Havells India: In high heavens

Change in product profile and improving profitability are getting noticed on bourses.

The Indian market seems to have lightened up to the prospects of Havells India, a leading electrical equipment manufacturer. The scrip has risen more than 25 per cent over a month. Analysts reckon the company is sweetly placed to make most of the consumption story in India.

Moreover, its enterprise value (EV) is 1.5-1.8 times its sales, lower than the acquisitions that have happened in the electrical component sector. National Panasonic paid around 2.5 times its sales value for Anchor and Legrand bought the switchgear business of Indo Asian Fuegear at around 2.89 times its FY10 revenues.

The issue with Havells was its acquisition of Sylvania in April 2007 and its unprofitable operations. The company has invested around Rs 530 crore in the subsidiary, but there has been a substantial reduction in the cash flow. Restructuring at Sylvania may actually see operating profit margins grow to four per cent. This becomes critical as Sylvania contributes around 54 per cent to Havell’s consolidated revenues. The company’s expenditure on capacity expansion plans may also fall to Rs 120 crore in FY11 from Rs 160 crore in FY10. With its plants operating at 60 per cent capacity utilisation levels, there would be enough room for volume growth in the business that is growing at 15 to 20 per cent.

Moreover, the company has consciously managed to grow its market share in the fans business from six per cent to 17 per cent over the past couple of years. Its market share in the switchgear business has climbed from 15 per cent to 20 per cent, while it has risen to 10 per cent in the lights and luminaries segment from six per cent earlier, note analysts. The company’s dependence on low-margin cable and wire business has also dropped. However, this segment still remains sensitive to raw material prices and affect the company’s profitability, as the cable business contributes around 42 per cent to revenues and 17 per cent to profits.

The changing profile of products and the improvement at Sylvania have seen an increased institutional interest in the company’s shares. This is expected to continue, as the branding efforts pay off.