Havells India (HAVL IN)

Rating: REDUCE | CMP: Rs661 | TP: Rs566

Uphill task ahead

Amnish Aggarwal amnishaggarwal@plindia.com | 91-22-66322233

Paarth Gala paarthgala@plindia.com | 91-22-66322242

 Havells India

Contents

Page No.

One stop shop FMEG player 5

Story in charts 6
Lloyd has its task cut out 7
HAVL repositioning Lloyd as ‘mass premium’ brand 7
Distribution – Entering emerging formats 8
Aiming for 75% in-house AC production by FY21 8
High competitive intensity, technology disruption a key challenge 9
Channel check suggests tough going in near term 12
Lloyd: Room Air Conditioners (~75% of sales); Needs to innovate 13
Lloyd LED TV: Little hope of survival? 13
Lloyd: Washing Machines; Might survive but unlikely to score big gains 14
Core Segment growth peaked out in FY19 15
Core segments to ride on BHARAT opportunity 16
Rural electrification, increased power supply to stimulate demand
for electrical products 16
HAVL to initiate rural push through mass brand ‘REO’ 17
Switchgears (17% of sales): Immense growth potential, margins at a risk 19
Cables and Wires (32% of sales): Innovations and EHV entry key to growth 20
LED lighting (13% of sales): Poor pricing power and easy Imitations
limit margin upside 21
Electrical Consumer Durables (20% of sales): Aiming for the skies 22
Innovation and Differentiation cornerstone of growth strategy 24
HAVL is investing in distribution expansion/ Automation 25
Channel Check takeaways 26
Financials & Valuations 27
Estimate CAGR of 13.3% in Sales over FY19-22 27
Commodity price pressures abating 28
EBIDTA and PAT CAGR of 14.8% and 14.1% over FY19-22 29
Valuations leave little room for an error 31
Annexure: 33
Board of Directors & KMP 33

September 9, 2019 2
September 9, 2019 Havells India (HAVL IN)
Company Initiation
Rating: REDUCE| CMP: Rs661 | TP: Rs566

Uphill task ahead

We initiate coverage on HAVL with Reduce rating and a price target of Rs566
Key Financials - Standalone
(33x Sept21EPS) as current valuations of 42.4xFY21EPS don’t fully price in 1)
Y/e Mar FY19 FY20E FY21E FY22E
poor visibility on scalability in Lloyd across segments and 2) peaked out
Sales (Rs. m) 100,576 112,224 127,902 146,230
EBITDA (Rs. m) 11,922 13,302 15,459 18,052 sales growth (19.8% in FY19) in Core segments like Switchgear, Cables and
Margin (%) 11.9 11.9 12.1 12.3 Lighting given slowdown in real estate, poor consumer sentiments and
PAT (Rs. m) 7,915 8,326 9,762 11,765 increasing competition.
EPS (Rs.) 12.7 13.3 15.6 18.8
Gr. (%) 12.9 5.2 17.3 20.6 Although HAVL is launching innovative products and new ECD categories
DPS (Rs.) 4.0 4.5 4.8 5.6 (water purifiers, grooming and kitchen appliances), however presence of
Yield (%) 0.6 0.7 0.7 0.8
brands like Philips, Braun, Wonderchef, Eureka Forbes and Kent will make
RoE (%) 19.8 18.5 19.3 20.5
sustained market share gains difficult. We believe increasing competitors
RoCE (%) 28.9 28.3 29.5 31.3
EV/Sales (x) 4.0 3.5 3.0 2.6 focus on premium products in fans and lighting can drag sales growth.
EV/EBITDA (x) 33.7 29.9 25.2 21.1
PE (x) 52.3 49.7 42.4 35.1
We estimate 13.3% sales CAGR over FY19-22 (11.6% in FY20) which will
P/BV (x) 9.8 8.7 7.7 6.8 enable an EBITDA CAGR of 14.8% led by gains from in-house manufacturing
in Lloyd, benign input costs and peaked out expenses on distribution
expansion and brand building. We estimate PAT growth of 5.2% in FY20 and
a CAGR of 14.1% over FY19-22.

HAVL which got re-rated post sale of Sylvania and Lloyd acquisition currently
Key Data HVEL.BO | HAVL IN
trades at 47.7x12 month forward PE which is at a premium of 15% to 5-year
52-W High / Low Rs. 807 / Rs. 550
Sensex / Nifty 36,982 / 10,946 average. We value the stock at 33xSept21 EPS and arrive at a target price of
Market Cap Rs. 414 bn/ $ 5,775 m Rs566. Sharp recovery in consumer demand and significant gains in Lloyd is
Shares Outstanding 626m
a key risk to our call. We initiate coverage with Reduce rating.
3M Avg. Daily Value Rs. 2056.26m

Investment Arguments

 Lloyd has its task cut out: HAVL is positioning Lloyd as a mass premium
brand and is investing in branding, innovation, distribution (dealer additions,
Shareholding Pattern (%) Modern trade and online), in-house production (75% of RAC by 2021). Lloyd’s
Promoter’s 59.55
LED TV plans have gone haywire as aggressive pricing by MI (30-40%
Foreign 26.95
Domestic Institution 4.64 discount to LG, Samsung) in a technology intensive product has left very little
Public & Others 8.86 room for it to scale up. Lloyd has presence in washing machines and plans to
Promoter Pledge (Rs bn) -
test launch Refrigerators to complete its portfolio, however significant gains
looks unlikely given entry of new competitors (Voltas Beko, Siemens and
Liebherr) and existing giants like LG, Samsung, Whirlpool and Hitachi.

 Core segments growth has peaked out: The core segment growth of 19.8%
Stock Performance (%) in FY19 was led by ECD (27%), Switchgear (18%) and Cables (20.5%) even
1M 6M 12M as lighting grew by only 10.7% due to price erosion in LED. Although HAVL
Absolute 2.2 (7.3) (2.6)
Relative 2.2 (8.2) 0.7
has plans to tap the emerging growth opportunity in BHARAT (Tier2/3 towns
and interiors) by push for REO and Standard brands, we expect sustained

Amnish Aggarwal
pressures led by 1) slowdown in real estate 2) pricing pressure and slow Govt
amnishaggarwal@plindia.com | 91-22-66322233 ordering in lighting 3) poor consumer sentiments and 4) increase in
Paarth Gala competition. We believe, our FY20 core segment sales growth of 13.5%
paarthgala@plindia.com | 91-22-66322242 (10.2% excluding ECD) is at risk given 9.1% (3.8% ex ECD) growth in 1Q and
residual growth of 14.8% for core segments (12.0% ex ECD) for 9MFY20.

September 9, 2019 3
 Havells India

 Innovations might not ensure success in new segments: HAVL’s USP has
been innovation and Premiumisation in key categories like fans, lighting, wires
and switchgear. Given high rate of product imitation and competitors shift
towards premium products in these categories (fans are 55% of ECD), HAVL
is focusing on new innovations like IOT (Internet of things), Bluetooth enabled
fans, façade lighting and emerging segments like water purifiers/heaters,
personal grooming and kitchen appliances. However, success in segments like
water purifiers (service driven), personal grooming and kitchen appliances
would be hard to come by given presence of competitors like Philips and Braun
in Grooming, Eureka Forbes and Kent in water purifiers and Philips and
Wonderchef in kitchen appliances.

 Commodity deflation to provide some respite: Key commodity prices –

Copper/Aluminium/Brent Crude have increased at a CAGR of 9%/11%/14%
over FY16-19 thereby impacting gross margins by 340bps over FY16-19.
However, Spot LME Copper prices are down 6%, Spot Aluminium LME prices
down by 13% while Brent Crude prices down 6%. We believe that the major
pressure due to high commodity prices is over and expect moderate expansion
in gross margins hereon. We estimate an increase in gross margins by 40bps
in FY20 and another 30bps in FY21.

 Estimate PAT CAGR of 14.1% over FY19-22: We estimate EBITDA CAGR

of 14.8% over FY19-22 led by gains from in-house manufacturing in Lloyd,
benign input costs and peaked out expenses on distribution expansion and
brand building. We estimate flat margins in FY20 but an increase of 20bps each
in FY21 and FY22. We estimate PBT from operations will increase by 9.5% in
FY20 and at a CAGR of 15.3% over FY19-22. PAT growth is estimated at 5.2%
in FY20 and at a CAGR of 14.1% over FY19-22.

 Valuations don’t leave any room for error: HAVL saw massive re-rating from
28.3x12 month forward PE post sale of Sylvania to 43x at the time of Lloyd
acquisition to a high of 58.5x in March2019. The re-rating was due to
expectations of HAVL emerging as a key player in consumer electrical with
presence in Switchgears, Cables, Lighting, ECD, Consumer Electronics and
White Goods. HAVL reported PAT CAGR of 15.8% in the past 3 years, not
significantly higher than peers. HAVL currently trades at 47.7x12 month
forward EPS which has moderated from peak of 58.5x but still at a premium of
15% to 5year average PE.

 We believe that P/E multiple of HAVL is high looking at future growth estimates
and competitive pressures faced in various product segments. We value the
stock at 33xSept21 EPS and arrive at a target price of Rs566. We initiate
coverage on the stock with Reduce rating.

September 9, 2019 4
 Havells India

One stop shop FMEG player

Incorporated in 1983, Havells India Limited (HAVL) is a leading fast moving

electrical goods (FMEG) Company with presence in Industrial & Domestic Circuit
Protection Devices, Cables & Wires, Motors, Fans, Modular Switches, Home and
Kitchen Appliances, Air Conditioners, Electric Water Heaters, Power Capacitors,
Luminaires for Domestic, Commercial and Industrial Applications.

 It has Havells and Crabtree, positioned as high-quality, mass premium brands

while Standard caters to mass segment. HAVL has launched REO brand to
cater to economy segment in tier2/3 cities.

 Even though HAVL’s acquisition of Sylvania did not work well, it has acquired
Lloyd to enter Consumer electronics (Televisions) and white Goods (AC’s,
washing machines).

 HAVL’s 90% products are energy efficient and manufactured in-house across
its 12 state-of-the-art manufacturing plants in India. It has started a unit to
manufacture AC’s in order to reduce costs and improve quality.

 HAVL’s works on ethos of customer delight, dealer relationships,

manufacturing efficiencies and employee engagement. It has a sales network
of 6,500 professionals, 10,500+ dealers and over 40 branches in the country.

HAVL’s core business reported a CAGR of 12.4% in sales and 17.2% in EBIT over
FY16-19 while Lloyd sales declined by 1% on comparable basis in FY19. HAVL is
repositioning Lloyd as a mass premium brand, has set up in-house manufacturing
facility and plans to enter refrigerators to complete its portfolio. It is also increasing
presence in EHV cables, Industrial switchgears, water heaters, grooming, water
purifiers and kitchen appliances. We believe Havells is in for tough times given
heightened competition in consumer electronics, white goods, water purifiers and
grooming products. In addition, rising competition in core categories (Premium fans,
lighting and switchgears) will make it difficult to repeat success of past few years.

