in house production by the start of FY21

•Company is looking for Rs. 3.0 billion CapEx expanding Fans segment majorly

• FY2020, we will end around Rs.5bn and cannot estimate FY21 currently. • AC plant was commissioned with 600,000 capacity the total capex of Rs.4bn. • Very limited capex planned for washing machine and refrigerators, and will continue to invest in designs.

• Company will be adjusting both the estimated Marcom and capex according to changing consumer trends. • The capex will vary according to the liquid funds available, the first priority for Havells is to maintain liquidity in the corona crisis. • Capex for the last couple of years was enough to take care of future growth initiatives, the company does not expect to incur any immediate capex.

Strategy

•Though the AC business was adversely impacted due to several factors last year, the Company has been working on improving brand salience, expanding distribution channel to large store format, broadening product portfolio and derisking the procurement from imports and third parties. Lloyd is in transition as the Company is progressing on executing this strategy. The manufacturing plant has commercialized. •The working capital strategy for Llyod would now mirror Havells' strategy and 95% production will be done in-house.

•The Management would definitely look at reducing the share of air conditioners through new product launches •TV has seen more of a disruption in the last few months. It's very difficult to pan out a 4, 5-year strategy

• Focus on reducing dependence on large distributors for a particular state by spreading distribution across modern format and regional retailers. • Expanding product range of washing machines and refrigerators from Q1FY21, changing the supply chain from import from China to depending on sourcing from India in company’s own design. • Focusing on the premium side of the fans business, and are equipped with entire portfolio of fans.

June 29, 2020 15

Profit and Loss Account

(Rs Mn) FY19A FY20A FY21E FY22E

Revenue 100,734 94,403 77,742 93,291

Total Expense 88,891 84,116 69,968 81,163

COGS 62,825 58,332 48,978 56,907

Employees Cost 8,417 9,067 7,774 8,396

Other expenses 17,649 16,717 13,216 15,859

EBIDTA 11,843 10,287 7,774 12,128

Depreciation 1,494 2,180 2,069 2,042

EBIT 10,349 8,107 5,705 10,086

Interest 163 197 0 0

Other Income 1,287 1,134 933 1,026

Exc. / E.O. items 0 0 0 0

EBT 11,473 9,044 6,638 11,112

Tax 3,594 1,688 1,671 2,797

RPAT 7,879 7,356 4,967 8,315

Minority Interest 0 0 0 0

Profit/Loss share of associates 0 0 0 0

APAT 7,879 7,356 4,967 8,315

Balance Sheet

(Rs Mn) FY19A FY20A FY21E FY22E

Sources of Funds

Equity Capital 626 626 626 626

Minority Interest 0 0 0 0

Reserves & Surplus 41,350 42,490 42,155 46,559

Net Worth 41,976 43,116 42,781 47,185

Total Debt 405 0 0 0

Net Deferred Tax Liability 3,168 2,865 2,865 2,865

Total Capital Employed 45,548 45,981 45,646 50,050

Applications of Funds

Net Block 29,040 33,496 35,427 37,385

CWIP 2,327 861 861 861

Investments 0 0 389 466

Current Assets, Loans & Advances 40,117 36,164 27,197 31,674

Inventories 19,190 18,719 15,335 18,658

Receivables 4,066 2,417 4,260 5,623

Cash and Bank Balances 13,114 11,325 4,743 4,053

Loans and Advances 2,116 2,147 448 448

Other Current Assets 1,632 1,556 2,410 2,892

Less: Current Liabilities & Provisions 25,935 24,754 18,441 20,550

Payables 15,598 14,138 10,160 11,118

Other Current Liabilities 10,337 10,616 8,281 9,432

sub total

Net Current Assets 14,182 11,410 8,756 11,124

Total Assets 45,548 45,981 45,646 50,050

E – Estimates

June 29, 2020 16

Important Ratios

Particulars FY19A FY20A FY21E FY22E

(A) Margins (%)

Gross Profit Margin 37.6 38.2 37.0 39.0

EBIDTA Margin 11.8 10.9 10.0 13.0

EBIT Margin 10.3 8.6 7.3 10.8

Tax rate 31.3 18.7 25.2 25.2

Net Profit Margin 7.8 7.8 6.4 8.9

(B) As Percentage of Net Sales (%)

