Havells finally takes the leap to air-conditioners

Even as competition heats up, acquisition of Lloyds has given it a big enough hold in small towns

An oft-repeated question that retailers of Havells fans have been asked over the years is: Do you also have air-conditioners?

For Havells India, which makes household electrical devices (MCBs, switches, wires et al) and appliances, it was a sign that its consumers were looking for more options to beat the heat than fans and water coolers as their disposable income increased. The demand for ACs has been on the rise and is set to grow at over 15 per cent per annum over the next few years.

Naturally, it made sense for Havells to take the plunge: ACs were an extension to its offering and a related field of diversification.

Yet, five years ago when Havells tried to enter the market, it got cold feet and decided to shelve the plan. The competition was too intense, its distribution network was not ready as air-conditioners require bigger, better showrooms than fans and light bulbs, and it lacked reliable service centres.

“Major players were foreigners with a good distribution network, and not having a recognisable brand and proper distribution channel were big drawbacks. It is only recently that Indian players have started to do well,” says Havells Chairman and Managing Director Anil Rai Gupta.

While there were similarities between its existing businesses and ACs — several of the items that Havells manufactures such as wires, sockets, and switchgears go into making ACs —, the lack of a distribution network was a big obstacle in the way of its ambitions.

“It meant we had to go for inorganic growth to enter this segment,” Gupta says.

Last month, with the acquisition of the consumer durables business of Lloyd Electric, Havells has taken the first step in this direction. As part of the deal, which is expected to close by the end of this month, Havells gets Lloyd’s business that is engaged in sourcing, assembling, marketing and distribution of air-conditioners, TVs, washing machines and other household appliances.

The Rs 1,600-crore acquisition has given Havells access to a whole gamut of products, but ACs will be the mainstay as they account for nearly 70 per cent of the Lloyd revenue.

While competition has intensified in the AC market, what Havells is banking on is Lloyd’s mass market appeal. For the industry, small towns account for 40 per cent of sales. For Lloyd, in contrast, 70 per cent sales come from small towns, where demand is set to grow faster as ACs make the transition from being a luxury item to necessity. This has been the reason why Lloyd  has become the number four player in terms of sales turnover in ACs after Voltas, Blue Star and Daikin and is growing at a CAGR of over 50 per cent against  the industry average of 7.7 per cent ( See A Slice of the Cooling Pie).

The key factors in Lloyd ’s success have been its positioning in the economy segment, higher distribution margins and huge ad spend to gain market share, says an analyst. Over the past year, Lloyd has stepped up its promotional campaign, signing different stars as brand ambassadors for different regions: Amitabh Bachchan in Maharashtra and north  India, Mohanlal in Kerala and Shruti Hassan in Tamil Nadu. It has recently also signed up Telugu film actor Mahesh Babu to promote its products in south India.

Havells wants to continue with this strategy to build on Lloyd’s regional strength further, while at the same time expand its reach in the metros. The acquisition has given it access to 10,000 distributors, 485 authorised service centres and 31 company-owned service centres.

Lloyd ’s distribution network will also be tapped to sell Havells products as  the company expands its consumer durables business. To start with, Havells plans to set up an assembling unit for ACs and use its R&D team to launch new products in the near future.

While the deal has given Havells a foothold in the AC market, which is expected to grow from 4 million units in FY16 to 7 million by FY20, the challenge will be to continue to make inroads into an increasingly competitive market.

Lloyd ’s strategy to gain market share has been at the expense of EBIDTA (earnings before income, depreciation, taxes and amortisation) margins which at 6 per cent is lower than Havells’ 16 per cent. However, most brokerage reports concur that the deal is fairly priced and will become earnings accretive in the medium term.

The company expects margins to start showing improvement in six to eight months.  “Margin improvement is a journey similar to what Havells has been through in the last decade. We believe that this industry commands double-digit margin; Lloyd could embark upon a similar journey with cost rationalisation, economies of scale, optimal channel and product mix management,” says Gupta.

While Havells is still in the process of thrashing out its strategy, price revision may be on the cards too.

For now, it is focused on ensuring a seamless integration of Lloyd’s distributors and employees into the Havells group.

The distribution advantage

Havells engages deeply with its dealers. Apart from the usual incentives, it offers free medical insurance to its dealers and their families, and flying miles in line with their performance, which they can redeem for family vacations abroad. The wife of every dealer gets a charge card into which money gets added every month based on her husband’s performance.

Dealerships are family-run enterprises. To make sure fathers and sons are on the same page, Havells holds special sessions for its dealers, addressed by top-notch experts, on how to sort out inter-generational issues and grow the business.

After demonetisation, Havells’ dealers were a worried lot. They feared that sales would fall and they would lose their incentives. Sensing their mood, Anil Rai Gupta straightaway reduced their incentive targets. They would get the same incentives even if their sales was less. He also told them that all losses because of delayed payments would be reimbursed to them. And last but not the least, he provided them cash relief.

The result: Havells did record sales in the months of November and December.