CFA Institute Research Challenge Hosted by Indian Association of Investment Professionals Indian Institute of Foreign Trade, New 1

This report is published for educational purposes only by students competing in the CFA Global Investment Research Challenge Havells Limited Date 09.11.2016 Electrical goods

NSE: HAVELLS | BSE: 517354 India Recommendation SELL

Price Target: INR 321.4 Price 08.11.2016: INR 392.45 Downside: 18.1% Highlights

We issue a SELL rating on Havells India Limited (HIL) with a one year target price of INR 321.4, arrived at by using the Discounted Free Cash Flow to the Firm Method and relative valuations based on trading Key Ratios 2016A comparables. Havells India Limited is one of the largest electrical equipment Int Cover 15.25x manufacturers in India and classifies itself as a fast moving electrical goods company. It operates in four major business segments viz. switchgear, P/E 47.80x cables, LED lightings and fixtures and Electrical Consumer Durables. P/BV 5.90x Inadequate presence in the tier 2, tier 3 and rural areas is a big factor that P/Cash EPS 45.80x could see the company’s growth trajectory marginally stalled as the company shows an uneven 70:30 distribution network across urban and rural regions. M Cap/Sales 2.85x The company is now working towards an FMCG like distribution network to EV/EBITDA 28.42x strengthen its presence in the source markets of the future growth. ROCE 10.60% A considerable war chest for acquisition means that the company ROE 24.10% currently stares at c. INR 23.5 per share. This cash, lying idle and earning no or base returns would translate into a lower return on equity (RoE), hurting Debt/Equity 0.00x the overall profitability of the company. EBITDA Margin 10.51% Lightings and cables business hit a roadblock as the stark plunge in the Net Profit Margin 15.80% LED lighting prices, reducing CFL market in India and highly volatile copper and aluminium prices have somewhat stalled the business growth that the company was expecting to reach. Economic options in the cables segment to Market Data cater to the increasing demand from the rural area also poses a threat of market cannibalization. Market Capitalization INR 244.89 bn (in INR bn except 2015A 2016A 2017E 2018E 2019E Shares Outstanding 624.57 mm per share data) Free Float 38.04% Revenues 85.69 77.14 83.81 91.62 100.98 52 Week High/Low INR 459.40/235.30 EBITDA 7.21 8.12 11.31 12.60 14.14 Avg. Monthly Volume 3,05,342.33 Net Income 3.85 12.21 8.27 9.38 10.55 Beta 0.81 Net Profit Margin (%) 4.50% 15.80% 9.87% 10.24% 10.44% EPS 6.22 8.21 13.34 15.13 17.01 700 DPS 3 3 3 3 3 600 500 Valuation: We opine that Havells India Limited is already trading at a very 400 high P/E multiple of 31.48x and P/BV multiple of 9.57x and is expected to 300 undergo correction. This is because despite the fact that the company is 200 going in the right direction with a stronger distribution network and a 100 0 defensive core business, the market seems to have already factored that in Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 making the correction a strong possibility.

NIFTY SENSEX HAVELLS

Source: Bloomberg, Company Fillings

Important disclosures appear at the back of this report 2

Business Description

Chart 1.1 : Revenue Breakdown by Segment (%) About Havells India Limited • HIL is one of the largest electrical equipment manufacturer in India. Incorporated in 1983, the company today has crossed a billion-dollar revenue mark on consolidated basis and classifies itself as a fast moving electrical goods company. • The company operates businesses in four major segments – Switchgears, Cables, Lighting and Electrical Consumer Durable. HT • HIL is currently rated AAA by CARE and AA+ by ICRA with a stable outlook. Product Segments Switchgears: Under this segment HIL operates in two major segments which are domestic MCB and modular switches and has witnessed a CAGR of 12% in last five years and in total this segment forms the second biggest part of company’s revenue Source: Company Fillings contributing 23.7% in FY’16 with a Y-o-Y growth of 0.55% and has the highest contribution margin at 39.2%. The company has a market share of around 28% in Chart 1.2 : Segment Contribution Margin (%) domestic MCB market and around 15% in modular switches market. The company also operates under the brands Standard and Crabtree and is expanding its portfolio with the Sylvania stake sale latest launch of Reo and Reo Bliss. Cables: Under this segment HIL operates in both domestic and industrial cable segments and this segment has witnessed a CAGR of 12% in last five years and forms the biggest part of the company’s revenue, contributing almost 40.6% in FY’16 with an overall contribution margin of 14.2%. The company has market share of almost 16% in domestic and 10% in industrial segment. This segment witnessed a growth of 0.8% as it was largely influenced by the commodities prices of copper as the benefits have to be passed-on to the customers. Lighting: Under this segment the company operates in two product categories lamps and fixtures and has witnessed a CAGR of 12% in last five years and contributes 14.7% to the company’s revenue with a contribution margin of 24.1%. Amongst the two categories, fixture category (including LED) forms 70% of the segment revenue. The company has a market share of around 14%. The major focus of the company is on the Source: Company Fillings LED segment which witnessed 100% Y-o-Y growth and which forms 51% of the segmental revenue. The acquisition of Promptec will boost LED and solar segment over the coming years. Chart 1.3 : HIL EPS and Dividend Payout Ratio Electrical consumer durables: The segment comprises of fans, water heater and domestics appliances and has witnessed a CAGR of 19.5% in last five years. This segment forms 21% of the revenue in FY’16 with a Y-o-Y growth of 11% and with a contribution margin of 25.2%. Fans forms 70% of the revenue in this segment and the company has a market share of 15% and is the only company to produce all four types of fans: ceiling, table, pedestal and wall fans. The company has launched various new appliances and air coolers and has ventured into niche category of air purifiers. The company also plans to launch solar water heaters in the coming years. Business Description

Company strategies Source: Company Fillings Focus on domestic markets During the year the company divested 80% stakes in its WOS Havells Malta Ltd. and 80% stake in Havells Exim Limited for a net consideration of INR 10.87bn to continue Growth drivers for HIL focus on Indian operations. This divestment will improve company’s financial position and profitability. To expand in the domestic markets and garner market shares company Government spending on Real estate market up-tick, entered into a purchase agreement with Promptec Renewable Energy Solutions Pvt. infrastructure sector brand based consumerism Ltd. to acquire a 51% stake for a net consideration of INR 291.2mm. This acquisition will help the company to expand in LEDs and solar lightening solution. LED pushing initiatives High capital expenditure like subsidies by being incurred by industry Focus on tier 2 and tier 3 cities Government The company will be penetrating more in the Tier-2 and Tier-3 markets to tap-in the Increasing electrification growth of these cities with its wider distribution reach and planning to expand to 1100 Favorable demographics of rural areas by cities from currently 700 cities having population of more than 50,000. The company Government also plans to expand in the western and the southern markets which currently Source: Student Research contributes only 15% and 25% respectively to the revenues.

Important disclosures appear at the back of this report 3

Business Description Chart 1.4 : Marketing & Advertisement Spend of HIL Established manufacturing base: HIL currently has 12 manufacturing units and produces c. 92% of the products in-house which is the highest in the industry. In FY’16, it operationalized its plant in Neemrana, for manufacturing of modern electric water heater. It is in the process of setting up two more manufacturing units at Guwahati, Assam for switchgears and , Karnataka for cables which may be operational by FY’18 with a total investment of INR 1.4bn. HIL has a policy of one plant one product to focus on efficiency. The current utilization level at each plant is c. 70-80%. Projection as a lifestyle brand: HIL enjoys a strong brand recall and operates in the HT premium end of the market where it is targeting next generation with automation, state- of-the-art switchgears and remote controlled electrical devices and is able to maintain high contribution margins. These smart devices dovetail with the Govt. initiatives of smart cities. It has consistently been spending 3-4% of revenues as advertising and Source: Company Fillings marketing expense and has increased its hiring as a strategic move to align itself as a FMEG brand and is continuously expanding and differentiating their product portfolio. Chart 1.5 : Shareholder Structure (%) Augmenting distribution network for expansion: HIL has the widest network of distributors and dealers amongst all electrical goods manufacturers. It has c. 85000 dealers + distributors, c. 100000 retailers and has exclusive chain of showrooms called Havells Galaxy which contributes c. 12% to the revenue. Currently the company has 375 exclusive showrooms and plans to expand it to 600 showrooms by FY’18. Shareholder structure: As on 31st March, 2016, HIL is 61.63% owned by promoters and 38.37% owned by public. In the public holding part, 29.74% is owned by institutions and 8.62% is owned by non-institutions. In the institutional holding part, 4.19% is held by Domestic Institutional Investors and 25.55% is Foreign Institutional Investors. The largest shareholder and promoter QRG Enterprises Ltd. (30.40% of shares) entered a revised Trademark License Agreement with HIL’s pursuant to which the rights of the brand were transferred to the company for no consideration w.e.f. April 01, 2016.

Source: Company Fillings Corporate Management: Mr. Anil Rai became the new CMD of HIL on 13th November, 2014 after the Chart 1.6 : Net Income (INR bn) demise of the founder and former CMD Mr. Qimat Rai Gupta. He has served the company as Executive director and Joint Managing Director since 2006. HIL reported a marginal increase in PAT over 2014-16 following the 80% divestment in Havells Malta Ltd. and Havells Exim Ltd. In FY’15, HIL expanded its Board of Directors from nine to twelve. Mr. Puneet Bhatia and Mr. Monhandas Pai were added as non-independent and non-executive BOD, Mr. Aveent Kumar Gupta was added as whole time director, Ms. Pratima Ram, a female director was added as an independent director. Corporate Governance

Corporate governance Board: The composition and election of the Board of Directors is in accordance with the requirements of the Companies Act 2013 and the Clause 49 of Listing Agreement. However, an area of concern is the Independence of the Independent Directors since majority have been holding the office since a period of 5 years or more. Source: Company Fillings Corporate Committee: The committees have been constituted based on the Companies Act, 2013 and Clause 49 of Listing Agreement. Meetings were duly held. Remuneration of Key Management Director Remuneration and Shareholding: The Directors hold 8.47% shares, of which 8.26% is held in the capacity of Promoters. The remuneration to directors were within the prescribed limits of the Companies Act 2013. INR (mm) 2016 2015 2014 Statutory Auditors: One of the Joint Auditors appointed and proposed for re- MD / WTD / appointment is S.R. Batliboi & Co LLP, an EY member firm, which has issued an 225.08 239.00 157.33 Manager unqualified Auditors Report on the Standalone Financial Statements; concluding a high level of Internal Control and adoption of good Corporate Governance practices. Directors 6.24 5.16 1.2 Corporate Social Responsibility The company believes that corporates have a special and continuing responsibility Key Managerial 4.86 3.98 - towards social development. It has taken CSR activities through QRG Foundation, a Personnel trust instituted by the group. The company has constituted a CSR committee with four board members and has been spending 2% of the average profit for last three years for CSR activities (INR 114.8mm in FY’16). Some of the major initiatives involves Mid-Day Source: Company filings Meal to 57,000 children in 672 schools, sanitation facilities in 102 schools by setting up of 816 toilets, donation of tables & benches to Govt. schools in .