COGS 62.4 61.8 63.0 61.0

Employee 8.4 9.6 10.0 9.0

Other 17.5 17.7 17.0 17.0

(C) Measure of Financial Status

Gross Debt / Equity 0.0 0.0 0.0 0.0

Interest Coverage 63.7 41.1

Inventory days 70 72 72 73

Debtors days 15 9 20 22

Average Cost of Debt 25.2 97.4

Payable days 57 55 48 44

Working Capital days 51 44 41 44

FA T/O 3.5 2.8 2.2 2.5

(D) Measures of Investment

AEPS (Rs) 12.6 11.8 7.9 13.3

CEPS (Rs) 15.0 15.3 11.3 16.6

DPS (Rs) 4.8 8.5 5.5 5.5

Dividend Payout (%) 38.3 72.3 69.2 41.3

BVPS (Rs) 67.2 69.0 68.4 75.5

RoANW (%) 19.9 17.3 11.6 18.5

RoACE (%) 18.7 16.5 10.8 17.4

RoAIC (%) 36.2 24.2 15.1 23.2

(E) Valuation Ratios

CMP (Rs) 585 585 585 585

P/E 46.4 49.7 73.7 44.0

Mcap (Rs Mn) 365,906 365,906 365,906 365,906

MCap/ Sales 3.6 3.9 4.7 3.9

EV 353,198 354,581 361,163 361,854

EV/Sales 3.5 3.8 4.6 3.9

EV/EBITDA 29.8 34.5 46.5 29.8

P/BV 8.7 8.5 8.6 7.8

Dividend Yield (%) 0.8 1.5 0.9 0.9

(F) Growth Rate (%)

Revenue 22.0 (6.3) (17.6) 20.0

EBITDA 1.1 (13.1) (24.4) 56.0

EBIT 0.3 (21.7) (29.6) 76.8

PBT 1.0 (21.2) (26.6) 67.4

APAT (5.6) (6.6) (32.5) 67.4

EPS (5.6) (6.6) (32.5) 67.4

Cash Flow

(Rs Mn) FY19A FY20A FY21E FY22E

CFO 5,494 10,610 1,717 7,298

CFI (4,972) (5,170) (4,389) (4,078)

CFF (3,656) (7,015) (3,911) (3,911)

FCFF 523 5,440 (2,283) 3,298

Opening Cash 15,616 13,114 11,325 4,743

Closing Cash 13,114 11,325 4,743 4,053

E – Estimates

DART RATING MATRIX

Total Return Expectation (12 Months)

Buy > 20%

Accumulate 10 to 20%

Reduce 0 to 10%

Sell < 0%

Rating and Target Price History

Month Rating TP (Rs.) Price (Rs.)

Jan-19 Buy 800 678

Oct-19 Buy 750 670

Jan-20 Accumulate 665 601

Mar-20 Reduce 540 490

Mar-20 Accumulate 540 480

May-20 Reduce 504 511

*Price as on recommendation date

DART Team

Purvag Shah Managing Director purvag@dolatcapital.com +9122 4096 9747

Amit Khurana, CFA Head of Equities amit@dolatcapital.com +9122 4096 9745

CONTACT DETAILS

Equity Sales Designation E-mail Direct Lines

Dinesh Bajaj VP - Equity Sales dineshb@dolatcapital.com +9122 4096 9709

Kapil Yadav VP - Equity Sales kapil@dolatcapital.com +9122 4096 9735

Yomika Agarwal VP - Equity Sales yomika@dolatcapital.com +9122 4096 9772

Jubbin Shah VP - Derivatives Sales jubbins@dolatcapital.com +9122 4096 9779

Ashwani Kandoi AVP - Equity Sales ashwanik@dolatcapital.com +9122 4096 9725

Lekha Nahar AVP - Equity Sales lekhan@dolatcapital.com +9122 4096 9740

Equity Trading Designation E-mail

P. Sridhar SVP and Head of Sales Trading sridhar@dolatcapital.com +9122 4096 9728

Chandrakant Ware VP - Sales Trading chandrakant@dolatcapital.com +9122 4096 9707

Shirish Thakkar VP - Head Domestic Derivatives Sales Trading shirisht@dolatcapital.com +9122 4096 9702

Kartik Mehta Asia Head Derivatives kartikm@dolatcapital.com +9122 4096 9715

Dinesh Mehta Co- Head Asia Derivatives dinesh.mehta@dolatcapital.com +9122 4096 9765

Bhavin Mehta VP - Derivatives Strategist bhavinm@dolatcapital.com +9122 4096 9705

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(Rs) HAVL Target Price

Dolat Capital Market Private Limited. Sunshine Tower, 28th Floor, Senapati Bapat Marg, Dadar (West), Mumbai 400013

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