Havells India (HAVL IN) Havells Indi A

India Industrials 3 November 2016

Havells India (HAVL IN) Havells Indi a

Target price: INR450.00 Share price (3 Nov): INR394.35 | Up/downside: +14.1%

Initiation: turning into a compounding story Saurabh Mehta (91) 22 6622 1009  We like the Havells’ growth story despite rich-looking valuations [email protected]  Sustainable competitive edge: strong brand, extensive distribution Ajay Devnani (91) 22 6622 1015  Initiating with an Outperform (2) rating and TP of INR450 [email protected]

Investment case: India's leading electrical consumer goods player. Share price performance

We initiate on Havells with an Outperform (2) rating. We believe its strong (INR) (%) brand and well-entrenched distribution network would ensure growth ahead 455 175 of the market. While industry growth has slowed over the past 3 years, the 391 154 company has maintained its business momentum with steady market-share 328 133 264 111 expansion and a 4pp rise in gross margin. The outlook is also favourable – 200 90 we forecast a 16% revenue CAGR and 1pp EBITDA margin gain to drive a Nov-15 Feb-16 May-16 Aug-16 Nov-16 21.9% net-profit CAGR over FY16-19E. Good asset turns and negative Havells (LHS) Relative to SENSEX Index (RHS) working capital should also underpin healthy returns. 12-month range 241.70-451.05 Sustainable competitive advantage. Havells has increased its presence Market cap (USDbn) 3.68 in India’s consumer electrical market by successfully entering new markets 3m avg daily turnover (USDm) 9.23 Shares outstanding (m) 625 and gaining significant market share, without competing with peers on Major shareholder Promoter Group (61.6%) pricing by selling everyday electrical goods (switches, circuit breakers, wires) as branded high quality products. In the process it has redefined the Financial summary (INR) way electrical business is done in India. Havells’ strategy is to build a wide Year to 31 Mar 17E 18E 19E distribution network, launch new products with an emphasis on quality (in- Revenue (m) 62,398 75,596 85,838 house manufacturing), and offer a superior customer service. Operating profit (m) 7,814 9,914 11,316 Net profit (m) 6,379 8,030 9,287 Core EPS (fully-diluted) 10.214 12.857 14.870 We foresee strong sustainable earnings growth for Havells over the long EPS change (%) 24.4 25.9 15.7 term (5-10 years) on the back of its sustainable competitive advantages, Daiwa vs Cons. EPS (%) (1.5) 4.3 5.2 PER (x) 38.6 30.7 26.5 such as its strong brand, distribution network and market share, along with Dividend yield (%) 1.0 1.3 1.5 long-term demand drivers such as the improvement in power availability in DPS 4.100 5.100 6.000 India, the shift in market share from unorganised to organised sector, and PBR (x) 8.3 7.3 6.4 Havells repeating its success in new product launches and expanding its EV/EBITDA (x) 25.9 20.3 17.5 ROE (%) 22.7 25.2 25.5 geographical exposure. Source: FactSet, Daiwa forecasts

Catalysts: With India’s economy seemingly on the cusp of recovery, we see Havells’ revenue rising on tailwinds from the positive impact of the 7th Pay Commission (hike in central government employee salaries), and the introduction of a GST (likely from FY18E).

Valuation: We initiate coverage with a 12-month TP of INR450 based on a 35x FY18E PER, a 40% premium to the stock’s past 5-year-average. We believe such a premium is justified given the company now has competitive sustainable advantages in terms of brand equity, extensive distribution network and market share, which are difficult to displace, and instil confidence in its long-term earnings growth. We also like its strong balance sheet, better return profile (after the Sylvania divestment), and average ROCE and ROIC for FY16-19E of 29% and 46%, respectively.

Risks: The key risks to our call are any failure to scale up new consumer launches and any impact of increased competition on profitability.

See important disclosures, including any required research certifications, beginning on page Error! Bookmark not defined.

Havells India (HAVL IN): 3 November 2016

Table of contents

Turning into a compounding story ...... 6 Investment summary ...... 6 Key charts ...... 9 Strong distribution channels … act as a key entry barrier ...... 10 Focus on branding and advertising … leading to high brand recall ...... 11 Consistency in launching new products … drives earnings growth ...... 13 Manufacturing focus ...... 14 Sylvania exit … brings the focus back to the domestic business ...... 14 Segmental analysis ...... 15 Switchgears ...... 15 Cables and wires ...... 17 Lighting and fixtures ...... 18 Electrical consumable durables ...... 20 Financial analysis ...... 23 Our assumptions ...... 24 Valuation and recommendation ...... 25 Risks ...... 26 Appendix 1 ...... 27 Company background ...... 27 Appendix 2 ...... 28 EESL ...... 28

Havells India (HAVL IN): 3 November 2016

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook Havells: revenue growth and PAT growth

We forecast Havells’ revenue to rise at a CAGR of 16% (%) over FY16-19E, backed by a recovery in growth for the 65 domestic business, a widening of its distribution channels, 55 incremental revenue from 2 new facilities, as well as tail 45 winds from the 7th Pay Commission and the introduction of 35 a GST (likely from FY18E), and a 1pp increase in its 25 EBITDA margin on the back of the company ceasing 15 brand royalty payments to parent company QRG 5 (5)

Enterprises from FY17, and higher revenue growth leading

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

FY18E FY19E to an EPS CAGR of 21.9% for FY16-19E. FY17E Revenue growth YoY % (LHS) Adjusted PAT growth % YoY (RHS)

Source: Company, Daiwa forecasts

Valuation Havells: 1-year-forward PER (x) We initiate coverage with an Outperform (2) rating and PER 42 12-month target price of INR450, based on a 35x PER for 37.3x Avg+2S.D. FY18E, a 40% premium to the stock’s past 5-year- 35 average, which we believe is justified by the company’s 28.7x Avg+1S.D. 28 strong competitive advantage in terms of its brand recognition and extensive distribution network. In our view, 21 20x Avg such attributes instil confidence in its long-term 14 11.4x Avg-1S.D. sustainable growth outlook, as well as strong balance 7 sheet and improved return profile (after the Sylvania 2.7x Avg-2S.D.

divestment). 0

Oct-16 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-06 Source: Bloomberg, Company, Daiwa forecasts

Earnings revisions Havells: Bloomberg-consensus EPS-forecast revisions

The Bloomberg-consensus earnings forecasts for FY17-18 (INR) have been revised down by 6-7.5% over the past 12 14 13.2 months, due to weaker-then-expected revenue growth. 13 12.6 12.4 12.1 However, from here on we see upside risk to the 11.5 12 consensus earnings forecasts on the back of potentially 10.9 higher-than-expected revenue growth, especially for FY18, 11 10.7 10.3 10.4 10.6 on the back of a recovery in domestic business demand 10 and incremental sales from the company’s 2 new facilities.

Jul-16

Apr-16 Oct-15 Oct-16

Jan-16 Jun-16

Feb-16 Mar-16

Nov-15 Dec-15 Aug-16 Sep-16 May-16 FY17E FY18E

Source: Bloomberg

Havells India (HAVL IN): 3 November 2016

Financial summary Key assumptions Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Cables - Revenue (% Ch YoY) 29.3 6.2 13.8 13.7 0.8 7.0 20.0 8.0 Switchgears - Revenue (% Ch YoY) 22.0 20.3 13.1 4.9 0.6 15.0 20.0 10.0 Electrical Consumables - Revenue (% 21.9 38.0 8.1 20.5 11.0 25.0 25.0 25.0 Ch YoY) Lighting and Fixtures - Revenue (% Ch 24.7 20.0 8.3 2.8 8.2 15.0 20.0 15.0 YoY) EBITDA margins (%) 12.6 12.7 13.6 13.3 13.8 14.3 14.8 14.8

Profit and loss (INRm) Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Cables 15,930 16,925 19,264 21,904 22,081 23,626 28,352 30,620 Switchgears 8,962 10,781 12,192 12,790 12,861 14,790 17,748 19,523 Other Revenue 11,265 14,545 15,741 17,693 19,427 23,982 29,497 35,696 Total Revenue 36,156 42,250 47,197 52,387 54,369 62,398 75,596 85,838 Other income 0 0 0 0 0 0 0 0 COGS (22,911) (26,514) (29,017) (31,784) (31,735) (36,659) (44,035) (50,001) SG&A (8,688) (10,388) (11,764) (13,612) (15,155) (16,847) (20,411) (23,176) Other op.expenses (447) (579) (636) (875) (922) (1,077) (1,236) (1,345) Operating profit 4,110 4,770 5,780 6,116 6,557 7,814 9,914 11,316 Net-interest inc./(exp.) (436) (277) (1) 170 384 1,046 1,238 1,582 Assoc/forex/extraord./others 64 79 173 176 2,201 0 0 0 Pre-tax profit 3,738 4,572 5,951 6,463 9,142 8,860 11,153 12,898 Tax (684) (858) (1,164) (1,813) (1,988) (2,481) (3,123) (3,612) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 3,054 3,714 4,787 4,649 7,154 6,379 8,030 9,287 Net profit (adjusted) 3,054 3,714 4,787 4,649 5,130 6,379 8,030 9,287 EPS (reported)(INR) 24.478 29.765 38.364 7.447 11.454 10.214 12.857 14.870 EPS (adjusted)(INR) 24.478 29.765 38.364 7.447 8.213 10.214 12.857 14.870 EPS (adjusted fully-diluted)(INR) 4.890 5.947 7.665 7.444 8.213 10.214 12.857 14.870 DPS (INR) 6.500 7.500 10.004 3.001 6.001 4.100 5.100 6.000 EBIT 4,110 4,770 5,780 6,116 6,557 7,814 9,914 11,316 EBITDA 4,557 5,349 6,416 6,991 7,479 8,892 11,150 12,661

