Havells India. Institutional Equities. Analyst Meet Update. Harbours Strong Growth Ambition ACCUMULATE

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1 Analyst Meet Update Institutional Equities Havells India Reuters: HVEL.BO; Bloomberg: HAVL IN Harbours Strong Growth Ambition We attended the analyst meet held by Havells India (HIL) recently. The company s management remains optimistic on sustenance of healthy growth momentum across its core electrical portfolio driven by expansion of distribution channel, revitalising product portfolio and entering hitherto untapped categories. HIL intends to significantly scale up Lloyd s consumer durable portfolio from Rs2bn revenues in FY17 to Rs65bn over the next five years by focusing on four product categories air-conditioner, panel TV, refrigerator and washing machine. We remain optimistic on growth prospects of the electrical and consumer durable industry in India. We like the premium brand positioning of HIL along with its superior margin profile, but we believe that its current rich valuation fully captures the near-term growth visibility. We have kept our earnings estimates intact and retained Accumulate rating on HIL with a target price of Rs552 based on 36x September 219E earnings. Key takeaways from the meeting are as follows: Core focus areas for future growth While the management is ambitious about growth outlook, it remains conservative on the financial front. HIL currently has a lean balance sheet and low working capital structure which it aims to sustain even during its journey of setting up an in-house facility for manufacturing consumer durables. The focus on deeper connect with retailers will continue as retail trade channel accounts for 6% of HIL s sales. To aid retailers, HIL provides them channel financing at attractive rates, offers uniform incentives irrespective of turnover (to avoid undercutting of sales among wholesalers and retailers), pays additional bonus over and above the target as well as ensures timely payment of credit notes in just three days after a marketing scheme has ended. The distribution network will be enhanced as HIL intends to go deeper in semiurban areas. HIL intends to focus on towns with a population of 25, (compared to earlier criteria of 5, population) to increase its penetration. Along with addition of Lloyd s consumer durable retail channel, the new focus on semi-urban areas is likely to lead to increase in retail touch-points to 2, (from 1, currently) with a presence in 2, towns (compared to 1,1 currently) over the next three to five years. HIL plans to increase its footprint of Havells Galaxy stores from 513 outlets currently, which account for 22% of total revenues. HIL intends to have a Galaxy store in 8 towns gradually over the next five years. HIL intends to scale up its presence in western and southern regions of India, which together account for 5% of national market, where HIL has a relatively low market share. HIL is aiming to appoint more distributors and dealers as well as focus on region-specific marketing activity. HIL intends to continue strengthening its core team. Currently it has 18 independent product teams, with 2,5 people in sales and 4 engineers working on product innovation across the company. 14 December 217 ACCUMULATE Sector: Consumer Electricals CMP: Rs533 Target Price: Rs552 Upside: 4% Chirag Muchhala Research Analyst chirag.muchhala@nirmalbang.com Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$bn) 334.5/ Wk H / L (Rs) 565/311 Daily Vol. (3M NSE Avg.) 1,635,42 One-Year Indexed Stock Performance Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Price Performance (%) 1 M 6 M 1 Yr Havells India Nifty Index Source: Bloomberg HAVELLS INDIA Nifty 5