Important disclosures appear at the back of this report 4

Industry Overview and Competitive Positioning

Chart 2.1 : GDP Growth of India (%) The Indian economy is expected to show more than 7% GDP growth rate despite looming uncertainties 7.6 7.2 2016 saw a number of key macroeconomic activities shaping the world economy like Brexit vote and US economy revival. The continuous volatility of the financial market 6.6 6.2 5.9 along with declining commodity prices has resulted in weak growth of the world 5.6 5.3 economy and an overall sentiment of caution amongst investors. India showed robust growth rate of 7.6% in 2015-16, while the average global economy growth was 3.1%, 4.3 making India the fastest growing economy in the world.

2012-13 2013-14HT 2014-15 2015-16 The outlook for Inflation in India seems positive and in the near future, it is expected to be around the RBI’s target range of 4% +/- 2%. Both, the CPI and WPI data depicts GDP Growth Per Capita GDP Growth that the RBI has been successful in keeping the inflation in check and in the target range of 4% - 6% over the period. The recent government policies like the revamped Source: Economy Survey 2015-16 PDS with JAM will improve the purchasing power in rural India, and stimulate demand in the economy. Also, the rollout of GST bill might have a huge stimulus in the Chart 2.2 : WPI and CPI rates in India (%) economy because of the increased margins for the suppliers as well as lower costs for the consumers. IMF forecast the GDP growth to be 7.7% in 2017. The expected increase in oil prices and geo-political tension between India and Pakistan together with policy changes in US post elections might pose significant risks in the future. Switchgear segment The industry forms 15.9% revenue of Transmission and Distribution equipment industry and is expected to grow at a CAGR of 19.2% till 2020 The switch-gear market is expected to grow in coming years with a push for pan India electrification and to generate 175GW from renewable resources by 2022. The increase in the real estate activity in Tier 2 and Tier 3 cities and a greater focus on Source: Economy Survey 2015-16 safety will also push the growth in domestic switch-gear market currently at INR 20,000 mm. The segment has got significant thrust with opening up of sector to 100% FDI and Chart 2.3 : Segment Growth of Electric a significant improvement in technology. The switch segment which is broadly Equipment Industry (INR bn) classified into non-modular which accounts for INR 15bn and modular switches which currently stands at INR 20bn is set to gain as customers look for attractive and energy efficient switches. The top 4 players in switches account for almost 70% of the organized market and that forms almost 75% of the total switches market. Lighting and EESL segment Rising personal disposable income, growing government initiatives encouraging use of LED lights and increasing focus on smart city projects to spur growth These factors are set to push the lighting market in India from INR 120bn in 2016 to INR 370bn by 2020, driven mainly by the LED lighting business. Government initiatives for energy conservation by partnering with EESL and providing LED light bulbs under the RGGVY initiative has already provided a strong foundation for the LED business. Electric Lamp and Component Manufacturer’s Association of India (ELCOMA) expects the LED lighting business to grow by a CAGR of 40% over 2016–2020, which will further drive up the lighting business which is expected to clock a CAGR of 18% over the same period. Thus, this sector provides a gainful avenue for investment. Source: ELCOMA Cables segment The industry is poised to grow at a CAGR of 7-8% till year 2019 with a thrust from infrastructure, telecommunication and power sectors. Chart 2.4 : Lighting Industry Expected Growth (INR bn, %) Currently domestic cable segment stands at INR 80bn and industrial cable segment stands for INR 120bn. The major demand is likely to come from power, infrastructure and telecom sector. With 4G spectrum allocation and a push for housing through the setup of Rural Housing Board, demand for cable is likely to increase in the near future. The sector is being granted 100% FDI under automatic route. The major risk for this segment comes from imported cables from China and Commodity price fluctuations, mainly in aluminium and copper. Electrical consumer durables segment Increasing investments, driven by growing demand and policy support will drive this sector to a 10.5% CAGR over FY16-FY20 Due to the aforementioned growth drivers, further supported by increasing electrification of rural areas, rising working age population and further penetration into the untapped rural market, the overall market size of ECD sector in India would reach Source: ELCOMA INR 1375bn.

Important disclosures appear at the back of this report 5

Industry Overview and Competitive Positioning Chart 2.5 : Competitor Operating Margins Comparison (INR bn, %) The rural markets, which contribute 33% of the revenue, are set to grow at 25% CAGR over the next 5 years. Modified Special Incentive Package Schemes (M-SIPS), National Electronic Policy (2012) and relaxed FDI norms for electronic hardware manufacturing and multi brand retail will further fuel growth. The production is expected to increase to INR 6.9tn by 2020 and the electronics market size is expected to increase to INR 26.7tn from INR 6.3tn during the same period. As a result, ECD sector provides a lucrative prospect for investment. Competitive Positioning Production capacity – Higher capex, building newer plants and one plant one product policy The company has been investing in new manufacturing facilities and produces almost 92% products in-house. The company has consistently invested ~2-2.8% of revenue as capex over years. The domestic manufacturing will benefit the company in depreciating Source: Bloomberg INR environment as it has the lowest levels of imports among Indian consumer electrical companies. The current utilization capacity being 70-80% across various plants, so the company will be in a competitive position to expand the production as Chart 2.6 : Marketing and Advertisement demand picks up. This strong manufacturing base has led doubling the market share of Spend of Havells v/s peers (% of revenue) HIL in almost every product segment in last 10 years. The company has maintained a lean working capital cycle of 15 days owing to high debtors discounting and channel financing which are off-balance sheet items. Excluding debtor discounting and channel financing, debtor days will be in-line with the industry. Cost leadership – Premium products and pricing The company is dominant in premium segment and is able to charge a premium for its products. The company is a dominant player in premium fans segment and a smaller presence in mass market segment, company’s product line stats from INR 1,800 whereas other competitor’s product line starts from INR 1,100. In wires and cables, the company is able to sell at a premium as compared to Finolex and Polycab. In switchgears, the company is a market leader and has one of the highest contribution margins in the industry. In ECD, company had launched multiple new appliances and Source: Companies Fillings this steady widening of portfolio will be contributing to the growth in this segment in the coming years. Chart 2.7 : Market Structure of Segments Strength of brand – Marketing expenditure, multi-product dealership, product portfolio The company has a strong top of the mind recall because of the marketing campaigns run by the company. The marketing expenditure has been one of the highest in the industry and is around ~3% of the revenue consistently. Dealerships of the company is a multi-product dealership unlike other competitors which are only single product dealership. With the opening up of HIL’s Galaxy stores which are one stop stores for HIL’s products adds to the brand visibility. HIL is the only company to be present across the entire consumer electrical space covering from switchgears to cables to kitchen appliances. This wide presence and the continuous expansion gives the company more Source: Various visibility through shelf space on multi-brand retail stores Improved Distribution network and Services- Strong connect with the electricians, Table 2.1 : Competitor Portfolio Analysis Dealer incentive structure, Customer services

Segment Havells Finolex Polycab CG Bajaj Philips ABB The company has a strong focus to build a dealer network and the largest number of dealers and distributors amongst competitors. The company had made tremendous Cables and * * * efforts to connect with retailers and electricians with almost 200,000 registered Wires electricians as they play a significant part in influencing the decision making of the Domestic customers. The company has joined with banks to finance the working capital of the Switchgear * * dealers, which appears as a contingent liability on the Balance Sheet and currently Industrial * * stands at INR 3.7bn. HIL’s is the only company to introduce customer services even for Switchgear the smallest SKU (Stock Keeping Unit). The cost of such a service is almost 1.5% of Motors * * * annual revenue but helps in building a strong brand and gain customer trust. Robust Return Ratios – High ROE, increasing cash inflows, cash lying on Balance Capacitors * * * Sheet, High margins Electrical Switches * * * The company has constantly maintained one of the best RoE and RoC in the industry. Lightening & Free cash inflow has been increasing for the firm and is expected to increase further on Fixtures * * * * earnings growth and low working capital. It has maintained best EBITDA margins in the industry. After the stake sale in Sylvania has, the company recorded an increased cash Fans * * * inflow and is eying a domestic acquisition to strength position in the domestic markets. Home Appliances * * * * Source: Companies Fillings

Important disclosures appear at the back of this report 6

Industry Overview and Competitive Positioning

Chart 2.8 : Porters Five Forces Analysis Innovation – In-house R&D capabilities, 185+ IPRs & 18+ patents

Competitive Rivalry The company has been investing heavily in-house research and development and 5 continuous product development has been differentiating HIL’s from its competitors and 4 contributing towards its brand equity and premium pricing. The company has positioned 3 itself more of a lifestyle brand with the launch of home automation, remote controlled electrical appliances. The company has launched energy efficient fans, fans with LED Threat of new 2 Threat of entrants Substitutes lights, Euro-II range of MCB, MCCB, Lumeno LEDs and even entry-level modular 1 switches for Tier-II and Tier-III cities. This constant innovation and increasing the churn 0 of products provides HIL’s with a competitive advantage and its higher multiple. Investment Summary

Bargaining power Bargaining power We issue a SELL recommendation on Havells India Limited (HIL) with a target price of of suppliers of customers INR 321.4 using the Discounted Free Cash Flow to Firm and the relative valuation method. This offers a 18.1% downside from its closing price of INR 392.45 on November Source: Student Research 8, 2016. HIL would stand to gain from its highly diversified core business through a solid Chart 3.1 : Copper and Aluminium Price Trends (INR) distribution network, which is set to improve as it continues to develop the same. The 500 seizure of payment of royalty from the current financial year will see the company gain on its EBITDA margins as well. But the stock market seems to have already factored this 400 in and hence the stock could see considerable correction in the coming year. 300 HIL’s business is on the back foot mainly because (1) LED has seen and is expected to continue seeing reduction in prices; (2) the cables business is being cannibalised by 200 companies providing budget options like Polycab and Finolex; (3) The switchgear segment sees HIL as an established player only in the premium segment and its infancy 100 in the other segments could hurt the bottomline; (4) the ECD business is still a very small 0 contributor to the revenues and sees established players as a huge threat; (5) the Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 pension liabilities for the subsidiaries in Brazil and Thailand could hurt profitability. Amongst other reasons, the government levied subsidies on LED lighting would see the Copper Aluminium prices fall furthers, thereby impacting the revenue despite growing volumes in the Source: MCX SX business. Also, HIL’s decision of not competing for any EESL tender floated by the Government of India in the coming financial year would see it lose out on its LED Chart 3.2 : HIL Cash Balance (INR bn) 34.98 business as well. The volatility in the commodity prices, especially copper prices, will put the margins under pressure as well. Sylvania Stake Sale 26.86 Strong urban distribution network, but rural network is work in progress