Core Portfolio (ex-Lloyd) contribute 82% of sales and 87% of EBIT

Sales Mix - FY19 EBIT Mix - FY19

Lloyd Sw itchgears Lloyd
18% 17% 13%
Sw itchgears
27%

ECD
22%
ECD
20%
Cable
32%
Cable
Lighting Lighting 22%
13% 15%
Source: Company, PL Source: Company, PL

September 9, 2019 5
 Havells India

Story in charts

Revenue CAGR at 13.3% over FY19-22 Switchgear have highest EBIT margins

Revenue from Operations YoY gr. (RHS) EBIT Margins - FY19

32.7%
160 35.0%
38.5%
140 30.0%
120 23.6%
25.0% 28.6% 26.8%
100
(Rs bn)

20.0%
80 14.0% 14.3%
11.6% 16.1% 17.1%
15.0%
60
40 10.0%
101

112

128

146
20 5.0%
81

0 0.0%
FY18 FY19 FY20E FY21E FY22E Switchgears Cable Lighting ECD Lloyd

Source: Company, PL Source: Company, PL

Soft RM to enable recovery in EBITDA margins PAT growth to recover post FY20

EBITDA Margin (RHS) Adj EPS (Rs) YoY gr. (RHS)

12.9%
20 13.0% 20.0 25.0%
20.6%
12.8%
12.6% 17.3% 17.3% 20.0%
15 12.3% 15.0
12.4% 12.9%
(Rs bn)

12.1% 15.0%
12.2%
10 11.9% 11.9% 10.0
12.0% 10.0%
11.8% 5.2%
5 11.6% 5.0
5.0%
11.2

12.7

13.3

15.6

18.8
10 12 13 15 18 11.4%
0 11.2% 0.0 0.0%
FY18 FY19 FY20E FY21E FY22E FY18 FY19 FY20E FY21E FY22E

Source: Company, PL Source: Company, PL

Havells has been launching new products at regular intervals

Year Product launches
1977 Rewirable Switches and Changeover Switches
1979 HBC Fuses
1980 High quality Energy Meters
1985 MCBs
1996 MCCB, Cables & Wires
1997 Crabtree wiring accessories
2003 Fans, CFLs, Lighting fixtures
2004 Domestic Switchgear
2005 Premium Fans
2010 Electrical Water Heaters
2012 Copper Flexible Cables (Standard), Crabtree piano switches, XPRO Switchgear, TPW Fans
2013 Domestic Appliances, Pumps
2015 LED Lighting
2016 Air Coolers, home automation and control in Crabtree brand, Solar street lights
2017 Personal grooming products, Water Purifier, Air conditioners, LED TV, washing machines
Source: Company, PL

September 9, 2019 6
 Havells India

Lloyd has its task cut out

Havells acquired the consumer durable business of Lloyd Electric & Engineering
(LEEL) which included the Lloyd brand, distribution network and manpower for an
enterprise value of Rs16bn in May 2017. Lloyd ranks amongst top few brands in
Room Air-conditioners (RAC) and has a presence in TVs & Washing Machine
segments. Acquisition of Lloyd marked HAVL’s entry into Rs700bn white goods and
electronics market which is estimated to grow at 15% CAGR in sales. Havells is
undertaking steps like 1) brand building and re-positioning 2) revamp of distribution
network 3) In-house manufacturing and 4) Entry in new product segments to
increase sales and profitability of Lloyd. We believe that Lloyd has its task cut out
to scale up in these segments due to strong brand play, tough competition, rapid
changes in technology and huge MNC dominance.

HAVL repositioning Lloyd as ‘mass premium’ brand

Lloyd had a positioning of a mass/economy brand targeting lower end of the

consumer pyramid in respective categories and competing with the likes of
Videocon, Haier, ONIDA, and Electrolux in Air conditioners and Sansui, ONIDA,
and Intex etc. in LED TV. This is in sharp contrast to Havells, which is positioned
as a premium brand across segments of Fans, Electric Wires, Lighting and
Switchgears. So HAVL is repositioning Lloyd as a mass premium brand led by
brand building, distribution revamp and quality enhancement.

High A&P spends to reposition Lloyd as “mass premium” brand

8%

7%
7%
FY18 FY19

6%
7%

5%
6% 5%

5%
4%

4%
3%

3%

3%
3%
3%

3%
3%

3%
2%
1.1%

1%
1%

2%
1%

1%

0%
Voltas Blue Star Whirlpool Hitachi Daikin HAVL LG India* Samsung Lloyd
India* India*

Source: Company, PL *FY17-FY18

 HAVL has started investing in advertising and brand building. Lloyd’s

advertising spends at 6.9% of sales is significantly higher than Havells (3.1%).
Lloyd has recently named Deepika Padukone and Ranveer Singh, as its brand
ambassadors to increase resonance with – young, versatile and new age
couples to improve its brand impression.

 Lloyd has considerably reduced the price gap with other players like Voltas,
Daikin and Blue Star etc. from 15-20% to 5-7%

 Lloyd is focusing on providing technology-rich offerings like Grande AC, U Led

TV and adopting Internet of Things (IoT) in its product portfolio.

September 9, 2019 7
 Havells India

Distribution – Entering emerging formats

Lloyd’s had a diversified & multi-level distribution network spread across 10,000
touch-points including distributors, large dealers & retailers. Lloyd has a stronger
presence in Tier II & Tier III towns in comparison to Tier 1 and metro cities. In
addition, Lloyd had very limited presence in modern retail stores and online formats.
HAVL has undertaken several initiatives to increase product visibility and
distribution reach.

 HAVL focuses on building long term dealer relationships by brand building,

innovative schemes to increase profitability and business expansion to other
Havells products. It is now extending incentives to Lloyd dealers at par with
HAVL distribution.

 HAVL is undertaking dealer expansion and migration to premium channel as a

key strategic initiative. Lloyd is aiming for 15% addition in dealers every year,
although it is also reducing some dealers in low priced channels.

 As against ZERO presence in online platforms, Lloyd AC is now available on

leading online platforms like Flipkart, Amazon and Croma etc.

 Lloyd is increasing presence in modern trade (30-35% of industry sales in

metros and Tier1 towns) and is now available in Reliance Digital, Tata Croma,
Vivek’s and Sargam. However, Lloyd is yet to penetrate in Vijay Sales due to
higher margin expectations of this retail chain

 Lloyd is expanding its EBO - Lloyd Galaxy, from current level of ~80 which will
improve the touch points, but more importantly, brand visibility

The distribution strategy is showing impact as Lloyd products are now available in
~75% of the total retail universe. Modern retail and Online retail now contribute 20%
of revenues against 7-8% prior to acquisition. However, exit from low price channels
will continue to impact sales in the near term, as new channels have not been able
to fully compensate for the loss of sales in Lloyd’s traditional channels.

Aiming for 75% in-house AC production by FY21

While HAVL manufactures over 90% of its core segment products in-house, Lloyd
relies heavily on Chinese imports (80%). This exposes it to currency fluctuations
and custom duty changes as intense competition makes it difficult to pass on these
costs thereby impacting margins. With a view to reduce dependence on imports &
better control over quality Lloyd has started production at newly setup RAC plant:

 The plant has a capacity of 0.6mn (expandable to 0.9mn) and set up at a total
cost of Rs3.5bn

 The plant is integrated with in-house components, automated with robotics.

The plant will result into reducing the import dependence to 30-40% from current
80%. Lloyd is looking at 75% in-house production by FY21.

September 9, 2019 8
 Havells India

High import content impacted margins due to depreciating INR

USD/INR EBITDA Margin % (RHS)

74 12.4% 14.0%
72 12.0%
9.3%

72
70 10.0%
7.0%
68 8.0%
66 4.8% 6.0%
2.9% 3.3% 3.4%
64 4.0%
1.7% 1.4%
62 2.0%

64

64

64

67

71
65

70

70
60 0.0%

Q1FY18

Q3FY18

Q4FY18

Q2FY19

Q3FY19

Q1FY20
Q2FY18

Q1FY19

Q4FY19
Source: Company, PL

Lloyd does not have any plan to have in-house production of washing machines
and LED TV’s. With Lloyd’s margins currently below the industry average, focus on
brand building, in-house manufacturing and increasing distribution reach will enable
margin expansion from current levels of 5.3%.

High competitive intensity, technology disruption a key

challenge

Lloyd has plans to offer complete portfolio of Whitegoods/ Electronics to the

consumers. Lloyd’s is looking to consolidate its position in the whitegoods segment
by increasing share in RAC (room AC) and washing machines and enter new
segments like Refrigerator. It aims to increase its presence in TV’s where it has
negligible share. Lloyd plans to test launch refrigerators in the coming months.
However, we believe that achieving sustained gains remain a challenge considering
high competitive intensity in these segments.

Presence of MNC with technology
backed product pipeline, strong
brands and deep pockets make it
difficult for Havells to make a major
success out of Lloyd acquisition
 Fierce competition from Global Giants: Unlike the domestic competition
faced by HAVL in core segments like fans, cables, lighting and small durables,
it will now be competing against international giants such as Hitachi, Daikin,
Samsung, LG, Panasonic & Sony in these segments. These MNCs have deep
pockets to invest in R&D and Technology development, branding, distribution
and marketing, which Havells will find it hard to match.

 New Entrants: The industry is also witnessing entry of new players (including
MNCs) given the huge growth potential of Indian market, rising disposable
income and low penetration levels.

 High Discounts: White goods and electronics market is characterized by

intense price based competition, price discounts and exchange schemes.

 The consumer durables industry faces technology disruptions and

obsolescence which results in steady price erosions and meaningful changes
in consumption pattern of consumers.

September 9, 2019 9
 Havells India

Televisions – low probability of success: We believe Lloyd has very low

chances of making success in Televisions as competition, technology change and
pricing will make it difficult for Lloyd to make any dent in the category:

 From CRTs to OLED, televisions have witnessed fast technology

advancements. Televisions have come a long way from CRT in nineties to PIP,
Surround Sound, Flat screen, Plasma, LCD, LED and now OLED. Change in
technology has made redundant several large CPT players. Brands like Texla,
Weston, Televista, BPL, Binnatone, Salora etc. have vanished and market is
dominated by LG, Samsung, Sony, Panasonic etc. from MNC stable.

MI’s aggressively priced launch has
forced players to cut prices by 25-
30% and spoiled little chance which
Lloyd had in LED TV market
 Lloyd was eyeing to fill the mid-priced void left by the exit of Videocon brands
(Videocon, Sansui & Phillips), however entry of MI and consequent reduction
in LED TV prices has pushed it on the back foot. We note that MI’s aggressive
pricing has forced industry to cut prices by 25-30%. MI, VU currently have
32inch offering between Rs10.5-14000 and 43 inch between Rs22-28000.
Lloyd has products priced around Rs16900 and 37500, thus competing with
LG, Samsung etc. So the market has got demarcated between a MI, VU and
Haier on one hand and LG, Samsung and Lloyd on the other.

Although Lloyds had started aggressive advertising with two celebrity brand
ambassadors, MI has filled in the void which Lloyd was planning to cater to. This
has done a major blow to plans of Lloyd and Televisions will remain just as a part
of portfolio with little probability of scale up in this business.

Xiaomi’s aggressive pricing kicked off deep discounting in LED

LED Smart TV (Rs) 32-inch 43-inch 49-inch 55-inch
LG 17,999 33,779 43,000 62,999
Samsung 19,999 36,999 42,999 59,999
Lloyd 16,869 37,499 45,000 56,999
Haier 13,700 27,900 39,999 54,999
MI 12,499 21,999 29,999 47,999
VU 12,980 23,855 26,300 44,430
Source: PL

Rapid technological obsolescence witnessed in the television industry in last few decades

Source: LG, PL

September 9, 2019 10
 Havells India

Air conditioners: For Room Air Conditioners the biggest technological change has
been the advent of inverter compressors which provide more comfort and are
energy efficient. Unlike the fixed speed AC, an AC with inverter technology will run
continuously but will draw only that much power that is required to keep the
temperature stable at the desired level.

