Havells India (HAVL IN)

Havells India (HAVL IN)

Rating: REDUCE | CMP: Rs661 | TP: Rs566

Uphill task ahead

Amnish Aggarwal [email protected] | 91-22-66322233

Paarth Gala [email protected] | 91-22-66322242

Havells India

Contents

Page No.

One stop shop FMEG player 5 Story in charts 6 Lloyd has its task cut out 7 HAVL repositioning Lloyd as ‘mass premium’ brand 7 Distribution – Entering emerging formats 8 Aiming for 75% in-house AC production by FY21 8 High competitive intensity, technology disruption a key challenge 9 Channel check suggests tough going in near term 12 Lloyd: Room Air Conditioners (~75% of sales); Needs to innovate 13 Lloyd LED TV: Little hope of survival? 13 Lloyd: Washing Machines; Might survive but unlikely to score big gains 14 Core Segment growth peaked out in FY19 15 Core segments to ride on BHARAT opportunity 16 Rural electrification, increased power supply to stimulate demand for electrical products 16 HAVL to initiate rural push through mass brand ‘REO’ 17 Switchgears (17% of sales): Immense growth potential, margins at a risk 19 Cables and Wires (32% of sales): Innovations and EHV entry key to growth 20 LED lighting (13% of sales): Poor pricing power and easy Imitations limit margin upside 21 Electrical Consumer Durables (20% of sales): Aiming for the skies 22 Innovation and Differentiation cornerstone of growth strategy 24 HAVL is investing in distribution expansion/ Automation 25 Channel Check takeaways 26 Financials & Valuations 27 Estimate CAGR of 13.3% in Sales over FY19-22 27 Commodity price pressures abating 28 EBIDTA and PAT CAGR of 14.8% and 14.1% over FY19-22 29 Valuations leave little room for an error 31 Annexure: 33 Board of Directors & KMP 33

September 9, 2019 2 September 9, 2019 Havells India (HAVL IN) Company Initiation Rating: REDUCE| CMP: Rs661 | TP: Rs566

Uphill task ahead

We initiate coverage on HAVL with Reduce rating and a price target of Rs566 Key Financials - Standalone (33x Sept21EPS) as current valuations of 42.4xFY21EPS don’t fully price in 1) Y/e Mar FY19 FY20E FY21E FY22E poor visibility on scalability in Lloyd across segments and 2) peaked out Sales (Rs. m) 100,576 112,224 127,902 146,230 EBITDA (Rs. m) 11,922 13,302 15,459 18,052 sales growth (19.8% in FY19) in Core segments like Switchgear, Cables and Margin (%) 11.9 11.9 12.1 12.3 Lighting given slowdown in real estate, poor consumer sentiments and PAT (Rs. m) 7,915 8,326 9,762 11,765 increasing competition. EPS (Rs.) 12.7 13.3 15.6 18.8 Gr. (%) 12.9 5.2 17.3 20.6 Although HAVL is launching innovative products and new ECD categories DPS (Rs.) 4.0 4.5 4.8 5.6 (water purifiers, grooming and kitchen appliances), however presence of Yield (%) 0.6 0.7 0.7 0.8 brands like Philips, Braun, Wonderchef, Eureka Forbes and Kent will make RoE (%) 19.8 18.5 19.3 20.5 sustained market share gains difficult. We believe increasing competitors RoCE (%) 28.9 28.3 29.5 31.3 EV/Sales (x) 4.0 3.5 3.0 2.6 focus on premium products in fans and lighting can drag sales growth. EV/EBITDA (x) 33.7 29.9 25.2 21.1 PE (x) 52.3 49.7 42.4 35.1 We estimate 13.3% sales CAGR over FY19-22 (11.6% in FY20) which will P/BV (x) 9.8 8.7 7.7 6.8 enable an EBITDA CAGR of 14.8% led by gains from in-house manufacturing in Lloyd, benign input costs and peaked out expenses on distribution expansion and brand building. We estimate PAT growth of 5.2% in FY20 and a CAGR of 14.1% over FY19-22.