20.19 The rural – urban distribution network is a 30:70 ratio for HIL which is somewhat alarming, considering that the growth in a more or less flat for the coming couple of 14.70 years is expected to come from the rural and the tier-2 and tier-3 cities. The company has recently started working on a goal towards becoming a fast moving electrical goods 8.82 7.77 (FMEG) company, trying to replicate the distribution network that the FMCG companies boast of. But it is expected to be initially a cost intensive change as the benefits to lure the distributors to be a part of this project could take a hit on the margins being earned 2014 2015 2016 2017E 2018E 2019E from the sales. Also, the acceptability of the premium products of HIL versus the economic options like Finolex, Polycab, Crompton Greaves etc. is still a grey area. Source: Company Fillings, Student Research Huge unutilized cash reserves on the balance sheet The sale of stake in Sylvania has added to the already built up huge cash reserves of Chart 3.3 : HIL Manufacturing Facilities HIL. For These reserves, the company has clearly stated the intent of utilizing them to acquire a company in the Indian market to help them reinforce their position in the Indian markets. But the cash reserves of INR 23.54 per share sitting idle on the balance sheet would further hurt the RoE that the company in the coming year. Also, in which business would this acquisition be and what premium would the company be ready to pay at a time which sees all the companies in this business trade at very high multiples, prevents from getting any clear idea as well. The delay in realization of synergy with this possible acquisition, as is the case with Promptec, could lead to further dampening of the returns. The agreed sale of stake in the Brazilian and Thai business of Sylvania once it reached profitability will add to this cash, with the possible utilization remaining nebulous. Cables and LED business show stunted growth The cable business is highly dependent on the copper commodity prices which have been quite volatile in the past and is expected to remain the same in the future. This has led to erratic and under pressure margins in the cables business, which contributes almost a third of HIL’s revenue, yet it registered a mere 14% contribution margin, least amongst all the businesses of HIL. The LED business too has seen volume growth but Source: Company Fillings the stark plunge in the prices has led to a single digit growth since 2012.

Important disclosures appear at the back of this report 7

Investment Summary

The migration from CFL to LED has also seen HIL needing to change the existing CFL Table 4.1 : WACC Computation manufacturing facilities to LED manufacturing facilities. The decision to not participate in the EESL tenders floated by the government this year on the back of inability to cater Equity 99.30% the demand of the same could see them miss out on crucial business. Debt 0.70% Valuation Methods Levered Beta 0.81 We derived our target price by using 60:40 ratio of the Discounted Free Cash Flow to Firm method and the relative valuation method. Risk Free Rate 6.82% Drivers of Volatility in Earnings Market Return Rate 13.68% The major drivers of volatility have been (1) divestment of stakes in Sylvania except Cost of Equity 12.4% Brazil and Thailand; (2) the commodity price volatility and (3) plunging prices of LED lighting. These are set to continue in the future, though the divestment of the remaining Interest Rate 11.75% stake in Sylvania is not expected to bring in similar volatility to the earnings as in the Tax Rate 22% past. The possible acquisition or merger would also lead to volatility in the earnings, Cost of Debt 11.75% which will further also be impacted by the synergy realization from the same. Possible investment risks WACC 12% Key risks that the investors must be aware of include regulatory risk such as delayed Source: Bloomberg, Student Research implementation of GST. Business risk includes slowdown in real estate and infrastructure sector, entry of new market players in business segments and upcoming business in tier 2 and tier 3 cities. The technological risks would encompass continuing technological constraints in LED lighting and disruption with new technologies in coming Chart 4.1 : Havells Revenue in INR bn and Margins future. The strategic risks being faced are cannibalization of sales by technologically upgraded products, increased exposure to only Indian markets and expansion plans not 105 17% 15.8% being as effective. The large, unutilized cash reserves also pose a financial risk. A 13.5% 13.8% 14.0% 85 detailed discussion on each of these is provided in the Investment Risk section 12.0% 12.2% 12.6% 13% 10.5% 10.2% 10.4% 65 9.9% Valuation 8.4% 8.9% 9% 6.8% 45 DCF Valuation 4.5% 5% We used Discounted Cash Flows to the Firm (DCF) method to arrive at target price of 25 INR 260.1 per common share. This method requires estimation of free cash flows to all the capital holders in the company and discounting it to arrive at an enterprise value. It is 85.69 77.26 83.81 91.62 100.98 1% 5 then adjusted with net debt to derive the equity value to finally determine the target 2015 2016 2017E 2018E 2019E price. The forecasted period is 2017-2021 for which the estimates have been drawn post -15 -3% which a terminal value is obtained at a constant growth rate.

Revenue EBITDA Margin Revenue assumptions

EBIT Margin Net Profit Margin The revenue is projected for its 4 operating segments: Switchgear: HIL operates in 2 sub-segments- a. Modular Circuit Breakers (TAM is c. Source: Company Fillings, Student Research 23%) and b. Modular Switches (TAM c. 18%). The future revenues are forecasted by estimating the market growth of these two sub-segments, expecting HIL to retain its market share of 29% and 20% respectively in both of these sub-segments. Chart 4.2 : Segment Wise Revenue Breakdown in bn Cables: HIL is a leading player in this segment. The past trends show this segment to have become a stable business for HIL and thus it is expected to grow at a stable rate. Lighting and Fixtures: This segment comprises of LED, CFL as the core technologies. 15.70 The remaining 20% stake in Sylvania contributes to this segment. Since the company 14.19 will be selling off this stake once it turns profitable, the revenue contribution is 10.28 12.76 considered constant as the focus is to improve the expenses side. Chile and USA 11.41 35.81 businesses are already contained, so only Brazil and Thailand subsidiaries are 33.50 considered as HIL. LED segment contributes c. 2/3rd to the domestic business and HIL 40.72 31.94 30.79 is expected to retain its market share in this fast growing market. The remaining 1/3rd of the domestic business mainly constitutes of CFL for which the market is expected to 32.93 decrease in the future. 28.76 21.90 22.08 25.17 ECD: In ECD, c. 70% of revenue comes from fans. The future revenue is projected according to market growth and remaining 20% is other ECD appliances like geysers for 12.79 12.86 13.94 15.17 16.54 which the overall growth of ECD market is considered a proxy for future projections. Cost Assumptions 2015A 2016A 2017E 2018E 2019E SG&A: These expenses are projected as a constant percentage of revenue. In future, Switchgear Cables Lighting ECD we do not see HIL having any significant increase in its SG&A expenses as HIL is already one of the highest spenders in advertising, comparable to the top FMCG Source: Company Fillings, Student Research companies of India. Employment Benefits: These expenses are projected as percentage of revenue. Since the company is moving towards FMCG model of distribution and has huge pension liabilities, these expenses are projected to grow at modest rate.

Important disclosures appear at the back of this report 8

Valuation

Havells India Limited share price and news flow Stake sale in Sylvania 1:5 stock split announced announced European debt crisis impacts Indian stock markets

HT

Market tumbles on concern Acquisition of Promptec Markets rise as Oil and Gold prices slump due to weaker rupee announced

Cash flow assumptions Table 4.2 : Havells Relative Valuation Depreciation and Amortization: Fixed asset turnover as percentage of revenue is taken Company Segmental Segmental Contribution as 6 year average and is expected to remain constant in forecasted period. The D&A Segments Revenue Revenue % Margins expense is taken as a fixed percentage of beginning Gross Fixed Assets that is calculated by deducting the total accumulated D&A from the gross block at the end of previous year. Sw itchgears 13.94 16.63% 37.72% Capital Expenditure: The Capex is divided into 2 parts: - (1) Maintenance Capex- which is Cables and Wires 25.17 30.03% 23.50% the same as D&A for that particular year and (2) Growth Capex- the remaining Capex is classified as growth capex. Lightening 31.94 38.11% 17.30% Working Capital: HIL is expected to maintain its improved working cycle days. Thus, it is ECD 12.76 15.22% 21.49% estimated by maintaining constant days of inventory for inventory forecast, days of receivable for debtors and days of payable for creditors’ amount. WACC assumptions Switchgear Weighted Average Cost of Capital (WACC) is calculated using CAPM model. The risk free Max Median Mean rate of 6.82% is current yield on 10 year Indian bonds. Beta of 0.81 is calculated by regressing the historical HIL return with respect to National Stock Exchange for a 5 year From P/E 2017E 190.69 146.49 146.49 period. The market risk premium of 5.19% is on the basis of the Indian stock market returns for the past 10 years. Tax rate of 22% is the current effective tax rate of company From P/E 2018E 174.41 136.50 136.50 which will be effected once GST is applicable from April 1, 2017 but since the process of its full implementation is under constant revision, the tax rate is considered unchanged. Cables Using CAPM model, the WACC is 12%. HIL has negligent debt because as per guidance the company is reserving cash and avoiding any big investments as it is looking for viable Max Median Mean acquisition targets in ECD segment. Price multiples From P/E 2017E 132.69 98.21 98.21 DCF method was our principal valuation approach but we have also analysed trailing price relatives of comparable firms. From P/E 2018E 124.42 92.83 92.83 We found the most appropriate peer to be Finolex Cables since it is also engaged in cables, lightings and switchgears. Majority of HIL’s business is in Lightings and Cables. Lighting Given the high marketing spend and the premium attached to the company’s products, HIL has consistently posted higher Price to Earnings (P/E) ratios compared to Finolex. This Max Median Mean high relative P/E ratio indicate that HIL's stock will have a limited upside. HIL's historical From P/E 2017E 87.44 67.68 67.43 performance indicates a CAGR of 39% over a 3-year period from INR 145.43/share to INR 392.45/share while that of Finolex’s CAGR is 87% from INR 65.95/share to INR 430/share From P/E 2018E 80.11 61.01 60.62 over 3 years. This though proves that the company has been performing well but the industry has been trading at a higher P/E with a premium attached to it. ECD Also, a relative analysis was conducted among HIL's segmental and risk profile peers. Bajaj Electrical and Crompton Consumer Electrical for ECD and Lightings are the most Max Median Mean similar businesses. Another measure for comparison is EV/EBITDA, which is appropriate in analysing the From P/E 2017E 159.58 100.88 102.21 value of a company regardless of its capital structure. By using this method, the effect of From P/E 2018E 141.88 95.58 94.63 depreciation policies is removed. An analysis of the EV/EBITDA ratios of these companies reveals that HIL has been trading at a premium. The company has also provided higher Havells India dividends as compared to its peers. Financial Analysis Max Median Mean Strong revenue growth supported by solid industry growth From P/E 2017E ₹ 570.40 ₹ 413.26 ₹414.32 The consolidated revenue of company has achieved growth almost entirely by company’s From P/E 2018E ₹ 521.13 ₹ 385.92 ₹384.57 domestic business. With remaining 20% of Sylvania business expected to sell off soon, the revenue CAGR is expected to improve further. Except the cable segment where due to Source: Bloomberg

