u In challenging environment in domestic and global markets,

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2 BSE SENSEX/S & P NIFTY 21290/6321 Sector Shareholding Pattern as on Dec 13 (%) PE Band Electrical Equipments & products Market Cap./Free Float (` Crs.) 9691/3714 Market Price as on 15/01/14 `(FV ` 5/-) Week High/Low ` 845/557 Equity Shares Outstanding (in Crs.) P/E Ratio (Times) (for FY '13) 23.4 P/B (Times) (for FY '13) 6.72 EV/EBITDA (Times) (for FY '13) ROE (%) (FY '13) Promoter FII DII Others Highlights u In challenging environment in domestic and global markets, Company has been able put up a reasonable performance during FY 13, in terms of consolidated revenues growing by 11.2%. However, adjusted net profit grew by only 4.3% without considering extraordinary income from brand related settlement and forex fluctuations. u While standalone business revenues grew by 17% to ` 4225 Crs. in FY 13, consumer business non industrial cable grew by 27% during the year. u Indian operations contribute about 58% of revenues and 96% of profits currently. However, Company is working towards increasing margins at Sylvania, which should increase overseas operations contribution towards profits. u Havells posted 22% revenue growth y-o-y in Q2 of FY 14 aided by strong growth in switchgear (23%) and cables segment (25%). Consumer durables and lighting & fixtures grew by 19% & 15% y-o-y respectively. EBITDA margins expanded due to lower advertisement cost and expanded contribution margins. Higher revenue & other income growth and EBITDA margin expansion led to 62.9% growth in net profit (excluding forex fluctuations). u For FY 13 Sylvania reported turnover of ` Crs., EBITDA of ` 142 Crs. and net profit of about ` 35.5 Crs. without considering forex fluctuations and exceptional item of ` Crs. For 1HY of FY 14 Sylvania reported revenues of ` Crs., with EBITDA of ` 56.6 Crs. and negligible profit at net level without considering forex fluctuations. u Although Sylvania s performance has been impacted by lower volumes in Europe and currency fluctuations in LATAN in the recent past, Company expects about 5-5.5% EBITDA margins for 2H of current year. Also, it expects initiatives till date to result in increasing EBITDA margins to 7-8% levels in coming years. u The sluggish growth in infrastructure sector impacted the performance of industrial cable division, but all other segments registered impressive growth in FY 13. Industrial segment contributes 25% of total business, while consumer constitutes the rest. Management believes that industrial segment demand has 2

3 started to pick up in last couple of quarters and has grown by 10% after starting the year with negative growth. Consumer segment demand is expected to follow. u The higher spending power in the country has seen consumers shifting to branded products. Within the branded category, there is a discernible move towards affordable premium products category. Besides the growth in the overall consumption, the resurgence of projects, especially the power projects and the realty sector, will also push growth in investment demand and fuel rise of industrial cables and switchgears. u Although Company reports high contribution margins in its various business segments, we note that it had very high unallocable expenses - about ` 1,100 Crs. in FY 13 - reducing the overall margins of the Company. u Company has strong balance sheet with 0.68:1 debt equity ratio, down from 1.08 in FY 12. ROE which was above 40% in last two years came down to 28.7% in FY 13, as reserves went up due to onetime brand settlement income. Company had free cash flow of more than ` 450 Crs. in last couple of years, which is expected to increase substantially during current year. Background Company acquired Havells brand in 1971 and came out with public issue in Today it has four business segments. Switchgear comprises of domestic and the industrial switchgears, electrical wiring accessories, industrial motors and capacitors. The cable segment includes domestic cables and industrial underground cables. The lighting and fixture segment constitutes energy saving Compact Fluorescent Lamps (CFL) and luminaries. The electrical consumer durable segment comprises of fans, water heaters and domestic appliances. Havells has some of the best global brands such as Crabtree, Sylvania, Concord, and Luminance in its portfolio. Crabtree is a premium brand for switches and switchgears. Domestic popular brands include Havells and Standard. Company has 14 manufacturing units in India spread over eight locations, and six plants aboard in six different locations. It is trying to set up more manufacturing plants, which will result in all its products being manufactured in house. Baddi plant in HP is in the process of doubling its production capacity. As on 31/3/13, Company had 56 subsidiaries out of which 55 companies are registered outside India, 1 of which is based at Hong Kong, which serves as a Central Procurement Company (CPC) to procure various electrical products for Havells and Sylvania trading operations. Most of the subsidiaries are wholly owned. On an average, the company spends around 3% of its revenues on advertisements for brand building. Over the past 4 years it has spent ` 400 Crs. plus in advertising with ` 143 Crs. in FY 13. For first half of FY 14 it spent ` 50 Crs. as against ` 70 Crs. in previous year. It intends to continue spending about 3-3.5% of revenues (excluding cables) on brand building. Customer support is provided through 298 service partners and around 1000 franchisee technicians. 3