HAVL which got re-rated post sale of Sylvania and Lloyd acquisition currently Key Data HVEL.BO | HAVL IN trades at 47.7x12 month forward PE which is at a premium of 15% to 5-year 52-W High / Low Rs. 807 / Rs. 550 Sensex / Nifty 36,982 / 10,946 average. We value the stock at 33xSept21 EPS and arrive at a target price of Market Cap Rs. 414 bn/ $ 5,775 m Rs566. Sharp recovery in consumer demand and significant gains in Lloyd is Shares Outstanding 626m a key risk to our call. We initiate coverage with Reduce rating. 3M Avg. Daily Value Rs. 2056.26m Investment Arguments

. Lloyd has its task cut out: HAVL is positioning Lloyd as a mass premium brand and is investing in branding, innovation, distribution (dealer additions, Shareholding Pattern (%) Modern trade and online), in-house production (75% of RAC by 2021). Lloyd’s Promoter’s 59.55 LED TV plans have gone haywire as aggressive pricing by MI (30-40% Foreign 26.95 Domestic Institution 4.64 discount to LG, Samsung) in a technology intensive product has left very little Public & Others 8.86 room for it to scale up. Lloyd has presence in washing machines and plans to Promoter Pledge (Rs bn) - test launch Refrigerators to complete its portfolio, however significant gains looks unlikely given entry of new competitors (Voltas Beko, Siemens and Liebherr) and existing giants like LG, Samsung, Whirlpool and Hitachi.

. Core segments growth has peaked out: The core segment growth of 19.8% Stock Performance (%) in FY19 was led by ECD (27%), Switchgear (18%) and Cables (20.5%) even 1M 6M 12M as lighting grew by only 10.7% due to price erosion in LED. Although HAVL Absolute 2.2 (7.3) (2.6) has plans to tap the emerging growth opportunity in BHARAT (Tier2/3 towns Relative 2.2 (8.2) 0.7 and interiors) by push for REO and Standard brands, we expect sustained pressures led by 1) slowdown in real estate 2) pricing pressure and slow Govt Amnish Aggarwal [email protected] | 91-22-66322233 ordering in lighting 3) poor consumer sentiments and 4) increase in Paarth Gala competition. We believe, our FY20 core segment sales growth of 13.5% [email protected] | 91-22-66322242 (10.2% excluding ECD) is at risk given 9.1% (3.8% ex ECD) growth in 1Q and residual growth of 14.8% for core segments (12.0% ex ECD) for 9MFY20.

September 9, 2019 3 Havells India

. Innovations might not ensure success in new segments: HAVL’s USP has been innovation and Premiumisation in key categories like fans, lighting, wires and switchgear. Given high rate of product imitation and competitors shift towards premium products in these categories (fans are 55% of ECD), HAVL is focusing on new innovations like IOT (Internet of things), Bluetooth enabled fans, façade lighting and emerging segments like water purifiers/heaters, personal grooming and kitchen appliances. However, success in segments like water purifiers (service driven), personal grooming and kitchen appliances would be hard to come by given presence of competitors like Philips and Braun in Grooming, Eureka Forbes and Kent in water purifiers and Philips and Wonderchef in kitchen appliances.

. Commodity deflation to provide some respite: Key commodity prices – Copper/Aluminium/Brent Crude have increased at a CAGR of 9%/11%/14% over FY16-19 thereby impacting gross margins by 340bps over FY16-19. However, Spot LME Copper prices are down 6%, Spot Aluminium LME prices down by 13% while Brent Crude prices down 6%. We believe that the major pressure due to high commodity prices is over and expect moderate expansion in gross margins hereon. We estimate an increase in gross margins by 40bps in FY20 and another 30bps in FY21.

. Estimate PAT CAGR of 14.1% over FY19-22: We estimate EBITDA CAGR of 14.8% over FY19-22 led by gains from in-house manufacturing in Lloyd, benign input costs and peaked out expenses on distribution expansion and brand building. We estimate flat margins in FY20 but an increase of 20bps each in FY21 and FY22. We estimate PBT from operations will increase by 9.5% in FY20 and at a CAGR of 15.3% over FY19-22. PAT growth is estimated at 5.2% in FY20 and at a CAGR of 14.1% over FY19-22.

. Valuations don’t leave any room for error: HAVL saw massive re-rating from 28.3x12 month forward PE post sale of Sylvania to 43x at the time of Lloyd acquisition to a high of 58.5x in March2019. The re-rating was due to expectations of HAVL emerging as a key player in consumer electrical with presence in Switchgears, Cables, Lighting, ECD, Consumer Electronics and White Goods. HAVL reported PAT CAGR of 15.8% in the past 3 years, not significantly higher than peers. HAVL currently trades at 47.7x12 month forward EPS which has moderated from peak of 58.5x but still at a premium of 15% to 5year average PE.