Important disclosures appear at the back of this report 9

Financial Analysis

volatile copper prices the revenue growth is stabilised, other segments particularly MCB, LED and ECD are expected to show high CAGR growth of c.12% in the 2017-2021 period. Chart 5.1 : Forecasted Capex (INR bn) Backed by strong expectations, the volume sales are bound to increase. Though LED 3.35 segment is showing recent trends of price reduction, we believe that volume sales will 2.90 compensate for it as in India the market still has untapped regions and with growing GDP 2.60 and per-capita income, people will move towards efficient lighting in their homes. Switchgear will continue to contribute maximum to revenue due to expected future growth 2.11 2.14 in this market. ECD Segment is expected to show highest growth in the product portfolio Increasing margins with improvements backed by core operations Sylvania business carried an unfunded liability of EUR 45mn. With this pension liability no more expensed from income statement, the operating expenses are expected to improve leading to better operating margins and net profit margins. Economies of scale and distribution strength has enabled HIL to deliver superior margins, increasing margin from 11% in 2016 to 14.5% in 2021. The company has a number of pioneering incentives 2015 2016 2017E 2018E 2019E building a loyal dealership network vis-à-vis its peers. This is further strengthen due to Source: Company Fillings, Student Research working capital cycle improvements. EBITDA CAGR is c. 10.7% and PAT CAGR is c. 13%. Sustained RoE which can dip due to ineffective utilisation of cash Though company has strong ROE performance, the increased cash on the BS is not invested as the company is looking for acquisition target in ECD segment. This will see a Table 5.1 : Estimating beta dip in RoE as the leverage of the company is almost nil and the cost of equity is high. HIL can improve RoE by equity buyback or increasing dividend payout ratio. But the model has Co-variance 0.0078% not assumed anything. The company has risen equity as & when required but it’s difficult Variance of Sensex 0.0097% to see if the company will able to the same with debt as well. Currently it has low leverage which it can use to reduce the cost of capital to increase its returns. It acquired Sylvania in Beta 0.81 2008 when the leverage was low but wasn’t able to fully understand European markets. Covariance has been calculated on 5 year daily returns Cash Generating Capacity is high Due to high revenue growth, margin improvements and tighter working capital Source: Bloomberg, Student Research management, the company is able to generate sufficient cash in the future to fund its capex requirements as indicated by strong CFO/Capex ratios. This generation is despite Chart 5.2 : DuPont Analysis the company paying constant dividend of INR 3 per share. This cash will be utilised in debt repayment and maintain the dividend policy. Valuation Ratios (x) 2015A 2016A 2017E 2018E 2019E 2020E 2021E P/E 63.1x 47.8x 29.4x 25.9x 23.1x 19.9x 16.3x P/Cash EPS 25.3x 45.8x 35.1x 25.4x 23.2x 20.9x 18.2x P/BV 5.4x 5.9x 5.1x 4.2x 3.5x 3.0x 2.5x EV/EBITDA 32.0x 28.4x 20.4x 18.3x 16.3x 14.4x 12.3x EV/Sales 2.5x 2.7x 2.8x 2.5x 2.3x 2.0x 1.8x Dividend Yield 1% 1% 1% 1% 1% 1% 1% Earning Ratios (%) 2015A 2016A 2017E 2018E 2019E 2020E 2021E EBITDA Margin 8.4% 10.5% 13.5% 13.8% 14.0% 14.3% 14.5% Op. Profit Margin 6.8% 8.9% 12.0% 12.2% 12.6% 12.9% 13.3% Net Profit Margin 4.5% 15.8% 9.9% 10.2% 10.4% 10.9% 11.5% CFO/Capex 456.2% 248.2% 207.3% 368.5% 362.2% 350.9% 315.3% ROE 21.2% 47.7% 24.4% 21.7% 19.6% 18.5% 18.4% ROCE 22.4% 21.0% 23.2% 20.3% 18.5% 17.3% 16.7% Source: Company Fillings, Student Research ROA 7.6% 27.2% 18.5% 17.8% 16.7% 16.2% 16.6% B/S Ratios 2015A 2016A 2017E 2018E 2019E 2020E 2021E Current Ratio 1.3x 1.8x 2.5x 3.0x 3.5x 4.0x 4.6x Table 5.2 : Target Share Price Estimation (INR) D/E 0.1x 0.0x 0.0x 0.0x 0.0x 0.0x 0.0x Debtor Days 31.6 11.1 11.1 11.1 11.1 11.1 11.1 Method Weightage Price WxP Creditor Days 86.8 48.1 48.1 48.1 48.1 48.1 48.1 Inventory Days 60.9 52.1 52.1 52.1 52.1 52.1 52.1 DCF 60% 260.1 156.06 Working Capital Days 5.6 15.1 15.1 15.1 15.1 15.1 15.1 Asset Turnover 7.0x 7.0x 6.4x 6.4x 6.4x 6.4x 6.4x Relative Valuation 40% 413.26 165.30 Per Share Data 2015A 2016A 2017E 2018E 2019E 2020E 2021E Adj EPS 6.2 8.2 13.3 15.1 17.0 19.7 24.0 Target Price 321.26 EPS 6.2 19.7 13.3 15.1 17.0 19.7 24.0 CEPS 15.5 8.6 11.2 15.5 16.9 18.7 21.6 Source: Student Research BVPS 72.1 66.5 77.2 92.4 110.8 131.9 157.7 DPS 3.0 3.0 3.0 3.0 3.0 3.0 3.0

Important disclosures appear at the back of this report 10

Investment Risks

Risks Mitigating Factors Business Risk Slowdown in Real Estate and Infrastructure Sector | BR1 Business and Strategy Risk With stagnancy being experienced by Real Estate developers, the Real Estate Sector New Market Focus on Branding and Product is facing a rough patch. This might have a negative impact on the revenue of the Entrants and Quality as consumers are moving Company, being demand for Switches, Cables and other products of the company, cheaper towards purchases based on influenced by the growth of Real Estate and Infrastructure Sector. substitutes could quality and Brand. impact revenue Entry of New Market Players in Business Segments | BR2 With China being the second largest market for LED Lighting with around 25% of Unable to tap into Introduction of new Brands to Global manufacturing capacity, the competition in the local markets might increase New Markets of exclusively cater to the Regular and Tier II cities having Economy Segment in the new resulting from imports from China. Also, the margins in the concerned business might commendable markets, so as to capitalize without squeeze due to increased competition and availability of cheaper Chinese substitutes. future potential cannibalizing sales of Premium Upcoming Market in Tier II and Tier III Cities | BR3 Brands in existing markets. With the Company’s product portfolio priced premium amongst competitors, and with Cannibalization of Transforming Production the premium perception amongst consumers, the Company might not be able to sales resulting capacities, enabling them to service the growing market in Tier II and Tier III Cities with Reo and Reo Bliss Brands. from technological produce the technologically innovations upgraded products; meanwhile Regulatory Risk venturing into new markets for Delayed implementation of GST | RR1 existing products With the Goods and Service Tax Regime set to rise in India, a concrete date for Technological Risk implementation of the new law is not yet clear. With the advent of the new Regime, business is set to benefit from reduction in the compliances required as well as from Import of key Undertake expansion for components manufacture of components; in the competitive tax rates, resulting from merging of the applicable Indirect Tax Laws. A shorter run, mitigate exposure to delay for the Act to set in motion might squeeze the margins for a longer duration, as price fluctuations by currency well as delay a much needed market stimulus. forwards and price agreement contracts. Technological Risk Continuing Technological Constraints in LED Lighting | TR1 Disruptive Undertake expenses for developing With rapidly changing technology in the lighting business, there is a risk of innovation in new products and upgrade existing product lines by products with new features, so as technological disruption in the business. Apart from that, the LED Chips required are competitors to satisfy the demand from the outsourced from other countries owing to IP constraints, poor infrastructure and customers investment costs. Further, around half of the LEDs assembling are outsourced due to Financial Risk volume and technology constraints. Strategic Risk Considerable Cash Investing cash balances in revenue Balances at hand generating securities till a suitable Increased Market Exposure due to concentration in Indian Markets | SR1 for future expansion project is identified. A With the disinvestment from the foreign markets, the company has increased its expansion special dividend can be considered exposure in Indian Markets. Although the disinvestment will lead to reduced and raising funds as and when opportunity is identified. consolidated losses from foreign subsidiaries, the over reliance on few markets might lead into market saturation in the future. Forex losses on Enter into Currency futures Expansion Plans might not be as effective | SR2 Future Divestment contracts to mitigate the foreign of Sylvania currency risk arising due to inflows With two new plants under construction, the total production capacity is bound to from future stake sale of Sylvania increase in the near future. Unfavourable market scenario might result in under- Business utilization of total installed capacity, thus resulting reduced profitability due to higher Operational Risk operational and maintenance costs w.r.t lower increase in contribution margin. Financial Risk Downtime caused Enter into insurance contracts and by Fortuitous Performance based compensations Considerable Idle Cash in Hand realized from sale of Subsidiary | FR1 Events and plans, Plant Maintenance Contracts As on 31st March 2016, the Company held INR 14.7bn, of which INR 10.7bn resulted Breakdown of to mitigate the potential losses from sale of 80% stake of Havells Sylvania Malta BV, a sub-subsidiary in Malta. The Plants cash reserves result in approx. INR 23.5 per share, which the management proposes Risks arising from Formulate Gantt Chart and exercise to use for expansion plans in the foreseeable future. The quantum of unutilized cash New Plants under control over work completed, and balances might result in lower profitability for the shareholders. commission reformulate strategy for changes in time line. Formulate strategy to formulate market for increased production. Implied Share Price Sensitivity to WACC and Terminal Growth Rate Terminal Growth Rate

BR3 260.1 5.40% 5.70% 6.00% 6.30% 6.60% BR2 FR1 High BR1 11.07% 294.01 307.09 321.72 338.19 356.87

SR2 RR1 11.69% 266.35 276.71 288.17 300.90 315.12 Impact Medium WACC 12.30% 244.02 252.43 261.63 271.76 282.95 TR1 SR1 Low 12.92% 225.06 231.98 239.49 247.68 256.65 Low Medium High Probability 13.53% 209.26 215.04 221.29 228.05 235.39 Source: Student Research Important disclosures appear at the back of this report 11

Appendix

Appendix 1A Macroeconomic Outlook of India

• Government Spending: The Government of India, in tandem with its expansionary policies and Laws and on the back of a better fiscal position, has taken steps towards stimulating growth in the Economy. The Government of India increased its Capital Expenditure to INR 586bn for Q1FY16, at a YoY growth of 18%, with a CAGR 13.48% approx. from the Q1FY13 Capital Expenditure of INR 401bn. Further, the Government has moved to make a higher allocation for its spending for Infrastructure development, which shall stimulate the growth in the economy as a whole due to access better infrastructure.

