Havells: Pay-back time for Sylvania

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After nearly five years of near-zero growth, Europe is coming out of recession, with all major countries expected to report positive economic growth this year. Electrical equipment major Havells' India is best placed to take advantage of the European growth story through its subsidiary, Havells Sylvania. Acquired by Havells in 2007 for around $200 million, Sylvania is among the top four lighting companies in the European market and Latin America. The company has also a small but fast growing presence in Africa and the Middle-East (AME). Europe and AME accounted for nearly two-third of Sylvania's revenues; the rest came from Latin America.

In FY13, Havells Sylvania clocked revenue of around Rs 3,200 crore, 42 per cent of Havells' global revenues and 39 per cent of operating profit. After the acquisition, Sylvania went through a financial and operational restructuring by its new owner, as it had turned loss-making post the 2008 economic crisis in India.

But all that is now behind Sylvania and it is profitable at the net level since FY11 and has reported higher operating margin every year since FY10. In FY13, Sylvania's operating margin of 10.8 per cent was up from 7.6 per cent in the previous year and less than one per cent in FY10.

Economic recovery in Europe will take care of Sylvania's biggest worry. "After nearly five years, our European business reported higher volume during the first two months of the current year and the trend seems sustainable. Faster volume growth will help maintain the operating margin of 10 per cent," says Sunil Sikka, president at Havells India.

"Sylvania's financials have seen a significant de-risking in the past five years, with consolidated gross debt to equity down from 2x in FY09 to 0.5x in FY13," writes Venugopal Garre of Barclays Equity Research. The only worry is the earnings volatility due to its exposure to multiple countries and the impact of currency on costs.

The view is shared by Prashant Kutty of Emkay Global who has a buy rating on Havells, on the back of improved financial performance by Sylvania and continued growth momentum in Havell's domestic business.

In the domestic market, Havells is already a market leader in switchgear (for homes and offices) and among the top three in fans, wires & cables and lighting products. Havells enjoys premium pricing in the market, thanks to a high brand recall. It continues to expand its product and brand portfolio and early this week launched the Sylvania range of premium lighting products. Two years ago, the company launched low-cost piano switches under the Reo brand to tap the growth opportunity at the bottom of the pyramid. Meanwhile, it continues to expand its range in consumer durables and kitchen appliances.