2 Switchgear segment s strategy The segment accounts for 18.4% of 1HFY18 sales and enjoys the highest contribution margin of 39.9% among HIL s product portfolio. The switchgear business has two broad product categories - MCB and decorative switches. In MCB category, HIL is the market leader with 27%-28% share. Other key competitors include Legrand and Schneider. The industry size of MCB category is Rs28bn, of which, the addressable market for HIL is Rs21.5bn. The main products include MCB, RCCB, isolater and distribution board. In terms of sales mix, 55% of MCB market is B2B in nature while 45% of sales takes place through the trade channel. In terms of customer mix, 54% of sales is driven by residential users, 15% by commercial, 19% by industry and OEM while the balance 12% by government and infrastructure sector. Within residential category, 31% of sales is driven by 1kA range while 23% is driven by 6kA range where HIL does not operate. For future growth of MCB segment, HIL intends to expand in non-residential category and increase its market share from less than 1% currently to 3% in the next three years by focusing more on B2B sales and differentiated products. Within residential segment, it is also exploring entry into 6kA category, which accounts for 23% of industry sales and where HIL currently does not have its presence. Also, HIL intends to strengthen its presence in southern and western regions which account for 5% of national market where it currently has a low market share. In decorative switch category, the total market size is Rs6bn of which addressable market for HIL is Rs5bn. The key products are switches, accessories and home automation system. The industry leader is Anchor (Panasonic) followed by Legrand, while HIL is third with a market share of 14%-15%. In terms of customer mix, residential segment accounts for 52% share, commercial 21%, hospitality 8%, healthcare 4%, government and infrastructure 11% and others at 4%. So far, HIL s major focus was on residential segment. HIL intends to expand its presence in non-residential segment and plans to increase its market share from less than 1% to 3% in three years through the B2B channel. Similarly, HIL has a relatively lower presence in entry level non-modular switches which it intends to scale up. HIL also intends to expand its geographical reach in western and southern regions with region-specific policies. Cable and wire segment s strategy Cable & wire is the largest product segment accounting for 33.1% of 1HFY18 sales but has the least contribution margin of 16.5% among HIL s product portfolio because of commoditised nature of business. The segment comprises two broad product categories - power cables and house wires which account for 5% of sales each. The power cable market size is Rs12bn divided into low voltage (Rs7bn), medium voltage (Rs42.5bn) and extra high voltage (Rs7.5bn). Polycab is the market leader followed by KEI Industries, while HIL is third-largest player with a market share of 1%. The unorganised market for power cables is also large at Rs65bn which is likely to lose share gradually to organised players. With the cut in GST rate from 28% to 18% from 15 November 217, the cable industry is poised to resume its growth path. The key growth drivers of power cables are likely to be strengthening of T&D infrastructure, smart city projects, metro rail projects, renewable energy sector as well as rising capex in sectors such as highways, railways, ports and mines. HIL expects the cable industry to double in the next four to five years and the unorganised segment s share to reduce substantially driven by GST and RERA. As regards growth drivers over the next three years, HIL intends to enhance its B2B sales, scale up export revenues from 2% currently to 1%, enhance market share in western region from 12% to 2% of total sales, enter into EHV cable market and continue to lay thrust on network expansion. HIL had made successful inroads in 66KV power cables and is now targeting EHV cable segments of 132KV and 22KV. It is open for a technological tie-up to get faster approval. 2 Havells India

3 House-wire has a market size of Rs8bn in organised segment which accounts for 65% of total industry. HIL is third-largest brand with a market share of 16% after Finolex and Polycab. Other key players include Anchor, RR Kabel and V-Guard. The future demand drivers are likely to be government initiatives like affordable housing, GST and national telecom policy. HIL has a strong sales channel with 3,5 direct billing points and direct representation in 7 towns (population strength above 5,) with a large sales team comprising 15 persons. HIL has higher margin in house-wire business compared to its peers as 68% of its sales comes from 9- metre wire which is a retail trade-driven product and, hence more profitable compared to 4% for the industry. To make inroads in western region, HIL intends to focus on distribution model (versus dealer model in rest of the country) while it is targeting southern market with region-specific policy. HIL will also continue to focus on project business, B2B channel as well as telecom tower sector where it has a strong presence. Lighting segment s strategy The lighting segment accounts for 15% of 1HFY18 sales and has healthy contribution margin of 28.2%. The segment comprises two broad product categories - consumer lighting and professional lighting - which account for 5% of sales each. The lighting market size is Rs176bn. The lighting industry is witnessing technological advancement with LED market growing significantly and traditional lighting sources (CFL and GLS) declining. Over the next five years, LED market is expected to grow 7x from Rs53bn to Rs35bn, while the conventional market will continue to sharply decline and is not expected to account for more than 3% of overall market. The key growth drivers of lighting segment are rising awareness among consumers about LED lights, government policies (EESL purchases), incentives (low GST rate at 12%) and rising investment in infrastructure (street lights, roads, metro-rail etc). HIL is favourably placed with a network comprising 3, direct dealers, 54 distributors and a presence in 15, retail outlets. HIL has a market share of 1%-14% across product categories it operates in while other key competitors are Philips, Crompton, Osram, Bajaj Electricals and Wipro. For future growth, HIL intends to scale up its presence from 54 distributors to 8 in three years and is planning to have 1 super-stockists in semi-urban and rural markets. HIL aims to double its sales in consumer lighting segment over the next three years and also continue to focus on professional lighting and enterprise business. Electric consumer durable segment s strategy The electric consumer durable segment (ECD) accounts for 18.7% of 1HFY18 sales and enjoyed healthy contribution margin of 25.2% in the same period. In ECD segment, HIL is focusing on primarily four categories - fan, water heater, small domestic appliance and pump. The fan category market size is Rs69bn, where HIL is third-largest with a share of 16%. Other key players include Crompton Greaves, Orient, Usha and Bajaj Electricals. HIL operates in mass market and premium range of fan segment and does not have a presence in economy category (fans priced below Rs1,5 each). Its focus remains on technology and aesthetics. HIL was the first company to offer metallic coloured fans, energy efficient 4W and 5W fans, 8-blade fans as well as decorative ceiling fans. HIL aims to increase its market share to 2% in three years and retain its dominance in premium segment. Water heater category has a market size of Rs14bn with a low penetration level of 9%-1%. The market comprises storage water heaters (8% of total industry), instant water heaters (15% of total industry) and gas-based water heaters (5% of industry). HIL is rapidly scaling up in water heater category and posted 49% revenue growth in FY17 on a low base. It has garnered a market share of 15% and is the third-largest 3 Havells India