• Inflation: India’s economic outlook with respect to inflation appears to be a big positive. The RBI Governors has successfully kept the inflation rate in check with in the target range of 4% +/- 2% using its Monetary Policies, without hampering the growth potential of the market. In the last 24 months, The average Urban and Rural Combined CPI is around 5.03%, with Urban CPI at 4.43% and Rural CPI at 5.54%. Moving around in the bracket of 3.5% to 6% in the time period, CPI has shown sharp movements with sustained momentum, currently witnessing a downward spiral movement. With the recent 25 basis points rate cut in the repo rate, the Monetary Policy Committee, headed by the incumbent RBI Governor, Dr. Urjit Patel has given a firm statement for the cause of economic growth, keeping the inflation in check. • Industry: The Industrial Growth story of India seems robust with more than Three-fourths of the months showing a positive growth in the Index of Industrial Production (IIP) since April’14; and with an average increase of 1.7% in the IIP since April’15, the momentum is only expected to continue in the future with a better monsoon than the last couple of years and positive government policies • Savings & Investment: In terms of gross savings, there was 8.6% decline in household savings in 2015-16 which was more than compensated by 17.6% increase in corporate savings resulting in constant ratio of 33%. Investment followed a similar pattern with a 15% decline in household investments in 2014-15 marginally compensated by 5.1% increase in corporate investment resulting in 2.5% decline in gross investment ratio • Balance of Payments: Owing to increased FDI and decrease in oil prices, the BoP level has improved. There was a decline of 4.1% in trade deficit levels in 2015-16 as compared to previous year. Healthy forex reserves restore the faith and certainty that India is well prepared in advance for any future shocks most notably the chances of oil price surge • Exchange Rate: The average exchange ratio was 66.25 in 2015, a 6.3% rise from 2014 level. This decrease in rupee value is due to increase meltdown of global growth resulting in capital flight and less investments in country. It was further deteriorated by the rise in demand for US dollar. But the damage has been contained due to recent RBI policies curtailing rupee depreciation • Consumption: India has always been a consumption driven economy with its consumption trends matching to those of high income countries. Post 2008 crisis, where the global consumption plummeted, India had a healthy consumption pattern. As per advance estimates, provided by Economic Survey, maximum growth and contribution is given by private consumption with growth rate of 15.7% in 2015-16 and contribution of 60% to GDP • Labour: The Indian Economic outlook looks positive in terms of labour force with a constant rising working-age population (15-65 years, CAGR of 0.47% since 2001) and expenditure on education, ~14% of total Government Expenditure. A declining Employment to Working Population Ratio coupled with increasing primary, secondary and tertiary education amongst the labour force has made available an educated labour force, ready to exploit opportunities and driving growth in the future

Gross Savings and GCF (INR bn) Historical inflation trend (%) 34.6 34.3 33.8 33.4 33 33

31.6

30.8

2011-12 2012-13 2013-14 2014-15

Gross Savings Gross Capital Formation

Source: Economic Survey of India (2015-16) Source: Economic Survey of India (2015-16) 12

Appendix

Appendix 1B Switchgear Industry • The electrical machinery industry in India is divided into three segments, namely (1) Generation machinery, (2) Transmission machinery and (3) Distribution machinery • Switchgear falls under the distribution machinery category and contributes about 16% of the revenue to the c. INR 1tn industry • From FY15 to FY22, the switch and control gear industry is set to grow at a CAGR of c. 20% and occupy nearly INR 550bn of the electrical machinery industry, outperforming the later by a huge margin • The Indian switchgear industry manufactures the apparatus for the entire voltage range from 240kV to 800kV • The exports market of the electrical machinery industry amounts to INR 340bn, driven mainly by the exports of cables and boilers & parts. This provides an opportunity for the exports of cables by HIL while also opens us the possibility of becoming an integral export • The demand side growth drivers include capacity addition for power generation, increasing demand for backup equipment and industrialization needs • Government policies like de-licensing of power, reduction in tariffs ad customs and hike in duty on foreign products has also lead to a favourable environment of growth • Investments through increasing FDI inflows, entry of global players through joint ventures and ease of credit access has meant that the dearth of capital is no longer a problem for the industry India’s electrical equipment industry (INR bn) Share of major electrical equipment (2015)

966.4

710.2 723.9 646.8

490.2 499.8 506

352.6

2007 2008 2009 2010 2011 2012 2013 2015

Source: ibef Electrical Machinery industry report, October 2016 Source: ibef Electrical Machinery industry report, October 2016

Capacity addition in India in Five year plans (INR bn) Market size of switch & control gears in India (INR bn)

541.2

290.4

151.2

2015A 2017E 2022E

Source: Ministry of Power, Government of India Source: Department of heavy industry annual report 13

Appendix

Appendix 1C Cables and Wires Industry • The wires and cable industry in India is divided into two segments, namely (1) Domestic Cables and (2) Industrial Cables, with domestic cables forming 40% of the overall market and industrial cables forming 60% of the market and both the segments have grown by CAGR of 6% over FY’11-15 • Wires and Cables falls under the distribution machinery category and contributes about 35.80% of the revenue to the c. INR 1tn industry • The industry is poised to grow at a CAGR of 7-8% till year 2019 with a thrust from infrastructure, telecommunication and power sectors. • The Indian wires and cables industry is highly fragmented and largely volume driven, the share of organised player is increasing as consumers focus more quality and safety features which currently stands at 65% of the market size • The exports market of the electrical machinery industry amounts to INR 340bn, driven mainly by the exports of cables and boilers & parts. Cables constitutes 17% of the same • The demand side growth drivers include capacity addition for power generation, pan India electrification. • Wires and Cables market is highly price sensitive and operates o thin margins, and are largely linked to prices of copper and aluminium • Finolex is the market leader in the wires and cables industry and has pan-India presence, other players are Havells, RR Kabels, KEI, V-Guard etc • Dealer margins in the industry are in the range of 2-4%. Companies offers discounts on the MRP which is generally passed on to the dealers.

Market shares in wires and cables industry in India (2015) Market size of wires and cables industry in India (INR bn)

Source: HDFC Sec Inst Research, Student Research Source: HDFC Sec Inst Research, Student Research

Revenue of major wires and cables producers in India (INR bn)

Source: HDFC Sec Inst Research, Student Research 14

Appendix

Appendix 1D Lighting & Fixtures Industry • Lighting sector contributes c.20% of the total energy consumption in India. The industry aims to reduce energy consumption to 13% by 2020. This has led to an introduction of a series of energy efficient innovative lighting products. Unorganised players forms 33% of the total market. The industry is classified into (i) Lamps (general lighting services (GLS), fluorescent tube lights (FTL), compact fluorescent (CFL) and others) (ii) Luminaries (iii) Accessories, component and gears (ACC) (iv) LED. From 2010-14, lighting industry grew at CAGR of c.17% whereas LED industry grew at 61% CAGR proving that LED will drive the future growth of the industry • The strong growth in lighting industry for the past 5 years has been due to movement from GLS lamps to CFL, and in the future, the movement will be from CFL to LED (expected CAGR of 36% in 2015-20) supported by residential boom due to rise in GDP and per capita income making LED products more affordable and government initiative to ban the sale of incandescent lamps • ELCOMA (Electric Light and Component Manufacturers Association of India) Vision 2020 aims to increase the domestic manufacturing capability of LED lighting products to cater to increasing demand and reduce dependence on imports. Currently India imports 100% of LED chips. As per ELCOMA, LED lighting will constitute ~60% (INR 216 bn) of the entire lighting industry in India (INR 376 bn) by 2020. This is backed by government initiatives to replace all street lighting and lights in public places to LED lights. The government launched the “100 cities LED based Domestic Efficient Lighting Program (DELP) and National Street Lighting Program on 5th January, 2015 • Under the National Street Lighting Program, 35 million conventional street lights are to be replaced with energy efficient LED street lights. The national DELP program also envisions replacement of 770 million incandescent bulbs with energy efficient LED bulbs. Till date, EESL has successfully implemented the street lighting program and the DELP in 18 and 5 cities respectively • LED bulbs cost between INR 160 and 300, CFLs INR 130 and 200 and Streetlights INR 85 per watt. The falling LED prices and easy entry of consumer electrical equipment companies into this space has led to reduction in margins, but effect is not severe due to cost of production showing similar decline • Havells is focusing on high margin part of this segment. Due to this reason, the company has given the guidance of not participating in government tenders until it can see the bulk orders providing suitable margins

Source: 18th Electric Power Survey, CEA Source: ELCOMA Analysis

Source: HDFC Instl. Research Source: HDFC Instl. Research 15

Appendix

Appendix 1E Electrical Consumer Durables • The ECD Industry can broadly be classified into of two segments, Fans and other ECD and Domestic appliances like OTG, microwaves, mixer grinders, food processors, coffee/sandwich makers, toasters, electric kettles, gas stoves, water purifiers, cookers/cookware, induction cooktop, choppers and hand blenders. • The Indian Manufacturers Association (IFMA) estimates the Fans market at 2.5mm units per month, growing at a CAGR of 10%. HDFC Securities has valued the Fans Segment at around INR 70bn with around INR 53bn attributed to organized market, which is dominated by players like Crompton, Usha, Orient, Havells, Bajaj and Khaitan; and upwards of INR.16bn towards the unorganized markets lead by brands like Sanyo, Metro, Omega, Indo, Royal etc. • Over the years, demand in Fans Segment has witnessed a shift towards the organized market form the unorganized market; however, competition from the local players continue to flourish due to very low technological constraints and low barriers to entry in the segment. Nevertheless, the demand for Branded products have seen a constant rise resulting from competitive pricing, product warranties and better after sales services. • With stiff competition in the Fans segment, the market has broadly classified into two sub segments, Premium Fans and Regular and Economy Fans. The Premium Fans sub segment is dominated by Havells Fans, whereas the major players in the Regular and Economy Fans Sub segment are Crompton, Usha and Orient Fans. Due to low entry barriers in the segment, players like Luminous and Remnis have emerged and gaining popularity, at the cost of Bajaj who is losing its market share. • The Other ECDs and Domestic Appliances Segment is valued at INR 65bn, growing at a CAGR of 23% period 2011 – 2015. Major growth drivers for this segment has been the rising Annual Personal Disposable Household Income, Effective Government Initiatives, rising Power Generation capacity and increasing number of Electrified Villages in India. • The Other ECDs and Domestic Appliances Segment can be broadly be classified into Home Appliances and Kitchen Appliances, with players offering a variety of products in the segment ranging from electrical iron to induction cooktops and food processors, thus making the segment, diverse and competitive. • The Other ECDs and Domestic Appliances Segment, being diverse and highly competitive, is witnessing a rapid shift towards the organized market as the consumers are shifting towards branded products due to perceived quality and competitive prices, with affordability facilitated by rising disposable income. • The trigger for purchase behavior in the Other ECDs and Domestic Appliances Segment is shifting to product quality, warranty and after sales services. Hence, a shift towards organized market players has been catalyzed in the past few years, with players offering longer warranties and better customer services.