. We believe that P/E multiple of HAVL is high looking at future growth estimates and competitive pressures faced in various product segments. We value the stock at 33xSept21 EPS and arrive at a target price of Rs566. We initiate coverage on the stock with Reduce rating.

September 9, 2019 4 Havells India

One stop shop FMEG player

Incorporated in 1983, Havells India Limited (HAVL) is a leading fast moving electrical goods (FMEG) Company with presence in Industrial & Domestic Circuit Protection Devices, Cables & Wires, Motors, Fans, Modular Switches, Home and Kitchen Appliances, Air Conditioners, Electric Water Heaters, Power Capacitors, Luminaires for Domestic, Commercial and Industrial Applications.

. It has Havells and Crabtree, positioned as high-quality, mass premium brands while Standard caters to mass segment. HAVL has launched REO brand to cater to economy segment in tier2/3 cities.

. Even though HAVL’s acquisition of Sylvania did not work well, it has acquired Lloyd to enter Consumer electronics (Televisions) and white Goods (AC’s, washing machines).

. HAVL’s 90% products are energy efficient and manufactured in-house across its 12 state-of-the-art manufacturing plants in India. It has started a unit to manufacture AC’s in order to reduce costs and improve quality.

. HAVL’s works on ethos of customer delight, dealer relationships, manufacturing efficiencies and employee engagement. It has a sales network of 6,500 professionals, 10,500+ dealers and over 40 branches in the country.

HAVL’s core business reported a CAGR of 12.4% in sales and 17.2% in EBIT over FY16-19 while Lloyd sales declined by 1% on comparable basis in FY19. HAVL is repositioning Lloyd as a mass premium brand, has set up in-house manufacturing facility and plans to enter refrigerators to complete its portfolio. It is also increasing presence in EHV cables, Industrial switchgears, water heaters, grooming, water purifiers and kitchen appliances. We believe Havells is in for tough times given heightened competition in consumer electronics, white goods, water purifiers and grooming products. In addition, rising competition in core categories (Premium fans, lighting and switchgears) will make it difficult to repeat success of past few years.

Core Portfolio (ex-Lloyd) contribute 82% of sales and 87% of EBIT

Sales Mix - FY19 EBIT Mix - FY19 Lloyd Sw itchgears Lloyd 13% 18% 17% Sw itchgears 27%

ECD 22% ECD 20% Cable 32% Cable Lighting Lighting 22% 13% 15% Source: Company, PL Source: Company, PL

September 9, 2019 5 Havells India

Story in charts

Revenue CAGR at 13.3% over FY19-22 Switchgear have highest EBIT margins

Revenue from Operations YoY gr. (RHS) EBIT Margins - FY19 32.7% 160 35.0% 38.5% 140 30.0% 120 23.6% 25.0% 28.6% 26.8% 100 20.0% 14.0% 14.3% 80 17.1% 11.6% 15.0% 16.1%

(Rs bn) (Rs 60 40 10.0%

20 5.0%

81

101

112

128 146 0 0.0% FY18 FY19 FY20E FY21E FY22E Switchgears Cable Lighting ECD Lloyd

Source: Company, PL Source: Company, PL

Soft RM to enable recovery in EBITDA margins PAT growth to recover post FY20

EBITDA Margin (RHS) Adj EPS (Rs) YoY gr. (RHS) 12.9% 20 13.0% 20.0 25.0% 20.6% 12.8% 17.3% 17.3% 20.0% 15 12.3% 12.6% 15.0 12.4% 12.1% 12.9% 15.0% 12.2% 10 11.9% 11.9% 10.0 12.0% 10.0% (Rs bn) (Rs 11.8% 5.2% 5 5.0