4 player. Other key competitors include Racold, V-Guard, Bajaj Electricals, Venus and AO Smith. HIL aims to scale-up its market share to 2% in three years and be among the top two players driven by strong portfolio and deeper market penetration. In small domestic appliance category, HIL is focusing on food preparation (mainly juicer, mixer, grinders etc) having a market size of Rs24bn, irons (Rs6.5bn market size) and cooking products (Rs11bn market size). HIL has a low market share in this category which has key competitors such as Bajaj Electricals and Philips as well as regional brands such as Preethi, Prestige and Maharaja. HIL aims to capture 1% market share in three years driven by product portfolio offering, superior design and performance. HIL forayed into pump segment two years ago, which has a market size of Rs35bn. The key players include Crompton, Texmo, Kirloskar and CRI. HIL aims to capture 1%-12% market share in pump category over the next three years. Lloyd consumer durable segment s strategy HIL bought consumer durable brand Lloyd in May 217 and forayed into white goods space. It accounted for 14.8% of 1HFY18 sales and with a contribution margin of 17.1%. Through Lloyd brand, HIL will focus on four categories - air-conditioner, television, refrigerator and washing machine. Lloyd has a healthy presence in ACs where it has captured 13% market share in the past seven years, while in panel TVs it has a market share of 3%. Lloyd has negligible presence in other two categories. The overall white goods industry size is estimated at Rs55bn, of which the above four categories account for 7%-75% share. The industry has posted a CAGR of 13% over the past 1 years, and has the potential to grow at a similar rate in the next 1 years as well considering the low penetration level. In AC segment, HIL intends to upgrade the brand positioning of Lloyd from low-end of the economy range to the mass-premium range. HIL will set up an in-house manufacturing facility for ACs which is likely to be operational in the next one year. AC segment is currently undergoing multiple disruption such as the shift to inverter ACs, star rating, upgradation to green gases etc. HIL also intends to scale up sales in other three categories - TV, refrigerator and washing machine - and will decide on the time to set up an in-house manufacturing facility over the next one year. In future, it aims to reduce the dependence on AC category and have an ideal sales mix comprising 5% from ACs, 25% from TVs, 1% from washing machines and 15% from refrigerators. With an aim of improving the dealer and distributor network as well as retail touch points (current presence through 1, display points across 45 cities) as well as scaling up product portfolio and brand image, HIL aims to make Lloyd a billion dollar revenue brand (Rs65bn), up from Rs2bn sales in FY17. It aims to be among the top 5 players in all four categories and improve margins in the next five years. Outlook and valuation We expect HIL to post 13.5% CAGR in electrical product sales over FY17-FY2E, while inclusive of Lloyd, HIL is expected to register 21.7% revenue CAGR. We are factoring in 15%-16% contribution margin for Lloyd over FY18E-FY2E, leading to 21%/2% CAGR in EBITDA/PAT, respectively, for HIL over FY17-FY2E. HIL is a strong financial franchise with robust operating/free cash flow (Rs29.9bn/Rs23.9bn, respectively, over FY17- FY2E), superior margin profile and healthy return ratios (RoCE/RoIC of 21%/57%, respectively, in FY17) which will support its premium valuation. While we remain optimistic on growth prospects of the electrical and consumer durable industry in India, we believe that the current rich valuation of HIL fully captures its near-term growth visibility. We have kept our earnings estimates intact and retained Accumulate rating on HIL with a target price of Rs552 based on 36x September 219E earnings, in line with its past three years average P/E. 4 Havells India