Fans Industry: Robust and Steady Growth (INR bn) Other ECDs & Appliances: Rapid Growth in Segment (INR bn)

65

53 48 50 44 38 38

28

FY 11 FY 13 FY 14 FY 11 FY 12 FY 13 FY 14 FY 15

Source: HDFC Securities Report – Electrical Equipment Source: HDFC Securities Report – Electrical Equipment 16

Appendix

Appendix 1F Electrical Equipment Industry

Lighting Industry in India (Value in INR bn calculated at wholesale prices Year 2015 (Jan-Dec)

Value 2010 Value 2011 Value 2012 Value 2013 Value 2014 Value 2015 Category Gr % Gr % Gr % INR bn INR bn INR bn INR bn INR bn INR bn Lamps incl. GLS, FTL, CFL and other 36 40.7 45.2 50.1 11 55.6 11 53 (-)4.7 lamps Luminaries incl. 35 42.7 49.5 56 13 62.1 11 65.2 5 High Mast

Accessories, Components & 8.5 9.5 10 10.7 7 11.6 8 12.9 12 Control Gears

Total (excl. LED) 79.5 92.9 104.7 116.8 12 129.3 11 131.2 1.4

LEDs 5 8.5 12.5 18.2 4 34 86 50.9 50

Total Lighting 80.9 101.4 117.2 135 15 163.3 21 182.1 11.5 Industry Value

Source: ELCOMA

Cumulative Growth of Electrical Equipment Industry for period 2014-16 Weightage for Growth over Weightage for Growth over Product 15-16 14-15 14-15 13-14 Cables 30.9 7.2 27.8 32.3 MCB 4.8 18.6 4.4 4.9 Switchgear 18.5 6.1 16.3 6.7 Transformer 13.4 11.4 15.5 -2.9 Capacitors 0.7 3.3 0.9 -10.1 Conductors 11.6 17.1 11.0 15.9 Transmission Lines 13.0 5.0 26.7 -0.7

Source: IEEMA 17

Appendix

Appendix 2 The Sylvania story • In 2007, Havells India Limited acquired a German company named SLI Sylvania for an enterprise value of c. EUR 227mm. SLI Sylvania was then a part of the operations of Osram, which again was a division of • When the Siemens group had undergone restructuring, The financial investors got the ownership of SLI Sylvania • This acquisition was completed through a special purpose vehicle created under the name Havells BV and hd the following objectives:

1. Taking advantage of the design and engineering prowess that SLI Sylvania had 2. Monetization the existing brands that were owned by Sylvania, namely Sylvania, Luminance, Linolite, Concord Marlin, Zenith and SLI Lighting. They also planned on the expansion of increasing the markets it catered to, both globally and in India 3. Penetrating newer markets in the European and Latin American regions along with certain parts of the Far East. They also planned to take advantage of the distribution network that Sylvania had in Europe to spur the growth in the switchgear business

• Of the consideration of c. EUR 227mm, c. EUR 35mm was pension liability which had to be paid when the amount arose. Against the remaining liability of c. EUR 192mm, Havells India Limited raised a non recourse debt of c. EUR 120mm and a recourse debt of c. EUR 72mm • c. EUR 50mm of the recourse type debt had been funded through the means of equity infusion. This was done by issuing c. 4.2mm shares @ INR 625 per share to Warburg Pincus. Each of these shares had a face value of INR 10 • But as the economic downturn of 2009 started hitting the European markets, Sylvania’s operations started bleeding as margins fell drastically • The company defaulted on two of the monthly repayments that had to be made to the consortium of banks that had lent the company for its working capital needs • The company then faced the issues of provisions for the pension liabilities as the volatility in the bond yields meant that the company had to make more provisions for the gap in the liabilities • Consequently, the increasing movement from CFL to LED based lighting meant that the existing manufacturing facilities saw an increasingly lower business and profitability. It needed to outsource the Led components need to manufacture LED lighting and reduce its manufacturing operations for CFL until it reached stable growth • Subsequently, Havells India Limited sold its stake in the all the businesses of Sylvania except the loss making ones in 2015 and also entered into an agreement with the parent company Feo to sell the remaining stake as soon as the business turns profitable • Havells India currently holds stake in the Brazilian and Thai business of Sylvania only, which have shown signs of improvement in the bottom line. Also, the company had shut down the business in Chile and USA after they stopped making losses

Sylvania RoE on investments of Havells (%) Sylvania profitability since acquisition (PAT in INR mm)

Source: Company filings Source: Company data 18

Appendix

Appendix 3 Porter’s 5 Forces • Threat of New Entrants | INSIGNIFICANT • The company is operating across all domestic kitchen appliances and also has massive presence in industrial cables and switchgears. These segments require massive investments to setup plants and build a nationwide distribution and dealer network. A new entrant will need to build a brand and continuously innovate to compete for a place for itself in the existing market and the gestation period for the same may be long enough to deter many entrants from entering, hence high entry barriers. The segment does face some risk from the unorganized section of the market and cheap imports. So threat of new entrants is INSIGNIFICANT

• Threat of Substitute Products | LOW • The segments require continuous innovation form producers and the producers face more obsolesce threat than the risk of substitution. The producers will have to embrace the disruptive technological changes like IOT in their product line and life style changes of customers to stay competitive. But on the other hand there is no visible threat in many segments like cables, lightening and switchgears. So, threat of substitutes is LOW

• Bargaining Power of Customers | MODERATE • There are a large number of producers present in the segments in which the company operates. There is immense variety present to the customer to make a purchase decision and price does make an impact in the buying decision. The company does operate in the premium segment and charges premium to its product line because of the superior quality of the products and top of the mind recall. The company makes a significant investment in marketing to maintain this premium position and faces stiffer competition from competitors and thus customers enjoy a SIGNIFICANT bargaining power

• Bargaining Power of Suppliers | MODERATE • The company is operating approximately 90% of the manufacturing in-house while still is dependent on the copper prices prevailing in the markets and the import of the chip for the manufacturing of LED Bulbs. The company has less or no power to control the prevailing copper prices and LED Chip being a technological product increases the bargaining power of the suppliers. While the company is able to hold-on to their margins in all segments and renewed focus on domestic markets coupled with in-house manufacturing does work in favor of the company. So, the bargaining power of the suppliers is MODERATE

• Competitive Rivalry within the industry | SIGNIFICANT • Since the company operates in multiple segments it faces multiple competitors in each segment. It faces significant competition in Electrical Consumers division and Cables division. Price is a major factor which affects the buying decision of the customers. Havells is able to charge premium for their products because of the superior quality but still faces risks in all the segments it operates. To ward-off competition, company spends a significant amount every year in marketing, diversifying product portfolio and product innovation. So, the competitive rivalry within the industry is SIGNIFICANT

Legend

0 No threat to the business 1 Insignificant threat to the business 2 Low threat to the business 3 Moderate threat to the business 4 Significant threat to the business 5 High threat to the business

Source: Team Estimates 19

Appendix

Appendix 4A Consolidated Statement of Profit & Loss

FYE Mar 2015A 2016A 2017E 2018E 2019E 2020E 2021E Income Statement (All figures are in INR billion except per share data and % data) Revenues

Switchgears 14.07 14.14 13.94 15.17 16.54 17.97 19.44

Cables 24.85 25.54 25.17 28.76 32.93 37.54 42.61

Lightings & Fixtures 43.86 33.04 31.94 33.50 35.81 39.78 48.63

ECD 11.06 12.55 12.76 14.19 15.70 17.32 19.06

Others

Total Revenues 93.84 85.27 83.81 91.62 100.98 112.61 129.73

Miscellaneous (8.15) (8.)

Revenue from Operations (Net) 85.69 77.26 83.81 91.62 100.98 112.61 129.73

Expenses

COGS 32.39 32.13 32.66 35.63 39.53 44.23 51.34

Gross Margin 62.2% 58.4% 61.0% 61.1% 60.9% 60.7% 60.4%

EBITDA 7.21 8.12 11.31 12.60 14.14 16.05 18.81

% Margin 8.4% 10.5% 13.5% 13.8% 14.0% 14.3% 14.5%

Purchase of Traded Goods 14.86 12.43 13.48 14.74 17.23 18.62 21.24

Change in Inventory 1.04 (0.73)

Employment Benefits 11.88 8.59 9.32 10.19 12.22 13.36 14.88

Other Expenses 18.32 16.71 17.92 19.45 21.52 24.08 27.75

Total Operating Expenses 78.48 69.14 73.38 80.01 90.51 100.29 115.21

D&A 1.39 1.27 1.30 1.39 1.44 1.50 1.58

EBIT 5.82 6.85 10.02 11.21 12.70 14.54 17.23

Interest Income 0.50 0.86 0.61 0.81 1.05 1.32 1.63

Interest Expense 0.64 0.45 0.08 0.08 0.02 0.02 0.02

Extraordinary Items 0.00 7.24 0.00 0.00 0.00 0.00 0.00

PBT 5.69 14.51 10.54 11.93 13.73 15.84 18.84

Tax Expenses 1.84 2.30 2.27 2.55 3.18 3.62 3.95

PAT 3.85 12.21 8.27 9.38 10.55 12.22 14.89

YoY Growth (13.65)% 216.7% (32.25)% 13.44% 12.4% 15.9% 21.8%

EPS 6.22 19.69 13.34 15.13 17.01 19.72 24.02

Adjusted EPS 6.22 8.21 13.34 15.13 17.01 19.72 24.02 20

Appendix

Appendix 4B Consolidated Balance Sheet

FYE Mar 2015A 2016A 2017E 2018E 2019E 2020E 2021E Balance Sheet (All figures are in INR billion except per share data) Equity

Share Capital 0.62 0.62 0.62 0.62 0.62 0.62 0.62

Reserves & Surplus 17.56 24.95 33.22 42.61 53.15 65.38 80.27

Shareholder's Funds 18.18 25.58 33.85 43.23 53.78 66.00 80.89

Minority Interest 0.00 0.08 0.08 0.08 0.08 0.08 0.08

Non Current Liabilities

Long Term Borrowings 2.26 0.02 0.00 0.00 0.00 0.00 0.00

Other Long Term Liabilities 4.69 0.92 0.74 0.75 0.74 0.75 0.78

Deferred Tax Liability 0.43 0.75 0.58 0.58 0.57 0.58 0.61

Other Long Term Liabilities 0.01 0.04 0.03 0.03 0.03 0.03 0.03

Long Term Provision 4.24 0.13 0.13 0.13 0.13 0.13 0.13

Current Liabilities

Short Term Borrowings 0.70 0.84 0.84 0.21 0.21 0.21 0.21

Trade Payables 10.51 5.20 5.29 5.77 6.40 7.16 8.31 Other Current Liabilities & Short 11.96 8.76 7.25 7.46 7.68 7.76 7.70 Term Provisions Other Current Liabilities 8.16 4.67 4.29 4.27 4.27 4.27 4.27

