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CRISIL Independent Equity Research Team

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Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an
investment making process - Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis
of Returns (Valuation Grade)

Fundamental Grade
CRISIL's Fundamental Grade represents an overall assessment of the fundamentals of the company graded in relation to
other listed equity securities in India. The grade facilitates easy comparison of fundamentals between companies,
irrespective of the size or the industry they operate in. The grading factors in the following:

Ø Business Prospects: Business prospects factors in Industry prospects and company's future financial
performance
Ø Management Evaluation: Factors such as track record of the management, strategy are taken into
consideration
Ø Corporate Governance: Assessment of adequacy of corporate governance structure and disclosure norms

The grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor
fundamentals)

CRISIL Fundamental Grade Assessment

5/5 Excellent fundamentals
4/5 Superior fundamentals
3/5 Good fundamentals
2/5 Moderate fundamentals
1/5 Poor fundamentals

Valuation Grade
CRISIL's Valuation Grade represents an assessment of the potential value in the company stock for an equity investor
over a 12 month period. The grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current
market price (CMP)) to grade 1 (strong downside from the CMP).

CRISIL Valuation Grade Assessment

5/5 Strong upside (>25% from CMP)
4/5 Upside (10-25% from CMP)
3/5 Align (+-10% from CMP)
2/5 Downside (negative 10-25% from CMP)
1/5 Strong downside (<-25% from CMP)

Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the
grading recommendation of the company.

Disclaimer
This Company-sponsored Report (Report) is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does
not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / Report are subject to change without any prior
notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes investment, legal,
accounting or tax advice or any solicitation, whatsoever. The subscriber / user assumes the entire risk of any use made of this data / Report. CRISIL
especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information only
of the authorized recipient in India only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form
to any other person - especially outside India or published or copied in whole or in part, for any purpose.
 List of companies under coverage

Initiating Coverage 3QFY09 Update

Sl. Report Company Name Sector CMP M. Cap Funadmental Fundamental Funadmental Fundamental
No. Date (Rs. Mn) value grade value grade
1 02-Feb-10 Aarti Industries Chemicals 49 3,757 56 3/5 56 3/5
2 31-Jan-10 ABG Shipyard Shipping 315 10,286 242 3/5 259 3/5
3 01-Feb-10 Apollo hospitals Hospitals 712 44,102 642 4/5 724 4/5
4 29-Jan-10 DLF Real Estate 335 568,495 356 3/5 356 3/5
5 27-Jan-10 Dolphin Offshore Oil & Gas 385 6,060 315 3/5 417 3/5
6 05-Feb-10 EID Parry Sugar 348 30,050 394 4/5 395 4/5
7 01-Feb-10 Everest Kanto Manufacturing 131 13,252 270 4/5 135 4/5
8 29-Jan-10 Hero Honda Automobiles 1,565 312,511 1,747 5/5 1,775 5/5
9 11-Feb-10 Indiabulls Securities Financial Services 31 7,932 60 4/5 48 4/5
10 05-Feb-10 JBF Industries Textiles 111 6,882 119 3/5 129 3/5
11 05-Feb-10 JM Financial Financial Services 39 30,550 57 4/5 57 4/5
12 01-Feb-10 KRBL Agriculture/Rice 194 4,716 340 3/5 340 3/5
13 31-Jan-10 NTPC Power 214 1,764,537 228 5/5 231 5/5
14 29-Jan-10 Pantaloon Retail (India) Retail 406 77,282 NA 4/5 NA 4/5
15 04-Feb-10 Phoenix Mills Real Estate 203 29,404 160 2/5 183 2/5
16 03-Feb-10 UTV Software Media and 498 17,066 548 3/5 538 3/5
Entertainment

CMP - Current Market Price (as on date of respective report)

M Cap - Market Capitalisation (as on date of respective report)
NA - Not Applicable
* - Company has requested for a fundamental grading only
 Independent Research Report – Havells India Limited
‘Superior fundamentals and potential upside’ Industry: Capital Goods | Electrical Equipment
Date: February 23, 2010

Havells, in India, is primarily engaged in manufacturing electrical equipments. Cable &

wires contributed 45% of standalone revenues in FY09 followed by the switchgears
CFV Matrix
segment, which contributed 27%. The lighting & luminaries and fans segments contributed
13% each. Most of its products derive demand from spending in the power and real estate
sectors in India.
E xce lle nt
F undam e nt a ls
Huge spend in power sector to drive cable and wires segment
The cable and wires segment contributes ~50% of standalone revenues of Havells. On 5

the back of strong power industry prospects, particularly the distribution segment where

Fundamental Grade
4
Havells is largely present, we expect revenues of this segment to grow from Rs11bn in
FY09 to Rs27bn by FY17, registering a CAGR of 12%. 3

Increasing share in switchgear market would remain a challenge 2

Havells has maintained ~5.5% share in the Rs100bn switchgears market in India where
1
the top seven players account for 59% of sales. The switchgear market can be broadly
divided into low, medium and high capacity, and Havells is only present in the low-voltage 4
P oor 1 2 3 5
segment. Going forward, given the fierce competition and limited presence, we believe it F unda m e nt als

would be difficult for Havells to increase its market share.

Valuation Grade

Shifting consumer preference to maintain buoyancy in organized fans market

Downside

Upside
Strong

Strong
The fans market saw a tremendous growth of around 28-30% in FY07 and FY08, due to
significant investments in the real estate market, coupled with the growth in replacement
demand and shift in demand from the unorganised to organised sector, on the back of
rising disposable income and increasing brand consciousness. We expect the underlying
Fundamental grade of '4/5 indicates Superior f undamentals
fan industry drivers to remain strong, leading to a robust 14% CAGR to Rs 72bn by FY17.
Valuation grade of '4/5' indicates Potential upside

Acquisition of Sylvania – Good for value but expensive for pocket

In April 2007, Havells bought the worldwide lighting business of Sylvania, except brand
rights in the US, Canada, Mexico, Australia and New Zealand. The acquisition was aimed
at expanding Havells’ geographical presence and leveraging Sylvania’s brand to enter the Key stock statistics
emerging markets. Sylvania’s enterprise value of €227mn was derived using a 7.3times BSE/NSE Ticker HAVELLS
EV/EBITDA multiple. Given Sylvania’s strong pedigree and over 100 years of existence,
we believe the choice of Sylvania was appropriate, but its valuation could have been Fundamental Value (Face Value Rs5) 614
significantly lower. Post the economic slowdown, EV/EBITDA multiple of peers reduced Current market price* 533
to 3-4 times. Shares outstanding (Mn) 60
Market cap (Rs Mn) 32,070
Successfully restructuring Sylvania will improve profitability
Enterprise value (Rs Mn) 42,205
Though we expect Sylvania’s revenue growth to remain muted, the main benefits would
be reaped from improving bottom line, on the back of restructuring activities. Phoenix and 52-week range (Rs) (H / L) 634 / 100
Prakram, the two restructuring plans, have been introduced to mainly rationalise P/E on EPS estimate (FY11E)(x) 12.7
personnel costs. The Phoenix (January ‘09 – September ‘09) plan is aimed at Beta (for Havells standalone) 1.3
restructuring 3 plants and personnel costs in Europe and Latin America. Prakram Free float (%) 39.8
(September ‘09 – June ‘10), which aims at an annual savings of €18mn by reducing
Average daily volumes 889,785
personnel costs in Europe, is currently under way.
* as on report date
We assign 4/5 and 4/5 on both fundamental and valuation
Havells’ Fundamental Grade of ‘4/5’ indicates that its fundamentals are ‘Superior’ relative
to other listed securities in India. This grading considers that Havells’ products derive Share price movement
demand from the power & real estate industries, where we expect massive expenditure,
and Havells being amongst the top ten players in the cables & wires, switchgears, fans & 600
lighting segments. It also factors in the experienced management team and its ability in
successfully turning Sylvania EBITDA positive in just 1 year, despite significant fall in 400
volumes in FY10. However, the grading gets tempered by its limited presence in the
switchgears & cables segments and also Sylvania’s presence in the matured market. The
Valuation Grade of ‘4/5’ indicates that the current market price has a potential ‘Upside’ to 200
our Fundamental Value per share of Rs614 (based on DCF method)
Key forecast (consolidated financials)
-
(Rs Mn) FY08 FY09 FY10E FY11E FY12E FY13E
Apr-01

Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Operating income 50,047 54,824 54,017 59,186 65,668 72,547