Inverter technology whilst consuming lesser power enables stable temperature at desired level

Source: PL

 Adoption to invertor technology has been very fast as the price differential
between a fixed speed and invertor AC has declined from 20-25% earlier to
less than 15% now. This has led to their share in sales rising to 40-50%.

Invertor AC’s are transforming the
industry and now account for 40-50%
of sales
 Given that there are a few players who manufacture AC compressor, the basic
technology changes are relatively less. However, most players continue to
provide add on features like smart remote, internet of things etc. to create
product differentiation.

 As AC’s running cost over the life of product is several times the cost of
acquisition, the consumer focus is more on energy efficiency.

We believe Lloyd has fair chance of increasing growth in AC segment given huge
underpenetration and limited product differentiation. Given the current competitive
situation in the market, reduction in costs from in-house production and its
translation to end consumer will be key to scale up in AC segment.

Refrigerator – another hard nut to crack: Lloyd eventually plans to increase

presence in the white goods market by test launch of Refrigerator, sometime next
year by out sourcing the product. Although refrigerator technology is fairly stable,
strong branding by players like Whirlpool, Samsung, LG, Hitachi, Haier and entry
of players like Voltas Beko, Bosch, Liebherr etc. will make success and profitable
existence a daunting task for Havells.

September 9, 2019 11
 Havells India

Channel check suggests tough going in near term

Although Lloyd has reduced price
differential in AC, no perceptible
quality change is visible
Our channel check suggests mixed feedback about the Lloyd brand and its revamp
attempts by Havells. Key takeaways are:
 Lloyd has reduced the price differential with Voltas and Blue Star etc. to 5-7%
in order to improve the brand perception. Thus the prices have come in line
with Voltas, Blue Star etc.

 Lloyd needs to improve product quality & features in its bid to successfully
revamp Lloyd as a mass premium brand, only changed pricing will not work.

 Lloyd has entered and increased shelf space in large format retail stores, it
needs to add EBO stores to improve its footprint in non-metro regions.

Revenues/EBITDA to grow 6.9%/4.4% over FY19-22

Particulars (Rs mn) FY18 FY19 FY20E FY21E FY22E
Net Revenue 14,141 18,555 19,112 20,812 22,672
YoY growth % 31.2% 3.0% 8.9% 8.9%
Contribution 2,683 3,176 3,154 3,434 3,741
% of sales 19.0% 17.1% 16.5% 16.5% 16.5%
YoY growth % 18.4% -0.7% 8.9% 8.9%
Add: Depreciation 184 204 372 423 447
Less: Advertisement & sales promotion 973 1,279 1,425 1,551 1,676
% of sales 6.9% 6.9% 7.5% 7.5% 7.4%
Less: Other SG&A 768 1,115 1,208 1,317 1,390
% of sales 5.4% 6.0% 6.3% 6.3% 6.1%
EBITDA 1,126 986 892 990 1,121
Margin % 8.0% 5.3% 4.7% 4.8% 4.9%
YoY growth % -12.4% -9.5% 10.9% 13.3%
Less:
Depreciation 184 204 372 423 447
Finance Cost 0 3 4 2 1
Forex (gain)/loss -156 -35 0 0 0
Add: Other Income 0 0 7 16 22
PBT 1,098 814 524 581 695
Margin % 7.8% 4.4% 2.7% 2.8% 3.1%
YoY growth % -25.9% -35.6% 11.0% 19.7%
Source: Company, PL

We estimate tepid sales growth for Lloyd in FY20 and some pick up in FY21. We
estimate sustained pressure on profitability due to higher distribution and brand
investments and competitive pressures. We expect PBT for FY20 to decline by
35.6%. We have cautious to negative stance on Lloyds in the medium term.

September 9, 2019 12
 Havells India

Lloyd: Room Air Conditioners (~75% of sales); Needs to innovate

Lloyd faces tough competition from market leader Voltas & incumbent MNCs
Product Market size (Rs bn) Lloyd's share (%) Market Position Competitors, Market Share (%) Category Penetration Level
Room Air Conditioners 120 13% #3-4 Voltas, LG, Daikin 5%
Source: Company, PL

Lloyd is in the midst of repositioning itself from a “mass” to “mass premium brand”

Source: Company, PL

Competitive Landscape: Highly competitive
HAVL is the 3-4th largest player in the Room Air Conditioner
market with a share of ~13%. Voltas remains market leader with
~24% market share followed by LG. There has been an increased
shift towards inverter ACs as consumers are now preferring
energy efficient models. RAC market is crowded by >20 players
given strong growth potential. We believe rising disposable
income rising necessity of AC in tropical conditions will enable 12-
13% volume CAGR over next 5 years. However, increasing
competitive intensity & input costs (custom duty, INR
depreciation) will prevent any margin expansion.
Strategy: Distribution expansion & In-house production
HAVL is in the midst of repositioning Lloyd from a mass to mass
premium brand by reducing the price gap and introducing new
features. It has roped in Bollywood’s power couple in a bid to
connect with the younger audience. Going ahead focus shall be
on innovation & IoT “smart” products. With its ~Rs5bn RAC facility
now operational in Rajasthan, Lloyd is expecting lower costs, and
better quality control. It is looking at expanding distribution in LFS
and online to gain share.

Lloyd LED TV: Little hope of survival?

In an industry fraught with technological disruption (latest from Xiaomi), Lloyd has negligible presence
Product Market size (Rs bn) Lloyd's share (%) Market Position Competitors, Market Share (%) Category Penetration Level
LED TV 300 3% - Samsung, LG, Sony 60%
Source: Company, PL

Lloyd is striving to make place in mass premium segment; however, faces an uphill task

Source: Company, PL

September 9, 2019 13
 Havells India

Competitive Landscape: Xiaomi entry hits Industry
Indian Flat Panel Display (FPD) TV industry is highly competitive
with LG, Samsung & Sony holding nearly 65% of market share.
Lloyd has a negligible presence with 3% market share. The LED
TV industry which was battling with entry of mid-tier players
Micromax, VU & private labels, has been hit by huge discounting
by Xiaomi. The risk of technological obsolescence remains high
as has been visible with phase out of CRT, Plasma and LCD in a
span of 10 years.
Strategy: Unlikely to remain a focus area
HAVL was looking at providing complete portfolio and to fill in the
vacuum created by the exit of Videocon brands (Videocon,
Phillips). However aggressive entry of Xiaomi (35% smart TV
share since launch) and price erosion has significantly impacted
players like Lloyd. Lloyd will continue to import/locally source TVs
and has little chance of scaling up in this category.

Lloyd: Washing Machines; Might survive but unlikely to score big gains

Dominated by MNCs, Lloyd has next to zero presence; will continue as filler product
Product Market size (Rs bn) Lloyd's share (%) Market Position Competitors, Market Share (%) Category Penetration Level
Washing Machines 70 - - LG, Samsung, Whirlpool 10%
Source: Company, PL

Currently, Lloyd imports its entire bouquet of Washing Machine.

Source: Company, PL

Competitive Landscape: MNC domination
Indian Washing Machine (WM) market is highly competitive with
LG, Samsung & Whirlpool holding combined market share of
68.9%. With IFB, Godrej, Haier & Hitachi being the other
prominent players. Lloyd has a negligible presence in the market.
Increasing product awareness, affordable pricing & innovative
products has aided the strong growth of WM. Semi-automatic is
the more popular category in India when compared to Fully-
automatic machines.
Strategy/Outlook: Just a Part of white goods portfolio
Lloyd largely imports its entire bouquet of Front Load, Top Load,
and Semi-Automatic washing machines since it has a negligible
presence in the space. Lower amount of technology play makes
the chances of success better than TV segment. However, once
it reaches a reasonable scale, Lloyd plans to set up a
manufacturing facility as it can give it better control over quality.

September 9, 2019 14
 Havells India

Core Segment growth peaked out in FY19

HAVL’s core business comprises of Cables, Switchgear, ECD and Lighting. This
segment of business is 82% of sales and has grown at a CAGR of 12.4% over
FY16-19. The core business grew at 9.3% over FY15-18 but by 19.8% in FY19 led
by ECD (27%), Switchgear (18%) and Cables (20.5%) even as Lighting grew by
only 10.7% due to price erosion in LED.
19.8% sales growth in core business
in FY19 was like a one off and is
Core business growth was led by increasing distribution, new launches in ECD like
unlikely to be repeated
water heaters, water purifiers and grooming products etc. HAVL also started
expanding its distribution in tier 2/3 cities and launched REO brand to capitalise on
demand following electrification and improving availability of power. HAVL also
benefitted from housing growth as it has strong presence in housing segment in
switchgear and cables.

HAVL created a clear brand architecture whereby Havells was positioned as a

premium brand, REO at the bottom and Standard as a mid- market brand. Cables
prices for these brands were at a discount of 5-15% than Havells. The discounting
for switchgears/switches has been 5-45%. However, lighting and select durables
will be sold under Havells brand only.

 Cables growth acceleration will be a function of gains in EHV segment.

 Switchgear sales will be reflective of urban housing, margins are a risk

 ECD faces tough competition in new segments

HAVL is not playing pricing game in lighting, however industry pricing needs to be
watched out for.

EBIT margins are a key risk Expect steady growth to continue

Switchgears (Rs mn) FY18 FY19 FY20E FY21E FY22E Cables & Wires (Rs mn) FY18 FY19 FY20E FY21E FY22E
Revenue 14,245 16,802 17,642 19,936 22,727 Revenue 26,834 32,346 36,389 41,302 47,084
YoY growth % -2.9% 18.0% 5.0% 13.0% 14.0% YoY growth % 0.3% 20.5% 12.5% 13.5% 14.0%
EBIT 5,572 6,464 6,704 7,576 8,636 EBIT 4,380 5,217 5,822 6,608 7,533
Margin 39.1% 38.5% 38.0% 38.0% 38.0% Margin 16.3% 16.1% 16.0% 16.0% 16.0%
YoY growth % -0.7% 16.0% 3.7% 13.0% 14.0% YoY growth % 34.5% 19.1% 11.6% 13.5% 14.0%
Source: Company, PL Source: Company, PL

Will margins bounce back? Strong Revenue CAGR of 21.7% over FY19-22
Lighting & Fixtures (Rs mn) FY18 FY19 FY20E FY21E FY22E ECD (Rs mn) FY18 FY19 FY20E FY21E FY22E
Revenue 11,687 12,934 14,357 15,936 17,848 Revenue 15,696 19,939 24,724 29,916 35,899
YoY growth % 14.3% 10.7% 11.0% 11.0% 12.0% YoY growth % 10.5% 27.0% 24.0% 21.0% 20.0%
EBIT 3,356 3,694 4,092 4,542 5,087 EBIT 4,202 5,349 6,675 8,077 9,693
Margin 28.7% 28.6% 28.5% 28.5% 28.5% Margin 26.8% 26.8% 27.0% 27.0% 27.0%
YoY growth % 26.6% 10.0% 10.8% 11.0% 12.0% YoY growth % 20.3% 27.3% 24.8% 21.0% 20.0%
Source: Company, PL Source: Company, PL

September 9, 2019 15
 Havells India

Core segments to ride on BHARAT opportunity

With the NDA government pushing for better electricity supply to household across
states, especially rural India, the demand for electrical products like wires, cables,
switch, fans etc. is expected to grow. HAVL is gearing up to capitalize on this
sustained growth opportunity in Bharat (rural India and small towns).