Cash flow (INRm) Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 3,738 4,572 5,951 6,463 9,142 8,860 11,153 12,898 Depreciation and amortisation 447 579 636 875 922 1,077 1,236 1,345 Tax paid (747) (925) (1,118) (1,505) (1,446) (2,481) (3,123) (3,612) Change in working capital (400) (652) 1,075 399 (911) 715 664 613 Other operational CF items 534 241 (20) (227) (2,464) (1,046) (1,238) (1,582) Cash flow from operations 3,572 3,814 6,525 6,004 5,243 7,125 8,691 9,663 Capex (1,358) (1,163) (901) (1,675) (1,703) (2,800) (1,800) (1,500) Net (acquisitions)/disposals (597) (169) (906) (1,292) 7,539 0 0 0 Other investing CF items 7 (24) (2,033) (3,121) (6,592) 0 0 0 Cash flow from investing (1,948) (1,356) (3,839) (6,088) (756) (2,800) (1,800) (1,500) Change in debt (72) (166) 753 (1,154) (434) 0 0 0 Net share issues/(repurchases) 0 0 0 99 41 0 0 0 Dividends paid (363) (943) (1,826) (1,460) (4,511) (3,073) (3,822) (4,497) Other financing CF items (414) (247) (83) (171) (62) (5) (5) (5) Cash flow from financing (848) (1,356) (1,155) (2,686) (4,965) (3,078) (3,827) (4,502) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 776 1,103 1,531 (2,769) (478) 1,248 3,064 3,661 Free cash flow 2,214 2,651 5,624 4,330 3,540 4,325 6,891 8,163 Source: FactSet, Daiwa forecasts

Havells India (HAVL IN): 3 November 2016

Financial summary continued … Balance sheet (INRm) As at 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 1,362 2,465 6,261 5,223 13,442 15,740 20,048 25,296 Inventory 6,489 6,630 6,827 6,897 7,844 9,089 10,947 12,430 Accounts receivable 1,597 1,302 1,365 1,325 1,576 1,710 2,071 2,352 Other current assets 931 1,131 1,362 2,852 1,661 2,069 2,430 2,711 Total current assets 10,379 11,528 15,815 16,298 24,523 28,608 35,497 42,789 Fixed assets 8,340 9,135 9,341 10,073 10,821 12,543 13,107 13,262 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 7,751 7,919 8,825 10,118 4,603 4,603 4,603 4,603 Total assets 26,470 28,583 33,981 36,489 39,946 45,753 53,206 60,654 Short-term debt 0 0 0 0 0 0 0 0 Accounts payable 5,425 3,990 4,495 3,945 4,363 5,131 6,180 7,017 Other current liabilities 3,408 3,852 5,712 7,921 8,351 10,084 12,280 14,101 Total current liabilities 8,832 7,841 10,208 11,866 12,714 15,215 18,460 21,118 Long-term debt 998 1,420 1,958 431 41 41 41 41 Other non-current liabilities 556 619 517 434 749 749 749 749 Total liabilities 10,386 9,881 12,683 12,731 13,504 16,005 19,250 21,908 Share capital 624 624 624 624 625 625 625 625 Reserves/R.E./others 15,459 18,078 20,675 23,134 25,817 29,124 33,331 38,121 Shareholders' equity 16,083 18,702 21,299 23,758 26,442 29,748 33,956 38,746 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 26,470 28,583 33,981 36,489 39,946 45,753 53,206 60,654 EV 245,926 245,245 241,986 241,497 232,889 230,591 226,283 221,035 Net debt/(cash) (364) (1,045) (4,304) (4,793) (13,401) (15,699) (20,007) (25,255) BVPS (INR) 128.898 149.888 170.695 38.052 42.338 47.632 54.369 62.039

Key ratios (%) Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) 25.5 16.9 11.7 11.0 3.8 14.8 21.2 13.5 EBITDA (YoY) 33.8 17.4 20.0 9.0 7.0 18.9 25.4 13.5 Operating profit (YoY) 32.1 16.0 21.2 5.8 7.2 19.2 26.9 14.1 Net profit (YoY) 26.4 21.6 28.9 (2.9) 10.3 24.4 25.9 15.7 Core EPS (fully-diluted) (YoY) 26.4 21.6 28.9 (2.9) 10.3 24.4 25.9 15.7 Gross-profit margin 36.6 37.2 38.5 39.3 41.6 41.3 41.8 41.8 EBITDA margin 12.6 12.7 13.6 13.3 13.8 14.3 14.8 14.8 Operating-profit margin 11.4 11.3 12.2 11.7 12.1 12.5 13.1 13.2 Net profit margin 8.4 8.8 10.1 8.9 9.4 10.2 10.6 10.8 ROAE 20.7 21.4 23.9 20.6 20.4 22.7 25.2 25.5 ROAA 12.7 13.5 15.3 13.2 13.4 14.9 16.2 16.3 ROCE 25.8 25.6 26.6 25.8 25.9 27.8 31.1 31.1 ROIC 22.4 23.2 26.8 24.5 32.1 41.5 51.0 59.4 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 18.3 18.8 19.6 28.1 21.8 28.0 28.0 28.0 Accounts receivable (days) 13.7 12.5 10.3 9.4 9.7 9.6 9.1 9.4 Current ratio (x) 1.2 1.5 1.5 1.4 1.9 1.9 1.9 2.0 Net interest cover (x) 9.4 17.2 4,128.4 n.a. n.a. n.a. n.a. n.a. Net dividend payout 26.6 25.2 26.1 40.3 52.4 40.1 39.7 40.4 Free cash flow yield 0.9 1.1 2.3 1.8 1.4 1.8 2.8 3.3 Source: FactSet, Daiwa forecasts

Company profile

Havells India is India's leading electrical goods manufacturer of industrial and consumer electrical products. It has presence in cables, switchgears, electrical consumables and lighting and fixtures. In FY16, it recorded revenue of INR54.3bn and net profit of INR7.1bn on standalone basis. In FY16, cables contributed 41% of sales and switchgears 24% of sales.

Havells India (HAVL IN): 3 November 2016

Turning into a compounding story Investment summary Havells is India’s leading electricals company, which over the years has expanded into the miniature circuit breakers, wires, lighting, fans and domestic appliances categories.

We initiate coverage with We initiate coverage of the stock with an Outperform (2) rating. We forecast an earnings an Outperform rating CAGR of over 21.9% for FY16-19 (vs. 11.4% for FY13-16) driven by: 1) increased revenue from the new launches, which are likely to benefit from the well-entrenched distribution network and strong branding, 2) a recovery in India’s domestic electrical industry with tailwinds from the positive impact of the 7th Pay Commission – the shift in market share from unorganised to organised sector, and 3) the revenue contribution from the company’s 2 new facilities in Bengaluru and Guwahati.

Sustainable competitive advantage We see strong brand Havells’ brand is associated with high quality products and a superior customer service, recognition and a well- while it also has a strong distribution network which has helped it gain market share in the entrenched distribution various segments within which it operates. To improve this brand value and extend its network ensuring growth reach further, the company has introduced innovative schemes like working capital ahead of the market financing for distributors, offers (royalty programmes, cash rewards) for retailers and electricians, improved product designs, etc., coupled with higher advertising spend. Today, the company’s product basket, which ranges from simple switches, fans, home appliances to auto-timed circuit breakers working at various power levels, caters to the needs from a simple household to the most complicated facility. Its wide product offering along with superlative consumer experience encompasses the company’s simple but effective approach to the market, which gives Havells a sustainable competitive advantage, in our view.

1) Strong distribution channels … act as a key entry barrier Drives business through In our view, the key entry barriers to the business are access to the distribution network. focus on distribution The company’s success is built around a wide network of dealers with whom it has long- channels standing relationships built up over a number of years. It currently has 6,500 dealers and is increasingly focussing on connecting with last-mile retailers and electricians. The type of product the company ventures into also depends on the capabilities of the respective dealer networks as well as feedback from the dealers.

2) Focus on branding and advertising … leading to high recall Havells’ absolute spend Havells complements its strategy of having a large dealer network with a focus on on advertising is much advertising and brand building. As it has the highest number of categories of products higher than that for most amongst all the electrical companies in India and occupies No.1-4 positions in many of of its competitors those, which give it scale and scope, it is able to spend INR1.5-1.7bn per year on branding and advertising (3-4% of its annual sales). Most smaller competitors (which compete in different product categories, such as switchgears/cables/lights/fans) are unable to spend as much on advertising, so even though Havells operates in markets with a large number of competitors, it has a higher brand recall across products.

3) Consistency in launching new products … drives earnings growth Has successfully Havells, over the years, has expanded into miniature circuit breakers (MCBs) (1987), wires entered new segments, (1996), lighting (2003), fans (2003) and domestic appliances (2010-11). It has a well- which has aided growth entrenched dealer network and has constantly focussed on identifying new products and used its existing network to sell them. As a result, the company has successfully entered new segments, such as lighting and fans, as late as 2003 (which had 4-5 strong players around 2003-04) and has been able to gain significant market share, which has in turn driven revenue and earnings. The company is now focussing on new product launches, such as domestic appliances, pumps, air coolers, to further expand its portfolio of offerings,

Havells India (HAVL IN): 3 November 2016

segments whose revenue we forecast to rise at a 25% CAGR each over FY16-19E, and drive the next earnings growth cycle.