EBITDA 3,722 3,109 3,733 5,290 6,646 7,814 Havells Nifty
Adjusted net income 1,610 -1,601 -1,590 2,525 3,670 4,465
EPS-Rs 29.2 -27.5 -26.4 42.0 61.0 74.2 - Indexed to 100
EPS growth (%) 53.5 n.m. 3.8 n.m. 45.3 21.7
PE (x) 19.7 n.m. n.m. 12.7 8.7 7.2
Analytical contact
P/BV (x) 4.6 5.5 6.1 4.3 3.0 2.2
RoCE(%) 26.3 11.5 16.2 25.6 30.7 32.2 Chetan Majithia (Head, Equities) +91 22 3341 4148
RoE(%) 33.9 -24.5 -27.9 40.0 40.9 35.7 Sagar Parikh +91 22 3342 3502
EV/EBITDA (x) 11.4 13.9 11.3 7.6 5.5 4.2 Email: clientservicing@crisil.com +91 22 3342 3561
Source: Company, CRISIL forecast

1
 Havells India Limited

Fundamental Grading Grade: 4/5

Havells’ fundamentals are ‘Superior’ We have assigned Havells a Fundamental Grade of ‘4/5‘. This grade indicates that the
relative to other listed securities in company’s fundamentals are ‘Superior’ relative to other listed securities in India. It also
India factors in several aspects such as:

Havells’ products derive demand from spending in the power transmission &
distribution and real estate sectors in India. We expect total spending of more than
Rs 13-14 trillion in the power sector over the next 7-8 years, of which approximately
Rs 1.5-2 trillion would be on cables (including heavy, medium and light capacity
cables) used for transmission and distribution purposes. Similarly, the Rs 45-billion
wires industry, which primarily derives demand from growth in the real estate
sector, is expected to register a CAGR of 13% over the next 7-8 years.

o The cable and wires segment contributes ~50% of standalone revenues of

Havells. On the back of the strong power industry prospects, particularly
the distribution segment where Havells is largely present, we expect
revenues of this segment to grow from Rs11bn in FY09 to Rs27bn by
FY17, registering a 12% CAGR. However, absence in high-intensity
cables remains a drawback and lends opportunity for product expansion.

o In the Rs100bn domestic switchgears market, Havells has a share of

~5.5%. Havells is largely present in the low-voltage switchgears segment
and faces stiff competition from Legrand SA, Schneider Electric SA, Indo
Asian Fusegear Ltd, and Larsen & Toubro Ltd, among others. The top
seven players account for 59% of the industry. Among them, while
Siemens and Anchor Limited have raised their market share significantly
by 4.01% and 3.65%, respectively in the last 7 years, Havells has been
able to increase it by only 1.95%. Going forward, given the fierce
competition and limited presence in the low-voltage segment, we believe
that Havells would find it difficult to increase its market share any further.

o The fans market witnessed tremendous growth in FY07 and FY08, due to
significant investments in the real estate market, coupled with the growth
in replacement demand. The industry clocked, on an average, a growth of
28-30% in the last two years compared to 10% CAGR witnessed during
FY03-06. We expect the underlying fan industry drivers to remain strong,
leading to a robust 14% CAGR to Rs 72bn by FY17. On the back of
stupendous industry prospects, we expect Havells’ revenues to touch Rs
8.3bn by FY17, registering a 15% CAGR.

Havells has successfully expanded its product portfolio through the inorganic route
and through joint ventures. Over the years, it acquired companies like Electrical
Control & Switchboard in 1997 and Standard Electricals in 2010. In April 2007,
Havells acquired Sylvania, which was almost 1.5times larger than Havells, giving it
access to a much larger geography.

We expect Sylvania’s revenue growth to remain muted due to its primary presence
in the matured European market. However, the main benefits would accrue from
improving bottom line, on the back of the restructuring activities. Phoenix and
Prakram, the two restructuring plans, have been introduced to rationalise fixed
costs, mainly personnel expenses. Phoenix (January 2009 – September 2009) is
aimed at saving €12mn annually by closure of two non-European plants, shifting of
one European plant and rationalising personnel cost both in Europe and Latin
America. The second plan Prakram aims at saving €18mn annually by rationalising
personnel cost in Europe.

CRISIL Equities 2
 Havells India Limited

Havells made the loss-making Sylvania profitable at EBITDA level this year itself by
restructuring the company, despite a significant fall in volumes in FY10. As the
almost full-year results of both the restructuring plans - Phoenix and Prakram - will
take effect from next year, Sylvania would become profitable at net levels in FY11.
Venturing into unknown territories of Europe through acquisition of Sylvania reflects
well on the management’s capabilities.

Under the current loan arrangements, a revolving loan of 40mn euros and term loan
(non-recourse portion) of 52mn euros fall due in FY12 and FY13, respectively. We
expect Sylvania, given its expected financial position, will not have resources to
repay the loans and will need to refinance both these loans. However, once the
restructuring plans are fully implemented and indigenised, and as the economic
scenario improves, the company’s operating parameters would be far more
promising; also, it would be much easier to get the debt refinanced compared to
FY09, when it got the loans refinanced.

We expect Havells (consolidated) gross revenues at Rs 89.8bn by FY17,

registering a CAGR of 6.1%. The overall revenue growth will remain subdued
because of muted growth expected from Sylvania. We expect Havells (standalone)
to register a strong 8-year CAGR of 11.6% and touch Rs55.6bn by FY17. However,
given the muted prospects in the European markets, we expect Sylvania to
demonstrate ~1% revenue CAGR.

We see Havells’ (consolidated) operating margins at around 11% by FY13, which

will remain stable in that range, going forward. Similarly, we expect net margins at
6% by FY12 and thereafter improve gradually. Havells would incur huge costs on
restructuring Sylvania in FY09 and FY10; hence, its margins will improve
significantly from FY11-12 onwards.

Havells’ management is technically sound and has adequate industry experience.

Its disclosure standards are relatively good. Based on the available disclosure
levels in annual reports, website and other publicly available information, CRISIL
Equities is of the opinion that the company has good corporate governance
practices.

CRISIL Equities 3
 Havells India Limited

Table 1: Havells - Business Environment

Parameter Existing Business

Cable & Wires Switchgears Lighting Fans
Consolidated
% Revenue contribution (FY09) 19.4% 10.9% 63.8% 4.9%
% Revenue contribution (FY17) 29.4% 14.2% 46.4% 9.2%

Product offering Low tension cables Domestic switchgears CFL Ceiling fans
(less than 63amp)
Industrial switchgears
Wires Luminaires Pedestal fans
(63amp - 1.1Kva)

Geographic Presence India India Indian, Europe and Latin India

America with the
acquisition of Sylvania

Current market position 6-7% ~5.5% 9-9.5% 11-12%

End market Industries and corporate Industries and corporate Industries and corporate Retail segment
houses houses houses
Retail segment Retail segment Retail segment

Key competitors Polycab Wires & Cables Legrand SA
Sterlite Technologies Schneider Electric SA
Finolex Cables Indo Asian Fusegear
Kei Industries Larsen & Toubro Ltd
Siemens AG
ABB Ltd
Philips India Crompton Greaves
Bajaj Electronics Usha International
Crompton Greaves Khaitan Electricals
Orient paper & Industries
Polar Industries

Sales growth forecast (FY09-17)

-- Standalone 11.6% 9.4% 11.9% 14.7%
-- Sylvania 0.3%

Demand drivers Massive expenditure in
power distribution segment
Massive expenditure in Spending in real estate
power distribution industry in India for
segment Havells and in Europe
and Latin America for
Sylvania
Spending in real estate
industry
Shift in customer focus
from unorganised to
organised segment

New opportunities, if any Foray into high and mid- Introduction of high and
tension cables mid-voltage switchgears

CRISIL Equities 4
 Havells India Limited

Grading Rationale

Massive spending in power & real estate industries provides

Spending of over Rs1.5-2 trillion in
power sector over the next 8 years
provide huge opportunities
tremendous growth opportunities
Havells’ products derive demand from spending in the power transmission & distribution and
real estate sectors in India. We expect total spending of more than Rs 13-14 trillion in the
power sector over the next 7-8 years, of which approximately Rs 1.5-2 trillion will be on
cables (including heavy, medium and light capacity cables), mainly used for transmission
and distribution purposes.

Table 2: Snapshot of expenditure in power sector Chart 1: Break-up of expenditure in cable & wires
(Rs Bn)
Estimated capex on FY10-FY17 Generation
Distribution 17%
Generation 8,533.9 36%
T&D 5,006.0
-- Transmission 2,821.3
-- Distribution 2,184.7
Total 13,539.9
Transmission
47%

Source: CEA, CRISIL Equities Source: CEA, CRISIL Equities

Similarly, the Rs 45 billion wires industry, which primarily derives demand from growth in the
real estate sector, is expected register a 13% CAGR over the next 7-8 years.

Huge spending in power sector to drive cable and wires segment

The cable and wires segment contributes ~50% of standalone revenues of Havells. On the
We expect cable and wires industry back of strong power industry prospects, particularly the distribution segment, where Havells
to be at Rs 370bn by FY17, is largely present, we expect revenues of this segment to grow from Rs11bn in FY09 to
registering a 12% CAGR Rs27bn by FY17, registering a CAGR of 12%.