Rural electrification, increased power supply to stimulate

demand for electrical products

Rural electrification has been one of the key focus area of Govt in the recent years,
more so post 2014. Electricity has reached all 0.6mn villages in India under ‘Deen
Dayal Upadhyaya Gram Jyoti Yojana’ (DDUGJY). The government has also
achieved ~100% last mile connectivity by providing connections to households
under Pradhan Mantri Sahaj Bijli Har Ghar Yojana’ (Saubhagya), except in cases
where people have not shown inclination to get electricity connections.

All Urban/Rural households now have access to electricity supply

Rural Urban
98% 100% 100%
100% 93%
88% 86%
90%
80%
70%
60% 55%

50% 44%
40%
30%
20%
2001 2011 2017 2019

Source: Ministry of Power, PL

In addition to electricity reaching the interiors, there has been improvement in

quality of power driven by significant reduction in load shedding and lower voltage
fluctuations, more so in rural India and small towns. We believe that increase in
access and availability will increase demand for essentials like cables, wires,
switches and fans initially. We believe increased supply of electricity coupled with
rising disposable income will increase demand for other basic appliances like mixer
grinder, air coolers and televisions in Phase II. Phase III could see increase in
demand for direct cool refrigerators and eventually room air conditioners.

Phase I Phase II Phase III

• Wires • Mixer/Grinder • Direct Cool

• Cables • TV Refrigerator
• Switch • Air Cooler • Room AC
• Fans

September 9, 2019 16
 Havells India

With the electrification drive in the states of Bihar and Jharkhand, the growth in
television households was the highest in these states at 24%, followed by Assam,
Sikkim and North East at 21%. Although electrification will have long term gains,
sharp increase in density of TV’s suggest that bump up in demand for basic goods
like LED bulbs, fans etc. will play out sooner than was expected earlier.

10 states with 24hrs rural power supply Rural power supply on an upward trajectory
Rural Power Supply (hr/day) May18 Jun-19 Power Supply (hr/day) May-18 Jun-19
Gujarat 24.0 24.0 Nagaland 20.0 22.0
Himachal Pradesh 24.0 24.0 Bihar 18.2 21.9
Kerala 23.0 24.0 Rajasthan 22.0 21.0
Maharashtra 23.3 24.0 Odisha 19.0 20.1
Punjab 24.0 24.0 Assam 19.0 19.0
Tamil Nadu 24.0 24.0 Karnataka 19.0 18.6
Telangana 24.0 24.0 Meghalaya 21.5 18.5
West Bengal 24.0 24.0 Uttar Pradesh 17.9 18.0
Tripura 23.5 24.0 Jharkhand 16.8 17.4
Uttarakhand 23.9 24.0 Sikkim 17.0 16.5
Madhya Pradesh 23.0 23.5 Haryana 13.6 16.4
Andra Pradesh 23.1 23.2 Jammu & Kashmir 14.5 16.0
Chattisgarh 23.0 23.0 Mizoram 10.0 14.7
Manipur 22.5 22.5 Arunachal Pradesh 14.3 14.3
Source: National Power Portal, PL Source: National Power Portal, PL

HAVL to initiate rural push through mass brand ‘REO’

HAVL has been an urban centric company focusing on premium and mass premium
segment of products. 100% village and household electrification and improved
availability of power has opened up immense growth opportunities in rural India and
small towns. In addition, media reach and internet has created awareness about
quality and brands, which works to the advantage of organised players. HAVL has
taken several strategic steps to capitalise on the growth opportunity in rural India
and small towns (10k-50k population).

 Distribution Expansion: HAVL has started a pilot project to expand rural

distribution in UP, Odisha and Rajasthan. Currently it has presence in 1,000
villages and small towns and is looking at increasing reach to 3,000 by 2020.
Rural distribution will be modelled like an FMCG company with a stockist or
super stockist who is supplying to the retailers.

 Focus through mass priced REO and Standard brands: Since HAVL has
premium positioning, in a bid to prevent brand dilution, HAVL is entering these
markets through ‘REO’ and ‘Standard’ brand. While Switchgears, Switches,
Wires & Cables (~50% of sales) shall be sold under these brands, Lighting
products will remain under Havells brand only.

 REO/Standard products at 5-45% discount to Havells: Cables offered

under REO/Standard brand are priced 5-15% lower than Havells cables.
Similarly, the MCB’s are priced 11-45% lower than Havells. Despite lower
prices, REO and Standard products are not expected to be margin dilutive as
they have lesser features/aesthetics than HAVL brand products.

September 9, 2019 17
 Havells India

REO-Standard PVC cables at average discount of 5-15% to HAVL

Single Core PVC Cable, (List Price in Rs/90m)
Nominal area of
Havells REO diff (%) Standard diff (%)
conductor (sq.mm)
0.75 870 780 -10.3 820 -5.7
1.0 1,160 995 -14.2 1,095 -5.6
1.5 1,725 1,490 -13.6 1,630 -5.5
2.5 2,785 2,410 -13.5 2,630 -5.6
4.0 4,090 3,600 -12.0 3,865 -5.5
6.0 6,150 5,380 -12.5 5,810 -5.5
Source: Company, PL

REO-Standard MCB at average discount of 15-27% to HAVL

Single Pole MCB (List Price in Rs per unit)
Rating Havells REO diff (%) Standard diff (%)
6A-32A 245 137 -44.1 180 -26.5
40A 479 325 -32.2 415 -13.4
63A 526 405 -23.0 465 -11.6
Double Pole MCB (List Price in Rs per unit)
Rating Havells REO diff (%) Standard diff (%)
6A-32A 680 540 -20.6 595 -12.5
40A 1,056 750 -29.0 915 -13.4
63A 1,139 900 -21.0 1,000 -12.2
Four Pole MCB (List Price in Rs per unit)
Rating Havells REO diff (%) Standard diff (%)
6A-32A 1,532 1,155 -24.6 1,285 -16.1
40A 2,050 1,520 -25.9 1,735 -15.4
63A 2,148 1,695 -21.1 1,840 -14.3
Source: Company, PL

REO-Standard switches at average discount of 8%-40% to HAVL

Switch (List Price in Rs per unit)
Type Havells REO diff (%) Standard diff (%)
1Way Switch 44 30 -31.8 40 -9.1
2Way Switch 102 58 -43.1 97 -4.9
1Way Bell Push 118 63 -46.6 105 -11.0
Mega Bell Push 155 81 -47.7 145 -6.5
Source: Company, PL

September 9, 2019 18
 Havells India

Switchgears (17% of sales): Immense growth potential, margins at a risk

HAVL is market leader in Rs22bn MCB industry; holds 14-15% market share in premium modular switches
Organized
Product Market size (Rs bn) HAVL's share (%) Market Position Peers
Penetration Level
MCB 22 27-28% #1 Legrand, Schneider High
Switches* 22 14-15% #3 Panasonic (Anchor), Legrand Medium
Source: Company, PL *Premium Modular plate switches

Switchgear sales dominated by residential segment (70% of sales)

Switchgear Sales Mix %

Non-
Residential
30%

Residential
70%

Source: Company, PL

Competitive Landscape: Leader in Residential segment
MCB: HAVL is the largest player with a market share of ~27-28%
followed by Legrand & Schneider. Technology intensive nature of
the product has resulted in high share of organised players
(~90%). Switchgear is a highly urbanised product which is yet to
enter small towns and rural India in a major way, which signifies
huge growth potential in the medium term.
Modular Switches: With a market share of ~14-15% HAVL is the
third largest player after Anchor (Panasonic) & Legrand. Rising
disposable income & growing preference for aesthetically
designed modular switches will enable 11% CAGR of Industry
over FY18-23.
HAVL’s Strategy & Outlook: Long Term growth positive
HAVL’s MCBs have a strong presence in trade channel/dealers
and residential segment contributes ~70% of total revenue.
Havells is expanding in industrial segment and has tied up with
Hyundai. Switchgear demand is impacted due to slowdown in real
estate and construction activity.
Havells is following a multi-brand strategy (Havells, Crabtree,
Standard) to cater to consumers across price segments. In its
semi-urban/ rural push, HAVL is offering switches & switchgears
under the REO brand with value pricing to expand the market.

Switchgear Industry is de-growing since Nov2018 due to slowdown in construction

activity. Liquidity issues and pressure on large builders and contractors is impacting
demand as the product has usage mainly in new construction. HAVL has adopted
a two pronged strategy to increase growth 1) push for Standard and REO branded
switchgear (price discount of ~11-45% than Havells) to cater to affordable housing
segment and 2) expanding super stokists and distributors in small towns. Our
industry and channel checks suggest that consumers don’t mind paying high price
as they seek to fulfill the need of protection from short circuits and fire. We believe
that such a positioning (except cartelization) is unsustainable and entry of new
players in this industry will result in gradual moderation in switchgear contribution
margins from current levels of 38-39% (~25% after proportionately adjusting for its
share in unallocated expenses).

September 9, 2019 19
 Havells India

Cables and Wires (32% of sales): Innovations and EHV entry key to growth

HAVL is focused on increasing distribution reach, penetrate semi-urban/rural markets through “REO”
Competitors, Market
Product Market size (Rs bn)* HAVL's share (%) Market Position Organized Penetration Level
Share (%)
Residential 80 16% #3 Finolex, Polycab Low
Industrial 120 10% #3 Polycab, KEI Medium
Source: Company, PL

Cables & Wires sales split equally between Domestic & Industrial segments; Clever ad campaigns

Cables & Wires Sales Mix %

Industrial Domestic
50% 50%

Source: Company, PL

Competitive Landscape: Measured competition
In the ~Rs346bn organized cables & wires market, HAVL is the
third largest player with ~8% market share followed by KEI
industries. Polycab (18%) is the largest player offering a wide
range of products. HAVL has higher share from domestic
segment in comparison to competitors.
Led by government initiatives in power & infrastructure, cables &
wires industry is expected to grow at a CAGR of 15% over FY18-
23 to Rs1033bn. Increase in technological & product
complexities, promotion & branding by leading cable
manufacturers is likely to increase organized share of cables to
74% (66% currently).
Strategy/ Outlook: EHV and branding holds key
HAVL’s plans to expand portfolio and enter new segments (EHV)
as it currently caters to ~58% of overall organized cables & wires
market. HAVL continues to focus on innovation and launched heat
and fire resistant cables (HRFR) in regular product range.
In a bid to penetrate the semi-urban/rural markets, HAVL has
launched wires at a lower price point under the REO brand. The
management is focused on increasing its distribution reach in the
western region where HAVL’s presence is currently weak.

HAVL has launched value for money cables for residential usage under the brand
REO which are priced at 10-15% discount to Havells brand. Havells has positioned
products on innovation platform and is looking at increasing distribution reach in tier
2/3 cities and also western India where it is weak. We believe increasing share in
western India would be a tough task given that it is a strong hold of Polycab and
Finolex. We believe Havells needs to venture into high end industrial cables to
increase growth rates. However, rising usage of Busbar trunking in high rise
buildings and Industrial projects is a key risk to the industry, albeit in long term.