In-house manufacturing … aids quality checks, supply chain needs Unlike peers, Havells Havells has kept manufacturing at the core of its business strategy, and in-house manufactures in-house manufacturing has helped to maintain the quality, check on costs and quick response to which allows it to control changes in supply chain requirements. Unlike its competitors, Havells manufactures quality and respond around 90% of its sales in house, with only about 10% outsourced, which is in stark quickly to supply chain contrast to its domestic competitors which have higher outsourcing, such as V Guard requirements (VGRD IN, not rated) (60%), Crompton (CROMPTON IN, not rated) (50%), Bajaj Electricals (BJE IN, not rated) (95%).

Key demand drivers in place for the long term We forecast Havells’ revenue to rise at a CAGR of 16% over FY16-19E backed by: 1) a recovery in revenue growth for the domestic business on the back of a macro improvement with the support of good monsoons, 2) a widening of its distribution channels and last-mile connections, 3) incremental revenue from the 2 new facilities that should aid revenue growth in the north-east and south of the country where the company has not been very strong in the past, 4) tail winds from the 7th Pay Commission (which has recommended a salary hike of 23.5% for civil servants) which would benefit around 10m central government employees and pensioners. This move will cost the government about INR1tn annually, and add to the demand for consumer electrical products, 5) a shift to an organised sector in a few product categories post the introduction of the GST (likely in FY18E), and 6) a consistent (round the clock) supply of power across the country on the back of the government’s ‘Power for All’ initiative.

Havells: revenue-growth expectations for various segments Segments FY13-16E FY16-19E CAGR Comments CAGR Switchgear 6.1% 14.9% We expect strong revenue growth in the segment led by the commissioning of a new facility in Guwahati enhancing its market lead. As well as growth from newer products like pumps, about which management is also very optimistic. Cables 9.3% 11.5% We expect revenue growth for the segment via the new facility in Bangalore to improve the company’s position in the southern market. However, revenue growth in the segment is closely linked to copper prices, so any fall in copper prices leads to an improvement in its margins and vice versa. Lighting and fixtures 6.4% 16.6% Strong demand for LEDs should drive revenue growth, as well as demand for street lighting through subsidiary Promptec. Electrical 13.1% 25.0% This segment includes fans and appliances. Havells is a leader in premium fans, consumables which we expect to drive revenue growth along with small appliances, water heaters and air coolers, where its revenue base for appliances is small and the company is trying to manufacture in-house as well as sell through the channels.

Source: Company, Daiwa forecasts

We see strong sustainable revenue growth for Havells over the long term (5-10 years) on the back of its strong sustainable competitive advantage, such as its brand, distribution network and market share, which we believe would be difficult to displace.

Along with the above-mentioned demand drivers in place for the long term, we also see a number of other long-term revenue drivers, such as: 1) A consistent (round the clock) availability of power across the country, which should drive demand for consumer electrical goods (currently 45% of rural households have no access to power). 2) Improving penetration of electrical consumer durable goods. 3) The shift in market share from unorganised to organised sector, specifically for lighting & fixtures, cables and domestic switchgears (of which 30-50% of the market is still unorganised). The introduction of a GST likely from FY18E, which would act as a trigger for the switch from an unorganised to an organised market. 4) The company repeating its success in new product launches (with a new focus on domestic appliances, pumps and air coolers). 5) Expanding its geographical coverage to the west and south (currently 60-65% of the company’s sales are derived from the north and east).

Havells India (HAVL IN): 3 November 2016

6) Other factors like urbanisation and innovation (premiumisation [ie adding new product designs and features]).

Valuations We forecast a 21.9% EPS Despite the rich absolute valuations at which the stock is trading currently, we believe the CAGR over FY16-19E multiples will expand further as management successfully creates and improves upon its sustainable advantages in a mundane business, such as its strong brand and extensive distribution network (major entry barriers to the businesses), and consensus earnings revisions are revised up on a potential cyclical upturn in the domestic business after a weak FY15-16. Hence, we forecast a 21.9% EPS CAGR over FY16-19E. Moreover, the company has a stronger balance sheet post the Sylvania divestment in January 2016, which suggests potential for inorganic expansion (leading to improved revenue growth) and a better return profile.

To back-test our 12-month target price of INR450 using DCF metrics, we build in a revenue and EBITDA CAGR of 20% over the next 10 years, terminal growth of 5.5% and a WACC of 11.5%. However, if revenue growth is lower at 17.5%/15%, there could be 7.5/+20% downside for the share price, respectively.

Havells: share-price performance Havells: 1-year forward PER (x) % PER 160 42 37.3x Avg+2S.D. 140 35 28.7x Avg+1S.D. 28 120 21 20x Avg 100 14 11.4x Avg-1S.D.

80 7

2.7x Avg-2S.D. Jul-16

Jul-15 0

Jan-15 Jan-16

Mar-15 Mar-16

Sep-15 Sep-16 Nov-14 Nov-15 Nov-16

May-15 May-16

HAVL BSE Consumer Durables SENSEX

Oct-16 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-06 Source: Bloomberg Source: Bloomberg, Company, Daiwa forecasts Note: Share price as on 3 November 2016

Under our bull scenario, whereby the domestic electrical industry recovers, the new facilities contribute decent revenue, and new products record strong revenue growth, we build in revenue growth of 25% YoY for FY18 and a 1pp improvement in the EBITDA margin.

Under our bear scenario, whereby the company fails to scale up its new customer launches, and ASPs and profitability fall on intensifying competition, we forecast revenue growth of 15% YoY for FY18 and a 1pp decline in the EBITDA margin.

Bull-bear scenarios Our base case assumes CMP 20% YoY revenue growth -4% +14% +26% INR394.4 for FY18 and a 0.5pp improvement in the INR 500 EBITDA 15 495 EBIDTA margin, whereas down 100bps 30 our bear and bull cases 470 Revenue growth EBITDA of 15% in FY18 30 450 build in 15% and 25% up 100bps revenue growth, and a 440 Revenue growth of 1pp decrease/increase in 40 25% in FY18 410 the margin CMP 380 INR394.4 380

350 Bear case Base case Bull case

Source: Daiwa forecasts

Havells India (HAVL IN): 3 November 2016

Key charts Havells: product information and positioning

Havells Domestic MCB 20 15% 29% Legrand Schneider Panasonic (Anchor) Switches 22 5% 20% Legrand Havells Finolex Domestic cable 80 6% 16% Polycab Havells Polycab Industrial cable 120 6% 10% KEI Havells Philips Lighting & Fixtures 65 3-10% 10-14% Havells Crompton Crompton Fans 62 6% 15% Orient Havells

Water heaters 9% Racold 14 na* AO Smith

Other appliances 2-3% Bajaj 52 na* Philips

Source: Company, Daiwa Note: na*= Entered the category in 2011

Havells: revenue contribution (FY16) Havells: revenue contribution (FY19E)

Electrical Electrical Consumables Switchgears Switchgears Consumables 21% 24% 23% 26%

Lighting and Fixtures 15% Cables Cables 41% Lighting and Fixtures 36% 15%

Source: Company Source: Daiwa forecasts

Havells: segmental growth rate and EBITDA margin assumptions FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Segmental revenue growth (% YoY) Switchgear 5.8 22.0 20.3 13.1 4.9 0.6 15.0 20.0 10.0 Cables 15.3 29.3 6.2 13.8 13.7 0.8 7.0 20.0 8.0 Lighting and fixtures 24.6 24.7 20.0 8.3 2.8 8.2 15.0 20.0 15.0 Electrical consumables 39.1 21.9 38.0 8.1 20.5 11.0 25.0 25.0 25.0 EBITDA margins (%) Switchgear 38.3 38.0 35.8 35.0 36.8 42.0 41.5 41.3 41.3 Cables 7.9 9.1 10.4 12.1 13.4 15.5 15.5 15.5 15.5 Lighting and fixtures 19.5 25.5 25.8 27.3 28.8 26.2 26.0 26.0 26.0 Electrical consumables 28.1 28.9 25.8 27.8 26.3 26.6 26.0 26.0 26.0

Source: Company, Daiwa forecasts

Havells India (HAVL IN): 3 November 2016

Strong distribution channels … act as a key entry barrier Drives business through The key entry barrier to the business is access to the distribution network. The company’s increased focus on success is built around a wide network of dealers with whom it has long-standing distribution channels relationships built up over a number of years. It currently has around 6,500 dealers and is increasingly focussing on connecting with last-mile retailers and electricians. The type of product the company ventures into also depends on the capabilities of the respective dealer networks as well as feedback from the dealers.

The company had an exclusive network of 385 Havells Galaxy stores as of September 2016, and a network of around 6,500 direct dealers, 100,000 retailers and 200,000 electricians.

Havells: number of Galaxy stores Havells: number of dealers

(Number of stores) 600 (Number of dealers) 600 7,000 6,500 5900 500 6,000 5,500

375 5,000 4,300 400 342 4,000 300 249 200 3,000 200 150 1,800 2,000 93 1,000 100 1,000

0 0 FY11 FY12 FY13 FY14 FY15 FY16 FY19E FY05 FY06 FY11 FY14 FY15 FY16 Source: Company, Daiwa Source: Company, Daiwa

In addition to the Galaxy stores, the company also promotes a ‘Shop for shop’ concept where a designated counter/space within a host retailer is dedicated to the Havells brand. In addition to its existing distribution network, the company has developed new customer channels, such as modern format retail (MFR), canteen store department (CSD).

In order to strengthen its connections with retailers and electricians, improve awareness of Havells, and promote new product launches, the company has introduced initiatives like Sampark, Power Plus (now known as e plus) and cash reward schemes. Until 2 years ago, Havells would only interact with the dealers; however, it now sees merit (better sales) in improving its connections with retailers and electricians, and to that end, has introduced the above schemes, including direct cash rewards, where money is transferred directly to the respective bank accounts of retailers and electricians.