The domestic cable and wires market is highly fragmented and competitive. Unorganised
players cater to approximately 40-45% demand, while large players such as Polycab Wires
& Cables, Sterlite Technologies, Finolex Cables and Kei Industries cater to the remaining
demand. However, despite severe competition in the market, Havells has increased its
market share by 270bps over the last 4 years, primarily because of strong product offering
and shift in consumer demand towards branded products. Therefore, we believe Havells will
maintain its market share in future too.

Chart 2: Trend in the market share of top players

20 16%

15 12%

10 8%

5 4%

- 0%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08
Cable & wires industry (Rs Bn) Polycab
Sterlite Finolex
Havells

Source: CMIE, CRISIL Equities Estimates

CRISIL Equities 5
 Havells India Limited

Expanding product portfolio to include high-intensity cables is an opportunity

Expanding product portfolio to Havells is largely present in low-voltage cables (primarily used for power distribution) and
include high-intensity cables is an wires. However, it does not offer high-tension cables (33Kva and above), which are used for
opportunity power transmission purposes. Havells, because of its absence in the power transmission
segment, will miss an approximately Rs1tn opportunity arising in this segment.

Increasing share in switchgear market would remain a challenge

Havells has maintained ~5.5% share in the Rs100bn domestic switchgear market. The
Havells has a 5.5% share in the
switchgear market can be broadly divided into low capacity (up to 1.1Kva), medium (1.1-
switchgears market
6Kva) and high capacity (6Kva and above). Havells is only present in low-voltage
switchgears. The low-voltage segment can be further classified into domestic (less than
63Amp) and industrial (more than 63Amp up to 1.1Kva).

Havells faces stiff competition from top European multinationals such as Legrand SA and
Schneider Electric SA, and from Indian players like Indo Asian Fusegear Ltd in the domestic
switchgears segment. In the industrial segment, it competes with Larsen & Toubro Ltd,
Siemens AG and ABB Ltd, etc.

The top seven players account for 59% of the industry sales. Among them, while Siemens
and Anchor Limited have increased their market share by 4.01% and 3.65%, respectively,
Havells was able to raise it by 1.95%. However, going forward, considering the fierce
competition and limited presence, we believe it would be difficult for Havells to raise its
market share.

Table 3: Change in market share of top players over 7 years

Company Change in Market share
Siemens 4.01
ABB 0.32
L&T 0.1
Anchor** 3.65
Areva -0.06
Crompton Greaves -1.62
Havells 1.95
** Change in market share in last 3 years
Source: CMIE, CRISIL Equities Estimates

We expect switchgears revenues to We, therefore, expect revenues from the switchgears segment to grow to over Rs 12.8bn by
grow at 9% CAGR to reach Rs13bn FY17 from Rs 6.2bn in FY09, registering a 9.4% CAGR.
by FY17
Introduction of newer products remain a key

Havells has a limited presence within the switchgears market. Therefore, new product
offerings catering to a larger pie of the market would remain a key for the company to
maintain its market share. Considering the above fact, though Havells has initiated steps to
widen its product portfolio (for e.g., it recently included motors), we remain cautious on its
capability to achieve growth in this segment.

Shifting preference to maintain buoyancy in organised fans market

The fans market saw tremendous growth in FY07 and FY08, due to significant investments
in the real estate market, coupled with growth in replacement demand. The industry clocked,
on an average, 28-30% growth in the last two years compared to a CAGR of 10%, during
FY03-06.

CRISIL Equities 6
 Havells India Limited

We expect Havells to demonstrate
strong revenue CAGR of 14.7% to
Rs 8.3bn by FY17
Within the overall growth in the fans market, growth of organised players was far higher than
the industry growth, due to shift in demand from the unorganised to the organised sector, on
the back of rising disposable income and increasing brand consciousness, primarily among
the Indian middle class. We expect the underlying fan industry drivers to remain strong,
leading to a robust 14% CAGR to Rs 72bn by FY17. The top five organised players that
control ~70% of the market, including Havells’ share of 12%, are expected to reap the
benefits of underlying changing drivers compared to primarily single-product companies like
Khaitan.

We, therefore, believe Havells to demonstrate strong revenue CAGR of 15% to Rs 8.3bn by
FY17, due to its wide product offering and strong brand.

Chart 3: Growth in fans industry over the years Chart 4: Havells’ revenues from fans segment

20,000 10,000
18,440
8,284
7,723
7,500 7,003
15,000 14,013 6,209
5,408
4,650
11,295 5,000
3,956
10,045 3,338
10,000 9,207 2,769
8,476
2,500

5,000 0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E

Fans industry (Rs Mn) Havells' revenues (Rs Mn)

Source: CMIE, CRISIL Equities Source: Company, CRISIL Equities

Havells to benefit from focus on energy-efficient lighting in India

The lighting market in India witnessed a 13% CAGR during 2006-09. However, the compact
fluorescent lamp (CFL) segment saw a robust growth of 29% during the same time, on the
back of increasing focus on using energy-efficient lighting lamps.

Within the lighting industry, CFL’s share increased considerably from 15.6% in 2005 to 23%
in 2008. This was primarily at the cost of a dip in the share of General Lighting Service (GLS)
from 13.3% in 2005 to 10.5% in 2009 and fluorescent lamps (FTL) from 24.4% in 2005 to
18.7% in 2009. Going forward, given the focus on using more energy-efficient lighting
instruments in India, we expect CFL’s market size to grow to Rs48bn by FY17, registering a
12% CAGR vis-à-vis the lighting industry’s 8% CAGR.

CRISIL Equities 7
 Havells India Limited

Chart 5: Growth in lighting industry Chart 6: Growth in CFL industry

160 50 48
142 46
135 43
128
119 41
120 111 40
37
101
92 32
83
80 30 28

23

40 20
FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E
Lighting Industry (Rs Bn) CFL (Rs Bn)

Source: CMIE, CRISIL Equities Source: Industry sources, CRISIL Equities

Strong history of acquiring technologies and product diversification

Havells has successfully
inorganically in the past
grown
Havells has been expanding its product portfolio either through the inorganic route or
through joint ventures. For example, Havells entered into a 50:50 joint venture with
Electrium, UK to introduce in India one of its product, Crabtree, in 1996. Crabtree is one of
the leading EWA (electrical wire accessories) brands globally. When Electrium was later sold
in 2001, Havells bought over the balance share, giving it rights to market the brand in the
South Asian Association for Regional Cooperation (SAARC) region, consisting of
Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka). Siemens
AG, Europe holds the right to market the brand in the remaining geographies.

Table 4: Acquisitions / Joint Ventures entered into by Havells to build a strong product portfolio
Year Acquisition / Joint Venture Company Name Benefit
1987 Joint venture Geyer, Germany Manufacturing MCBs
1996 Acquisition A private company Manufacture plant for cable and wires
To manufacture Dorman Smith MCCBs and Crabtree Modular Plate
1996 Joint venture Electrium, UK
switches
Electrical Control & Switchboards,
1997 Acquisition To manufacture customised solutions
Noida
2010 Acquisition Standard Electricals
Source: Company, CRISIL Equities

Building adequate capacities to ensure growth momentum

Over the years, Havells has been consistently ramping up its capacity across product lines. It
has incurred a capex of approximately Rs2.0bn in FY10, primarily to raise its cable and wires
capacities. Over the last couple of years, this segment was operating at over 90% capacity
utilisation. With the incremental capacity coming on stream, Havells would be able to reap
the benefits of the expected rise in demand over the next 2-3 years. To maintain the growth
momentum, we expect Havells to incur a similar capex every 3-4 years.

CRISIL Equities 8
 Havells India Limited

Table 5: Capacity utilisation levels

Product Units Installed capacity Actual production Utilisation %
FY07 FY08 FY09 FY10 FY07 FY08 FY09 FY10 FY07 FY08 FY09 FY10
Domestic switchgears mn poles 36 42 48 45 20 22 19 23 57% 52% 39% 50%

Cable and wires

Cable mn meters 25 30 33 48 20 27 30 33 81% 89% 92% 68%
Wire mn meters 675 675 900 1,102 444 365 385 432 66% 54% 43% 39%
Total 700 705 933 1,150 464 392 415 465 66% 56% 44% 40%

Luminaires
CFL (million) mn units 30.0 30.0 50.0 50.0 14.6 15.1 10.5 13.0 49% 50% 21% 26%
Fans (million) mn units 2.4 3.0 4.8 4.8 1.5 2.0 2.2 2.9 62% 67% 46% 60%
Source: Company, CRISIL Equities

Investment in Sylvania – A long-term bet

In April 2007, Havells bought over the worldwide lighting business of the thinly profitable
Sylvania from three private equity players (except brand rights in the US, Canada, Mexico,
Australia and New Zealand). The acquisition was aimed at expanding Havells’ geographical
presence and leveraging Sylvania’s brand to enter emerging markets. Given Sylvania’s
strong pedigree and over 100 years of existence, we believe the choice of Sylvania was
appropriate.