September 9, 2019 20
 Havells India

LED lighting (13% of sales): Poor pricing power and easy Imitations limit margin upside

HAVL enjoys 10-14% market-share in an industry plagued by intense competitive intensity and price erosion
Product Market size (Rs bn)* HAVL's share (%) Market Position Competitors, Market Share (%) Organized Penetration Level
Lighting & Fixtures 65 10-14% #2-4 Philips, Crompton, Bajaj, Wipro Medium
Source: Company, PL

Innovations have limited shelf life in Lighting

Lighting Sales mix %

B2G
16%

Consumer
Lighting
49%
Profession
al Lighting
35%

Source: Company, PL

Competitive Landscape: Intense price based competition
With a market share of ~10-14%, HAVL ranks between ~#2-4 in
India’s lighting industry. Phillips (#1), Crompton, Bajaj, Syska &
Wipro are the other large players in the market. LED is now the
dominant lighting technology across all applications as
sustained reduction in prices and Govt push (Ban on fluorescent
lamps and free/subsidised distribution) has resulted in
consumer shift. Innovation, Premiumisation and aesthetics are
key to offer a differentiated value proposition (Eg. Anti-bacterial
bulbs by Crompton) in a market flushed with Chinese imports
and easy product imitations.
Strategy/Outlook: Innovation and Penetration a focus area
HAVL has designed an exhaustive product range keeping in mind
consumer consideration & preference. With a thrust on innovation,
HAVL is looking to set up its 2nd R&D facility in the tech city of
Bangalore (1st being in Noida). In order to ease the negative impact of
price erosion (LED’s) & RM inflation on margins, HAVL is focusing on
innovation & deeper penetration (increase distribution reach). In
consumer lighting (~50% of lighting sales), HAVL is improving primary
& secondary reach while in professional lighting (B2B + B2G) it is
focused on product innovation & use of latest technology.

Lighting segment has been under pressure due to slow Govt orders and pricing
pressures in B2C segment. Rising competition from Chinese products and lack of
product differentiation has been one of key limitations. Havells does not want to
play the volume based push strategy in this business and has been focusing on
increasing presence in the fixtures, battens and decorative lighting. We note that
easy availability and regular launch of new products in fixtures can accelerate
growth as the fixtures segment is dominated mainly by unorganized players.

We believe that pricing power in lighting and fixtures would remain limited given
that the products can be easily imitated and value pricing plays a far important role
than branding. We expect steady sales growth of 11% CAGR; margin recovery will
be slow given highly competitive nature of the industry.

September 9, 2019 21

Electrical Consumer Durables (20% of sales): Aiming for the skies
Market leader in premium fans; focusing on innovation in a bid to offer differentiated value proposition in ECD
Product Market size (Rs bn)* HAVL's share (%) Market Position Competitors, Market Share (%) Organized Penetration Level
Fans 69 16% #3
Water Heaters 14 15% #2
Other Appliances 52 2-3% NA
Source: Company, PL
Water Purifiers, Kitchen appliances and Grooming products added to the portfolio
Source: Company, PL
FANS: Industry eying Premiumisation
Fans account for ~55% of ECD sales for Havells. HAVL is the
third largest player in fans, with dominant leadership in the
premium segment (~25% of market). Crompton leads the overall
market with a share of ~24-25%. Havells redefined fans with its
premium offering in an old and laid back category. However, the
Industry dynamics are changing as all key players like Crompton
and Orient etc. have started focusing on the premium segment
with multiple offerings. We expect steady demand as Rural
electrification and improved power availability is a key trigger.
Water Heaters; Competitive Intensity on the rise
HAVL is the second largest player (15% share) in the ~Rs14bn
market where Racold is leader with ~30% share. Crompton and
orient are increasing offerings in this segment which will increase
competition.
Appliances: late entrant
Small appliances market (~Rs52bn) is dominated by Phillips and
Bajaj. HAVL (since 2012) has a negligible presence in the space
with only ~2-3% market share. Other players include Morphy
Richards, Kenstar and USHA. The category has seen entry of
Prestige, Pigeon and Wonderchef and a host of other kitchen
ware brands. Philips clearly dominates the premium segment and
its acquisition of Preethi has consolidated its position in south
India. Philips offers the most comprehensive range of Small
appliances including juicers, air fryers, citrus presses and has
entered air purifiers, garment steamers, Humidifier and small
vacuum cleaners. Wonderchef, riding on the popularity of chef
Sanjeev Kapoor is one of the fast emerging brands in the kitchen
appliance segment and has recorded sales of Rs3bn with a target
of Rs8bn in five years.
September 9, 2019
Havells India
Crompton, Orient, Usha High
Racold, AO Smith Low
Bajaj, Phillips Low
Strategy/Outlook: REO to drive mass move
Rising competition in the premium segment and huge scope in
tier2/3 cities has forced Havells to 1) consolidate its position in
premium segment through new models/products (Enticer smart
fans, Stealth cruise & Trinity) and 2) increasing offerings under
REO brand in mass segment to capitalise on growth opportunity
in rural India and small towns. Havells is targeting to increase
overall share to 20%. Increasing focus of major players will
expand premium segment, however rising competition can
impact sales growth, pricing and limit scope of margin expansion.
Strategy/Outlook: Product Differentiation is key
HAVL launched Adonia water heaters (colour changing LED
technology) in a bid to further expand its market share. The
category offers huge growth potential given presence of large
local/unorganized players and huge scope of innovation and
branding.
Strategy/Outlook: Tough to scale up
HAVL is realigning distribution with increasing availability of its
products through Kitchen Appliance stores and launching
regional specific products. HAVL has entered host of new
products including RO&UV water purifiers (launch in 100 cities),
Juicers, blenders, irons, Mixers, Air Fryers, Toasters and
Tea/Coffee makers etc. HAVL has positioned its products as a
premium offering given that the segment offers huge scope for
upgradation and has limited brand presence of Philips and
Wonderchef at the top. However, given the strong brand
perception of Philips built over decades and personality led
positioning of Wonderchef, it would be a herculean task for
Havells to make a significant dent in this segment. Water
purifier segment seems tough to crack with presence of Eureka
Forbes, Kent, Philips and HUL in this service driven category.
22
 Havells India

Grooming Products; Huge growth potential Strategy/Outlook: Tough to crack

Grooming products have a market size of Rs18-20bn and are
growing at a CAGR of 25-30%. Grooming products have been a
stronghold of Philips and Braun with little presence from domestic
players. We believe that the changing consumer attitude towards
personal grooming is increasing demand for female centric
products like Hair Dryers, Hair Epilators etc. Similarly, male
grooming products like Electric shavers, trimmers, body
groomers are finding rising demand with growing need to look
and feel good.
Havells is targeting premium positioning in grooming products
and will compete with Philips, Braun (Gillette) and Panasonic
mainly. We note that Havells has priced its products at 10-15%
discount to Philips, however it will have to compete with other
players and domestic brands. Havells needs to create a distinct
positioning to succeed like it had done in fans. However, as
Havells is not a first mover in this, making strong inroads in the
grooming segment will be a long and arduous journey.

Mass premium positioning of products competing with the likes of Philips, Wonderchef
Personal Grooming Products Key Competitors HAVL Positioning
Electric Shaver, Multi Grooming Kit, Beard
Male Grooming Phillips, Braun, Nova, Syska, Panasonic, Vega Mass Premium
Trimmer, Nose & Ear Trimmer, Body Groomer
Hair Styling, Hair Dryer, Skin Care, Female
Female Grooming Phillips, Braun, Vega, Syska, Panasonic Mass Premium
Depilation
Baby Grooming Baby Hair Clipper Phillips, Panasonic, Yijan, Glendan Mass Premium

Appliances Products Key Competitors HAVL Positioning

Air Fryer, Induction Cooker, Oven Toaster
Morphy Richards, KenStar, Wonderchef,
Cooking Griller, Sandwich Maker, Pop Up Toaster, Mass Premium
Prestige, Phillips
Electric Cooker
Juicer Mixer Grinder, Mixer Grinder, Blender, Prestige, Preethi, Phillips, Bajaj, Morphy
Food Preparation Mass Premium
Food Processor, Juicer Richards, Kenstar, Wonderchef, Phillips
Brewing Coffee Maker, Kettle, Tea Maker Wonderchef, Phillips, Morphy Richards Mass Premium
Garment Care Steam Iron, Dry Iron, Garment Steamer Morphy Richards, KenStar, Phillips Mass Premium
Source: xxx

ECD segment contributes ~20%/22% to sales/EBIT of Havells. ECD sales have

grown at a CAGR of 18% in the past 4 years, with tepid growth in 2016 and 2018.
Fans account for ~55% of sales while kitchen appliances and water heaters account
for ~13% each of category sales. Water purifiers and grooming products account
for ~4-5% each. Entry into new products is driving growth of ECD segment. Havells
has been able to increase presence in water heaters. While expanding product
portfolio offers opportunity to grow sales, intense competition in grooming and
kitchen appliances can act as a near term drag. We believe that Havells is trying to
enter multiple segments at the same time, even as some of its competitors have
well defined niches. We remain cautious on the increased aggression into new
product segments.

September 9, 2019 23
 Havells India

Innovation and Differentiation cornerstone of

growth strategy

HAVL started as a switches and fuse company which ventured into new segments
like Fans, Lighting, domestic appliances (water heaters, Water Purifiers, Kitchen
Appliances, Male and female grooming). It has also entered into technology-based
product extensions in new categories like LED lighting and home automation. HAVL
is using advanced data analytics and technology to develop products to fill need
gaps. HAVL’s R&D Centre is focused on developing intelligent, eco-friendly and
energy efficient products. Havells plans to increase the R&D spend from current
0.8% to 2% which will be instrumental in new product development. HAVL’s
aggressive push for innovation and new launches is reflected in:

 IOT-enabled devices including Indoor smart light meeting requirements of HCL

(Human centric light). HAVL is also developing intelligent and connected
products ranging from smart home lighting, air conditioners, fans and water
heaters which can be controlled from remote location including voice
assistance platforms to provide ease of control through voice command.

 High-end automation solutions for new homes and retrofits for existing homes.

 ‘Bluetooth’ enabled fans, ‘QR codes’ in products to tackle counterfeit,

interactive lighting solutions among others.

 Smart and connected appliances such as Adonia and Droid water heater.

 Technological tie-up with Hyundai for Magnetic Contractors

The results are visible as Lighting & ECD recorded sales CAGR of 15% and 21%
respectively over the last decade. We expect these initiatives to enable 21.7%/11%
growth in ECD/Lighting over FY19-22E

Innovative product launches: Fast cooling RAC, energy efficient fans & IoT enabled water heater

Source: Company, PL

Trim LED clip-on; product expansion in kitchen appliances

Source: Company, PL

September 9, 2019 24
 Havells India

HAVL is investing in distribution expansion/ Automation

E-Sampark Mobile App
HAVL has been making significant investments to improve the depth and quality of
marketing and distribution. Continuous investment in the cutting-edge technology
and innovation has helped HAVL to stay ahead in the highly competitive landscape.
HAVL has always viewed IT as an enabler and of strategic advantage in order to
gain market share, connect deeper with customers and increase efficiency &
profitability. HAVL is looking at increasing the use of technology with several online
and mobile based applications to bring customers and partners closer:

 HAVL has a strong domestic presence across 45 cities with nearly 6,500 sales
professionals. Now it has access to 2,283 towns with population exceeding
25,000 which represent 50% of such towns in India.