4 Apart from advertising, Company focuses on distribution network. It has 20,000 strong distribution network and 5000 dealers. It plans to reach 700 towns- from existing 500 with focus on Tier II & Tier III towns. Its entry in to rural market through entry level conventional piano switches under brand name Reo is expected to push growth in other categories as well. Switchgears Havells enjoys a dominant market share in the overall organized switchgears market. In domestic Miniature Circuit Breakers (MCB) it enjoys 29% market share, and in switches it has 16% share. Notwithstanding the slow pace of implementation of industrial and residential projects, Havells managed to comfortably retain its overall market share, thanks to its strong brands. Switchgear segment, comprising industrial and domestic switchgears, electrical wiring accessories, industrial motors and capacitors, is sold through the dealer-distribution channel. Focus on household switchgears helped Company during FY 13 in balancing the relatively slower growth in the industrial switchgears, where it traditionally enjoys a significant market share. It has widened product range in the MCBs, used in households, to emerge as the dominant player in the industry, enjoying close to 28% market share - largest in the country. A new brand of switchgears under the brand Crabtree XPRO, aimed at professionals and discerning clientele, was introduced during the year to complement the Crabtree range of switchgears. Also for the first time, Havells under its premium brand Crabtree, launched super premium glass plate switches Murano in its portfolio. The Company also expanded the product range in Crabtree brand by introducing distribution boards, MCB, RCCB and range of Time switches. During the year, Havells marked its foray into entry level conventional piano switches Reo, creating a new segment of Premium Conventional Switches and gained entry in rural markets. The Switchgears division registered net revenue of ` 1,078.1Crs. during FY 13 (15% of total), as compared to ` Crs. during FY 12, reflecting a growth of 20%, with contribution margins in this segment at 33.9%. The division grew 16% without Reo, new product, which contributed ` 34 Crs. of revenues in FY 13. Switchgear revenues grew 23% y-o-y in Q2 of FY 14 to ` Crs. driven by launch of Reo switches revenues of ` 19 Crs., and improved off take in the segment. The division revenues grew by 15% y-o-y excluding Reo. Company has guided for ` Crs. of revenues for Reo in FY 14 as against ` Crs. earlier, due to delay in distribution off take. Contribution margins improved to 36.6% for Q2 of FY 14, aided by higher price realizations and improving efficiencies in Reo. 4

5 Cables & Wires Investments in building the manufacturing capacities in this segment have led to Havells emerging as one of the largest producers of cables in the country. Its flexible copper cables, which are fire proof, have found a good response from both industrial consumers and other consumers, enabling a marked shift in demand from the unorganized to the organized sector. The division produces two types of cables: industrial underground cables which find usage in commercial and industrial ventures, and domestic cables which are used in buildings and residential apartments. While in domestic cables (market size of ` 6500 Crs.), Company has 14% market share, in industrial cables (market size of ` 10,000 Crs.) it has 9% share. Income from the Cable division was ` 1,692.5 Crs. during FY 13 as compared to ` 1,593 Crs. during FY 12. This division accounts for 23.4% of the total consolidated revenues. Contribution margins were also better at 9.1% of net revenues, up from 7.9% in the previous year. Industrial Cable revenue de grew by 10% during FY 13 whereas the domestic cable registered growth of 32%. Division grew its revenues by 25% y-o-y in Q2 of FY 14 to ` Crs., on low base of last year and growth in industrial cables, which grew by 36% y-o-y. Lighting & Fixtures Company is India s first manufacturer of new generation Ceramic Metal Halide (CMH) lamps. It launched Fans, CFL lamps and Lighting in 2003 and Havells brand in US & Mexico in In CFL lighting market of ` 2300 Crs. in the country, Havells enjoys # 2 position and 12% market share. Major competitors are Phillips & Osram. In lighting luminaries market of about ` 2,900 Crs. in the country, Havells enjoys # 4 position and 13% market share. Revenue share of Own Production & Revenue share of Own Production & Traded Traded Goods Goods - FY '13 - FY (Rs. 13 Crs.) (` Crs.) Switchgears - OP Switchgears -TG Lighting & Fixtures - OP Lighting & Fixtures -TG Electrical Consumer Durables -OP Electrical Consumer Durables -TG Cables 5