Valuation of Sylvania could have been lower

Havells bought over Sylvania for
€227mn on April 7, 2007
Sylvania’s enterprise value of €227mn was calculated using a 7.3times EV/EBITDA
(enterprise value / earnings before interest, tax, depreciation and ationalizin) multiple.
However, post the economic slowdown, these multiples for its peers have reduced to 3-4
times currently. Considering the sharp fall in multiples as a result of the changed economic
scenario, we feel that the valuation could have been significantly lower.

Sylvania derives 70% and 27% of revenues from Europe and Latin American, while the
balance is contributed by Asia.

Chart 7: Revenue – Geographical split (FY09)

Asia
3%
Latin America
27%

Europe
70%

Source: Company, CRISIL Equities estimates

Limited volume growth expected in the matured Europe market

We expect flattish volume growth in
While revenues from Europe declined 7% in FY09, Latin America continued its buoyancy
matured markets like Europe

CRISIL Equities 9
 Havells India Limited

with 15% growth in net revenues. Going forward, we expect the European market to show a
muted volume growth, while Latin America and Asia are expected to continue to grow
comparatively faster.

On analysing the trend in revenues of other players in the same business, we found a similar
Philips, another lighting giant, saw
growth pattern. For expample, Philips Electronics N.V., a European lighting giant, witnessed
decline in proportion of revenues
rising proportion of revenues from Latin America and Asia over the last 3 years, while the
from Europe over the years
proportion of revenues from Europe saw a decline.

Chart 8: Philips – rising trend in sales in Latin America and Asia and declining in Europe / Africa

60
52
50 50 50
48 47
45 46
44
41 40
40

28 29
26 27 27 27 27 28
24 25 24 24 24
22 22
20 20 20 20
20 18 18 17

7 8 7 7
6 6 6 6 6 6 5

0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09

Latin America Asia pacific North america Europe / Africa

Source: Philips, CRISIL Equities estimates

Adverse currency movement will partly offset revenue growth in Latin America
Strengthening of euro vis-à-vis
Though we see Latin America demonstrating strong growth in volumes, we expect the
dollar negates the effect of increase
growth to be negated when converted into euro because of the strengthening euro vis-à-vis
in revenues generated from Latin
dollar. Based on this, we expect net growth from Latin America to remain at 2-4%.
America (in dollar terms)

Chart 9: Movement in euro-dollar exchange rate Table 6: Example of how strengthening euro vs dollar
negates growth
Year Revenue Growth (%) Avg Ex-rate
1.7
$ Euro $ Euro
FY07 100.0 78.1 1.28
1.4 FY08 120.0 83.9 20.0% 7.4% 1.43
1.37 FY09 130.0 86.7 8.3% 3.3% 1.50

1.1
1.01

0.8
Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09

Euro/Dollar exchange rate Linear (Euro/Dollar exchange rate)

Source: University of British Columbia Source: CRISIL Equities

However restructuring will improve profitability over a longer term…

While we expect Sylvania’s revenue growth to remain muted due to its presence in the
matured European market, the main benefits would be reaped from improving bottom line,
on the back of the restructuring activities. Phoenix and Prakram, the two restructuring plans,

CRISIL Equities 10
 Havells India Limited

have been introduced to rationalize fixed costs, mainly personnel expenses. Phoenix
(January 2009 – September 2009) is aimed at restructuring two non-European and one-
European plant and rationalizing personnel cost in Europe and Latin America. Havells has
been successful in achieving the objective of Phoenix by reducing annual costs by
euro12mn.

Table 7: Two restructuring plans at Sylvania

Name Phoenix Prakram
Start date January-09 September-09
End Date September-09 June-10
Focus geography Latin America & Europe Europe
Total cost (Mn Euros) 12 22
Cost expensed 7mn Euros in FY2009 In FY10 (3rd quarter)
5mn Euros in FY10 (1st quarter)
Actions planned -- Reduce 700 people in Latin America -- To reduce manpower in Europe
-- Reduce 600 people in Europe (Holland, France, Germany and UK)
-- Variablising fixed cost through increased
-- Shifting UK’s manufacturing plant to India
outsourcing from China and India
-- Closure of plants in Brazil & Costa Rica
Result
Estimate benefits (Mn Euros p.a.) 12 18
Manpower Reduced from 3800 to 2500 To reduce manpower from existing 2500
Plants 10 plants reduced to 7 NA
Current status Completed Going on, as scheduled
Source: Company, CRISIL Equities

The second plan, Prakram, which aims at rationalising personnel cost in Europe, is currently
under way. Given the success in the first plan, we believe Havells will be able to successfully
carry out the current plan, leading to further annual savings of euro18 million.

Refinancing loans of approximately
80mn euros over FY12-13 would
remain a challenge
…but refinancing debt would remain a challenge, albeit minor
Under the current loan arrangement, a revolving loan of 40mn euros and a term loan (non-
recourse portion) of 52mn euros fall due in FY12 and FY13, respectively. We expect
Sylvania, given its expected financial position, will not have the resources to repay the loans
and will need to refinance both these loans.

Table 8: Details of loan outstanding

Paym ent Schedule FY09 FY10E FY11E FY12E FY13E FY14E
In M illion Euros
By Havells - Recourse debt
Outstanding debt 23.3 16.6 10.0 3.3
Installment payable during year -6.7 -6.7 -6.7 -3.3
Closing Balance 16.6 10.0 3.3 0.0

By Sylvania
Term Loan - outstanding non-recourse portion 76.0 76.0 76.0 64.0 52.0 52.0
Installment payable during year 0.0 0.0 -12.0 -12.0 0.0 -12.0
Refinancing
Bullet principal payment 0.0 0.0 0.0 0.0 -52.0 0.0 the Non-
Loan refinanced 52.0 0.0 recourse term
Closing Balance 76.0 76.0 64.0 52.0 52.0 40.0 loan in FY13

Revolving Loan - due for payment 40.0 40.0 30.0

Paid during the year -40.0 -10.0 -10.0 Refinancing
Refinanced 40.0 0.0 0.0 the Revolving
Closing Balance 40.0 30.0 20.0 loan in FY12
Payoff by Sylvania 0.0 0.0 -12.0 -12.0 -22.0 -20.0
Total Payoff (by Group) -6.7 -6.7 -18.7 -15.3 -22.0 -20.0
Source: Company, CRISIL Equities Estimate

CRISIL Equities 11
 Havells India Limited

However, once the restructuring plans are implemented and indigenised, and as the
economic scenario improves, the company’s operating parameters would appear more
promising and it would be easier to get the debt refinanced when compared to FY09, when it
breached lending covenants and got the loans refinanced.

Table 9: Comparative scenario of Sylvania’s operating margins

Particulars FY08 FY09 FY13E FY14E
Operating margin % 1.1 -2.9 4.2 4.9
Net margin % 0.6 -9.2 3.0 3.4
Source: Company, CRISIL Equities estimates

CRISIL Equities 12
 Havells India Limited

Financial Outlook

Strong revenue growth expected on the back of tremendous

opportunities
We expect Havells (consolidated) gross revenues to be Rs 89.8bn by FY17, registering a
Consolidated revenues are expected
6.1% CAGR. The overall revenue growth will remain subdued because of muted growth
to be over Rs 89bn by FY17,
expected from Sylvania.
registering a 6% 8-year CAGR

Chart 10: Trend in consolidated revenues

105 11.0 12
10.5
9.6 9.6
90 10

8
75
5.8
5.1 6
60 4.1
3.5
Rs Bn

(%)
4
45
2

30
0
-1.5

15 -2

0 -4
FY09 FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E

Net Sales YoY Growth

Source: Company, CRISIL Equities Estimate

We expect gross revenues of Havells (standalone) to register a strong 11.6% 8-year CAGR
and be at Rs55.6bn by FY17. However, given the muted prospects in the European markets,
we expect Sylvania to demonstrate flat revenues.

Chart 11: Havells – Revenue growth Chart 12: Sylvania – Revenue growth
60 25%
22.0% 550 5%

50 18.1% 3.7% 3.8%

20% 1%
2.7%
16.3% 2.2% 1.8% 1.4%
40 500
15% -0.7%
-3%
11.3% -2.3%
30
8.3% 10%
7.2% -7%
20 5.7% 450
4.7% 4.9%
5% -11%
10

-12.0%
- 0% 400 -15%
FY09 FY11E FY13E FY15E FY17E FY09 FY11E FY13E FY15E FY17E

Gross Sales (Rs Bn) - LHS % growth - RHS Revenue (Mn Euros) - LHS % growth - RHS

Source: Company, CRISIL Equities Source: Company, CRISIL Equities

CRISIL Equities 13
 Havells India Limited

We expect net margins to stabilise
around 6.5-7%
Operating & net margins to stabilise around 11% and 7%, respectively
We expect Havells’ operating margins at 11% by FY13, which will remain stable in that
range, going forward. Similarly, we expect net margins at 6% by FY12, gradually improving
from thereon. Havells would incur huge restructuring costs in FY09 and FY10 and hence, will
see significant improvement in margins from FY11 onwards.