Havells: initiatives to establish stronger connections with the channels

Source: Company

Havells India (HAVL IN): 3 November 2016

The company has created a 360-degree connect with its dealers, retailers, electricians and consumers to leverage its networks and technology. One such initiative is the introduction of M Catalogue and M Connect. M Catalogue is a mobile application with a unique augmented reality feature that helps consumers visualise the product picture on the site of installation. M Connect is a mobile application for trade partners.

Havells: using technology to connect with the channel

Source: Company

Focus on branding and advertising … leading to high brand recall Havells’ absolute spend Advertising has been one of the key differentiating features for Havells. In FY16, it spent on advertising is much INR1.8bn on advertising and brand initiatives, 3.3% of its revenue. The company has spent higher than that for most on an average 3-4% of revenue on advertising since FY10, among the highest in the competitors industry. It complements its strategy with a large dealer network and a focus on advertising and brand building.

Havells: advertising expenses as % of sales Advertising expenses and as % of sales (FY16)

(%) (INRm) (%) 4.0 3.6 1,800 5.0 3.3 1,788 3.5 3.1 1,500 4.3 3.1 3.0 4.0 3.0 2.6 2.5 1,200 3.3 2.4 3.0 2.5 2.2 2.3 2.0 1.9 900 2.0 1.9 2.0 600 1.8 803 1.5 848 300 1.0 1.0 348 0.6 139 0.5 0 - Havells Bajaj Electricals V-Guard CGCEL Finolex cables 0.0 AD expenses (LHS) % of sales (RHS) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Source: Company Source: Company, Capital Line Note: AD= advertisement

Having the highest number of product categories amongst all the electrical companies in India (it occupies No.1-4 positions in many categories) gives Havells the ad spend scale and scope most of its smaller competitors (which compete in different product categories such as switchgears/cables/lights/fans) do not have; so even though the company operates in markets with a large number of competitors, it enjoys a higher brand recall across product segments.

Havells India (HAVL IN): 3 November 2016

India: presence of major players in the electrical industry Segment Products Havells Crompton Bajaj V-Guard Finolex KEI Electricals cables Industries Switchgears Domestic MCB   Industrial switchgears   Cables Low voltage and domestic wires     High voltage    Lighting CFL     LED     Luminaries    Electric consumer Fans      durables Water heaters     Coolers    Pumps    Stabilizers  Inverters  Juicer/mixer grinder    

Source: Companies, Daiwa Note:  = Present in the category

Strong brand recall Havells’ innovative ads have helped it establish a strong brand recall in customers’ minds as well as a clear positioning for its products as being safe and reducing electricity costs.

Havells: domestic switch advertisement ‘Shock Laga’ Havells: domestic wire advertisement – ‘Wires that don’t catch fire’

Source: Company, Daiwa Source: Company, Daiwa

Havells: LED bulb advertisement ‘Bill Chhota Dil Bara’ Havells: fan advertisement ‘Hawa Badlegi’

Source: Company, Daiwa Source: Company, Daiwa

Havells India (HAVL IN): 3 November 2016

Consistency in launching new products … drives earnings growth Successfully entered Havells, over the years, has expanded into the MCB (1987), wires (1996), lighting (2003), newer segments, which fans (2003) and domestic appliances (2010-11) categories. The company has consistently have aided growth focused on identifying new products, using its capability and feedback from the distribution channels, and later using its existing dealers to sell them. As a result the company has successfully entered newer segments, such as lighting and fans, which already had 4-5 existing strong players, and has still been able to gain significant market share. These new areas have helped drive the company’s revenue and earnings growth.

Currently, it is focusing on new product launches, including domestic appliances, pumps, air coolers, to further expand its portfolio of offerings.

Havells: product launches/new categories entered into Year New product launches/ new categories entered into 2003 Fans 2003 CFL and lighting 2010 Water heater 2011 Small home appliances 2012 Air coolers

Source: Company

Havells: market share across divisions in FY06 and FY16 and change in market share

35% +14% 30% 29% 25% +15% +10% 20% +11% +9% 20% 15% +4% 0% 15% 16% 15% 10% 14% 10% 10% 10% 5% 5% 6% 6% 6% 0% 3% Domestic MCB Switches Domestic cable Industrial cable Lighting - CFL Lighting - Consumer durable Luminaires - Fans FY06 FY16

Source: Company

Havells India (HAVL IN): 3 November 2016

Manufacturing focus In-house manufacturing Unlike peers, Havells The company has kept manufacturing at the core of its business strategy, which has manufactures in-house helped it maintain quality, keep a check on costs and provide a quick response to changes for quality control and in supply chain requirements. quick response to supply chain Havells has 12 manufacturing locations in India located in Haryana, Rajasthan, requirements Uttarakhand, Uttar Pradesh and Himachal Pradesh. Its latest facility to become operational, in FY16, was a factory to manufacture water heaters in Neemrana, Rajasthan.

The company manufactures around 90% of its sales in-house, with the remaining outsourced. In contrast, its competitors have much higher outsourcing proportions, such as V Guard (60%), Crompton (50%) and Bajaj Electricals (95%).

Havells: manufacturing facilities in India India: % of manufacturing in-house (FY16)

No. Plant Location (%) 1 Switchgear 100 90 Consumer/Domestic Haridwar, Uttarakhand Baddi, Himachal Pradesh 80 Industrial Sahidabad, Uttar Pradesh Faridabad, Haryana 2 Capacitors Sahidabad, Uttar Pradesh 60 50 3 PCB Assembly Line Noida, Uttar Pradesh 40 4 Motors and Pumps Neemrana, Alwar, Rajasthan 40 5 Cables Alwar, Rajasthan 6 Lighting, Fixtures and Water Heaters Neemrana, Alwar, Rajasthan 20 7 Electrical consumer durables - fans Haridwar, Uttarakhand 5 8 Centre for Research and Innovation Noida, Uttar Pradesh 0

Havells Crompton V-Guard Bajaj Electricals

Source: Company Source: Companies

Sylvania exit … brings the focus back to the domestic business Sylvania stake sale has In January 2016, the company completed an 80% stake sale in 2 subsidiaries (part of shifted management’s Sylvania) Havells Malta (excluding subsidiaries of Havells Malta Limited in the US, Brazil, focus back on the Chile and Thailand) and Havells Exim (Hong Kong) to Shanghai Feilo Acoustics at an domestic business equity value of Euro186m (INR13.6bn). The company will retain the remaining 20% in Havells Malta and Havells Exim, with an exit option in the next 3-5 years. Havells Malta’s operations in Chile and the US have been subsequently scaled back.

Havells acquired Sylvania, a leading lighting products company with operations in more than 48 countries, in 2007 at an EV of €235m. Sylvania has manufacturing plants throughout Europe, Asia, North Africa and Latin America. Post the acquisition, Sylvania’s performance deteriorated significantly due to sluggish growth in Europe and Latin America and continued losses; as such, Sylvania had been a major overhang for Havells stock.

This stake sale has allowed management to refocus on the domestic business, and led to overall improvement in working capital cycle and return ratios over the past year.

Havells India (HAVL IN): 3 November 2016

Segmental analysis

Havells’ business is divided in to 4 segments – switchgears, cables, lighting and fixtures and electrical consumer durables which includes fans.

Havells: revenue contribution (FY16) Havells: revenue contribution (FY19E)

Electrical Electrical Consumables Switchgears Switchgears Consumables 21% 24% 23% 26%

Lighting and Fixtures 15% Cables Cables 41% Lighting and Fixtures 36% 15%

Source: Company Source: Daiwa forecasts

Havells: EBITDA contribution (FY16) Havells: EBITDA contribution (FY19E)

Electrical Electrical Consumables Consumables 22% Switchgears 26% Switchgears 39% 37% Lighting and Fixtures 15% Cables Lighting and Cables 25% Fixtures 22% 15%

Source: Company Source: Daiwa forecasts

Switchgears The Indian switchgear market is classified as low voltage, medium voltage and high voltage switchgears. Havells has a presence in circuit breakers, switches, distribution boards and energy-saving switchgears. It is a strong player in the low voltage switchgear market, especially MCBs. Havells is a dominant player in the domestic/consumer switchgear market with a market share of 28% in FY16, while in the switches market, it had a 16% share as of FY16. The switchgear market in India is mainly organised (75-80% organised) with around 70% of the market controlled by the top-3 companies.

We forecast the Havells’ market share in domestic switchgears has remained at 28-29% since FY14, but its switchgear division to market share in switches contracted from 20% in FY15 to 15% in FY16. The switchgear record a 14.9% revenue division contributed 24% of total sales in FY16. Havells has a dominant position in the CAGR over FY16-19E vs. mass market or entry level switchgear segment through its ‘Reo Bliss’ brand, and in the 6.1% for FY13-16 premium category through its ‘Crabtree’ brand.

Havells India (HAVL IN): 3 November 2016

India: market size of switchgear industry (INRbn) Havells: market share in the switchgear industry

(INRbn) (%) 24 29 29 28 22 30 22 20 25 20 20 20 16 18 17 17 15 15 16 15 16 15 10 14 5 12 5 10 0 FY14 FY15 FY16 FY06 FY14 FY15 FY16 Domestic MCB Switches Domestic MCB Switches

Source: Company Source: Company

The EBITDA margin On the domestic MCB front, Havells competes with France’s Legrand and Schneider, and increased from 30.3% in on the switches side, Japan’s Panasonic and France’s Legrand are the strong competitors. FY06 to 42% in FY16 The switchgears division contributed 24% of Havells’ total sales in FY16. Revenue for the switchgears division rose at an 11.9% CAGR from FY11-16, versus a 17.4% CAGR from FY06-11. The EBITDA margin for the segment increased from 30.3% in FY06 to 42% in FY16.