S.T Provisions 3.80 4.09 2.97 3.19 3.41 3.49 3.43

Total Liabilities & Equity 48.31 41.41 48.05 57.50 68.89 81.97 97.98

Assets

Fixed Assets 12.21 10.99 13.04 14.26 15.71 17.52 20.19

Goodwill 3.58 0.20 0.20 0.20 0.20 0.20 0.20

Other Long Term Assets 2.91 3.33 1.76 2.18 2.67 3.34 3.74

Total Non Current Assets 18.70 14.53 15.01 16.64 18.59 21.07 24.13

Inventories 13.66 8.37 8.23 8.99 9.91 11.06 12.74

Trade Receivables 6.23 2.59 2.55 2.79 3.07 3.43 3.95

Cash & Bank Balances 7.77 14.70 20.19 26.86 34.98 43.93 54.31

Other Current Assets 1.94 1.21 2.08 2.23 2.34 2.49 2.86

Total Current Assets 29.61 26.88 33.05 40.87 50.30 60.90 73.85

Total Assets 48.31 41.41 48.05 57.51 68.89 81.97 97.98 21

Appendix

Appendix 4C Consolidated Cash Flow Statement

FYE Mar 2015A 2016A 2017E 2018E 2019E 2020E 2021E Cash Flow Statement (All figures are in INR billion) Cash Flow from Operating Activities Operating Income 5.82 6.85 10.02 11.21 12.70 14.54 17.23 D&A 1.39 1.27 1.30 1.39 1.44 1.50 1.58 Change in Trade Payables (1.46) (5.31) 0.09 0.48 0.63 0.76 1.15 Change in Other Current 0.38 (3.2) (1.51) 0.21 0.22 0.08 (0.06) Liabilities Change in Inventories 1.27 5.29 0.14 (0.77) (0.92) (1.14) (1.68) Change in Trade Receivables 3.77 3.64 0.04 (0.24) (0.28) (0.35) (0.52) Change in Other Current Assets 0.37 0.73 (0.87) (0.14) (0.11) (0.15) (0.37) Taxes (1.84) (2.3) (2.27) (2.55) (3.18) (3.62) (3.95) Exceptional & Translational (0.08) (1.66) CFO 9.63 5.31 6.94 9.59 10.49 11.62 13.39 Cash Flow from Investing Activities Interest Income 0.50 0.86 0.61 0.81 1.05 1.32 1.63 Capital Expenditure (2.11) (2.14) (3.35) (2.6) (2.9) (3.31) (4.25) Change in Other Long Term (0.15) (3.77) (0.19) 0.01 (0.01) 0.01 0.03 Liabilities Change in Other Long Term (2.05) (0.43) 1.57 (0.42) (0.49) (0.67) (0.4) Assets Net proceeds from sale or (1.06) 5.75 0.00 0.00 0.00 0.00 0.00 disposal CFI (4.86) 0.28 (1.36) (2.2) (2.35) (2.65) (2.99) Cash Flow from Financing Activities Interest Expense (0.64) (0.45) (0.08) (0.08) (0.02) (0.02) (0.02) Debt Repayment (6.9) (5.77) (0.02) (0.63) 0 0 0 CFF (7.54) (6.22) (0.1) (0.71) (0.02) (0.02) (0.02) Total Cash Flow (2.78) (0.62) 5.48 6.67 8.12 8.95 10.38

Schedules Bank Balance Opening Balance 8.82 7.77 14.70 20.19 26.86 34.98 43.93 Cash Flow (2.78) (0.62) 5.48 6.67 8.12 8.95 10.38 Other Balances 1.73 7.55 Closing Balance 7.77 14.70 20.19 26.86 34.98 43.93 54.31

PPE Schedule Opening Balance 8.60 (3.07) 10.99 13.04 14.26 15.71 17.52 Capex 2.11 2.14 3.35 2.60 2.90 3.31 4.25 D&A 1.38 1.26 1.30 1.39 1.44 1.50 1.58 Closing Balance 12.21 10.99 13.04 14.26 15.71 17.52 20.19

Retained Earnings Schedule Opening Balance 16.04 17.56 24.95 33.22 42.61 53.15 65.38 PAT 3.85 12.21 8.27 9.38 10.55 12.22 14.89 Closing Balance 17.56 24.95 33.22 42.61 53.15 65.38 80.27 22

Appendix

Appendix 4D Segmental Breakdown

(Values in INR billion) 2015A 2016A 2017E 2018E 2019E 2020E 2021E

Revenues 85.69 77.14 83.81 91.62 100.98 112.61 129.73 Switchgear 12.79 12.86 13.94 15.17 16.54 17.97 19.44 Cables 21.90 22.08 25.17 28.76 32.93 37.54 42.61 Lighting 40.72 30.79 31.94 33.50 35.81 39.78 48.63 ECD 10.28 11.41 12.76 14.19 15.70 17.32 19.06

EBITDA 7.21 8.12 11.31 12.60 14.14 16.05 18.81 Switchgear 2.58 2.92 4.16 4.65 5.22 5.95 6.99 Cables 1.64 1.86 2.61 2.91 3.27 3.72 4.36 Lighting 1.54 1.70 2.13 2.36 2.62 2.94 3.41 ECD 1.45 1.62 2.37 2.68 3.02 3.44 4.05

D&A 1.39 1.27 1.30 1.39 1.44 1.50 1.58 Switchgear 0.32 0.34 0.32 0.36 0.37 0.39 0.40 Cables 0.27 0.25 0.25 0.27 0.28 0.30 0.31 Lighting 0.67 0.51 0.52 0.56 0.58 0.61 0.64 ECD 0.12 0.15 0.15 0.20 0.21 0.22 0.23

Capex 0.73 0.88 2.05 1.22 1.46 1.81 2.66 Switchgear 0.68 0.31 0.73 0.45 0.53 0.66 0.97 Cables 0.16 0.93 0.21 0.14 0.16 0.20 0.29 Lighting 0.53 0.51 1.34 0.78 0.94 1.16 1.71 ECD 0.59 0.17 0.62 0.35 0.43 0.52 0.77

EBIT 5.82 6.85 10.02 11.21 12.70 14.54 17.23 Switchgear 2.26 2.58 3.83 4.29 4.86 5.56 6.59 Cables 1.37 1.61 2.36 2.64 2.99 3.42 4.05 Lighting 0.87 1.19 1.61 1.80 2.04 2.34 2.77 ECD 1.33 1.47 2.22 2.48 2.81 3.22 3.82

Segment Assets 32.3 21.2 22.89 23.22 23.83 24.87 27.04 Switchgear 5.34 5.64 6.04 6.13 6.30 6.57 7.14 Cables 4.59 5.79 5.74 5.61 5.48 5.39 5.37

Segment Liabilities 21.01 7.75 10.29 13.89 18.22 23.20 29.29 Switchgear 2.58 1.77 2.35 3.17 4.16 5.30 6.69 Cables 1.66 1.97 2.62 3.53 4.63 5.90 7.45 Lighting 15.33 2.23 2.96 4.00 5.24 6.68 8.43 ECD 1.43 1.78 2.36 3.19 4.18 5.33 6.73 23

Appendix

Appendix 4E DCF Calculations

Terminal (Values in INR billions; except per share) 2015A 2016A 2017E 2018E 2019E 2020E 2021E Value Revenues 85.7 77.3 83.8 91.6 101.0 112.6 129.7 137.5

NOPAT 4.6 5.4 7.9 8.8 10.0 11.4 13.5 14.3

(+) Non Cash Expenses 1.3 1.4 1.4 1.5 1.6 4.3

(+) Increase in Working Capital 0.3 (0.5) (0.6) (0.7) (1.1) (1.4)

(+) Capex (3.3) (2.6) (2.9) (3.3) (4.2) (4.5)

Adjusted Unlevered Free Cash Flow 6.1 7.1 7.9 8.9 9.8 12.7

Present Value of Free Cash Flow 5.7 5.9 5.9 5.8 5.7

Total Present Value of Free Cash Flows 29.0

Free Cash Flow in Terminal Year

Tax Rate 22%

WACC 12.3%

Perpetual Growth 6%

Terminal Value 201

Discount Factor 0.6

Present Value of Terminal Value 118

% of Enterprise Value 80%

Total Enterprise value 147

Total Debt 0

Cash & Cash Equivalents 15

Total Equity Value 161

Fully Diluted Shares Outstanding 0.6

Implied Share Price 260.1 24

Appendix

Appendix 4F Comparable

Market Cap EV/Sales EV/EBITDA P/E Company EV (INR billion) (INR billion) 2017E 2018E 2017E 2018E 2017E 2018E Switchgears Havells 253.35 240.09 3.8x 3.3x 26.3x 22.5x 39.6x 33.9x Crompton 115.13 120.68 2.8x 2.5x 23.6x 19.9x 37.9x 30.6x Finolex 55.89 56.43 2.1x 1.9x 12.3x 11.5x 20.3x 17.2x Median 2.5x 2.2x 17.9x 15.7x 29.1x 23.9x ECD Bajaj Electrical 26.22 27.60 3.3x 2.8x 23.0x 18.9x 35.2x 29.4x Crompton 115.29 120.84 2.8x 2.5x 23.6x 19.9x 37.9x 30.6x Symphony 96.53 96.11 12.3x 10.3x 43.9x 34.7x 55.7x 43.6x 127.51 121.82 1.9x 1.7x 22.3x 18.8x 29.2x 24.7x Finolex 55.89 56.43 2.1x 1.9x 12.3x 11.5x 20.3x 17.2x Median 2.8x 2.5x 23.0x 18.9x 35.2x 29.4x Lightening Bajaj Electrical 26.22 27.61 3.3x 2.8x 23.0x 18.9x 35.2x 29.4x Crompton 115.29 120.8 2.8x 2.5x 23.6x 19.9x 37.9x 30.6x Eveready 18.46 20.40 1.3x 1.1x 13.3x 10.3x 23.5x 15.4x Finolex 55.89 56.43 2.1x 1.9x 12.3x 11.5x 20.3x 17.2x Median 2.5x 2.2x 18.1x 15.2x 29.3x 23.3x Cables Finolex 55.89 56.43 2.1x 1.9x 12.3x 11.5x 20.3x 17.2x V-Guard 62.93 62.08 2.9x 2.5x 28.1x 23.6x 42.3x 35.0x Median 2.5x 2.2x 20.2x 17.5x 31.3x 26.1x Improvement 1077.30 1065.19 6.2x 5.3x 32.1x 27.3x 50.3x 42.4x 249.90 249.57 4.8x 4.1x 27.6x 24.7x 49.8x 40.6x Kajaria Tiles 95.25 97.44 3.5x 3.1x 17.7x 15.3x 34.4x 28.2x Median 4.8x 4.1x 27.6x 24.7x 49.8x 40.6x Risk Profile Peers L&T 111.95 637.49 20.3x 15.2x BHEL 340.09 263.44 0.9x 0.8x 106.0x 14.6x 60.7x 20.8x Thermax 101.36 95.75 1.9x 1.7x 21.6x 18.3x 35.3x 29.7x 21.35 22.27 1.3x 1.3x 9.0x 9.3x 15.5x 15.9x Median 1.3x 1.3x 21.6x 14.6x 27.8x 18.4x

With Contribution Margins Switchgear Max Median Mean From P/E 2017E 190.69 146.49 146.49 From P/E 2018E 174.71 136.50 136.50 Cables and Wires From P/E 2017E 132.69 98.21 98.21 From P/E 2018E 124.42 92.83 92.83 Lighting From P/E 2017E 87.44 67.68 67.43 From P/E 2018E 80.11 61.01 60.62 ECD From P/E 2017E 159.58 100.88 102.21 From P/E 2018E 141.88 95.58 94.63 Combined Segment From P/E 2017E ₹570.40 ₹413.26 ₹414.34 From P/E 2018E ₹521.13 ₹385.92 ₹384.57 25

Appendix

Appendix 5 Du-Pont Analysis Return on Equity (RoE) is a strong measure of how well the management of a company creates value for its shareholders. The number can be misleading, however, as it is vulnerable to measures that increase its value while also making the stock riskier. Without a way of breaking down the components of ROE investors could be duped into believing a company is a good investment when it's not.