 HAVL has 10,500+ dealers and has opened 500 Galaxy stores which offer
HAVL products under one roof. HAVL sales team undertakes 7,000 channel
partners and 75,000 retailer visits/month.

 HAVL has nurtured strong relationship with dealers by brand building, efficient
service network, innovative schemes and expansion in portfolio from wires to
switchgear, lighting and ECD. This has provided strong stickiness to the dealer
and distributor network for the company.

 E-Sampark – A retailer app that supports direct communication between HAVL

and its retailers. Digitised consumption and redemption of loyalty programme
and will help save significant manpower and cost previously incurred to help
manage the loyalty programme.

M-Konnect Mobile App  M-Konnect App – It is a dealer APP which enables placement of orders,
update on products, promotions, schemes, claim settlement and resolution of
concerns. 80% of orders are now booked from mobile application.

 Distribution Management System – It Works as mini ERP system to

distributors, providing benefits like real time monitoring of receivables, tracking
of targets, faster settlement of secondary schemes & better inventory
management.

 Enterprise Data Warehouse - It is the Centralised data repository that stores

transactional data. EDW is designed for decision-support, analytical reporting,
ad-hoc queries and data mining thereby converting enterprise wide data into
business insights for quick decision making.

 HAVL is now working on advanced analytics in air conditioners which will

enable them to predict service need, push notifications to service staff and
consumers, allocate resources in advance, reducing downtime and providing
a personalised and friction-free consumer experience.

These initiatives have helped the company delight its customers, achieve better
channel partner relationship and improve engagement with employees. The
investments in the artificial intelligence, natural language processing, IOT and IIOT
ensures that the company is building future ready products and services.

September 9, 2019 25

Lloyd needs to improve product
quality and features in order to make
inroads in white goods
Although Havells is leading new
launches and innovation in Kitchen
appliances and grooming, any
aggression by Philips and other
incumbents can impact its growth
Exclusive Havells Galaxy and Lloyd outlets
Source: Company, PL
September 9, 2019
Havells India
Channel Check takeaways
 SBU structure in place: HAVL has put in place a strong SBU structure with
each business unit being headed largely by ex-telecom guys. In addition to this,
there exists focused teams for each sub-category within a business unit.
 Lloyd – Making sustainable gains a tough ask: Although Lloyd is re-
branding itself through extensive ad-campaigns, it continues to lag in terms of
product quality and features. In order to be able to make any meaningful
inroads in this highly competitive category (dominated by Samsung, LG,
Hitachi, Daikin etc.) Lloyd needs to improve its product offering and ensure
right placement of products.
 ECD - HAVL leading the premiumisation drive: In the ECD segment,
especially in Kitchen Appliances and Personal grooming, incumbents like
Phillips aren’t really aggressively focusing on innovation. HAVL is driving
innovation and Premiumisation across the category. However, any aggression
by players like Philips, Kenstar etc. negatively impact HAVL.
 Switchgears margins at peak: With real estate marking slowing down,
HAVL’s switchgear’s sales growth has moderated. HAVL has launched mass
quality switchgears under the “REO” brand to cater to tier II/III markets.
 Increasing wallet share with channel partners through new launches:
Although, HAVL products are priced at a premium, the channel partners remain
extremely happy with the built, quality, innovation & after sale service offered.
Leveraging this goodwill created over the years, new launches are more easily
accepted by channel partners thereby increasing HAVL’s wallet share with
them. HAVL’s retail loyalty program is also well-appreciated by channel.
 Distribution channel expansion: Although Lloyd is now present in most
Large Format Retail stores (except Vijay Sales), lack of full product category
display has limited shelf space gains.
26
 Havells India

Financials & Valuations

Estimate CAGR of 13.3% in Sales over FY19-22
We expect Sales CAGR of 13.3% over FY19-22. We believe delayed recovery in
real estate can impact switchgear/ cables, Govt ordering can impact growth rates
in lighting and poor consumer sentiment in ECD beyond 1HFY20.

 Switchgear: While real estate slowdown is expected to impact Switchgears in

FY20, expect recovery to enable mid- teens sales growth thereafter.

 Cables: We estimate a steady 13.3% sales CAGR for cables over FY19-22
led by entry in EHV segment under Havells and mass market push through
REO.

 Lighting: We estimate a steady 11.3% sales CAGR in lighting which factors in

lower pricing pressures in LED and gains in fixtures segment.

 ECD: We estimate 21.7% sales CAGR in ECD segment led by emerging

categories like water heaters, Coolers and Kitchen appliances and moderate
success in new categories like grooming products and water purifiers.

 Lloyds: We estimate 6.9% Sales CAGR as poor show in FY20 will drag the
numbers. RAC will lead growth with double digit sales CAGR, however TV and
Washing machines will report low to mid-single growth.

Core portfolio (Ex-Lloyd) contribute 82% of revenues

Sales Mix - FY19 Lloyd Sw itchgears

18% 17%

Electrical
Consumer
Durables
20% Cable
32%

Lighting &
Fixtures
13%
Source: Company, PL

ECD to lead revenue growth, Lloyd to remain a drag

Revenues (Rs mn) FY18 FY19 FY20E FY21E FY22E
Switchgears 14,245 16,802 17,642 19,936 22,727
YoY gr. -2.9% 18.0% 5.0% 13.0% 14.0%
Cable 26,834 32,346 36,389 41,302 47,084
YoY gr. 0.3% 20.5% 12.5% 13.5% 14.0%
Lighting & Fixtures 11,687 12,934 14,357 15,936 17,848
YoY gr. 14.3% 10.7% 11.0% 11.0% 12.0%
Electric Consumer Durables 15,696 19,939 24,724 29,916 35,899
YoY gr. 10.5% 27.0% 24.0% 21.0% 20.0%
Lloyd Consumer 14,141 18,556 19,112 20,812 22,672
YoY gr. - 31.2% 3.0% 8.9% 8.9%
Total 82,603 1,00,576 1,12,224 1,27,902 1,46,230
YoY gr. 25.4% 21.8% 11.6% 14.0% 14.3%
Source: Company, PL

September 9, 2019 27
 Havells India

Commodity price pressures abating

HAVL has been impacted by sharp commodity price inflation over the past few
years. Key commodity prices – Copper/Aluminium/Brent Crude have increased at
a CAGR of 9%/11%/14% over FY16-19 thereby impacting gross margins by 340bps
over FY16-19. However, commodity price pressure has abated since the beginning
of FY20. Spot LME Copper prices are down 6%, Spot Aluminium LME 13% while
Brent Crude prices are down 6%. However, the ensuing trade wars & INR/USD
rates will determine the trend in the prices of key inputs like Copper, Aluminium,
Paints & Plastics. We believe that the major pressure due to high commodity prices
is over and expect moderate expansion in gross margins hereon. Despite focus on
non- premium segments under the REO brand in core categories and low margins
in Lloyd, we estimate an increase in gross margins by 40bps in FY20 and another
30bps in FY21.

LME copper prices down 6% since April-19 LME aluminum prices down 13% since April-19

Copper Spot (INR/MT) Aluminium Spot (INR/MT)

5,50,000 1,80,000
5,00,000 1,60,000
4,50,000 1,40,000
4,00,000 1,20,000
3,50,000
1,00,000
3,00,000
80,000
2,50,000
60,000
2,00,000
May-16

May-17

May-18

May-19
Jan-17
Mar-17

Jan-18
Mar-18

Jan-19
Mar-19
Jul-16

Jul-17

Jul-18

Jul-19
Nov-16

Nov-18
Sep-16

Sep-17
Nov-17

Sep-18

Sep-19
May-16

May-17

May-18

May-19
Jan-17

Jan-18

Jan-19
Mar-17

Mar-18

Mar-19
Jul-16

Jul-17

Jul-18

Jul-19
Sep-16

Sep-17

Sep-18

Sep-19
Nov-16

Nov-17

Nov-18

Source: PL
Source: PL

Brent crude prices continue to remain soft

Brent Crude (US$/barrel)

100.00

80.00

60.00

40.00

20.00

-
25-Apr-16

25-Oct-17

25-Apr-18

25-Oct-18

25-Apr-19
25-Oct-16

25-Apr-17
25-Aug-16

25-Aug-17

25-Aug-18

25-Aug-19
25-Dec-16

25-Dec-18
25-Jun-16

25-Jun-17

25-Dec-17

25-Jun-18

25-Jun-19
25-Feb-18

25-Feb-19
25-Feb-16

25-Feb-17

Source: PL

September 9, 2019 28
 Havells India

EBIDTA and PAT CAGR of 14.8% and 14.1% over FY19-22

We estimate EBITDA CAGR of 14.8% over FY19-22 led by gains from in-house
manufacturing in Lloyd, benign input costs and peaked out expenses on distribution
expansion and brand building. We estimate flat margins in FY20 but an increase of
20bps in FY21 and 20bps in FY22. We estimate PBT from operations will increase
by 9.5% in FY20 and at a CAGR of 15.3% over FY19-22. PAT growth is estimated
at 5.2% in FY20 and at a CAGR of 14.1% over FY19-22.

Switchgear margins have peaked out

EBIT (Rs mn) FY18 FY19 FY20E FY21E FY22E
Switchgears 5,572 6,464 6,704 7,576 8,636
Margin 39.1% 38.5% 38.0% 38.0% 38.0%
YoY gr. -0.7% 16.0% 3.7% 13.0% 14.0%
Cable 4,380 5,217 5,822 6,608 7,533
Margin 16.3% 16.1% 16.0% 16.0% 16.0%
YoY gr. 34.5% 19.1% 11.6% 13.5% 14.0%
Lighting & Fixtures 3,356 3,694 4,092 4,542 5,087
Margin 28.7% 28.6% 28.5% 28.5% 28.5%
YoY gr. 26.6% 10.0% 10.8% 11.0% 12.0%
Electric Consumer Durables 4,202 5,349 6,675 8,077 9,693
Margin 26.8% 26.8% 27.0% 27.0% 27.0%
YoY gr. 20.3% 27.3% 24.8% 21.0% 20.0%
Lloyd Consumer 2,683 3,176 3,154 3,434 3,741
Margin 19.0% 17.1% 16.5% 16.5% 16.5%
YoY gr. 18.4% -0.7% 8.9% 8.9%
Source: Company, PL