We forecast this division’s revenue to rise at a 14.9% CAGR over FY16-19E on a potential pick-up in the industrial cycle and gradual improvement in housing demand; also, the company’s new facility in Guwahati should add to revenue from FY18 onwards.

Havells: switchgear quarterly revenue growth YoY Havells: switchgear quarterly EBIT margin

(%) (%) 35 41 38 25 35 32 15 29 5 26 23 (5)

4Q FY124Q FY134Q FY144Q FY154Q FY164Q 1QFY12 2QFY12 3QFY12 1QFY13 2QFY13 3QFY13 1QFY14 2QFY14 3QFY14 1QFY15 2QFY15 3QFY15 1QFY16 2QFY16 3QFY16 1QFY17 2QFY17

3Q FY133Q FY134Q FY171Q 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 2QFY17 1QFY12 Source: Company Source: Company

Havells: switchgear revenue and growth Havells: switchgear EBITDA margin

(INRbn) (%) (%) 21 20 50 45 18 42.0 41.5 41.3 41.3 18 15 40 39.2 15 13 13 40 38.3 38.0 12 36.8 11 30 35.8 12 9 35.0 9 7 7 35 33.7 6 6 20 32.0 4 6 3 30.3 30.4 2 10 29.2 3 30 0 0

FY05 FY16 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

FY17E FY18E FY19E

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

FY18E FY19E Revenue (LHS) Growth YoY % (RHS) FY17E

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Havells India (HAVL IN): 3 November 2016

Cables and wires We forecast this division Havells is the 3rd largest player in the cables market, ie, domestic as well as industrial will grow at 11.5% CAGR cables. The market for the cable industry (domestic and industrial) increased from over FY16-19E vs 9.3% INR165bn in FY14 to INR200bn in FY16. Havells’ market share in domestic cables for FY13-16. improved markedly from 6% in FY06 to 16% in FY16, and in industrial cables, its share rose to 10% in FY16, from 6% in FY06. However, market share over the past year has remained more or less stagnant. Some 55-60% of the cables and wires market in India is organised, so there is still scope for a further shift from an unorganised format to an organised format in this area.

India: market size of cable industry Havells: market share in cable industry

(INRbn) (%)

130 120 18 16 15 14 14 110 100 100 11 12 10 9 90 9 80 6 6 72 6 70 65 3

50 0 FY14 FY15 FY16 FY06 FY14 FY15 FY16 Domestic Industrial Domestic Industrial

Source: Company Source: Company

Copper is the major cost driver for the business, with margins for the cables segment highly dependent on copper prices. The LME copper price has fallen by around 50% in the past 5 years, which has helped boost the EBIT margin for the cables division by 4.6pp (from 8% in 1Q FY12 to 12.6% in 2Q FY17).

Havells: comparison of LME copper prices and cables division Havells: industrial and domestic cables volume growth EBIT margin

($/tonne) (%) (%) 29 28 9,000 16 30

8,000 14 20 17 12 20 16 7,000 12 10 10 9 8 6,000 10 8 4 1 5,000 6 0 4,000 4

(10) -9

2Q FY132Q FY141Q FY163Q FY172Q 2QFY12 3QFY12 4QFY12 1QFY13 3QFY13 4QFY13 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 4QFY16 1QFY17 1QFY12 1Q FY16 2Q FY16 3Q FY16 4Q FY16 1Q FY17 2Q FY17 Copper price (LHS) Cables EBITM % (RHS) Industrial cable Domestic cable

Source: Company, Bloomberg, Daiwa Source: Company

The cable division contributed 41% of Havells’ total revenue in FY16, and revenue increased by a 12.4% CAGR from FY11-16 and a 21.5% CAGR from FY06-11. In FY16, sales volume growth was offset by lower copper prices leading to flat overall sales at 0.8% YoY.

The EBITDA margin for this segment was 15.5% for FY16, improving by 7.5pp from FY11, mainly on account of the fall in copper prices. Any pick-up in industrial capex and revival in housing demand would be key growth drivers. We forecast revenue for the cable division to rise at a CAGR of 11.5% over FY16-19E and post a stable margin of 15.5% over the same period.

Havells India (HAVL IN): 3 November 2016

Havells: cables and wires quarterly revenue growth YoY (%) Havells: cables and wires quarterly EBIT margin (%)

(%) (%) 35 15

13 25 11 15 9

5 7

(5) 5

4Q FY124Q FY142Q FY154Q 1QFY12 2QFY12 3QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17

1Q FY121Q FY154Q 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 2QFY12 Source: Company Source: Company

Havells: cables revenue and growth Havells: cables EBITDA margin

(INRbn) (%) (%) 15.5 15.5 15.5 15.5 35 31 70 16 28 14.2 30 13.4 24 14 25 22 22 50 12.6 12.1 19 12.0 20 16 17 12 30 10.4 12 9.4 15 11 11 11 10 8.9 9.1 10 8 7.9 5 10 3 8 5 6.1 0 (10) 6

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

FY17E FY18E FY19E

FY09 FY10 FY11 FY12 FY06 FY07 FY08 FY13 FY14 FY15 FY16

Revenue (LHS) Growth YoY % (RHS) FY05

FY18E FY19E FY17E Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Lighting and fixtures We forecast revenue for- The size of the lighting industry in India was INR182bn as at end-2015 and rose at a this division to rise at a 16.6% CAGR from 2010-16, mainly led by strong revenue growth for the LED market. The 16.6% CAGR over FY16- LED segment witnessed a 59.1% CAGR over the same period, coming in at INR51bn for 19E from 6.4% for FY13- 2015. The lighting industry registered total volume of 1,544m units in 2015. Except LEDs, 16 every other lighting segment in the industry declined in 2015 in volume terms. The LED volumes jumped more than 1,176% YoY for 2015. Moreover, we note that 50% of the lighting market in India still operates as an unorganised industry.

Havells has presence in 2 product categories, namely, lamps and luminaries, the revenue mix between the 2 being 35% and 65%, respectively. Havells is present in the compact fluorescent lamps (CFL) market as well (10% market share as of FY16), but this product is on a declining trend due to an increase in demand for energy efficient products in India, like LED bulbs, tube lights, etc., on the back of the significant fall in prices, which has made LED products more affordable after the entry of Energy Efficiency Services Limited (EESL) (please refer Appendix 2).

Havells India (HAVL IN): 3 November 2016

India: lighting industry size and growth India: lighting industry size and growth

(INRbn) (%) (Units m) (%) 200 182 22 1,700 1,614 12 163 1,600 1,544 170 8 1,467 19 1,500 135 140 1,359 4 117 1,400 16 1,283 1,291 101 1,300 110 1,200 0 85 13 1,200 80 (4) 1,100 50 10 1,000 (8) 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015 Lighting industry (LHS) Growth YoY % (RHS) Lighting industry (LHS) Growth YoY % (RHS)

Source: ELCOMA Source: ELCOMA

India: lighting industry segmentation (value wise) India: lighting industry segmentation (volume wise)

(%) (%) 100 100 - - - - - 0.0 0.0 6 8 11 14 10 21 21 24 9 9 28 26 30 31 28 25 80 8 80 7 15 7 14 15 41 15 16 16 16 60 42 42 41 60 38 36 40 40 64 62 59 56 53 56 55 20 43 40 39 37 20 34 29 0 0 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015 Lamps (excl. LED) Luminaries (excl. LED) Accessories LED Incandescent lamps Fluorescent lamps CFL LED lamps LED street lights

Source: ELCOMA Source: ELCOMA

The Promptec In order to expand its footprint into high growth lighting verticals lie LEDs and solar energy, acquisition has led to Havells acquired a majority 51% stake in Promptec Renewable Energy Solutions in April higher revenue growth 2015 at an enterprise value of INR650m. Promptec has a presence in the marketing and potential for the lighting manufacturing of LEDs and solar lighting products. In June 2016, the company raised its & fixtures segment stake in Promptec to 70% for an undisclosed amount. The acquisition of Promptec has resulted in higher revenue-growth potential for Havells in this segment.

India: market share of organised players in electric lighting India: estimated market size of electric lighting industry industry (FY15)

(INRbn) 250 240

Phillips, 20% Others, 30% 200

CGCEL, 10% 150 140 Surya Roshni, 14% 100 Wipro, Bajaj Electricals, 81 8% 10% 50 Havells, 8% FY10 FY15 FY20E Source: Company Source: Company

The lighting industry is going through a structural change, with the focus completely shifting to LED lighting from CFL. The segment contributed 15% of Havells’ total revenue in FY16, while LED lighting contributed more than 50% of the segment’s revenue, which was up 100% in FY16. The entry of EESL has caused a disruption in the lighting market across India, resulting in prices of LED bulbs falling by 82% in the past 18 months. While Havells up till now has not participated in EESL’s LED bulbs tenders due to profitability concerns, it has not affected the company’s overall revenue growth. Nevertheless, Havells has participated in LED street lighting tenders through Promptec. Recently, the company

Havells India (HAVL IN): 3 November 2016

participated in an EESL tender for LED tube lights, but such tenders constitute a negligible part of Havells’ revenue.

The company was able to maintain the EBITDA margin for its lighting and fixtures segment at 26.2% in FY16, due mainly to a higher sales proportion of luminaries in the segment sales, which is still largely an unorganised market.