If this number goes up, it is generally a great sign for the company as it is showing that the rate of return on the shareholders’ equity is going up. The problem is that this number can also rise simply when the company takes on more debt, thereby decreasing shareholder equity. This would increase the leverage of the company, which could be a good thing, but it will also make the stock riskier.

To avoid mistaken assumptions, the Du-Pont analysis is undertaken. Its components include:

Operating efficiency - as measured by profit margin (how much profit the company gets out of its revenues) Asset use efficiency - as measured by total asset turnover (how effectively the company makes use of its assets) Financial leverage - as measured by the equity multiplier (a measure of how much the company is leveraged)

Legend RoE*

2014 2015 2016 2017E 26% 20% 18% 12% 11% 9.8% 9.3% 9.2% 2018E 2019E 2020E 2021E

Leverage Ratio* Interest Burden*

3.2x 2.6x 1.6x .72x 88% 87% 94% 105% .67x .64x .62x .61x 106% 108% 108% 109% Asset Turnover Ratio* Operating Margin* 1.5x 1.7x 1.8x 1.7x Tax Burden* 8.1% 7.4% 9.8% 12% 1.5x 1.4x 1.3x 1.3x 75% 67% 67% 78% 12% 12% 13% 13% 78% 76% 77% 79%

Source: Latest Company Fillings and Student Estimates * - Figures are rounded off

According to the Du-Pont analysis, we can infer the following: • Havells is earning interest income on the amount invested and has a net interest inflow • Havells will improve it operating efficiency over the years and because of the increase in assets specifically cash will bring down the asset turn over ratio and as the company is paying offs its debts and more assets are financed by equity, the company leverage ratio goes down over the years 26

Appendix

Appendix 6 Havells India Graphs

Segment wise Contribution Profit composition (%) Total Debt and Equity Chart (INR bn)

Source: Company Filings Source: Company Filings

Consolidated and Standalone Revenue & Growth Rate (INR bn, %) Proportion of gain in Market Share (%)

Source: Company Filings, Student Research Source: Company Flings, Student Research

Top 5 shareholders In-house manufacturing facilities (% of total production)

Source: Company Filings CSR Spend (INR mm)

Source: Company Filings Source: HDFC Sec Inst Research 27

Appendix

Appendix 7 Board of Directors Description:

S. # Director Position % Shareholding Affiliates/Other Work

Anil joined the company in 1992 and was instrumental in the Chairman and Managing marketing strategy of the company. He steered the company 1 Mr. Anil Rai Gupta 2.78% Director during the global economic crisis In 2007 and led the efforts the of acquisition of Sylvania, which was 1.5 times bigger than Havells.

One of the first directors of the company and belonging to Non Independent/ Non Promoters group, he is the technical head at Havells. He has 2 Mr. Surjit Gupta 5.23% executive guided the company into a leading position in the Electrical industry. He has worked with QRG group for over 2 decades and is responsible for the introduction of new products and development 3 Mr. Ameet Kumar Gupta Whole Time Director 0.25% and even for the setting up of new manufacturing facilities for the Group. He is a chartered Accountant with rich experience in finance and Whole Time Director / allied fields and has served the company for more than 35 years. 4 Mr. Rajest Kumar Gupta 0.20% CFO He is Director (Finance) and to retire by rotation at the ensuing Annual General Meet. A qualified CA, retired from LIC and held various positions in 5 Mr. Sunil Behari Mathur Independent Director 0.00% domestic and international offices there. He is an Advisor for National Investment Fund and member of IRDA He is the MD of Cholamandalam Investment and Finance Company Ltd. (Chola). He has over 21 years of experience in 6 Mr. Vellayan Subbiah Independent Director 0.00% domestic and international markets. He is a recipient of the Extraordinary Entrepreneur of the Year - TiECON 2014 Award. He is also a Director of SRF Ltd.

He has vast experience in finance and banking matters and has 7 Mr. Vijay Kumar Chopra Independent Director 0.00% held top leadership positions in various prestigious banking organizations like CBI, Punjab & Sindh Bank, Corporation

An IAS officer with 37 years of civil service. He was awarded with "Dayanand Mumjal Award" for "Manager of the Year". He has even 8 Mr. Surender Kumar Tuteja Independent Director 0.00% acted as consultant to various international programmes and was a member of Indian Delegation at WTO, Doha round. An IAS officer and a Phd in Political Economy is former Finance 9 Mr. Adarsh Kishore Independent Director 0.00% Secretary, GOI and former Executive Director, IMF representing Bangaladesh, Bhutan, India and Srilanka. An exceptional banker with three decades of experience and worked at various international locations. She is currently the 10 Ms. Pratima Ram Independent Director 0.00% advisor to various financial, real estate and healthcare companies. She has held board positions in SBI, India Infoline Finance Ltd.

He is a key player in the development of IT Services and a former board member at where he was the CFO and HR Head. He is also the Chairman SEBI PMAC and a trustee of IFRS Non Independent/ Non 11 Mr. Mohandas Pai 0.00% Foundation. He has been a member of various national executive committees like Kelkar Committee, Non-Resident Taxation Committee. In 2005, he was awarded Padma Shri for his efforts for the betterment of Trade and the Industry

He is country head - India for TPG Asia. He currently serves as Non Independent/ Non 12 Mr. Puneet Bhatia 0.00% Director on the Boards of Shriram Transport Finance and Shriram executive City Union Finance. He holds a MBA degree from IIM-C

Source: Company filings 28

Appendix

Appendix 8 Awards and recognitions

2015 • HIL introduced India’s First Brightest LED Lights ‘LUMENO’ 2006 • HIL reaches a milestone of 300 Galaxy’s • Added CFL production unit in Haridwar manufacturing plant. • HIL launched the world’s most electric water heater plant in Neemrana • Expansion at manufacturing plant for increase of production capacity. 2014 • Expansion at manufacturing pant and installation of an export • Introduced Premium Fans Category under Standard Brand oriented unit • Became the only company to manufacture entire range of Ceiling, Table, • Crabtree India merged with Havells India Pedestal and Wall (TPW) range of Fans in-house • Started in 2005, Mid-Day Meal scheme now stands extended to over 55,000 2005 school children across 656 schools in of Rajasthan • Set up manufacturing plant in Haridwar, Uttaranchal for fans • More than 270 Galaxies across the country • Set up R&D Centre at H.O. • Set up Mid day Meal programme at Alwar, Rajasthan with 1500 students 2013 • Awarded KEMA certification by the Dutch Council for Accreditation, • First private cable and wire facility set up at Alwar plant making QRG the only group to attain this certification • Entered the business of Self Priming Monoblock Pumps • Introduced first Sustainability Report 2004 • Set up manufacturing plant at Baddi, HP for Domestic Switchgear 2012 • Set up a plant for manufacturing of CFL at existing manufacturing plant in • Set up India’s first and only large scale Lighting Fixtures plant in Neemrana , • Launched Copper Flexible Cables under the Standard Brand • Set up a manufacturing plant for manufacturing Ceiling Fans at Noida, • Launched Crabtree XPRO Switchgear UP • Entered new segment, Kit Kat switches, under Brand REO • Set up our own marketing office in London through our wholly owned • Expanded Baddi plant for manufacturing of Kit Kat Switches subsidiary company Havells U.K. Ltd. • In December 2004 placed 235 fully convertible debentures of ‘10 Lacs on 2011 M/s. Shine Ltd., Mauritius • Launch of new range of Control Gear Cosmic Star series • Attained CE certificate for CFL • Set up of new Industrial Switchgear Plant in Sahibabad • Launch of Domestic Appliances 2003 • Standard Electrical merged with Havells • Launch of Fans, CFL and Ligting • Entered into a Joint Venture with Shanghai Yaming Lighting, China 2002 2010 • Standard Electrical Company becomes a 100% subsidiary of the • Set up 2nd unit for Fan Manufacturing at Haridwar company • Set up world's first new generation CMH Lamp Plant at Neemrana • Attained the IEC certification for Industrial switchgear and CSA • Acquired 100% interest in Standard Electricals certification for all manufacturing plants. • Entered Electrical Water Heater Busienss • Launched Havells brand in US and Mexico 2001 • Acquired business of Havells Industrie Ltd, MCCB of Crabtree India Ltd 2009 and merged ECS Ltd in the company to consolidate its area of core • Set up fully automatic 2nd unit for Switchgear manufacturing at Baddi competence. • Global consolidation of CFL manufacturing at Neemrana • Launch of India’s 1st HPF CFL 2000 • Launch of India’s 1st BEE 5* rated Fan • Acquired controlling stake in Duke Amics Electronics (P) Ltd engaged in manufacturing of Electronic Meters-Single Phase, Three Phase, Multi 2008 Function, Tri Vectors. • Acquired controlling interest in Standard Electricals Ltd. • Set up of fully automated plant for Motors in a J.V with Lafert of Spain in Neemrana 1998 • First Indian CFL manufacturers to have adopted RoHS, European norms on • Introduced Ferraris high-end meter in joint venture with DZG, Germany Restriction of hazardous Substances in CFLs • Set up Global Corporate office, QRG Towers in Noida 1997 • Investment of 50 crores in Global Center for Research and Innovation (CRI) • Acquired Electric Control & Switchboards at Noida, UP, for • Change in Corporate Brand Identity manufacturing customized packaged solutions

2007 1993 • Set up Capacitor manufacturing plant in Noida, U.P., with capacity of • Set up another manufacturing plant at Faridabad, Harayan, for Control 6,00,000 kVAr per month Gear Products • Acquired the Lighting business of Frankfurt-based company ‘Sylvania’, a • Listed on both, the (BSE) and the National global leader in lighting business; Company’s turnover crossed US$ 1 billion Stock Exchange(NSE) • Warburg Pincus, representing approximately 11.2% of the fully diluted share capital of the company. 1990 • QRG Group entered healthcare business by acquiring a majority stake in • Set up a manufacturing plant at Sahibabad, UP, for Changeover central Hospital and Research Centre, Faridabad Switches. Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with Indian Association of Investment Professionals, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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