Chart 13: Havells (consolidated) – Operating and net margins

15

10.8 10.8 10.8 10.8 10.7

10.1
8.9
10
6.9 6.6 6.6
6.2 6.2 6.2
5.7 5.6
4.3
5

0
-2.9 -2.9

-5
FY09 FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E

Net margin (%) EBITDA margin (%)

Source: Company, CRISIL Equities Estimate

Going forward, to improve margins in Sylvania, Havells plans to adopt measures like
procuring raw materials from China and shifting more manufacturing facilities to India. It also
plans to outsource more work locally then in-house manufacturing, which will improve
margins.

RoE to significantly improve post restructuring in FY11

Havells’ RoE to improve significantly
Havells earned a return on equity (RoE) of -24.5% in FY09, primarily because of an
post restructuring
exceptional expense of Rs1.9bn incurred on restructuring Sylvania. We expect Havells to
incur similar expenditure on restructuring Sylvania in FY10, leading to negative return even
in that year. From FY11 onwards, we expect Sylvania to turn positive at net level, leading to
a significant improvement in RoE. Further, the decrease in equity base due to losses at
Sylvania would lead to a leap in RoE.

Chart 14: Movement in return on equity (RoE)

60

35

40 41
36
29
24 22
10 19

-25 -28
-15

-40
FY09 FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E

Return on Equity

Source: Company, CRISIL Equities estimates

CRISIL Equities 14
 Havells India Limited

Ability to rationalise working capital cycle is commendable

Havells has significantly reduced its
Havells took steps to reduce its working capital requirements in FY07, and succeeded in
working capital requirements
significantly reducing debtors that year itself. It securitised debtors in two ways, taking them
off their balance sheet.

Channel financing – Havells assisted its dealers and distributors getting bank limits, which
otherwise would have been difficult given their small size of operations and scattered
presence. Bankers directly pay Havells for its debtors.

Debtors factoring – Havells gets most of its balance debtors refinanced through bank.

Table 10: Significant reduction in debtors (as % of sales) in FY07

Particulars FY05 FY06 FY07 FY08 FY09
Net sales 5,777 9,900 15,285 20,318 21,793

Debtors 1,636 1,282 310 661 867

as % of Sales 28.3% 12.9% 2.0% 3.3% 4.0%
Source: Company, CRISIL Equities Estimate

Further, the company also formed department wise task forces in October 2008 to rationalise
processes and trim working capital requirements.

CRISIL Equities 15
 Havells India Limited

Management Evaluation
CRISIL’s Fundamental Grading methodology includes a broad assessment of management
quality, apart from other key factors such as industry and business prospects, and financial
performance. Overall, we believe the management is relatively good with high-risk appetite.

Strong experience and established track record

The Chairman and Managing Director, Mr Qimat Rai Gupta, bought over the Havells brand
Management is experienced in the in 1971. A graduate, Mr Gupta has over 50 years of experience in the electrical equipments
electrical equipments business business. Mr Anil Gupta, son of the Managing Director and MBA from the US, is Joint
Managing Director and overlooks the marketing and brand-building initiatives. He has been
with Havells since 1992. Since 2008, he is also responsible for Sylvania’s operations. Mr
Surjit Gupta, co-founder, holds the position of Director – Operations. He holds a diploma in
mechanical engineering and has over 35 years of work experience in the industry. The
management has been successful in building a strong and diversified product portfolio. They
also lead the company to leadership position in few of the operating segments.

Strong appetite for inorganic growth

Havells has consistently adopted measures to grow through inorganic means. Over the
years, it acquired companies like Electrical Control & Switchboard in 1997, and Standard
Electricals in 2010. In April 2007, Havells acquired the almost 1.5times larger Sylvania,
which gave it access to a much larger geography. Its ability to acquire a company larger, in
size, than itself and then successfully integrate it is commendable.

Successful in turning Sylvania profitable in a short span of time

Success in turning Sylvania
In spite of significant fall in revenues in FY10, Havells turned the loss-making Sylvania
profitable despite significant fall in
profitable at EBITDA level this year itself by restructuring the company. Since the almost full-
volumes is commendable
year results of both the restructuring plans (i.e. Phoenix and Prakram) will take effect from
next year, Sylvania would become profitable at net levels in FY11. Venturing into unknown
territories of Europe, acquiring a company and turning it around by implementing a
restructuring plan, we believe reflects well on the management’s capabilities.

Proactive steps towards controlling working capital are creditable

Havells sensed the stress on the company’s balance sheet as a reason for the rising debtor
and inventory levels, and implemented various measures to control the same. These
measures included debtor securitisation, forming task forces within each of the business
units to identify spots where inventory (turnover and time) can be improved, bargaining with
suppliers for better credit terms as well as rates. We believe, the management has been
proactive and has taken adequate steps to keep operations under control.

Strong second line of management

Professionals with sound industry knowledge and business experience lead Havells’
management. The senior management team has varied work experience ranging from 11 to
over 40 years in their respective fields, and have been with the company for more than 5-6
years, on an average.

CRISIL Equities 16
 Havells India Limited

Corporate Governance
CRISIL’s fundamental grading methodology includes a broad assessment of corporate
governance and management quality, apart from other key factors such as industry and
business prospects, and financial performance. CRISIL Equities also analysed the
company’s shareholding structure, board composition, typical board processes, disclosure
standards and related-party transactions. Any qualifications by regulators or auditors also
served as useful inputs while assessing corporate governance.

Havells reflects good corporate governance practices in its board’s constitution and by the
The company adheres to good
presence of audit and other committees, which support the board processes. Based on
corporate governance practices
balance-sheet disclosures, attendance record of independent directors and their level of
engagement in the company’s affairs, CRISIL Equities believes that Havells adopts good
corporate governance standards.

Board composition: Havells’ board comprises ten directors, of whom five are
independent. The Chairman and Managing Director, Mr Qimat Rai Gupta, leads the board.
Other non-independent directors include Mr Anil Gupta, Joint MD who takes care of
marketing; Mr Rajesh Gupta, Director–Finance, oversees finance and accounts; Mr Surjit
Gupta, Director – Operations, looks after the operations part, including material
management, and Mr Niten Malhan, who is a nominee director of investor Warburg Pincus.

Board processes: The balance-sheet disclosures indicate that all the processes
relating to committees are in place and these committees are chaired by independent
directors. Mr Sunil Behari Mathur, independent director, chairs the audit committee; Mr Abid
Hussain, who chairs the remuneration committee, is an independent director.

Further, the board comprises professional individuals with varied experience. In addition, the
disclosure level is sufficient to analyse the level of involvement in the company.

CRISIL Equities 17
 Havells India Limited

Valuation Grading Grade:3/5

We have used valued Sum of Parts approach to value Havells group. We have used the
Our Valuation Grade of ‘4/5’
discounted cash flow (DCF) method to value both Havells (standalone) and Sylvania
indicates that there is a potential
separately. We chose to value both the entities independently as they operate as well as
‘Upside’ to our Fundamental Value
serve diverse, but not similar, geographies and face different business opportunities and
per share from the current market
challenges.
price
Based on the above valuation method, we arrive at the Fundamental Value of Rs 614 per
share for Havells. We have valued Havells (standalone) and Sylvania at Rs 450 and Rs 164
per share, respectively. At our Fundamental Value of Rs 614 per share, we believe that the
stock, which currently trades at 12.9 times its estimated FY11 EPS, is priced cheap
compared to assigned P/E of 14.6 times. Consequently, we initiate coverage on Havells with
a Valuation Grade of ‘4/5’, indicating that there is a potential ‘Upside’ from the current
market price to our fundamental value per share.

Valuing Havells (standalone)

Using the DCF method, we arrive at the Fundamental Value of Rs 450 per share for Havells’
standalone business.