11.6% 5.0%

11.2 12.7 13.3 15.6 10 12 13 15 18 11.4% 18.8 0 11.2% 0.0 0.0% FY18 FY19 FY20E FY21E FY22E FY18 FY19 FY20E FY21E FY22E

Source: Company, PL Source: Company, PL

Havells has been launching new products at regular intervals Year Product launches 1977 Rewirable Switches and Changeover Switches 1979 HBC Fuses 1980 High quality Energy Meters 1985 MCBs 1996 MCCB, Cables & Wires 1997 Crabtree wiring accessories 2003 Fans, CFLs, Lighting fixtures 2004 Domestic Switchgear 2005 Premium Fans 2010 Electrical Water Heaters 2012 Copper Flexible Cables (Standard), Crabtree piano switches, XPRO Switchgear, TPW Fans 2013 Domestic Appliances, Pumps 2015 LED Lighting 2016 Air Coolers, home automation and control in Crabtree brand, Solar street lights 2017 Personal grooming products, Water Purifier, Air conditioners, LED TV, washing machines Source: Company, PL

September 9, 2019 6 Havells India

Lloyd has its task cut out

Havells acquired the consumer durable business of Lloyd Electric & Engineering (LEEL) which included the Lloyd brand, distribution network and manpower for an enterprise value of Rs16bn in May 2017. Lloyd ranks amongst top few brands in Room Air-conditioners (RAC) and has a presence in TVs & Washing Machine segments. Acquisition of Lloyd marked HAVL’s entry into Rs700bn white goods and electronics market which is estimated to grow at 15% CAGR in sales. Havells is undertaking steps like 1) brand building and re-positioning 2) revamp of distribution network 3) In-house manufacturing and 4) Entry in new product segments to increase sales and profitability of Lloyd. We believe that Lloyd has its task cut out to scale up in these segments due to strong brand play, tough competition, rapid changes in technology and huge MNC dominance.

HAVL repositioning Lloyd as ‘mass premium’ brand

Lloyd had a positioning of a mass/economy brand targeting lower end of the consumer pyramid in respective categories and competing with the likes of Videocon, Haier, ONIDA, and Electrolux in Air conditioners and Sansui, ONIDA, and Intex etc. in LED TV. This is in sharp contrast to Havells, which is positioned as a premium brand across segments of Fans, Electric Wires, Lighting and Switchgears. So HAVL is repositioning Lloyd as a mass premium brand led by brand building, distribution revamp and quality enhancement.

High A&P spends to reposition Lloyd as “mass premium” brand 8%

FY18 FY19 7%

7% 7% 6%

6% 5%

5% 5% 4%

4%

3%

3%

3%

3%

3% 3%

3% 3% 2%

2% 1%

1%

1% 1.1% 1%

0% Voltas Blue Star Whirlpool Hitachi Daikin HAVL LG India* Samsung Lloyd India* India*

Source: Company, PL *FY17-FY18

. HAVL has started investing in advertising and brand building. Lloyd’s advertising spends at 6.9% of sales is significantly higher than Havells (3.1%). Lloyd has recently named Deepika Padukone and Ranveer Singh, as its brand ambassadors to increase resonance with – young, versatile and new age couples to improve its brand impression.

. Lloyd has considerably reduced the price gap with other players like Voltas, Daikin and Blue Star etc. from 15-20% to 5-7%

. Lloyd is focusing on providing technology-rich offerings like Grande AC, U Led TV and adopting Internet of Things (IoT) in its product portfolio.

September 9, 2019 7 Havells India

Distribution – Entering emerging formats

Lloyd’s had a diversified & multi-level distribution network spread across 10,000 touch-points including distributors, large dealers & retailers. Lloyd has a stronger presence in Tier II & Tier III towns in comparison to Tier 1 and metro cities. In addition, Lloyd had very limited presence in modern retail stores and online formats. HAVL has undertaken several initiatives to increase product visibility and distribution reach.

. HAVL focuses on building long term dealer relationships by brand building, innovative schemes to increase profitability and business expansion to other Havells products. It is now extending incentives to Lloyd dealers at par with HAVL distribution.

. HAVL is undertaking dealer expansion and migration to premium channel as a key strategic initiative. Lloyd is aiming for 15% addition in dealers every year, although it is also reducing some dealers in low priced channels.

. As against ZERO presence in online platforms, Lloyd AC is now available on leading online platforms like Flipkart, Amazon and Croma etc.

. Lloyd is increasing presence in modern trade (30-35% of industry sales in metros and Tier1 towns) and is now available in Reliance Digital, Tata Croma, Vivek’s and Sargam. However, Lloyd is yet to penetrate in Vijay Sales due to higher margin expectations of this retail chain

. Lloyd is expanding its EBO - Lloyd Galaxy, from current level of ~80 which will improve the touch points, but more importantly, brand visibility

The distribution strategy is showing impact as Lloyd products are now available in ~75% of the total retail universe. Modern retail and Online retail now contribute 20% of revenues against 7-8% prior to acquisition. However, exit from low price channels will continue to impact sales in the near term, as new channels have not been able to fully compensate for the loss of sales in Lloyd’s traditional channels.

