Havells: Switching on better prospects

The improving profitability of its lighting subsidiary Sylvania, new product launches and capacity additions will be the key growth drivers for the electrical and power distribution equipment maker, Havells India.

Analysts expect the standalone revenues of the company to grow at 20 to 25 per cent on a standalone basis during FY11-13. Havells currently trades at a P/E of 20 times its 2011-12 earnings. Analysts believe any uptick in Sylvania profits and a good response to new launches can provide upsides to the stock. Most brokerages have a buy rating on the stock and expect it to deliver 28-30 per cent returns over a one-year horizon.

 

Sylvania turnaround
Post its takeover by Havells in 2007, Germany-based SLI Sylvania posted losses (owing to recession in Europe). Sylvania forms nearly half of the company’s consolidated revenues at present. An aggressive restructuring exercise, focusing on pruning fixed costs by exiting from unprofitable businesses and outsourcing manufacturing to low-cost locations have borne fruit as Sylvania reported a net profit of Rs 8.1 crore (versus a loss of Rs 71 crore in September 2009) in the September quarter. In the first half of 2010-11, its operating profit margins stood at 4.6 per cent from negligible margins a year back. Sylvania is expected to turn the corner in the December quarter. Brokerages expect Sylvania to post growth of 7 to 8 per cent in the next couple of years. Havells intends to shift its focus to the Latin American and Asian countries, thereby aiding top line growth. The company expects to save 33.5 million euros annually on the back of this restructuring.

Growth boost but high debt a concern
Aggressive brand promotion coupled with a good distribution network have helped Havells expand its market share across all its products. The company is launching water heaters and Sylvania’s lighting products which have higher margins. Analysts believe lighting and durables will drive growth and expect a compounded growth rate of 26 per cent and 19 per cent respectively during FY12-15. At present, it has a consolidated debt of Rs 1,100 crore and a high debt-to-equity ratio of 2. To reduce this burden, the company is planning to raise funds via the equity route in the near term, improving its balance sheet quality and profitability. While Havells is able to pass on the rise in prices of its key inputs (copper and aluminium), the time lag involved in doing so may hit the margins in the short term.
 

GEARING AHEAD
In Rs  cr	FY10	FY11E	FY12E
Sales	5,453	5,713	6,374
Ebitda (%)	6.1	8.5	9.9
NP	74	250	370
P/E (x)	35.6	19.5	13.2
E:Estimated                                       Source: Bloomberg

Dec quarter and the road ahead
For the December quarter, Havells’ top line growth is pegged at 16 per cent while the bottom line is expected to dip 5 per cent on a year-on-year basis (standalone basis). While Sylvania will contribute positively, strong demand across segments will drive top line growth. Margins will remain lower than last year owing to higher commodity prices. A higher effective tax rate of 23 per cent (versus 19 per cent) would impact the earnings growth.

Havells will invest Rs 120 crore to double its compact fluorescent lamps (CFL) capacity in two years. Also, it has doubled the manufacturing capacity of its cable and wire segment, which is likely to help it double its revenue from this segment to Rs 2,400 crore by FY13. Additionally, Havells plans to penetrate the smaller towns this year, thereby boosting its top line growth.