Havells: lighting and fixtures quarterly revenue growth YoY (%) Havells: lighting and fixtures quarterly EBIT margin (%)

(%) (%) 30 29

27 20 25 10 23 0 21

(10) 19

3Q FY123Q FY143Q FY163Q 1QFY12 2QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 4QFY16 1QFY17 2QFY17

4Q FY124Q FY143Q 2QFY12 3QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 1QFY12 Source: Company Source: Company

Havells: lighting and fixtures revenue and growth Havells: lighting and fixtures EBITDA margin

(INRbn) (%) (%) 13 30 28.8 14 30 27.3 12 11 25.5 25.8 26.2 26.0 26.0 26.0 9 20 25 10 8 7 7 21.5 8 7 6 10 19.1 19.5 6 4 20 4 3 3 4 0 2 15 13.3 0 (10)

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

FY17E FY18E FY19E

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

FY18E FY19E Revenue (LHS) Growth YoY % (RHS) FY17E

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Electrical consumable durables We forecast revenue for Havells first entered this segment in 2004 by selling electrical fans. Since then, it has the electrical added products, such as water heaters, air coolers, air purifiers, and appliances, etc. In consumable durables appliances, it has a presence in juicers, mixer grinders, blenders, irons, cookers, air fryers, segment to expand at a etc. 25% CAGR over FY16- 19E vs. 13.1% for FY13- Product extension 16 Havells is a comparatively a new entrant in the electrical consumable durables space compared to its peers. Gradually, the company has expanded its presence across products with the launch of its small home appliances product categories. Now, it has a presence in product categories such as cooking, brewing, food preparation, garment care, fans, air coolers, water heaters, etc.

Havells: product launches and brand extensions Year Product 2004 Entered in to fans category 2010 Entered in to water heater category 2011 Entered in to small home appliances business 2012 Launched 'koolaire' air coolers 2014 Introduced premium fans under standard brand 2015 Launched India's most energy efficient fan ES 40

Source: Company, Daiwa

Havells India (HAVL IN): 3 November 2016

Havells had a 14% Havells has a dominant position in the premium fan segment with an overall 14% share in market share in the the organised fan market as of FY15. The size of India’s fan industry was INR62bn as of premium fan segment as August 2016, and around 60% of the electrical consumer durables and small appliances of FY15 market in India is organised.

EESL has plans to distribute 2 lakh energy efficient 5-star fans of 50W in FY17. The price of 50W under the scheme is INR1,200 as against the market price of INR2,000 for the same fan. There are concerns among the players in the industry that fans will also witness the same price decline as seen for LED bulbs; however the technology for fans is mature and the costs are unlikely to see declines as seen for LEDs, in our view. Also, Havells mainly operates in the premium fans segment, which is unlikely to be impacted much by EESL.

India: estimated market size of fan industry (volume (m)) India: estimated market size of fan industry (INRbn)

(Units m) (INRbn) 70 62.0 80 75 60 46.5 8.0 70 50 10.0 40 60 55 30 52.0 50 20 36.5 10 40 35 0 FY15 FY20E 30 Organised Unorganised FY10 FY15 FY20E

Source: Company Source: Company

India: market share of organised players in fan industry (FY15) Havells: market share in fan industry

(%) 16 15 14 Others, 17% Orient Electric, 12 23% Havells, 14% 8 6 CGCEL, 26%

Usha, 20% 4

0 FY06 FY11 FY16 Source: Company Source: Company

The electrical consumables durable segment contributed 21% of Havells’ total revenue in FY16 and has been the fastest-growing segment over the past 6 years. Revenue for the segment increased at a 19.5% CAGR from FY11-16 and the EBITDA margin stood at 26.6% in FY16. In the appliances segment, in 2011 the company introduced a new range of air coolers, life style based products like air fryers and air purifier, which have a niche market now.

Going forward, we expect revenue growth for this segment to be driven by: the launch of new products, the extension of existing products, and a greater focus on distribution and advertising expenses.

Havells India (HAVL IN): 3 November 2016

Havells: electrical consumer durables quarterly revenue growth Havells: electrical consumer durables quarterly EBIT margin YoY (%)

(%) (%) 60 31

50 29 40 27 30 25 20

10 23

0 21

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17

3QFY12 2QFY13 1QFY14 4QFY14 3QFY15 2QFY16 1QFY17 2QFY12 4QFY12 1QFY13 3QFY13 4QFY13 2QFY14 3QFY14 1QFY15 2QFY15 4QFY15 1QFY16 3QFY16 4QFY16 2QFY17 1QFY12 Source: Company Source: Company

Havells: electrical consumables revenue and growth Havells: electrical consumables EBITDA margin

(INRbn) (%) (%) 24 22 120 28.9 30 28.1 27.8 26.6 20 18 25.8 26.3 26.0 26.0 26.0 80 14 25 16 22.0 21.9 11 12 10 40 8 9 20 6 8 5 16.1 0 15.5 3 2 3 3 14.3 4 1 2 15 0 (40)

FY05 FY10 FY15 FY06 FY07 FY08 FY09 FY11 FY12 FY13 FY14 FY16

FY17E FY18E FY19E

FY13 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY14 FY15 FY16

Revenue (LHS) Growth YoY % (RHS) FY05

FY18E FY19E FY17E Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Havells India (HAVL IN): 3 November 2016

Financial analysis

16% revenue CAGR for FY16-19E We forecast a revenue Despite weak FY16 revenue growth, we forecast 15% YoY revenue growth for FY17, with CAGR of 16% and 1H FY17 already up 16.6% YoY. For FY18, we forecast 21.2% YoY growth, from a lower EBITDA margin base, along with additional revenue from the 2 new facilities, a cyclical recovery in demand expansion of 1pp over as well as tailwinds from the 7th Pay Commission and introduction of the GST (likely in FY16-19E FY18E). We forecast FY19E revenue growth to moderate to 13.5% YoY from a higher base.

Havells: revenue and revenue growth Havells: revenue and EBITDA margin

(INRbn) (%) (INRbn) (%) 100 80 86 100 86 15 76 76 14 80 80 62 60 62 13 52 54 52 54 60 47 60 47 12 42 42 36 40 36 40 29 40 29 11 21 22 24 21 22 24 15 20 15 10 20 10 20 10 6 6 9

0 0 0 8

FY10 FY05 FY06 FY07 FY08 FY09 FY11 FY12 FY13 FY14 FY15 FY16

FY13 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY14 FY15 FY16

FY17E FY18E FY19E

FY17E FY18E FY19E Revenue (LHS) Revenue growth YoY % (LHS) Revenue (LHS) EBITDA Margin % (RHS)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

EPS CAGR of 21.9% for FY16-19E A 1pp margin expansion on the back of a reversal of the royalty payments and higher revenue growth lead us to forecast a 21.9% EPS CAGR of over FY16-19E.

Havells: EBITDA margin Havells: adjusted PAT and PAT growth

(%) (INRbn) (%) 14.8 14.8 9.3 15 14.3 10 110 8.0 13.6 13.8 14 13.3 8 90 13.1 6.4 70 13 12.6 12.7 5.1 6 4.8 4.6 11.8 3.7 50 12 4 3.1 2.3 2.4 30 10.6 1.4 1.5 11 10.4 2 1.0 0.3 0.6 10 10 9.5 9.6 9.2 0 (10)

FY09 FY05 FY06 FY07 FY08 FY10 FY11 FY12 FY13 FY14 FY15 FY16

FY18E FY17E FY19E

FY05 FY09 FY06 FY07 FY08 FY10 FY11 FY12 FY13 FY14 FY15 FY16

FY18E FY19E FY17E PAT (LHS) Adjusted PAT growth % YoY (RHS)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Negative working capital cycle … the lowest among its peers Havells has maintained strict control over its working capital over the past few years and has used channel financing schemes to shorten its cash collection cycle from distributors. It has an agreement with banks, under which they advance credit to Havells’ distributors at low interest rates, so that they can pay Havells quicker and thereby avail cash discounts. Havells, in turn, guarantees to banks 5-10% of loans advanced. Havells has improved its working capital cycle since FY09 and now operates on a negative working capital cycle (the lowest amongst its peers).

Havells India (HAVL IN): 3 November 2016

Havells: working capital as % of sales India: working capital as % of sales

(%) (%) 30 28.3 35 25 25 20 15 15 13.0

10 5 4.9 3.3 3.9 2.9 5 1.1 0.4 0.5 (5)

FY05 FY12 FY06 FY07 FY08 FY09 FY10 FY11 FY13 FY14 FY15 FY16 (5) -1.4 -1.5 -3.0

Havells Bajaj Electricals

FY12 FY06 FY07 FY08 FY09 FY10 FY11 FY13 FY14 FY15 FY16 FY05 V-Guard Finolex cables Source: Company Source: Company, Capital line

Havells: Return on invested capital (ROIC) Havells: Return on capital employed (ROCE)

(%) (%) 65 59 50 46 45 55 51 40 36 35 31 31 28 45 42 42 30 25 26 26 27 26 26 22 23 35 25 35 32 20 27 15 23 24 25 22 22 22 10 19 5

15 0

FY09 FY07 FY08 FY10 FY11 FY12 FY13 FY14 FY15 FY16

FY13 FY16 FY07 FY08 FY09 FY10 FY11 FY12 FY14 FY15

FY17E FY18E FY19E

FY18E FY19E FY17E Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Negative working capital Havells’ free cash has continuously improved since FY11 with an improving working capital cycle since FY14, the cycle and a negative working capital cycle since FY14, despite incurring regular capex lowest among peers given its focus on in-house manufacturing. We expect free cash to improve in FY18-19, with medium-term capex expected to peak in FY17.

Havells: dividend payout ratio Havells: capex and FCF

(%) (INRm) 63 12,000 52.4 54 10,000 8,000 45 40.3 40.1 39.7 40.4 6,000 36 4,000 26.6 25.2 26.1 27 2,000 13.2 12.9 0 18 9.5 10.6 10.1 10.4 6.8 (2,000) 9 (4,000)

FY07 FY05 FY06 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

FY17E FY18E FY19E

FY11 FY14 FY06 FY07 FY08 FY09 FY10 FY12 FY13 FY15 FY16

FY05 Capex FCF

FY18E FY19E FY17E Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Our assumptions In the switchgear and cables segment, we believe the main driver for revenue in FY17-18 will be the additional capacity from the 2 upcoming factories for switchgears and cables (Bengaluru and Guwahati). Revenue growth in FY19 is likely to be lower mainly on account of a higher revenue base in FY18.