Aiming for 75% in-house AC production by FY21

While HAVL manufactures over 90% of its core segment products in-house, Lloyd relies heavily on Chinese imports (80%). This exposes it to currency fluctuations and custom duty changes as intense competition makes it difficult to pass on these costs thereby impacting margins. With a view to reduce dependence on imports & better control over quality Lloyd has started production at newly setup RAC plant:

. The plant has a capacity of 0.6mn (expandable to 0.9mn) and set up at a total cost of Rs3.5bn

. The plant is integrated with in-house components, automated with robotics.

The plant will result into reducing the import dependence to 30-40% from current 80%. Lloyd is looking at 75% in-house production by FY21.

September 9, 2019 8 Havells India

High import content impacted margins due to depreciating INR

USD/INR EBITDA Margin % (RHS)

74 12.4% 14.0% 72 12.0% 9.3% 70 72 10.0% 7.0% 68 8.0% 66 4.8% 6.0% 3.3% 3.4% 64 2.9% 4.0% 1.7% 1.4%

62 2.0%

64

64

65

64

67

70

71 70

60 0.0%

Q1FY18

Q2FY18

Q3FY18

Q4FY18

Q1FY19

Q2FY19

Q3FY19 Q4FY19 Q1FY20 Source: Company, PL

Lloyd does not have any plan to have in-house production of washing machines and LED TV’s. With Lloyd’s margins currently below the industry average, focus on brand building, in-house manufacturing and increasing distribution reach will enable margin expansion from current levels of 5.3%.

High competitive intensity, technology disruption a key challenge

Lloyd has plans to offer complete portfolio of Whitegoods/ Electronics to the consumers. Lloyd’s is looking to consolidate its position in the whitegoods segment by increasing share in RAC (room AC) and washing machines and enter new segments like Refrigerator. It aims to increase its presence in TV’s where it has negligible share. Lloyd plans to test launch refrigerators in the coming months. However, we believe that achieving sustained gains remain a challenge considering high competitive intensity in these segments.

Presence of MNC with technology . Fierce competition from Global Giants: Unlike the domestic competition backed product pipeline, strong faced by HAVL in core segments like fans, cables, lighting and small durables, brands and deep pockets make it it will now be competing against international giants such as Hitachi, Daikin, difficult for Havells to make a major success out of Lloyd acquisition Samsung, LG, Panasonic & Sony in these segments. These MNCs have deep pockets to invest in R&D and Technology development, branding, distribution and marketing, which Havells will find it hard to match.

. New Entrants: The industry is also witnessing entry of new players (including MNCs) given the huge growth potential of Indian market, rising disposable income and low penetration levels.

. High Discounts: White goods and electronics market is characterized by intense price based competition, price discounts and exchange schemes.

. The consumer durables industry faces technology disruptions and obsolescence which results in steady price erosions and meaningful changes in consumption pattern of consumers.

September 9, 2019 9 Havells India

Televisions – low probability of success: We believe Lloyd has very low chances of making success in Televisions as competition, technology change and pricing will make it difficult for Lloyd to make any dent in the category:

. From CRTs to OLED, televisions have witnessed fast technology advancements. Televisions have come a long way from CRT in nineties to PIP, Surround Sound, Flat screen, Plasma, LCD, LED and now OLED. Change in technology has made redundant several large CPT players. Brands like Texla, Weston, Televista, BPL, Binnatone, Salora etc. have vanished and market is dominated by LG, Samsung, Sony, Panasonic etc. from MNC stable.

MI’s aggressively priced launch has . Lloyd was eyeing to fill the mid-priced void left by the exit of Videocon brands forced players to cut prices by 25- (Videocon, Sansui & Phillips), however entry of MI and consequent reduction 30% and spoiled little chance which Lloyd had in LED TV market in LED TV prices has pushed it on the back foot. We note that MI’s aggressive pricing has forced industry to cut prices by 25-30%. MI, VU currently have 32inch offering between Rs10.5-14000 and 43 inch between Rs22-28000. Lloyd has products priced around Rs16900 and 37500, thus competing with LG, Samsung etc. So the market has got demarcated between a MI, VU and Haier on one hand and LG, Samsung and Lloyd on the other.

