Havells India - Bright Glow

Havells India is one such company that not only enjoys brand equity but has the advantage of a seasoned management backing it. Apart from strong growth that is expected in most of the segments it operates in, Havells also has a strong financial profile, characterised by robust profitability and strong cash generation, with working capital requirements being limited. But the most important factor behind the recommendation is the expected better performance of its subsidiary Sylvania which was till date a drag on its consolidated performance.

On the valuation front, its CMP of Rs 391 discounts its trailing four-quarter earnings by 19x and the EV/EBITDA stands a bit higher at 10x. However,the expected better performance from all the four segments and especially the expected turnaround of Sylvania are likely to make it lucrative going ahead. As regards the business of the company, it can be divided into four segments viz. lighting, switchgear, electrical consumer durables, and cables and wires. 

On a stand-alone basis the cable and wire segment is the highest contributor (42 per cent in 9MFY11) to the topline but is the weakest in terms of profitability. However, it is still an important part of the portfolio since the business complements its efforts to offer an entire range of products that a customer would require while setting up an electrical system. Switchgear is the second highest contributor to its topline (27 per cent) and due to its leadership position (in the domestic housing space) in the markets, it is the most profitable segment of the company. 

The electronic consumer durables business contributes 16 per cent to the topline. With a large distribution network of 4,500 wholesalers and 35,000 retailers, Havells stands to benefit. Also, the heavy capital expenditure (FY08-Rs 185 crore,FY09-Rs 180 crore and FY10-Rs 169 crore) is expected to help the company cater to the rising demand. In the lighting division, the domestic lighting division contributes up to 15 per cent on a stand-alone basis. But it is the performance of the international lighting division (Sylvania) which is expected to drive growth.

Earlier in FY09 and FY10, Sylvania posted losses on account of a recession in the developed countries and used to be a drag on the consolidated financials of the company. But due to the restructuring undertaken by Havells, Sylvania has posted growth in four consecutive quarters. Even the EBITDA margins in Q3FY11 improved to 5.30 per cent from negative 4.70 per cent in Q3FY10. As a result, the consolidated net profit for 9MFY11 stood at Rs 190.26 crore (profit of Rs 5.27 crore attributed to Sylvania) as compared to loss of Rs 191.31 crore in 9MFY10 (loss of `380.85 crore from Sylvania). This is definitely better than a profit of Rs 69.56 crore it posted in FY10. 

Hence, with growth expected from all the segments and the current profitable profile of Sylvania, we at DSIJ recommend investors to buy the scrip with a target price of Rs 500 in the next one year.