We expect the revenue growth for consumer durables to be driven by the launch of new products, the adding of new features to existing products, an increased focus on deepening distribution and a lower base in FY16 which should enable higher growth in the next few years (we forecast a 25% CAGR till FY19).

Havells India (HAVL IN): 3 November 2016

Havells: segmental growth rate and EBITDA margins assumptions FY14 FY15 FY16 FY17E FY18E FY19E Segmental revenue growth (% YoY) Switchgears 13.1 4.9 0.6 15.0 20.0 10.0 Cables 13.8 13.7 0.8 7.0 20.0 8.0 Lighting and Fixtures 8.3 2.8 8.2 15.0 20.0 15.0 Electrical Consumables 8.1 20.5 11.0 25.0 25.0 25.0

EBITDA margins (%) Switchgears 35.0 36.8 42.0 41.5 41.3 41.3 Cables 12.1 13.4 15.5 15.5 15.5 15.5 Lighting and Fixtures 27.3 28.8 26.2 26.0 26.0 26.0 Electrical Consumables 27.8 26.3 26.6 26.0 26.0 26.0

Source: Company, Daiwa forecasts

Valuation and recommendation We initiate coverage with We initiate coverage with an Outperform (2) rating and 12-month target price of INR450 an Outperform (2) rating based on a 35x PER for FY18E, a premium of 40% to its 5-year-average, which is justified and target price of in our view as the company now has a number of competitive advantages, such as its INR450 brand and extensive distribution network, which gives us confidence in its long-term sustainable growth outlook (a 21.9% EPS CAGR for FY16-19E).

The company also has a strong balance sheet and better return profile (after the divestment of its Sylvania operations), with average ROCE and ROIC for FY16-19E at 29% and 46%, respectively. To back-test our target price of INR450, we use DCF methodology and build in a revenue and EBIDTA CAGR of 20% over the next 10 years, a terminal growth rate of 5.5% and WACC of 11.5%. However, if growth were to slow to 17.5%/15%, the share price could see 7.5%/20% downside, respectively.

Havells: share-price performance Havells: 1-year forward PER (x) % PER 160 42 37.3x Avg+2S.D. 140 35 28.7x Avg+1S.D. 28 120 21 20x Avg 100 14 11.4x Avg-1S.D.

80 7

2.7x Avg-2S.D. Jul-16

Jul-15 0

Jan-15 Jan-16

Mar-15 Mar-16

Sep-15 Sep-16 Nov-14 Nov-15 Nov-16

May-15 May-16

HAVL BSE Consumer Durables SENSEX

Oct-16 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-06 Source: Bloomberg Source: Daiwa forecasts Note: Share price as of 3 November 2016

Havells: PBR bands Havells: EV/EBITDA bands INR INRm 400 8x 300,000 34x 350 250,000 26x 300 6x 200,000 250 18x 200 4x 150,000 150 100,000 10x 100 2x 50 50,000

0 0

Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16

Oct-14 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-15 Oct-16 Oct-06 Source: Bloomberg, Company, Daiwa forecasts Source: Bloomberg, Company, Daiwa forecasts

Havells India (HAVL IN): 3 November 2016

India electrical: valuation metrics Companies Bloomberg Share price Mcap Million PE (x) EV/EBITDA (x) ROE (%) EPS CAGR code (INR) (USDbn) O/Sh FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E over FY16-18E (%) Havells HAVL IN 394.4 3.7 624.9 49.8 38.6 30.7 31.3 25.9 20.3 28.5 22.7 25.2 25.1 Crompton CROMPTON IN 172.7 1.6 626.7 52.1 38.1 30.1 55.0 24.5 20.4 105.0 81.1 61.4 31.5 Bajaj Electricals BJE IN 257.5 0.4 101.1 27.1 18.6 15.1 13.0 11.1 9.5 13.3 16.4 18.1 34.2 V-Guard VGRD IN 205.5 0.9 300.9 55.2 41.1 33.8 28.3 27.4 22.9 26.3 27.6 27.1 27.8 Source: Bloomberg, Daiwa forecasts Note: Share price as of 3 November 2016

Risks Any failure by the company to scale up its new consumer launches, as well as any impact of increased competition on its ASPs and profitability. This is the main risk to our earnings forecasts, rating and target price.

A secondary risk is any delay in industrial capex picking up, given that the company’s switchgears and cable divisions are dependent on industrial capex. Any delay would affect segmental revenue growth.

Havells India (HAVL IN): 3 November 2016

Appendix 1 Company background In FY16, Havells Havells India is India’s leading fast moving electrical goods (FMEG) manufacturer, present recorded revenue of in a wide range of industrial and consumer electrical products. The company operates in 4 INR54.3bn and a net segments – switchgears, cables, lighting and fixtures, and electrical consumer durables. profit of INR7.1bn on a standalone basis It manufactures around 90% of products in house with the remainder outsourced. The company has a strong global presence across 50 countries, with 12 manufacturing locations in India. The domestic manufacturing plants are located in states such as Haryana, Rajasthan, Uttarakhand, Uttar Pradesh and Himachal Pradesh.

Havells: organisational chart Havells Revenue: INR54.3bn (FY16)

Switchgears Cables Lighting & Fixtures Electrical Durables 24% of Revenue 41% of Revenue 15% of Revenue 21% of Revenue 42% EBITDA margin 15.5% EBITDA margin 26.2% EBITDA margin 26.6% EBITDA margin

. Industrial switchgear . Low and high voltage . CFL . Fans . Consumer switchgear industrial cables . LED . Water heater . Switches . Domestic cables . Luminaires . Air cooler . Switch accessories . Small appliances . Motors . Pumps

Source: Company

Havells India (HAVL IN): 3 November 2016

Appendix 2 EESL EESL is an Energy Efficiency Services Limited (EESL) is a joint venture among SOEs NTPC Ltd, PFC, implementation REC, and PGCIL, and is an implementation agency/authority which promotes energy- agency/authority which efficient programmes in India. EESL has been working to drive quicker adoption of energy- promotes energy efficient solutions, in view of India’s new climate commitments. The aim is to reduce efficiency programmes emissions levels by 35% by 2030 with new, efficient and cleaner technology. in India Several policies from the government have been implemented to capture energy efficiency opportunities through EESL. Key initiatives to be implemented by EESL include: 1) Unnati Jyoti by affordable LEDs for all (UJALA) 2) The Street Lighting National Project (SLNP) 3) The National Energy Efficient Fan Programme (NEEFP) 4) Agricultural Demand Side Management (AgDSM)

EESL: ongoing programmes Programme Comments LED bulbs Distributed 170m units up to September 2016 Target is to replace 770m incandescent bulbs by 2019 6-7 tenders have been awarded to date. 1st tender was awarded in June 2014 Procurement price fell drastically from INR310 in January 2014 to INR55 in April 2016 (down by 82%) Expected annual cost reduction of consumer bills of INR400bn

LED tube lights Completed a pilot project of 90,000 tube lights in Andhra Pradesh Started selling in the urban areas of Uttar Pradesh and Delhi from 1 October 2016 Procurement price is INR138 as against market price of INR700-800 for 2000 lumens Available on up-front as well as on bill financing (OBF) basis

Street lights Target is to replace 35m conventional street lights Replaced 92,000 conventional street lights with LED lighting in Vizag The aim is to recover the cost of investment from the savings the municipalities will have from the lower energy usage Expected annual cost reduction of municipalities of INR55bn

Fans Distributed 90,000 fans in Andhra Pradesh and Uttar Pradesh Target is 200,000 fans in FY17 Procurement price of energy efficient fans is INR900 as against market price of INR2,000 for 50W fans Available on up-front as well as on an equated monthly instalment (EMI) basis EESL responsible for installation of new fans and dismantling of old fans

Pumps MoU between state government, state DISCOM and EESL Distributed 200,000 pumps in Andhra Pradesh Floated tenders in Maharashtra for 100,000 pumps Target is to replace 1m old agricultural pumps with new pumps in FY17 The cost of implementation is recovered through the annual savings from the state DISCOM

Source: EESL, UJALA, Daiwa

Unnati Jyoti by affordable LEDs for all (UJALA) The main objective of this scheme is to promote efficient lighting which reduces electricity bills and helps conserve the environment.

The UJALA scheme targets: 1. To replace 770m incandescent bulbs in the residential sector by March 2019 2. Expected overall annual energy savings of 10.5bn KWh 3. Expected load reduction of 5GW 4. Expected annual cost reduction of consumer bills of INR400bn 5. Annual estimated greenhouse gas emission reductions of 79m tonnes of CO2

LED bulbs EESL distributes LED bulbs under the DELP or UJALA scheme. EESL’s procurement of LED bulbs commenced in January 2014 at INR310 each for 0.8m units and around 170m units have been distributed to date. The scheme targets to replace 770m incandescent

Havells India (HAVL IN): 3 November 2016

bulbs with LED bulbs by 2019. The price of LED bulbs has declined drastically by 82% from INR310 in January 2014 to INR55 in April 2016. The main goal is to provide high- quality LED bulbs to domestic consumers at a cheaper rate.

Prices of LED bulbs fell State-wide campaigns have been launched to create awareness and visibility of the by 82% from January scheme. The pooling method is used to price the bulbs, whereby distribution and 2014 to April 2016 advertisement costs, tax, ROE and debt servicing costs are added to the procurement cost, to arrive at a selling price. In recent months, EESL has been distributing 9W bulbs in place of 7W bulbs, in an attempt to improve the specification gradually under the scheme. Each 9W LED bulb provides the same luminosity as a 100W incandescent bulb while consuming less than 10% of the electricity consumed by a 100W incandescent bulb.