5 Exhibit 1: Segment-wise revenue growth trend (YoY) (% ) (5) (.5) (.2) (4.5) FY13 FY14 FY15 FY16 FY17 1HFY18 Switchgears Cables Lighting Consumer durables Exhibit 2: Segment-wise contribution margin trend (% ) FY13 FY14 FY15 FY16 FY17 1HFY18 Switchgears Cables Lighting Consumer durables Lloyd Exhibit 3: Segment-wise revenue mix in 1HFY18 (%) Lloyd, 14.8 Switchgears, 18.4 Consumer durables, 18.7 Lighting, 15. Cables, Havells India

6 FY13 FY14 FY15 FY16 Institutional Equities FY17 FY18E FY19E FY2E Exhibit 4: Segment-wise analysis Y/E March (Rsmn) 2QFY17 1QFY18 2QFY18 YoY (%) QoQ (%) 1HFY17 1HFY18 YoY (%) Revenues Switchgear 3,474 3,389 3,299 (5.1) (2.7) 7,3 6,688 (4.5) Cable 5,592 6,363 5, (1.5) 1,921 12, Lighting & fixture 2,371 2,598 2, ,667 5, Electrical consumer durable 3,85 3,583 3, (1.3) 6,599 6, Lloyd - 2,672 2,698 NA ,371 NA Total 14,522 18,65 17, (4.5) 29,19 36, Revenue mix (%) Switchgear Cable Lighting & fixture Electrical consumer durable Lloyd Contribution Switchgear 1,445 1,37 1,363 (5.7) 4.3 2,879 2,67 (7.3) Cable , ,512 1, Lighting & fixture ,223 1, Electrical consumer durable ,733 1,71 (1.3) Lloyd NA NA Total 3,689 4,141 4, ,348 8, Contribution margin (%) Switchgear Cable Lighting & fixture Electrical consumer durable Lloyd Total Exhibit 5: Trend in net revenues (Rsmn) (%) 12, , 8, , 4, 2, Net sales % growth YoY Note: Llyod portfolio addition in FY18 leading to strong spurt in growth 6 Havells India

7 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Jan-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Jan-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Institutional Equities Exhibit 6: Trend in margins (%) Gross margin EBITDA margin PAT margin Exhibit 7: Trend in return ratios (%) ROE ROCE ROIC Exhibit 8: One-year forward P/E (Rs) (x) 5 4 (Average P/E = 35x) x 3x 35x 4x 45x stock price P/E Average P/E SD +1 SD +2 SD -1 Source: Nirmal Bang Institutional Equities Research 7 Havells India