6 Company continued to strengthen its manufacturing base, with the launch of the Neemrana lighting fixtures plant in FY 13, which is the first large scale lighting fixtures plant in the country. It is currently in the process of enhancing the plant s capacity from the present 20 Lacs pcs per month to 40 Lacs pcs per month. 50% of the production from Neemrana plant is earmarked for exports through the network of Sylvania, with the balance catering to the domestic market. The division registered net revenue (own production) of ` Crs. during FY 13 in standalone operations as against ` Crs. during previous year, indicating a growth of 20% with contribution margins of 23.6%. Growth in Electrical Consumer Durables was also driven by higher growth in new product segment i.e. Domestic Appliances. Fan division without appliances grew by 25%. On consolidated basis, division reported revenues of ` 3,688 Crs., 50.9% of total revenues, as more than half of revenues of this division comes from purchase of goods for trading. Lighting & Fixtures grew 15.2% y-o-y to `180 Crs. in Q2 of FY 14, led by healthy growth in luminaries. Contribution margins were flat at 22.5%, wherein luminaries margins improved (higher share of manufactured), while CFL margins declined, which is becoming more commoditized in nature. Electrical Consumer Durables After launching domestic appliances in 2011, Company further strengthened its domestic appliances range in FY 13, and emerged as the #3 brand in the industry in less than 2 years of its launch, while maintaining premium level pricing. It launched new models in all categories of garment care, brewing, cooking and temperature control. Currently product portfolio includes fans, juicers, mixer grinders, hand blenders, choppers, steam and dry irons, pop-up toasters, electric cookers, induction cookers and electric kettles. It enjoys # 3 position and 15% market share in ` 4500 Crs. fans market in India. The electrical consumer durables division registered net revenue of ` Crs. during FY 13 as compared to ` Crs. in FY 12, a growth of 38% with contribution margins of 25.1%. For Q2 of FY 14 division posted 19% y-o-y growth to `193.3 Crs., driven by growth in small appliances 52% y-o-y. Although growth in fans was muted, margins improved y-o-y by 4.8% to 27.4%, as Company reduced imported components over previous year. Company expects domestic appliances business to contribute about 15% of overall business in next 4-5 years. Havells Galaxy One Stop Shop Since last 2-3 years, Havells has opened around 200 Havells Galaxy Stores which offer one stop shop for the Company s products ranging from ceiling fans to switches, switchgears, cables and lighting products. It is run by Company s dealers as franchisees. It has helped Company increase its presence across different markets and increase revenues from this channel from customers across 6

7 home, industries and commercial establishments. Company plans to double the number of stores over next couple of years and cover 250 towns against 130 towns at present. Galaxy now contributes 12% of non cable business, apart from brand visibility and direct customer engagement. Sylvania Global Sylvania has wide product portfolio of energy-efficient lights, lamps and luminaries. The brands of this 100 year old company have vast dealers (10,000) & distribution network in Europe and Latin America. The rationalization of product range and financial restructuring done in the earlier years has also helped in bringing about a degree of stability in global operations. Company continues to source a part of products from emerging markets, including India and China. Sylvania EBIDTA margin in FY 13 were impacted due to the absence of one time commodity gain booked in FY 12, decline in sales in Europe and currency volatility in Americas. It earned Euro 30.5 million net profit on revenues of Euro million in FY 13. However, Euro 25.8 million was received towards brand related settlements, net of which the PAT came to Euro 4.7 million as against Euro 10.2 million in previous year. Company is experiencing stable conditions in Europe, Latin America & Asia. It is trying to enter new territories like South Africa, Malaysia and Chile. It is also planning to expand in to electrical products apart from lighting. Havells has undertaken debt refinancing at Sylvania, apart from significant deleveraging aided by proceeds of Havells equity and internal accruals. Total exposure of Havells in Sylavania is 156 million Euros, including 31 million Euros of guaranteed debt. Qtr Ended (in million Euros) Sylvania quarterly preformance June '12 Setp. '12 Dec. '12 March '13 June '13 Sept. '13 Net Revenue EBITDA EBITDA Margin (%) Pension Liab. Exp Depreciation Finance Cost Forex Loss/(Gain) Other Income Exceptional Item Profit before Tax Tax Profit after Tax Note: Exeptional item and forex loss/(gain) is not considered for profit calculations. 7