Key assumption to our valuation:

a. We have made explicit forecasts for the period FY11 to FY17

b. We have assumed capex of Rs 2.0bn in FY10 and similar capital expenditure in FY14.
Apart from these major capacity expansions, we have assumed maintenance capex in
the range of Rs 0.8-1bn each year

c. We have assumed a terminal growth rate of 3% beyond the explicit forecasted period
until FY17

d. Due to change in debt profile, we have calculated different WACC for each year until the
explicit period

Table 11: Peer comparison of select financial metrics

Companies M. Cap. Revenue EBITDA margin Net margin RoE
( Rs Mn) FY08 FY09 FY08 FY09 FY08 FY09 FY08 FY09
Havells Limited 31,131 50,029 54,775 5.6 3.7 3.2 -2.9 33.8 -24.5

Cables
Kei Industries 2,553 8,736 9,697 11.3 5.2 5.0 0.1 24.3 0.6
Switchgears
ABB* 181,563 59,303 68,370 12.0 11.5 8.3 8.0 34.8 29.2
Siemens** 219,677 96,336 92,336 5.9 9.4 6.2 7.6 29.2 27.9
Areva* 66,268 20,063 26,412 16.9 15.3 10.8 8.6 46.4 35.5
Fans
Crompton Greaves 152,803 68,323 87,373 9.2 11.5 6.0 6.4 35.8 35.7
Bajaj Electricals 17,106 13,732 17,689 9.9 10.0 5.3 5.0 50.1 42.5

Note:
-- Market cap is calculated as on Jan 19, 2009
-- All numbers are consolidated numbers
* Year ending December. FY08 corresponds to year ending December 2007 and so on.
** Year ending September. FY08 corresponds to year ending September 2008 and so on.
Source: NSE, CRISIL Equities Estimate

CRISIL Equities 18
 Havells India Limited

Valuation of Sylvania

We have used the DCF method to arrive at the Fundamental Value of Rs 164 per share for
Sylvania’s business.

Key assumption to our valuation:

a. We have made explicit forecasts for the period FY11 to FY17

b. Different debt-equity ratio and hence different WACC has been used for each year, as
we see drastic change in the capital structure of the company over the next few years
while it refinances debt (during FY12-13) and then repays the same

c. We have used a terminal growth rate of 1.5% for the company

d. No capital expenditure has been assumed until FY17, as there are enough capacities in
factories at Sylvania, especially post the dip in volumes in FY10

CRISIL Equities 19
 Havells India Limited

Company and business overview

Brand “Havells” was acquired in 1971 In 1971, with the acquisition of the Havells brand, Mr Qimat Rai Gupta, Promoter Chairman
and Managing Director, founded the company which is currently headquartered in Noida.
Prior to forming the company, the promoter was trader of electrical equipments in Delhi.

Table 12: Company's timeline of growth

Year Milestones

1958 Promoter, Mr Qimat Rai Gupta, started trading operations in Delhi

1971 Acquired brand "Havells"
1976 Set up first manufacturing plant for renewable switches and changeover switches
1979 Set up facility for HBC fuses
1980 Started manufacturing high-quality energy meters
1987 Started manufacturing MCBs in a JV with Geyer, Germany
1990 Facility for changeover switches set up
1993 Facility for control gear products set up in UP
1996 ■ Entered in power & cables market by acquiring a manufacturing plant at Alwar
■ Entered into a JV with Electrium, UK for manufacturing Dorman Smith MCCBs and Crabtree Modular Plate switches
1997 Acquired electric control & switchboards for manufacturing customised packaged solutions
2000 ■ Acquired controlling stake in Duke Arnics Electronics (P) Ltd
■ Acquired controlling interest in Standard Electricals Ltd
2004 ■ Set up plant at Baddi for domestic switchgears
■ Set up facility for CFL at Faridabad
■ Plant set up for manufacturing of Ceiling fans at Noida
2005 Set up fan manufacturing plant at Haridwar
2006 Crabtree India Limited merged with Havells
2007 ■ Set up capacitor manufacturing plant in Noida with capacity of 6,00,000 kVAr per month
■ Acquired Frankfurt based Sylvania
■ Warburg Pincus, a global PE firm, invested USD110 million in Havells
2008 Entered into motor market
2009 Set up a fully automatic switchgear manufacturing facility
2010 Acquired 100% interest in Standard Electricals
Source: Company, CRISIL Equities

Havells, with its wide range of products, covers the entire gamut of household, commercial
Havells owns some of the prestigious and industrial electrical equipment requirements. Havells owns some of the prestigious
global brands like Sylvania, global brands like Crabtree, Sylvania, Concord, Luminance, Linolite, & SLI Lighting. The
Luminance, Concord etc company has eight plants in various parts of India.

Table 13: Building up product profile over the years

1976 Re-wire able switches and changeover switches
1979 HBC Fuses
1980 Energy meters
1987 MCBs
1993 Control gear products
1996 Power cables and wires
2004 Domestic switchgears, Ceiling fans
2007 Capacitors
Source: Company, CRISIL Equities

Over the years, Havells has placed itself amongst the top electrical and power distribution
equipment manufacturers in the country. It has grown significantly and has established a
strong position. In few of its products like switchgears and wires, Havells is amongst the top
ten players in the industry.

CRISIL Equities 20
 Havells India Limited

Chart 15: Revenue break-up - FY08 Chart 16: Revenue break-up - FY09

Electrical Electrical Others

consumable consumable 1%
Others Switchgears
Switchgears durables Cable and wires
durables 2% 11%
11% 5% 20%
5%
Cable and wires
20%

Lighting and
Lighting and
fixtures
fixtures
62%
63%

Source: Company, CRISIL Equities Source: Company, CRISIL Equities

Overview of Havells’ operations in India

Havells’ Indian operations clocked revenues of Rs 21,980 million in FY09. Below is the
revenue break-up of its revenues.

Figure 1: Havells (Standalone) revenue break-up in FY09 – change to millions

Havells India
Rs 21,980 mn

Sw itchgears Cable & Wire Lighting & fixture Electrical consumer Others
Rs 6,080 mn Rs 9,910 mn Rs 2,770 mn durable Rs 2,770 mn Rs 450 mn

Domestic Pow er cables Energy-saving lamp Fans

Rs 3,250 mn Rs 6,360 mn Rs 840 mn Rs 2,770 mn

In India Wire Luminaires

Rs 2,000 mn Rs 3,550 mn Rs 1,930 mn

Exports
Rs 1,250 mn

Industrial*
Rs 1,710 mn

Electrical Wire
Accessories
Rs 1,120 mn

*Note: Industrial revenues (in Switchgears segment) includes revenues from Motors (Rs130 million) and Capacitors (Rs90 million)
Source: Company, CRISIL Equities

CRISIL Equities 21
 Havells India Limited

Acquisition of Sylvania expanded Havells’ footprints globally

Havells acquired lighting business
of SLI Sylvania in April 2007 for USD
300 million to expand its presence
Havells acquired the lighting business of SLI Sylvania (Sylvania) in April 2007 for USD 300
million (€227mn). The transaction was an exit route for three PEs (Subros, JP Morgan and
DDJ Capital), which were then the owners. The acquisition took effect through a Dutch
subsidiary – Havells Netherlands BV. The deal got funded all through debt financed by a
consortium of Barclays Bank and State Bank of India.

Funding details of the acquisition are as follows:

Table 14: Funding details of the Sylvania acquisition

Particulars Mn Euros Details
Purchase price 227.0
Transaction cost 7.5
Total 234.5

Pension liabilities not to be funded 34.5

Funds to be arranged 200.0 Funded by consortium of Barclays and SBI

Non-recourse debt 120.0

-- Term Loan @ 80.0 Payable over 5 years from 2009-13. 4 mn paid so far.
-- Revolving Loan 40.0 Fully due in 2012

Recourse debt 80.0

-- Paid so far 63.0 Mainly funded through shares issue to Warburg Pincus
-- Current outstanding# 17.0
@
Payable half yearly (June and December). Installment of 6 mn
However, after the loan covenants were breached, the loan terms were re-negotiated and now
the first installment of loan will start from 2011.
#
Recourse debt is payable half yearly. Installment of Euros 3.3mn
Source: Company, CRISIL Equities

Sylvania operates in Europe, Latin America and Asia. However, Havells could not get brand
Sylvania operates in geographies of
rights of US, Canada and Mexico, which are owned by Osram Sylvania, and Australia and
Europe, Latin America and Africa
New Zealand markets. Sylvania was earlier present in the Indian markets through a joint
venture named Sylvania Laxman Limited that ended during the early nineties (around 1993)
after the demise of its founder, Mr Laxman Swaroop Aggarwal.

Figure 2: Global presence of Havells (post the acquisition of Sylvania)

Source: Company

CRISIL Equities 22
 Havells India Limited

Sylvania derives more than 70% of its revenues from the European region. However, during
the economic slowdown, Latin America’s share in total revenues increased from 23% in
FY08 to 27% in FY09. This region refers to Argentina, Brazil, Costa Rica, United States,
Ecuador and Venezuela. Below is the geography wise break-up of revenues over the past
two years:

Chart 17: Revenue break-up - FY08 Chart 18: Revenue break-up - FY09

Asia
Asia
3%
3% Latin America
Latin America
27%
23%

Europe
Europe
74%
70%

Source: Company, CRISIL Equities Source: Company, CRISIL Equities

CRISIL Equities 23
 Havells India Limited

Industry Overview
Havells, in India, is primarily present in the cables and wires, switchgears, lighting and
luminaries and fans sectors.

Cable and wires

We expect cable and wires industry
to be at Rs150bn as at FY09 and is
expected to register a 12% 8-year
CAGR
We expect the market size of the cables and wires industry to be around Rs 150bn in FY09,
of which cables would be approximately Rs95-100bn; approximately 70% of the industry is
organised, while the remaining accounts for the unorganised and regional level players. The
wire industry in India is expected to be approximately Rs 50-55bn in FY09.

