Havell’s India is likely to sustain its growth momentum on the back of booming user industries such as construction, engineering and power. The commissioning of new plants for electrical consumer durables – fans, CFL, etc, and switchgears in the excise- free zone of Uttaranchal and Himachal Pradesh would help it to expand its market share and improve margins.
Company Background
Havells India is one of the leading electrical and power distribution equipment companies in the country, manufacturing products ranging from building circuit protection, industrial & domestic switchgear, cables & wires, energy meters, fans, CFLs, luminaries, bath fittings and modular switches. Promoted by Qimat Rai Gupta and S K Gupta, Havell's India was incorporated in August 1983. It started by producing miniature circuit breakers and distribution boards in 1984. It entered into a technical collaboration with Christian Geyer, Germany, to manufacture miniature circuit breakers in India. In 1991, it was amalgamated with Elymer Havell’s, which had facilities to manufacture HRC fuses. The company has set up a new manufacturing facility for MCB's and other switchgear products at Baddi, Himachal Pradesh and an integrated ceiling fans manufacturing unit at Haridwar in Uttaranchal.
Investment rationale
Boom in user industries
Havell’s India is likely to sustain the growth momentum on the back of the boom in the user industries such as construction, engineering and power. Its top line has grown at a CAGR of over 45% during the past 5 years from Rs 171.08 crore in FY01 to Rs 1108.25 crore in FY06. During this period the bottom line grew at a CAGR of over 59% from Rs 6.21 crore to Rs 63.21 crore. Domestic & industrial switch gears, cables and consumer electrical equipment contribute an equal 25% to its revenues while the balance rest 18% and 7% is contributed by wires and the newly acquired Crabtree revenue (cater to premium segment of modular switches and bath fittings) respectively.
The company is in a sweet spot as all its divisions are likely to sustain growth momentum given the ongoing boom in user industries such as construction, engineering and power.
(a) Switchgear Division
Havell’s is the largest manufacturers of MCBs, RCCBs, and distribution boards in India with the market share of around 25% in the market for MCBs. In FY06, switchgear contributed 30% at Rs 329.85 crore to its overall revenue. This segment is the most profitable one with operating margins to the tune of 31.17% in the H1FY07. The company currently exports MCBs to over 45 countries, including the quality conscious European countries. In order to accelerate its growth further, the company is in the process of setting up a 100% export-oriented unit (EOU) at Baddi, which would augment its capacities to 30 million poles of MCBs and would it in the top 10 league of manufacturers in the world.
The cable & wire segment generated Rs 344.34 crore in the H1FY07 with operating margins of 13.30% at Rs 46.02 crore. In FY06, the cable division grew at 52% YoY to Rs 465.16 crore. The company is recognized as quality manufacturers of cable & wires and offers a complete range of low and high voltage PVC and XLPE cables, besides, domestic FR/FRLS wires, Co-Axial TV and telephone cables. During the FY06, the company had almost doubled its capacity.
(c) Electrical Consumer Durables Division
During FY06, the turnover of the division grew at 109% y-o-y to Rs 274.41 crore while in the first half of FY07, the revenue from the division increased by around 61% y-o-y to Rs 193.87 crore. The company generated operating profit of Rs 24.50 crore with 12.63% margin. In this division, the company expanded its CFL capacity to become the largest CFL manufacturer in the country. The company currently exports CFL to the neighboring countries of Sri Lanka, Bangladesh besides Middle East and African countries. The company has initiated marketing of this energy saving product in the smaller towns and rural areas, which is likely to push the demand and growth of the product.
The electrical consumer business is the fastest growing segment wherein company enjoys market leadership position in compact fluorescent lamps (CFL) segment, which is growing at 40% per annum.
Expansion to sustain growth momentum
The company is undertaking expansion in existing as well as new product categories to widen its offerings and reap the opportunities emerging in user industries. The company is entering into two new segments, electrical motors and power capacitors at a capex of Rs 100 crore which would be funded entirely through internal accruals. Initially the company would manufacture motors up to 100 HP and gradually ramp up to 300 HP in due course. The company also plans to set up a power capacitor unit in Haridwar with an initial capacity of 3,00,000 KVRs. The company hopes to generate revenues of about Rs 36 crore from capacitors and Rs 240 crore from motor business in its first year of operation.
Tax incentives from new plants to expand market share
It has commissioned new plants for electrical consumer durables – fans, CFL, etc. in the tax-free zone of Uttaranchal and Himachal Pradesh. The production in these zones would enable the company to expand market share along with margins. The company hopes to capture a bigger slice of the Rs 1,600 crore electric fan segment from the unorganized sector on the back of tax incentives which would help it to bridge the price differential. Besides pricing power, the company hopes to generate volumes from this segment that is likely to grow at 16% per annum through its innovative product, which consume 33% less power.
Risks & Concerns
1. The company’s principal inputs are aluminium and copper. Copper constitutes almost 40% of the total cost of production of electric equipment. The prices of these metals are currently on an upturn, which may put pressure on the margins. However, the company is able to pass on the incremental cost though with a time lag.
2. The domestic market for consumer electric products is highly competitive with presence of unorganized sector. As the unorganized sector does not pay excise, the company has set up plant in Baddi, where it would have excise benefit through which it would be able to take on the unorganized sector more efficiently.
The company’s top line has grown at a CAGR of over 45% during last 5 years from Rs 171.08 crore in FY01 to Rs 1108.25 crore in FY06. Bottom line grew at faster pace with a CAGR of over 59% from Rs 6.21 crore to Rs 63.21 crore during the same period. For the first half of FY07, the company reported a net profit of Rs 46.90 crore on sales of Rs 786.49 crore. We expect the company to sustain its growth momentum in the current financial year though the growth rate may moderate later due to high base effect. The company is likely to post a net profit of over Rs 95 crore in FY07E on a turnover of over Rs 1600 crore on a conservative basis though the company is targeting it to be Rs 2000 crore.Valuation
Havell’s India is likely to sustain its growth momentum on the back of the boom in the user industries such as construction, engineering and power. Commissioning of new plants for electrical consumer durables viz. fan, CFL, etc. in excise free zones would also lead to margin expansion. The company is currently trading at Rs 315, 18x the FY07E EPS of Rs 17.45. The company has an impressive return on equity of more than 45%, which along with margins expansion may trigger into further re-rating of stock. We expect the company to generate returns to the tune of 20% over 3-6 months with a target price of Rs 380.
Technical Outlook
The stock is currently trading above its 200 day moving average, which is around Rs 273. The stock has a strong support at Rs 302 level. It made a double bottom at these levels and bounced back to Rs 314 level. On the upper side, if it closes above Rs 324 with good volume, we expect a strong breakout and it could rise to Rs 351 – Rs 380 levels.