8 Sylvania Europe The markets in Europe continued to remain sluggish in calendar Problems faced by some sovereign states and policy measures taken in Euro zone impacted consumption. The century-strong brand presence of Sylvania s product portfolio, encompassing lighting fixtures and lighting lamps, has allowed Company to keep stability and focus on profit growth. Sylvania Americas American markets include largely Latin American countries. The volatile currency movements in some of these emerging markets remain a challenge. Company is also pursuing opportunities in other markets, notably ASEAN and Africa. Financials In FY 13, consolidated revenues grew by 11.2% to ` 7248 Crs. Consolidated EBITDA grew by 1.1% to ` 686 Crs. and net profit by 4.1% to ` 414 Crs. The profit figures does not include payment of ` Crs. received by subsidiary company towards onetime brand related settlement. Over the past five years while consolidated revenues grew by 7.6%, standalone revenues have grown by 15.3%. While consolidated net profit grew by 20.8%, standalone net profit grew by 20.9%. On a standalone basis Havells grew it net sales by 16.8% in FY 13 to ` 4,225 Crs. EBITDA grew by 17.5% to ` 544 Crs. Net profit grew by 21.6%% to ` 371 Crs. For 1HY of FY 14, Company grew its revenues by 11.4% y-o-y, while EBITDA grew by 25.4% and net profit by 37.6%. Revenue growth which was more or less flat in first quarter, accelerated in second quarter and aided first half growth of 11.4%. Q2 growth was also helped by lower base in earlier year. Improvement in contribution margins & lower advertisement cost led to higher EBITDA growth. Interest cost dropped from ` 15.5 Crs. to ` 5 Crs. in 1H FY 14 mainly due to lower acceptances. Other income including interest on FD was ` 8.1 Crs. as against ` 1.1 Crs. in previous year. Company has improved profitability ratios at both operating and net levels during 1H FY 14. Standalone Switchgears revenues grew by 11% to ` Crs. including ` 36 Crs. contributed by Reo switches. Industrial cables grew by 8%. Sylvania - Revenues & EBITDA on regional basis Consolidated Net Revenue EBITDA in Euro EBITDA in % % Revenue share Year Ended FY '12 FY '13 FY '12 FY '13 FY '12 FY ' Europe Americas Others Total

9 Revenues at Sylvania for 1H FY 14 was about 2% down at million Euros. EBITDA margins suffered and were lower at 3.4% against 4.3% in 1H of FY 13, mainly due to decrease in volumes and currency volatility. However, savings in interest has saved the day with PAT at 0.1 million Euro as against net loss of 1.4 million Euro last year. However, due to lower operating profits & other income (1H FY 13 included income on sale of fixed assets in Brazil of 3.1 million Euros) full benefit of interest cost savings of 6.7 million Euros were not reflected in net profits. 1H of FY 13 had one time charge of refinancing cost of 4.2 million Euros. Company incurred forex losses in 1H of FY 14 due to volatility of LATAM currencies on outstanding creditors of imported goods. Without considering all non recurring items, Sylvania reported net profit of 0.1 million Euros for 1H of FY 14, as against net loss of 0.3 million Euros in 1H of FY 13. Although Company has earned only 3.42% EBITDA margins in the 1H of FY 14 for Sylvania, it is guiding for 5-5.5% EBITDA margin for 2H of FY 14. Although Europe is expected to be stable without much growth, Latin America market is growing in terms of local currency and dollar terms. Hence, with cost stabilization and selective growth, Company is hopeful of achieving 5-5.5% margin in 2H of FY 14. Company has excellent working capital management with net working capital at only 7 days sales and debtors at 9 days and creditors at 57 days sales as of Sept. 13. However, ` 670 Crs. was outstanding in channel financing and receivable discounting book as of Sept. 13. Company incurred ` 120 Crs. of capex in FY 13 in standalone entity. Again maintenance capex is expected to be around ` 100 Crs. each, for next couple of years. Company plans to incur about ` 50 Crs. towards production facilities for water heaters divided in to current year and next year. Segmentwise Revenue Analysis - Standalone Business Period (` Crs.) FY '12 FY '13 Y-O-Y growth % Net Revenue % to total Net Revenue % to total Switchgears Cables Lighting & Fixtures Electrical Consumer Durables