Chart 19: Growth in market of cable and wires industry over the years

Wires and cables industry (Rs Bn)

200

8-year CAGR of 12% 177

150

142

100
103
93 91

71 73
50 60
54

-
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08

Source: Prowess, CRISIL Equities

We expect expenditure of over Given the strong domestic demand, derived out of expected expenditures to the tune of Rs
Rs13tn in power cables segment 13.5tn in the power sector in India over the next 5-7 years, we expect the cables industry to
be at Rs240bn, registering a 11% 8-year CAGR.
over the next 5-7 years
Table 15: Demand estimation for cables industry in India (Rs Bn)
(Rs Bn)
Estimated capex on FY10-FY17
Generation 8,533.9
T&D 5,006.0
-- Transmission 2,821.3
-- Distribution 2,184.7
Total 13,539.9

Consequently, expenditure on cables

-- Generation 256.0
-- Transmission 705.3
-- Distribution 546.2
Total 1,507.5
Source: CMIE, CRISIL Equities

CRISIL Research estimates around 66,000 MW to be added during 2009-10P to 2013-14P.

Incremental transmission lines are expected to grow at a CAGR of 2 per cent from 2009-10P
to 2013-14P. The development of the National Grid for enhancing inter-regional transmission
capacity to 37,150 MW by 2012 will fuel the demand for power cables, conductors and wires.

CRISIL Equities 24
 Havells India Limited

In addition, national as well as regional schemes, for e.g. RGGVY and APDRP, will also aid
demand for cable and wires.

Figure 3: Power transmission and distribution chain

Source: Industry publications and CRISIL Research

Also, we believe that there will be no further significant capacity additions over the next 2-3
years, as most of the expansion has already taken place and the present annual installed
capacity is above the annual expected demand. However, over the next 5 years, as demand
outstrips capacity, players would go for capacity expansions.

Figure 4: Cable segmentation across sectors

Source: Industry publications and CRISIL Research

Cables are broadly classified as – Extra high voltage (HVDC, 765 kV,400 kv,220 kv), high
voltage (132KV, 66KV) used in transmission of power and medium voltage (33Kv to 3.3 KV)
and low voltage (1.1kv and 500 volts) used for the distribution of power. Wires are generally
used for domestic purposes. Havells primarily operates in the low-medium voltage cables
and domestic wires.

CRISIL Equities 25
 Havells India Limited

Switchgears
The switchgears industry in India was estimated at Rs 102bn in FY08; of which 84% of the
output was consumed domestically.

Chart 20: Switchgears – Total market size Chart 21: Domestic consumption as % of total market

120 60% 85%

84%
47.7%

84% 84% 84%

90 39.3% 45%

83% 82%
60 23.8% 30%
82%
15.1% 82%
15.9% 81%

30 15%
81%

0 0% 80%
FY04 FY05 FY06 FY07 FY08 FY03 FY04 FY05 FY06 FY07 FY08
Market Size % growth Domestic Cons as % of Total Market

Source: CMIE, CRISIL Equities Source: CMIE, CRISIL Equities

Over the years, the switchgears market has been concentrated in nature, wherein the top
few players hold a major market share. The market holding of the top 7-8 players has
increased from 46% in FY03 to ~60% in FY08. Also, the Herfindahl index, for the
switchgears industry, has increased from 4.2% to 5.7%, indicating that competition has
reduced within the segment in favour of the top few players that now incrementally control
the market.

Table 16: Trend in market share of top 7 companies Chart 22: Herfindahl index for switchgears industry
Company FY03 FY04 FY05 FY06 FY07 FY08 6.0%
Siemens 8.7 8.9 10.1 7.2 10.5 12.8
5.7%
ABB 10.4 11.7 12.7 12.5 10.4 10.7
5.0% 5.4%
L&T 9.3 9.2 6.5 10.6 9.8 9.4
Anchor** 5.3 10.3 8.9 4.9%
4.8%
4.6%
Areva 6.3 6.5 7.7 5.8 6.0 6.3
4.0%
4.2%
Crompton Greaves 7.5 7.6 7.6 7.3 6.4 5.9
Havells 3.5 4.4 5.0 4.5 3.9 5.4
Total 45.8 48.4 49.6 53.1 57.2 59.4 3.0%
FY03 FY04 FY05 FY06 FY07 FY08
** Increase in market share over the last 3 years
Herfindahl Index

Source: CMIE, CRISIL Equities Source: CMIE, CRISIL Equities

Power-efficient lighting instruments have moderate growth prospects

Philips and Osram that hold close to 70% of the market primarily dominate the European
lighting (€2.6bn) industry. The lamps industry is highly consolidated, with the top 3 players,
i.e. Philips, GE and Siemens/Osram, owning over 60% of the total market.

The fixtures market, on the contrary, is highly fragmented and there is huge competition from
small and mid-sized local players. Chinese companies are also entering the markets with
energy-saving solutions, adding to the competition.

CRISIL Equities 26
 Havells India Limited

Sylvania is also present in Asia and Latin America, where Philips and Osram hold ~25% and
45% of the market, respectively.

Chart 23: €5bn lamps industry (where Sylvania is Chart 24: €12bn fixtures industry (where Sylvania is
present) present)

Philips GE
7% 2%
Others Philips Zumtobel
38% 29% 11%
Sylvania
2%

Sylvania Osram Others

GE 19% 78%
5%
9%

Source: Company Source: Company

Considering the efforts being taken to replace unproductive incandescent lights, we feel
there is potential for the energy-saving lamp market, particularly in Europe.

Energy-saving lamps in Europe – A market scenario

The growing concern over climate change in Europe has led to numerous policies and
regulations to replace incandescent lighting systems with energy-efficient lighting systems.
As the levels of greenhouse gases are rising because of human activities, the European
Union (EU) is now strongly responding to the challenge of climate change. Various projects
are being undertaken to increase the usage of efficient lighting instruments like:

I. Roll-Out Member States (RoMS), a joint working group, which will deploy a lighting
energy-efficient programme in the European Union.

II. Bottom up to Kyoto (ButK), 3-year project started in 2007, aims to help
municipalities ‘make the switch’ to efficient street & office lighting systems

Phaseout of incandescent bulbs by 2012.

The European Lamp Companies Federation (ELC) has put forward a proposal outlining a
phaseout plan for all inefficient domestic light sources by 2015 in five phases, spread over
eight years.

CRISIL Equities 27
 Havells India Limited

Figure 5: Phases for elimination of inefficient lighting instruments Figure 6: Energy-efficiency meter

Lam p P ha s e 1 P ha s e 2 P ha s e 3 P ha s e 4
2 0 15
P ha s e 4 +
2 0 17
The EU Energy Label diagram
Category 2009 2 0 11 2 0 13
is found on all lamp boxes
ABCD ABC
100W
EF G D EF G
Energy
ABCD ABC
75 W + Manufacturer
EF G D EF G
Model
ABCD ABC More efficient
60 W + EF G D EF G A
A
ABCD B
25 W + EF G
C
D
E
F
G
Less efficient

Source: ELC, CRISIL Equities Source: ELC, CRISIL Equities

CRISIL Equities 28
 Havells India Limited

Annexure: Financials
Income Statement
(Rs Mn) FY07 FY08 FY09 FY10E FY11E FY12E FY13E FY14E
Net sales 15,285 49,785 54,584 53,749 58,891 65,341 72,186 76,408
Operating income 15,451 50,047 54,824 54,017 59,186 65,668 72,547 76,790
EBITDA 1,611 3,722 3,109 3,733 5,290 6,646 7,814 8,317
Depreciation 97 694 905 894 926 954 983 1,036
Interest 318 1,095 1,414 1,333 1,178 1,135 1,119 1,063
Other income 0 48 12 125 59 61 63 65
PBT 1,196 1,981 801 1,631 3,244 4,618 5,775 6,283
Adjusted PAT 1,012 1,604 372 1,050 2,525 3,670 4,465 4,757
Reported PAT 1,021 1,610 (1,601) (1,590) 2,525 3,670 4,465 4,757
No. of shares 54 55 58 60 60 60 60 60
Earnings per share (EPS) 19.0 29.2 (27.5) (26.4) 42.0 61.0 74.2 79.1