Revenue/PAT to grow at CAGR of 13.3%/14.8% over FY19-22E

Particulars (Rs mn) FY18 FY19 FY20E FY21E FY22E
Revenue from Operations 81,386 1,00,576 1,12,224 1,27,902 1,46,230
YoY gr. 32.7% 23.6% 11.6% 14.0% 14.3%
Gross Profit 31,578 37,791 42,666 48,973 56,168
Margin 38.8% 37.6% 38.0% 38.3% 38.4%
Other Expenses 21,085 25,869 29,351 33,442 37,884
% of sales 25.9% 25.7% 26.2% 26.1% 25.9%
EBITDA 10,493 11,922 13,315 15,531 18,283
Margin 12.9% 11.9% 11.9% 12.1% 12.5%
YoY gr. 27.3% 13.6% 11.7% 16.6% 17.7%
Other Income 1,170 1,276 1,251 1,528 2,006
Depreciation 1,395 1,486 1,858 2,117 2,234
EBIT 10,268 11,712 12,708 14,942 18,054
Margin 12.6% 11.6% 11.3% 11.7% 12.3%
YoY gr. 22.4% 14.1% 9.3% 17.0% 20.2%
Interest 240 159 188 77 47
PBT 10,028 11,553 12,520 14,865 18,008
Tax 3,022 3,637 4,257 5,129 6,213
Adj PAT 7,006 7,915 8,263 9,737 11,795
Margin 8.6% 7.9% 7.4% 7.6% 8.1%
Exceptional item 119 0 0 0 0
Reported PAT 7,125 7,915 8,263 9,737 11,795
Adj EPS (Rs) 11.2 12.7 13.2 15.6 18.9
YoY gr. 17.3% 12.9% 4.4% 17.8% 21.2%
Source: Company, PL

September 9, 2019 29
 Havells India

Quarterly snapshot: 1Q sales up just 4.5% and PAT declined 17.3%, 2Q unlikely to show respite
Particulars (Rs mn) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20E 3Q20E 4Q20E
Revenue from Operations 25,963 21,910 25,184 27,519 27,120 24,438 28,633 32,034
YoY gr. 39.5% 23.3% 28.1% 8.6% 4.5% 11.5% 13.7% 16.4%
Gross Profit 9,755 8,391 7,522 10,211 10,131 9,164 10,881 12,490
Margin 37.6% 38.3% 29.9% 37.1% 37.4% 37.5% 38.0% 39.0%
Other Expenses 6,632 5,766 4,577 6,982 7,375 6,232 7,158 8,600
% of sales 25.5% 26.3% 18.2% 25.4% 27.2% 25.5% 25.0% 26.8%
EBITDA 3,123 2,625 2,946 3,229 2,757 2,933 3,722 3,890
Margin 12.0% 12.0% 11.7% 11.7% 10.2% 12.0% 13.0% 12.1%
YoY gr. 81.1% 2.2% 12.3% -9.7% -11.7% 11.7% 26.4% 20.5%
Other Income 292 343 331 310 397 300 300 362
Depreciation 350 391 353 391 469 465 465 460
EBIT 3,064 2,577 2,923 3,147 2,684 2,768 3,558 3,792
Margin 11.8% 11.8% 11.6% 11.4% 9.9% 11.3% 12.4% 11.8%
YoY gr. 76.5% 2.8% 15.2% -9.7% -12.4% 7.4% 21.7% 20.5%
Interest 26 37 36 61 47 35 35 70
PBT 3,039 2,540 2,888 3,086 2,637 2,733 3,523 3,722
Tax 935 754 931 1,018 898 902 1,163 1,327
Adj PAT 2,104 1,786 1,957 2,068 1,739 1,831 2,360 2,396
YoY gr. 73.3% 4.4% 12.9% -11.9% -17.3% 2.5% 20.6% 15.8%
Source: Company, PL

Quarterly snapshot: Lloyd drags sales and margins in 1Q20, trend to continue
Particulars (Rs mn) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20E 3Q20E 4Q20E
Revenue
Switchgears 3,758 4,231 4,162 4,651 3,775 4,316 4,370 5,181
YoY gr. 5.6% 28.3% 20.9% 17.9% 0.5% 2.0% 5.0% 11.4%
Cable 7,499 7,665 8,203 8,979 7,785 8,240 9,434 10,931
YoY gr. 4.2% 34.6% 31.1% 16.8% 3.8% 7.5% 15.0% 21.7%
Lighting & Fixtures 2,583 2,856 3,695 3,800 2,804 3,170 4,139 4,244
YoY gr. -5.1% -0.4% 28.7% 17.7% 8.6% 11.0% 12.0% 11.7%
Electric Consumer Durables 5,042 4,579 5,552 4,765 6,235 5,953 6,940 5,595
YoY gr. 37.2% 42.4% 33.5% 2.6% 23.7% 30.0% 25.0% 17.4%
Lloyd Consumer 7,081 2,579 3,572 5,324 6,520 2,759 3,750 6,083
YoY gr. 165.0% -4.4% 21.9% -8.8% -7.9% 7.0% 5.0% 14.3%
Total 25,963 21,910 25,184 27,519 27,120 24,438 28,633 32,034
YoY gr. 31.0% 23.3% 28.1% 8.6% 4.5% 11.5% 13.7% 16.4%
EBIT
Switchgears 1,493 1,628 1,631 1,712 1,489 1,597 1,661 1,957
Margin 39.7% 38.5% 39.2% 36.8% 39.5% 37.0% 38.0% 37.8%
YoY gr. 14.3% 19.5% 18.2% 12.4% -0.2% -1.9% 1.8% 14.3%
Cable 1,279 1,070 1,294 1,575 1,288 1,318 1,509 1,707
Margin 17.0% 14.0% 15.8% 17.5% 16.5% 16.0% 16.0% 15.6%
YoY gr. 48.8% -5.6% 20.9% 19.5% 0.7% 23.2% 16.7% 8.4%
Lighting & Fixtures 711 847 1,089 1,047 809 872 1,138 1,272
Margin 27.5% 29.6% 29.5% 27.6% 28.9% 27.5% 27.5% 30.0%
YoY gr. -7.1% 9.3% 33.1% 4.9% 13.8% 3.0% 4.5% 21.5%
Electric Consumer Durables 1,423 1,250 1,412 1,265 1,729 1,548 1,874 1,525
Margin 28.2% 27.3% 25.4% 26.5% 27.7% 26.0% 27.0% 27.2%
YoY gr. 74.3% 39.8% 14.8% 0.3% 21.6% 23.9% 32.7% 20.5%
Lloyd Consumer 1,370 476 531 798 1,049 428 600 1,077
Margin 19.4% 18.5% 14.9% 15.0% 16.1% 15.5% 16.0% 17.7%
YoY gr. 248.1% -9.6% 10.7% -37.8% -23.4% -10.2% 12.9% 34.9%
Source: Company, PL

September 9, 2019 30
 Havells India

Valuations leave little room for an error

HAVL saw massive re-rating from 28.3x 12 month forward PE post sale of Sylvania
to 43x at the time of Lloyd acquisition and made a high of 58.5x in March 2019. The
re-rating was due to emergence of HAVL as the emerging company in consumer
durables which caters to entire spectrum of products ranging from switchgears,
Cables, Lighting, ECD, consumer electronics and white goods. HAVL reported PAT
CAGR of 15.8% in the past 3 years which is not significantly higher than other
industry players. we estimate HAVL to report PAT growth of 5.2% in FY20 and
14.1% CAGR over FY19-22. HAVL currently trades at 47.7x 12 month forward EPS
which has moderated from peak of 58.5x but is still at a 15% premium to average
multiple of last 5 years.

We believe that P/E multiple of HAVL is high looking at future growth estimates and
competitive pressures faced in various product segments. We value the stock at
33x Sept21 EPS and arrive at a target price of Rs566. We initiate coverage on the
stock with Reduce rating. Sharp recovery in consumer demand and significant
gains in Lloyd is a key risk to our call.

HAVL trades at a premium to its peers

Sales growth (%) PAT growth (%) RoE (%) P/E (x)
Name
FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E
Havells 23.6 11.6 14.0 11.1 5.2 17.3 19.8 18.5 19.3 52.3 49.7 42.4
Crompton Consumer 9.8 12.6 12.3 24.3 11.1 20.7 39.6 35.9 34.3 38.8 32.5 26.9
Voltas 11.2 10.1 11.4 -11.3 -3.6 39.2 13.0 12.5 14.5 40.1 39.1 30.5
Finolex Cables 9.3 8.7 12.4 -3.9 9.1 14.9 14.9 14.4 14.7 16.4 15.0 13.1
Polycab 17.9 13.6 12.4 39.6 14.7 12.0 19.2 16.8 16.3 17.2 15.7 13.4
Orient Electric 16.7 19.7 14.9 8.2 47.4 27.7 24.3 29.0 29.8 46.5 31.6 24.8
V-Guard 11.0 14.0 14.3 24.4 29.1 21.5 20.0 21.6 22.3 57.0 44.1 36.3
KEI 22.2 17.4 15.9 25.8 26.2 24.0 26.3 24.8 24.0 20.4 16.1 13.0
Bajaj Electricals 41.5 -6.8 5.7 99.8 -4.2 37.1 16.5 14.8 17.2 23.0 24.2 17.1
Blue Star 12.6 11.5 13.4 30.0 15.8 23.3 22.8 23.4 25.3 37.2 32.4 26.1
Whirlpool of India 12.3 14.9 14.2 16.1 22.0 18.0 20.7 21.2 21.2 51.4 42.2 35.8
Johnson Controls Hitachi 2.6 16.8 18.0 -14.2 53.1 29.9 15.0 19.5 21.0 50.1 32.7 25.2
Source: Company, PL

1 year forward PE trending towards average

P/E (x) Peak(x) Avg(x) Median(x) Min(x)

70.0 58.5
60.0
47.7
50.0 40.5
40.0
30.0 41.3
20.0 28.3
10.0
0.0
Apr-15

Apr-16

Apr-17

Apr-18

Apr-19
Dec-18
Aug-15

Dec-15

Aug-16

Dec-16

Aug-17

Dec-17

Aug-18

Aug-19

Source: PL

September 9, 2019 31
 Havells India

ROE to gradually recover over FY20 RoCE to improve over FY19-22E

RoE (%) 32.0 RoCE (%) 31.3

21.0 31.0
20.5 29.5
20.5 30.0
28.9
20.0 29.0 28.3
19.8 28.2
20.0
19.3 28.0
19.5 19.2
27.0 26.1
19.0 18.5 26.0
18.5 25.0
18.0 24.0
17.5 23.0
FY17 FY18 FY19 FY20E FY21E FY22E FY17 FY18 FY19 FY20E FY21E FY22E

Source: Company, PL Source: Company, PL

Free Cash flows to increase post Lloyd capex Net cash per share to improve

Free Cash Flow Net Cash (Rs mn) Net Cash / Share (Rs)

15 14
35,000 53 60
11
10 30,000 50
7
25,000 38
40
(Rs bn)

5
0 20,000
25 30
- 23
15,000 19
-5
20
-5 10,000
14,182

11,903

15,758

23,594

33,141
5,000 10
-10
FY18 FY19 FY20E FY21E FY22E - -
FY18 FY19 FY20E FY21E FY22E
Source: Company, PL
Source: Company, PL

Negative working capital cycle sustains Dividend payout ratio to be maintained at 42-44%
0
Net Working Capital days Dividend Payout Ratio DPS (Rs) (RHS)
-2
5.6
-4 44.0% 6.0
43.0% 4.5 4.75
-6 -8 5.0
42.0% 4.0
-8 -10 41.0% 3.5 4.0
-11
-10 40.0%
3.0
-12 -13 39.0%
-15 38.0% 2.0
-14
43.1%