EESL: progress as of September 2016 EESL: breakdown of an LED bulb cost as of April 2016 No Date of procurement Quantity (m) Specification (W) Price (INR) Cost INR % of Procurement cost 1 Jan-14 0.8 7 310 Procurement cost 56 - 2 Aug-14 3.0 7 204 3 Nov-14 3.0 7 149 Add: 4 Jan-15 8.0 7 104 State VAT 6 10-12% 5 Mar-15 8.0 7 82 Distribution cost 5 10-12% 6 Jun-15 50.0 7 70 Advertising cost 7 10-12% 7 Nov-15 30.0 9 72 Annual maintenance cost 1 2% 8 Jan-16 30.0 9 65 Debt cost 5 10% 9 Apr-16 50.0 9 55 Total cost 24 40-45%

Selling price 80

Source: EESL, Daiwa Source: EESL, Daiwa

LED tube lights The pilot project to install 90,000 LED tube lights in Vishakhapatnam, Andhra Pradesh, was already completed a few months ago and the scheme commenced in Uttar Pradesh and Delhi on 1 October 2016. The procurement price for a 20W LED tube light is currently around INR138 while the selling price is INR220-230 (around 40-45% has been added to the procurement cost to arrive at the selling price). The market price for the same tube light (ie, for 2,000 lumens) is INR700-800.

The tube lights are available up-front and on an on-bill financing (OBF) basis with a 12- month payment period. In Maharashtra, they will only be available on an upfront basis in urban areas.

The Street Lighting National Project (SLNP) The SLNP is another programme established by the government (along the lines of the UJALA) to replace conventional street lights with LED lighting. The scheme aims to replace 35m conventional street lights and has already been implemented in Vizag, where 92,000 conventional street lights have been replaced with LED lighting. The project is expected to reduce energy consumption by 50% and save the municipality INR310m annually.

SLNP scheme targets: 1 To replace 35m of conventional street lighting 2 Expected overall annual energy savings of 9000m KWh 3 Expected annual 1.5GW reduction in load 4 Expected annual cost reduction to municipalities of INR55bn 5 Annual estimated greenhouse gas emission reductions of 6.2m tonnes of CO2

EESL replaces the street lights at its own cost and there is no upfront payment required by the municipalities. EESL aims to recover the cost of investment from the municipalities, by way of the amount saved from the lower energy usage being paid back to EESL by the municipalities. The programme is already being implemented across various states in India and has replaced around 1.3m street lights to date.

Havells India (HAVL IN): 3 November 2016

The National Energy Efficient Fan Programme (NEEFP) Under the scheme, EESL distributes energy-efficient 5-star rated 50W ceiling fans that consume up to 40% less electricity than other 5-star rated fans, at a lower price than that of 5-star rated fans. It has already distributed 90,000 fans in Andhra Pradesh and Uttar Pradesh and targets to distribute 200,000 fans across India in FY17.

Under the scheme, the fan is available at INR1,250 on an upfront basis and INR60 a month on an equated monthly instalment (EMI) basis. The fans are only available in white and brown colours. The market price for the fan is around INR2,000. EESL has also decided to take responsibility for the installation of new fans and the disposal of old fans.

EESL: comparison of fan procurement prices under EESL and retail price/MRP

EESL plans to sell an (INR) energy efficient fan 4,500 priced at INR1,100-1,200, with a procurement 3,600 price of INR900 2,700

1,800

900

0 Normal fan CMP Energy efficient fan MRP Super efficient fan MRP Energy efficient fan (EESL)

Source: Company

Agricultural Demand Side Management (AgDSM) This scheme will help farmers replace older energy-consuming agricultural pumps with new 5-star-rated energy efficient pumps. The pumps will have a smart control panel and SIM card, which will give farmers the flexibility to control them from their mobile phones from any location. However, the scheme requires a MoU between the state government, state DISCOM and EESL before implementation. The scheme has a number of benefits, including no upfront costs to farmers and free repair and maintenance over the project period. The cost of implementation is made up through the state DISCOM’s annual saving on energy bills.

The EESL plans to replace 1m old agricultural pumps with new pumps over FY17. It has distributed 200,000 pumps to the farmers in Andhra Pradesh on a pilot basis, which it believes will lead to a 30% energy saving by 2019, which would translate into annual savings of INR200bn on agricultural subsidies, or a saving of 50bn units of energy annually. EESL’s procurement of these new pumps is at INR30,000 and sells them for INR45,000. EESL has floated tenders for 100,000 pumps to be distributed in Maharashtra.

Apart from the distribution of LED bulbs, tube lights, energy-efficient fans and agricultural pumps, EESL also plans to distribute super-efficient air conditioners that consume less power than a 5-star-rated air conditioners.

Havells India (HAVL IN): 3 November 2016

Abbreviations FMCG Fast-moving consumer goods PAT Profit After Tax FMEG Fast-moving electrical goods Capex Capital expenditure MCB Miniature Circuit Breaker FCF Free cash flow KEI KEI Industries Limited NTPC National Thermal Power Corporation Limited AO Smith A. O. Smith India PFC Power Finance Corporation Limited CAGR Compound annual growth rate REC Rural Electrification Corporation Limited AD Advertisement expenses PGCIL Power Grid Corporation of India Limited PCB Printed circuit board EMI Equated monthly instalment HO Head office DISCOM Distribution companies LME London Metal Exchange UJALA Unnat Jyoti by Affordable LEDs for All ELCOMA Electric Lamp and Components Manufacturers Association of India MoU Memorandum of understanding LED Light-emitting diode KWh Kilowatt hour CFL Compact fluorescent lamp GW Gigawatt CGCEL Crompton Greaves Consumer Electricals Limited CO2 Carbon dioxide EESL Energy Efficiency Services Limited W Watt ES Energy saving MRP Maximum retail price SLI Sylvania Lighting International SIM Subscriber Identity Module

Source: Company, Daiwa Source: Company, Daiwa

Havells India (HAVL IN): 3 November 2016

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Steel Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Machinery) Co-head of Asia Pacific Research Iris PARK (82) 2 787 9165 [email protected] Rohan DALZIELL (852) 2848 4938 [email protected] Consumer/Retail Regional Head of Asia Pacific Product Management SK KIM (82) 2 787 9173 [email protected] Kevin LAI (852) 2848 4926 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Economist for Asia ex-Japan; Macro Economics (Regional) Thomas Y KWON (82) 2 787 9181 [email protected] Olivia XIA (852) 2773 8736 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Macro Economics (Hong Kong/China) Kevin JIN (82) 2 787 9168 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Small/Mid Cap

Head of Automobiles; Transportation and Industrial (Hong Kong/China) TAIWAN Brian LAM (852) 2532 4341 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Auto Components; Transportation – Railway; Construction and Engineering (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Leon QI (852) 2532 4381 [email protected] (Regional) Banking; Diversified financials; Insurance (Hong Kong/China) Christie CHIEN (886) 2 8758 6257 [email protected] Yan LI (852) 2773 8822 [email protected] Banking; Insurance (Taiwan); Macro Economics (Regional) Banking (China) Steven TSENG (886) 2 8758 6252 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (PC Hardware) Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Adrian CHAN (852) 2848 4427 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Jamie SOO (852) 2773 8529 [email protected] Small/Mid Cap Gaming and Leisure (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] INDIA Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Carlton LAI (852) 2532 4349 [email protected] Head of India Research; Strategy; Banking/Finance Small/Mid Cap (Hong Kong/China) Saurabh MEHTA (91) 22 6622 1009 [email protected] Dennis IP (852) 2848 4068 [email protected] Capital Goods; Utilities Power; Utilities; Renewables and Environment (Hong Kong/China) Jonas KAN (852) 2848 4439 [email protected] SINGAPORE Head of Hong Kong and China Property Ramakrishna MARUVADA (65) 6499 6543 [email protected] Cynthia CHAN (852) 2773 8243 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Property (China) David LUM (65) 6329 2102 [email protected] Thomas HO (852) 2773 8716 [email protected] Banking; Property and REITs Custom Products Group Royston TAN (65) 6321 3086 [email protected] Oil and Gas; Capital Goods

Shane GOH (65) 64996546 [email protected] Property and REITs; Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)

Havells India (HAVL IN): 3 November 2016

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Havells India (HAVL IN): 3 November 2016

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Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.

Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates, may have received compensation for any products other than Investment Banking (as disclosed)or brokerage services from the subject company in this report or from any third party during the past 12 months. Daiwa India and its associates may have debt holdings in the subject company. For information on ownership of equity, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report. Associates of Daiwa India, registered with Indian regulators, include Daiwa Capital Markets Singapore Limited and Daiwa Portfolio Advisory (India) Private Limited.

Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd. and it may only be distributed in Taiwan to specific customers who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd. and non-customers including (i) professional institutional investors, (ii) TWSE or TPEx listed companies, upstream and downstream vendors, and specialists that offer or seek advice, and (iii) potential customers with an actual need for business development in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Neither Daiwa-Cathay Capital Markets Co., Ltd. nor its personnel who writes or reviews the research report has any conflict of interest in this research. Since Daiwa-Cathay Capital Markets Co., Ltd. does not operate brokerage trading business in foreign markets, this research is “without recommendation” to any foreign securities and Daiwa-Cathay Capital Markets Co., Ltd. does not accept orders from customers to trade in such securities that are without recommendation. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd. in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital

Havells India (HAVL IN): 3 November 2016

Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 64.0% Hold** 21.2% Sell*** 14.8% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2016. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association