Havells India - Lighting up

PENNY WISE

Given the high growth expected in the power and housing sector, Havells India looks promising.

While there is no shortage of stocks which has given robust returns during the current rally, power distribution equipment company, Havells India stands out for the continued upside potential in the stock. The stock has seen a sharp run up of 336.8 per cent in the past 12-month period.

However, analysts believe there is more scope for appreciation as the stock's valuations are still reasonable considering its business prospects in rapidly growing power equipment and housing sector.

Leading player
Havells India, the flagship company of QRG enterprises, is one of the largest Indian power equipment distribution companies offering a wide array of products like building circuit protection equipment, domestic switchgears, cables and wires and electronic consumer durables which includes fans, CFLs (compact fluorescent lamps) and light fittings. Its business has grown at a phenomenal pace of 40 per cent in last ten years.

With about 11 industrial units located at different locations mainly in North India, the company has one of the largest dealer networks in the country with 1200 dealers catering to about 25000 retail outlets.

The company exports to over 45 countries across Europe, Middle East, Far East and African countries and has offices in UK, Dubai, Dhaka and China.

The company is a dominant player in the switchgear market having strong brand presence and an overall market share of 35 per cent. It is the largest manufacturer of MCBs (miniature circuit breakers), RCCBs (residual current circuit breakers) and distribution boards in India and among the top ten global manufacturers of switchgears.

It competes with companies like L&T & Siemens in industrial switchgear and Legrand & Indo Asian in domestic switchgear. In the cable and wire (C&W) business, the company offers entire range of low and high voltage PVC and XLPE cables, domestic FR/FRLS wires, co-axial TV and telephone cables and has a market share of about 20 per cent.

However, there are larger players like Polycab, Finolex etc and CCI and Universal Cables which are comparable. Havells recently forayed in to electrical consumer durables (ECD) business to manufacture fans, light fittings, CFLs etc in 2004.

Changing mix
The share of the switchgear business has come down from approximately 36 per cent in FY04 to 31 per cent in FY05 and the share of cables and wires and electronic consumer durable business has gone up from 41 per cent and 6 per cent in FY04 to 46 per cent and 19.50 per cent in FY05 respectively.

Analysts feel this change in the business mix can be a cause for concern as margins for the switchgear business are high while in the C&W business margins are under pressure as raw material prices form about 80 per cent of total costs.

There are also any number of players in the unorganised sector, which adds to the pricing pressure. Also in the electrical business the company faces stiff competition from established players like Bajaj Electrical and Orpat.

To counter the competitive pressures, the company has increased its capacity of C&W to 90 kms per day post March 2005. Also it has increased its capacity in fans to 2.4 million units and in CFLs to 20 million p.a.

The company recently announced merger of its group company Crabtree Ltd., which is mainly into modular plate switches and bathroom fittings with itself It has also opened a procurement office in Shanghai (China) for sourcing low cost material for its fans, lighting fixtures and CFLs.

The company's board has also approved the acquisition of a Greek company for about 10 million euros. The acquired company has a market share of about 20 per cent in Greece's electrical switchgear segment and a strong presence in Southern Europe.

Since the European market contributes about 40 per cent of its total exports, the company would leverage on the acquired company's brand and distribution network.

Rajesh Gupta, director (finance) of Havells India, expects that expansion and acquisition will enable the company to achieve a turnover of Rs 1000 crore by FY06 and about Rs 1400 crore in FY07.

Electronic consumer durables and cables and wires business are expected to be the biggest growth drivers. However margins are unlikely to improve further due to the increasing contribution from low margins business like C&W.

Financials
The company has a track record of consistent dividend payments and its return on net worth has also improved from 25.3 per cent in FY02 to 35 per cent in 2004-05. Sales have grown at a CAGR of 44.3 per cent and net profit at a CAGR of 52.7 per cent between FY02-FY05.

In FY05, the company's sales, operating profit and net profit recorded a growth of 60.3, 54.4 and 45.6 per cent at Rs 581.96 crore, Rs57.42 crore and Rs 30.52 crore respectively.

However both operating and net margins were down by 30 bps and 60 bps at 9.9 and 5.2 per cent respectively. Analysts attribute this to the change in the business mix and increasing contribution of low margins business like C&W.

Valuation
Apart from the rising demand from housing and construction sector, government's thrust on infrastructure and rural electrification programme is also expected to lead to the overall growth of the electrical industry.

The stock is trading at a trailing 12 month P/E of around 10x. Analysts feel that the valuation is quite attractive taking into consideration the trailing 12 month P/E of 15x and 11 x of the broader Sensex and its closest competitor Indo Asian Fusegear respectively.