42.8%

42.9%

43.2%

43.2%

37.0%
-16 1.0
36.0%
-18 35.0% -
FY18 FY19 FY20E FY21E FY22E FY18 FY19 FY20E FY21E FY22E

Source: Company, PL Source: Company, PL

September 9, 2019 32
 Havells India

Annexure:
Board of Directors & KMP

Key managerial posts held by family members

Name Management Role
Family Member Representation on Board of Directors
Anil Rai Gupta Chairman & Managing Director Yes
Rajesh Kumar Gupta Whole-time Director (Finance), Group CFO Yes
Ameet Kumar Gupta Whole-time Director Yes
Surjit Kumar Gupta Non-Independent, Non-Executive Director

Other Board of Directors

Puneet Bhatia Non-Independent, Non-Executive Director
T V Mohandas Pal Non-Independent, Non-Executive Director
Upendra Kumar Sinha Independent Director
Dr Adarsh Kishore Independent Director
Surender Kumar Tuteja Independent Director
Jalaj Ashwin Dani Independent Director
Pratima Ram Independent Director
Vellayan Subblah Independent Director
Vijay Kumar Chopra Independent Director
Source: Company, PL

Auditors list
Name
S R Batliboi & Co LLP Statutory Auditors
KPMG Internal Auditors
M/s Sanjay Gupta & Associates Cost Auditors
M/s MZ & Associates Secretarial Auditors
Source: Company, PL

September 9, 2019 33
 Havells India

Financials
Income Statement (Rs m) Balance Sheet Abstract (Rs m)
Y/e Mar FY19 FY20E FY21E FY22E Y/e Mar FY19 FY20E FY21E FY22E

Net Revenues 100,576 112,224 127,902 146,230 Non-Current Assets

YoY gr. (%) 23.6 11.6 14.0 14.3
Cost of Goods Sold 62,786 69,558 78,929 90,062 Gross Block 34,173 39,173 41,173 42,673
Gross Profit 37,791 42,666 48,973 56,168 Tangibles 21,951 26,951 28,951 30,451
Margin (%) 37.6 38.0 38.3 38.4 Intangibles 12,222 12,222 12,222 12,222
Employee Cost 8,324 9,651 10,872 12,283
Other Expenses 8,477 9,501 10,939 12,525 Acc: Dep / Amortization 8,270 10,128 12,245 14,479
Tangibles 7,645 9,259 11,132 13,122
EBITDA 11,922 13,302 15,459 18,052 Intangibles 624 869 1,113 1,358
YoY gr. (%) 13.6 11.6 16.2 16.8
Margin (%) 11.9 11.9 12.1 12.3 Net fixed assets 25,903 29,045 28,928 28,194
Tangibles 14,306 17,692 17,819 17,330
Depreciation and Amortization 1,486 1,858 2,117 2,234 Intangibles 11,597 11,353 11,109 10,864

EBIT 10,436 11,443 13,342 15,818 Capital Work In Progress 2,327 2,000 1,500 1,500
Margin (%) 10.4 10.2 10.4 10.8 Goodwill 3,105 3,105 3,105 3,105
Non-Current Investments 885 902 914 837
Net Interest 159 188 77 47 Net Deferred tax assets (3,217) (3,721) (4,317) (5,036)
Other Income 1,276 1,359 1,639 2,190 Other Non-Current Assets 1,462 1,766 1,680 1,724

Profit Before Tax 11,553 12,615 14,904 17,961 Current Assets

Margin (%) 11.5 11.2 11.7 12.3 Investments - - - -
Inventories 19,170 19,370 21,726 24,438
Total Tax 3,637 4,289 5,142 6,197 Trade receivables 4,048 4,520 5,081 5,769
Effective tax rate (%) 31.5 34.0 34.5 34.5 Cash & Bank Balance 12,848 16,063 23,799 33,246
Other Current Assets 1,475 1,627 1,919 2,193
Profit after tax 7,915 8,326 9,762 11,765 Total Assets 71,791 79,007 89,306 101,716
Minority interest - - - -
Share Profit from Associate - - - - Equity
Equity Share Capital 625 625 625 625
Adjusted PAT 7,915 8,326 9,762 11,765 Other Equity 41,800 46,738 52,925 60,476
YoY gr. (%) 13.0 5.2 17.3 20.5 Total Networth 42,425 47,364 53,551 61,102
Margin (%) 7.9 7.4 7.6 8.0
Extra Ord. Income / (Exp) - - - - Non-Current Liabilities
Long Term borrowings 405 305 205 105
Reported PAT 7,915 8,326 9,762 11,765 Provisions 324 382 448 512
YoY gr. (%) 11.1 5.2 17.3 20.5 Other non current liabilities 203 203 203 203
Margin (%) 7.9 7.4 7.6 8.0
Current Liabilities
Other Comprehensive Income - - - - ST Debt / Current of LT Debt - - - -
Total Comprehensive Income 7,915 8,326 9,762 11,765 Trade payables 15,594 16,694 18,943 21,615
Equity Shares O/s (m) 625 625 625 625 Other current liabilities 9,614 10,338 11,639 13,143
EPS (Rs) 12.7 13.3 15.6 18.8 Total Equity & Liabilities 71,791 79,007 89,306 101,716

Source: Company Data, PL Research Source: Company Data, PL Research

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 Havells India

Cash Flow (Rs m) Key Financial Metrics

Y/e Mar FY19 FY20E FY21E FY22E Year
Y/e Mar FY19 FY20E FY21E FY22E
PBT 11,553 12,615 14,904 17,961 Per Share(Rs)
Add. Depreciation 1,486 1,858 2,117 2,234 EPS 12.7 13.3 15.6 18.8
Add. Interest 159 188 77 47 CEPS 15.0 16.3 19.0 22.4
Less Financial Other Income 1,276 1,359 1,639 2,190 BVPS 67.8 75.7 85.6 97.7
Add. Other (852) 232 737 816 FCF 0.2 10.9 18.1 21.8
Op. profit before WC changes 12,345 14,893 17,835 21,058 DPS 4.0 4.5 4.8 5.6
Net Changes-WC (4,752) 896 108 249 Return Ratio(%)
Direct tax (2,468) (4,289) (5,142) (6,197) RoCE 28.9 28.3 29.5 31.3
Net cash from Op. activities 5,125 11,499 12,801 15,110 ROIC 25.8 25.9 32.5 42.8
Capital expenditures (5,009) (4,673) (1,500) (1,500) RoE 19.8 18.5 19.3 20.5
Interest / Dividend Income 876 - - - Balance Sheet
Others 5,914 - - - Net Debt : Equity (x) (0.3) (0.3) (0.4) (0.5)
Net Cash from Invt. activities 1,782 (4,673) (1,500) (1,500) Net Working Capital (Days) 28 23 22 21
Issue of share cap. / premium 180 - - 0 Valuation(x)
Debt changes (135) (100) (100) (100) PER 52.3 49.7 42.4 35.1
Dividend paid (3,016) (3,387) (3,576) (4,213) P/B 9.8 8.7 7.7 6.8
Interest paid (132) (188) (77) (47) P/CEPS 44.0 40.6 34.8 29.5
Others - - - - EV/EBITDA 33.7 29.9 25.2 21.1
Net cash from Fin. activities (3,103) (3,675) (3,752) (4,360) EV/Sales 4.0 3.5 3.0 2.6
Net change in cash 3,803 3,151 7,549 9,250 Dividend Yield (%) 0.6 0.7 0.7 0.8
Free Cash Flow 117 6,826 11,301 13,610 Source: Company Data, PL Research
Source: Company Data, PL Research

Quarterly Financials (Rs m)

Y/e Mar Q2FY19 Q3FY19 Q4FY19 Q1FY20
Net Revenue 21,910 25,184 27,519 27,120
YoY gr. (%) 23.3 28.1 8.6 4.5
Raw Material Expenses 13,519 15,751 17,308 16,989
Gross Profit 8,391 9,434 10,211 10,131
Margin (%) 38.3 37.5 37.1 37.4
EBITDA 2,625 2,946 3,229 2,757
YoY gr. (%) 2.2 12.3 (9.7) (11.7)
Margin (%) 12.0 11.7 11.7 10.2
Depreciation / Depletion 391 353 391 469
EBIT 2,234 2,593 2,838 2,287
Margin (%) 10.2 10.3 10.3 8.4
Net Interest 37 36 61 47
Other Income 343 331 310 397
Profit before Tax 2,540 2,888 3,086 2,637
Margin (%) 11.6 11.5 11.2 9.7
Total Tax 754 931 1,018 898
Effective tax rate (%) 29.7 32.2 33.0 34.1
Profit after Tax 1,786 1,957 2,068 1,739
Minority interest - - - -
Share Profit from Associates - - - -
Adjusted PAT 1,786 1,957 2,068 1,739
YoY gr. (%) 4.4 12.9 (11.9) (17.3)
Margin (%) 8.2 7.8 7.5 6.4
Extra Ord. Income / (Exp) - - - -
Reported PAT 1,786 1,957 2,068 1,739
YoY gr. (%) 4.4 0.7 (8.4) (17.3)
Margin (%) 8.2 7.8 7.5 6.4
Other Comprehensive Income - - - -
Total Comprehensive Income 1,786 1,957 2,068 1,739
Avg. Shares O/s (m) 626 626 626 626
EPS (Rs) 2.9 3.1 3.3 2.8
Source: Company Data, PL Research

September 9, 2019 35
 Havells India

Notes:

September 9, 2019 36
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Notes:

September 9, 2019 37
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Notes:

September 9, 2019 38
 Havells India
Price Chart

(Rs)

800

678

556

434

311
Sep - 18

Aug - 19
Sep - 16

Sep - 17
Mar - 17

Mar - 18

Mar - 19

Analyst Coverage Universe

Sr. No. Company Name Rating TP (Rs) Share Price (Rs)
1 Asian Paints Accumulate 1,522 1,479
2 Avenue Supermarts Hold 1,338 1,359
3 Britannia Industries Accumulate 3,068 2,602
4 Colgate Palmolive Reduce 1,159 1,275
5 Crompton Greaves Consumer Electricals BUY 297 225
6 Dabur India Hold 437 429
7 Emami Accumulate 386 310
8 Future Retail BUY 512 395
9 GlaxoSmithKline Consumer Healthcare Hold 7,972 7,473
10 Hindustan Unilever Accumulate 1,816 1,690
11 ITC BUY 367 265
12 Jubilant FoodWorks BUY 1,459 1,153
13 Kansai Nerolac Paints Accumulate 479 434
14 Marico Hold 357 363
15 Nestle India Hold 10,900 12,004
16 Pidilite Industries Accumulate 1,301 1,290
17 Titan Company BUY 1,173 1,047
18 Voltas Hold 609 601

PL’s Recommendation Nomenclature

Buy : >15%
Accumulate : 5% to 15%
Hold : +5% to -5%
Reduce : -5% to -15%
Sell : < -15%
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly

September 9, 2019 39
 Havells India

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September 9, 2019
Digitally signed by AMNISH AGGARWAL

AMNISH AGGARWAL
DN: c=IN, o=Prabhudas Lilladher Private Limited, ou=organisation, cn=AMNISH AGGARWAL,
serialNumber=7a6f13691881d5a8af6353865a61b48b7040e72f4a1bf53182e368b3ca14a5e4,
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2.5.4.20=c9b37ca6a8c78a11d6c42a4b6014e984fdf135dc1449611df0dc682d08443fc6,
st=Maharashtra
40
Date: 2019.09.06 23:52:56 +05'30'