8 Financials Exhibit 9: Income statement Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY2E Revenues 53,783 61,353 84,551 96,537 11,714 % growth Raw material costs 31,735 36,485 51,47 58,52 66,65 Staff costs 3,78 5,4 7,61 8,495 9,521 Other overheads 1,791 11,623 15,122 17,56 19,881 Total expenditure 46,234 53,111 74,138 84,53 96,52 EBITDA 7,549 8,241 1,412 12,485 14,662 % growth EBITDA margin (%) Other income 694 1,343 1,67 1,242 1,317 Interest costs Depreciation 1,49 1,196 1,353 1,483 1,657 Profit before tax 7,66 8,266 9,928 12,47 14,198 Tax 1,97 2,298 2,78 3,253 3,833 Exceptional items 2,24 (578) Reported net profit 7,12 5,39 7,148 8,794 1,364 Adjusted net profit 5,96 5,969 7,148 8,794 1,364 Adjusted PAT margin (%) Adjusted EPS (Rs) % growth Exhibit 11: Balance sheet Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY2E Share capital Reserves 28,912 32,111 35,497 39,777 44,875 Net worth 29,537 32,736 36,123 4,42 45,5 Short-term loans - 1,981 2,962 1, Long-term loans Total loans - 1,981 2,962 1, Deferred tax liability net 863 1,138 1,465 1,465 1,465 Liabilities 3,399 35,854 4,549 43,829 47,927 Gross block 12,818 14,25 16,44 18,44 2,44 Depreciation 1,45 2,18 3,461 4,944 6,61 Net block 11,773 11,917 12,583 13,1 13,443 Capital work-in-progress Intangible assets ,678 15,678 15,678 Long-term Investments 4,627 3,891 2,28 2,28 2,28 Inventories 7,844 9,284 13,521 15,226 17,165 Debtors 1,576 2,285 3,76 3,73 3,943 Cash 13,652 19,375 8,781 11,357 15,71 Other current assets 1,14 1,825 2,76 3,89 3,432 Total current assets 24,176 32,77 28,714 33,375 39,611 Creditors 4,363 6,296 1,845 11,7 12,965 Other current liabilities 6,127 7,45 7,961 9,4 1,221 Total current liabilities 1,491 13,746 18,85 2,74 23,186 Net current assets 13,686 19,24 9,98 12,671 16,426 Total assets 3,399 35,854 4,549 43,829 47,927 Exhibit 1: Cash flow Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY2E EBIT 6,5 7,45 9,59 11,2 13,5 (Inc)/dec. in working capital (839) 385 (1,479) (187) (4) Cash flow from operations 5,661 7,43 7,581 1,815 12,965 Other income 694 1,343 1,67 1,242 1,317 Depreciation 1,49 1,196 1,353 1,483 1,657 Tax paid (-) (1,541) (2,23) (2,453) (3,253) (3,833) Net cash from operations 5,863 7,946 7,548 1,287 12,15 Capital expenditure (-) (3,43) (1,255) (2,) (2,) (2,) Net cash after capex 2,82 6,692 5,548 8,287 1,15 Interest paid (-) (127) (122) (198) (197) (124) Dividends paid (-) (4,511) (2,256) (3,762) (4,514) (5,267) Inc./(dec.) in short-term borrowing - 1, (1,) (1,) Inc./(dec.) in long-term borrowing (417) Inc./(dec.) in total borrowing (417) 1, (1,) (1,) (Inc.)/dec. in investments 5, , Cash from financial activities (1,367) (5,711) (6,391) Intangibles / extraordinary items 5,174 (1,38) (14,775) - - Opening cash balance 5,223 13,652 19,375 8,781 11,357 Closing cash balance 13,652 19,375 8,781 11,357 15,71 Change in cash balance 8,429 5,723 (1,594) 2,576 3,714 Exhibit 12: Key ratios Y/E March FY16 FY17 FY18E FY19E FY2E Per share (Rs) Adjusted EPS Book value Valuation (x) P/E P/BV EV/EBITDA EV/sales Return ratios (%) RoCE RoE RoIC Profitability ratios (%) EBITDA margin EBIT margin PAT margin Turnover ratios Total asset turnover ratio (x) Fixed asset turnover ratio (x) Debtor days Inventory days Creditor days Havells India

9 Apr-12 Jun-12 Aug-12 Nov-12 Jan-13 Apr-13 Jun-13 Sep-13 Nov-13 Jan-14 Apr-14 Jun-14 Sep-14 Nov-14 Feb-15 Apr-15 Jun-15 Sep-15 Nov-15 Feb-16 Apr-16 Jul-16 Sep-16 Nov-16 Feb-17 Apr-17 Jul-17 Sep-17 Dec-17 Institutional Equities Rating track Date Rating Market price Target price (Rs) 25 March 213 Sell April 213 Sell May 213 Sell July 213 Sell July 213 Sell October 213 Sell October 213 Sell January 214 Sell January 214 Hold April 214 UR May 214 Buy July214 Buy July 214 Buy October 214 Buy January 215 Buy May 215 Accumulate July 215 Accumulate July 215 Accumulate October 215 Accumulate November 215 Accumulate January 216 Accumulate May 216 Accumulate July 216 Accumulate July 216* Accumulate September 216 Accumulate October 216 Accumulate October 216 Accumulate January 217 Accumulate January 217 Accumulate February 217 Accumulate February 217 Accumulate April 217 Accumulate May 217 Accumulate July 217 Accumulate July 217 Accumulate October 217 Accumulate October 217 Accumulate December 217 Accumulate * Coverage of the stock transferred to Chirag Muchhala Rating track graph Not Covered Covered 9 Havells India

10 Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang group has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. Reports based on technical and derivative analysis may not match with reports based on a company's fundamental analysis. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited. NBEPL has registered with SEBI as a Research Entity in terms of SEBI (Research Analyst) Regulations, 214. (Registration No: INH to ). NBEPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. NBEPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBEPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market-making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Access all our reports on Bloomberg, Thomson Reuters and Factset. Team Details: Name Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com , Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com /811, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /813, Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 31/32, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai-413. Board No. : /1; Fax. : Havells India