Balance Sheet
(Rs Mn) FY07 FY08 FY09 FY10E FY11E FY12E FY13E FY14E
Equity capital 269 290 301 301 301 301 301 301
Reserves & surplus 2,334 6,612 5,846 4,943 7,074 10,255 14,148 18,282
Debt 561 12,962 12,278 11,402 10,090 9,037 8,336 6,834
Current liabilities and provisions 2,686 14,943 14,308 15,358 16,136 17,410 18,789 19,678
Deferred tax liability/(Asset) 118 (76) (97) (92) (92) (92) (92) (92)
Minority interest - - - - - - - -
Capital employed 5,968 34,731 32,636 31,912 33,509 36,910 41,482 45,004
Net fixed assets 2,130 6,883 8,357 9,670 9,544 9,390 9,207 9,671
Capital WIP 293 1,005 308 158 158 158 158 158
Intangible assets - 3,781 3,756 3,529 3,529 3,529 3,529 3,529
Investments 32 32 - - - - - -
Loans and advances 445 1,958 2,221 1,742 1,630 1,839 2,061 2,196
Inventory 2,395 10,419 7,947 7,713 8,329 9,095 9,848 10,266
Receivables 310 8,227 7,573 7,834 8,118 8,649 9,129 9,466
Cash & bank balance 365 2,426 2,473 1,266 2,202 4,251 7,551 9,718
Applications of funds 5,968 34,731 32,636 31,912 33,509 36,910 41,482 45,004
Source: Company, CRISIL Equities

CRISIL Equities 29
 Havells India Limited

Cash Flow
(Rs Mn) FY07 FY08 FY09 FY10E FY11E FY12E FY13E FY14E
Pre-tax profit 1,196 1,981 801 1,631 3,244 4,618 5,775 6,283
Total tax paid (161) (571) (451) (576) (719) (948) (1,310) (1,526)
Depreciation 97 694 905 894 926 954 983 1,036
Change in working capital 848 (8,978) 2,251 1,731 (9) (233) (76) (2)
Cash flow from operating activities 1,981 (6,874) 3,507 3,680 3,442 4,392 5,372 5,791

Capital expenditure (988) (6,160) (1,681) (2,057) (800) (800) (800) (1,500)
Investments and others (0) (0) 32 - - - - -
Cash flow from investing activities (988) (6,160) (1,650) (2,057) (800) (800) (800) (1,500)

Equity raised/(repaid) or change in reserves (21) 2,858 1,023 - - - - -

Debt raised/(repaid) (538) 12,402 (684) (876) (1,312) (1,053) (700) (1,502)
Dividend (incl. tax) (157) (169) (176) (211) (294) (378) (451) (495)
Others (incl extraordinaries) 9 5 (1,974) (1,741) (101) (111) (121) (128)
Cash flow from financing activities (706) 15,095 (1,811) (2,829) (1,707) (1,542) (1,272) (2,124)

Change in cash posiiton 286 2,062 47 (1,206) 935 2,050 3,299 2,167

Opening Cash 78 365 2,426 2,473 1,266 2,202 4,251 7,551

Closing Cash 365 2,426 2,473 1,266 2,202 4,251 7,551 9,718
Source: Company, CRISIL Equities

Ratios
FY07 FY08 FY09 FY10E FY11E FY12E FY13E FY14E
Sales growth (%) 54.4 225.7 9.6 (1.5) 9.6 11.0 10.5 5.8
EBITDA growth (%) 54.1 131.0 (16.5) 20.1 41.7 25.6 17.6 6.4
EPS growth (%) 56.4 53.5 (194.3) 3.8 258.8 45.3 21.7 6.5
EBITDA Margin (%) 10.4 7.4 5.7 6.9 8.9 10.1 10.8 10.8
PAT Margin (%) 6.6 3.2 (2.9) (2.9) 4.3 5.6 6.2 6.2
Return on Capital Employed (RoCE) (%) 50.3 26.3 11.5 16.2 25.6 30.7 32.2 30.2
Return on equity (RoE) (%) 46.8 33.9 (24.5) (27.9) 40.0 40.9 35.7 28.8
Earnings per share (Rs) 19.0 29.2 -27.5 -26.4 42.0 61.0 74.2 79.1
Dividend per share (Rs) 2.9 3.1 3.0 3.0 4.2 5.4 6.4 7.0
Dividend payout ratio (%) 15.4 10.5 -11.0 -11.4 9.9 8.8 8.6 8.9
Dividend yield (%) 1.3 0.5 0.5 0.6 0.8 1.0 1.2 1.3
Adjusted Earnings Per Share (Rs) 18.8 29.1 6.4 17.4 42.0 61.0 74.2 79.1
Net Debt-equity 0.1 1.5 1.6 1.9 1.1 0.5 0.1 -0.2
Current Ratio 1.3 1.5 1.4 1.2 1.3 1.4 1.5 1.6
Interest Coverage 4.8 2.8 1.6 2.1 3.7 5.0 6.1 6.9
Price-earnings 12.2x 19.7x -20.9x -20.2x 12.7x 8.7x 7.2x 6.7x
Price-book 4.7x 4.6x 5.5x 6.1x 4.3x 3.0x 2.2x 1.7x
EV/EBITDA 7.8x 11.4x 13.9x 11.3x 7.6x 5.5x 4.2x 3.5x
Source: Company, CRISIL Estimates

CRISIL Equities 30
 Havells India Limited

Focus Charts

Share price movement chart Shareholding as on December 2009

600
Others
19.4%
400 DII
1.4%

200

- FII
19.1%
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
Oct-03
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Promoter
60.1%

Havells Nifty

Source: Company, CRISIL Equities Estimate Source: NSE

Trend in revenue growth (Consolidated) Op. and net profit margins (Consolidated)
105 11.0 10.5 12 15
9.6 9.6
10 10.8 10.8 10.8 10.8 10.7
90 10.1
8.9
8 10
75 5.8 6.9 6.6 6.6
5.7 6.2 6.2 6.2
5.1 5.6
6
4.1 4.3
60 3.5 5
Rs Bn

(%)

4
45
2
30 0
-1.5 0 -2.9 -2.9

15 -2
-5
0 -4 FY09 FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E
FY10E

FY11E

FY12E

FY13E

FY14E

FY15E

FY16E

FY17E
FY09

Net margin (%) EBITDA margin (%)

Net Sales YoY Growth

Source: Company, CRISIL Equities Estimate Source: CRISIL Research

Historical movement in euro-dollar exchange rate Sylvania’s margin to improve post restructuring
15%
1.7
8.3%
7.3%
4.9% 5.5%
4.2%
1.4 5% 2.6%
0.4% 5.8%
1.37 5.1%
-2.9% -2.5% 3.4% 3.8%
3.0%
1.8%
1.1 -0.2%
1.01 -5%

0.8 -9.2%
Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09
-15% -12.1%
Euro/Dollar exchange rate Linear (Euro/Dollar exchange rate) FY09 FY11E FY13E FY15E FY17E

EBITDA Margin (%) PAT Margin (%)

Source: University of Columbia Source: Company, CRISIL Equities estimates

CRISIL Equities 31
 Havells India Limited

Explanation of CRISIL Fundamental and Valuation (CFV) matrix

This matrix analyses fundamentals (addressed through the fundamental grade) and returns
(through the valuation grade).

Fundamental grade
CRISIL’s fundamental grade represents an overall assessment of the company’s
fundamentals graded relative to other listed equity securities in India. The grade facilitates
easier comparison of fundamentals between companies, irrespective of the size or the
industry they operate in. The grading factors in:

Business Prospects: Industry prospects and company’s future financial

performance

Management Evaluation

Corporate Governance

The grade is assigned on a five-point scale from grade 5 (indicating excellent fundamentals)
to grade 1 (poor fundamentals)

CRISIL fundamental grade Assessment

5/5 Excellent fundamentals

4/5 Superior fundamentals
3/5 Good fundamentals
2/5 Moderate fundamentals
1/5 Poor fundamentals

Valuation grade
CRISIL’s valuation grade represents an assessment of the potential value in the company
stock for an equity investor over a 12-month period. The grade is assigned on a five-point
scale from grade 5 (indicating strong upside from the current market price (“CMP”) to grade
1 (strong downside from the CMP).

CRISIL valuation grade Assessment

5/5 Strong upside (>25% from CMP)

4/5 Upside (10–25% from CMP)
3/5 Aligned (+/- 10% from CMP)
2/5 Downside (negative 10–25% from CMP)
1/5 Strong downside (< negative 25% from CMP)

Analyst disclosure:
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can
bias the grading recommendation of the company

Disclaimer:
This Company-sponsored Report (Report) is based on data publicly available or from sources considered reliable. CRISIL Ltd.
(CRISIL) does not represent that the data/report is accurate or complete and hence, it should not be relied upon as such. The data /
Report is subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report.
Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user
assumes the entire risk of any use made of this data / Report. CRISIL especially states that it has no financial liability, whatsoever, to the
subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This Report
should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person – especially outside India
or published or copied in whole or in part, for any purpose.

CRISIL Equities 32
About CRISIL Limited

CRISIL is India's leading Ratings, Research, Risk and Policy Advisory Company

About CRISIL Research

CRISIL Research is India's largest independent, integrated research house. We leverage our unique,
integrated research platform and capabilities spanning the entire economy-industry-company spectrum
to deliver superior perspectives and insights to over 600 domestic and global clients, through a range of
subscription products and customised solutions.

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