10 Concerns The entry of newer players in the lucrative consumer durables electrical goods segment could put pressure on existing companies to retain their market share. The slowdown in the global markets has led to unrestricted imports at very low prices. If this practice continues and Indian markets are flooded with cheap imports it could impact volumes and also put pressure on margins. Havells derives significant revenues from Europe, through its subsidiary Sylvania. Any prolonged slowdown in the region will have adverse impact on earnings. Consolidated Segment Results Period Ended (` Crs.) FY '10 FY '11 FY '12 FY '13 % to total Switchgears Revenues EBIT EBIT Margin (%) Cables Revenues EBIT EBIT Margin (%) Lighting & Fixtures Revenues EBIT EBIT Margin (%) Electrical Consumer Durables Revenues EBIT EBIT Margin (%) Total Revenues EBIT net of unallocable exp EBIT Margin (%) Note: Unallocable exp. is very high, resulting in much lower combined EBIT margin 10

11 Comments u Operating in a highly competitive environment, Havells is challenged by competition not only from emerging indigenous players, but also cheap imports of global producers struggling to balance the contraction of demand in the developed markets, like Europe. u During FY 13 Company entered into a revised Trademark License Agreement with QRG Enterprises Limited (one of the promoter companies), pursuant to which the brand Havells will be transferred to the Company for no consideration with effect from 1st April 2016, when the present license agreement expires. Accordingly the royalty fees will be discontinued from the current maximum cap of ` 40 Crs. per year. u Company s strategic focus on regular introduction of new products in the market has helped in developing new revenue streams from the domestic segment for electrical goods and appliances. This has helped in overcoming the sluggish demand in the industrial sector for electrical goods due to slow growth in infrastructure development. Having positioned itself as quality focused consumer brand, Havells has been able to gain market shares in various products through brand building initiatives and Havells Galaxy stores. The company s efforts in expanding the rural reach through Reo would be a growth driver for the future. u Company is guiding for 12% growth in 2H of FY 14, which will be contributed by 5-6% growth in industrial and 13-15% in other businesses. u Although Sylvania remains a concern, Havells domestic business has been growing well in difficult environment. The stock is available at about 24x P/E on historical earnings. We feel that the stock should track the earnings momentum in the coming quarters. 11

12 Standalone Quarterly Financials Quarter Ended (` Crs.) March '12 June '12 Sept. '12 Dec. '12 March '13 June '13 Sept. '13 Income from operations Inc./Dec. in stock Materials Purchase of stock in trade Employees Other Expenses Total Expenses EBITDA EBITDA Margin(%) Depreciation Interest Tax Other Income Forex fluctuations Loss/(Gain) Net Profit Net Profit Margin (%) Equity Capital No. of Equity Shares (FV ` 5/-) EPS (`) Note: Forex fluctuations not considered in profit calculations. 12

13 Consolidated Financials Period Ended (` Crs.) FY '10 FY '11 FY '12 FY '13 June '13 Sept. '13 Income from operations Inc./Dec. in stock Materials Purchase of stock in trade Employees Other Expenses Total Expenses EBITDA EBITDA Margin(%) Depreciation Interest Tax Other Income Forex fluctuations Loss/(Gain) Non Recurring Items Net Profit (net of MI) Net Profit Margin (%) Equity Capital No. of Equity Shares (FV ` 5/-) Reserves EPS (`) Book Value (`) ROE (%) Note: In FY 13, Company s subsidiary received ` Crs. towards one time brand related settlement net of impairment of fixed assets, not considered in profit calculations. 13

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