Although Lloyds had started aggressive advertising with two celebrity brand ambassadors, MI has filled in the void which Lloyd was planning to cater to. This has done a major blow to plans of Lloyd and Televisions will remain just as a part of portfolio with little probability of scale up in this business.

Xiaomi’s aggressive pricing kicked off deep discounting in LED LED Smart TV (Rs) 32-inch 43-inch 49-inch 55-inch LG 17,999 33,779 43,000 62,999 Samsung 19,999 36,999 42,999 59,999 Lloyd 16,869 37,499 45,000 56,999 Haier 13,700 27,900 39,999 54,999 MI 12,499 21,999 29,999 47,999 VU 12,980 23,855 26,300 44,430 Source: PL

Rapid technological obsolescence witnessed in the television industry in last few decades

Source: LG, PL

September 9, 2019 10 Havells India

Air conditioners: For Room Air Conditioners the biggest technological change has been the advent of inverter compressors which provide more comfort and are energy efficient. Unlike the fixed speed AC, an AC with inverter technology will run continuously but will draw only that much power that is required to keep the temperature stable at the desired level.

Inverter technology whilst consuming lesser power enables stable temperature at desired level

Source: PL

. Adoption to invertor technology has been very fast as the price differential between a fixed speed and invertor AC has declined from 20-25% earlier to less than 15% now. This has led to their share in sales rising to 40-50%.

Invertor AC’s are transforming the . Given that there are a few players who manufacture AC compressor, the basic industry and now account for 40-50% technology changes are relatively less. However, most players continue to of sales provide add on features like smart remote, internet of things etc. to create product differentiation.

. As AC’s running cost over the life of product is several times the cost of acquisition, the consumer focus is more on energy efficiency.

We believe Lloyd has fair chance of increasing growth in AC segment given huge underpenetration and limited product differentiation. Given the current competitive situation in the market, reduction in costs from in-house production and its translation to end consumer will be key to scale up in AC segment.

Refrigerator – another hard nut to crack: Lloyd eventually plans to increase presence in the white goods market by test launch of Refrigerator, sometime next year by out sourcing the product. Although refrigerator technology is fairly stable, strong branding by players like Whirlpool, Samsung, LG, Hitachi, Haier and entry of players like Voltas Beko, Bosch, Liebherr etc. will make success and profitable existence a daunting task for Havells.

September 9, 2019 11 Havells India

Channel check suggests tough going in near term

Our channel check suggests mixed feedback about the Lloyd brand and its revamp attempts by Havells. Key takeaways are: Although Lloyd has reduced price differential in AC, no perceptible . Lloyd has reduced the price differential with Voltas and Blue Star etc. to 5-7% quality change is visible in order to improve the brand perception. Thus the prices have come in line with Voltas, Blue Star etc.

. Lloyd needs to improve product quality & features in its bid to successfully revamp Lloyd as a mass premium brand, only changed pricing will not work.

. Lloyd has entered and increased shelf space in large format retail stores, it needs to add EBO stores to improve its footprint in non-metro regions.

Revenues/EBITDA to grow 6.9%/4.4% over FY19-22 Particulars (Rs mn) FY18 FY19 FY20E FY21E FY22E Net Revenue 14,141 18,555 19,112 20,812 22,672 YoY growth % 31.2% 3.0% 8.9% 8.9% Contribution 2,683 3,176 3,154 3,434 3,741 % of sales 19.0% 17.1% 16.5% 16.5% 16.5% YoY growth % 18.4% -0.7% 8.9% 8.9% Add: Depreciation 184 204 372 423 447 Less: Advertisement & sales promotion 973 1,279 1,425 1,551 1,676 % of sales 6.9% 6.9% 7.5% 7.5% 7.4% Less: Other SG&A 768 1,115 1,208 1,317 1,390 % of sales 5.4% 6.0% 6.3% 6.3% 6.1% EBITDA 1,126 986 892 990 1,121 Margin % 8.0% 5.3% 4.7% 4.8% 4.9% YoY growth % -12.4% -9.5% 10.9% 13.3% Less: Depreciation 184 204 372 423 447 Finance Cost 0 3 4 2 1 Forex (gain)/loss -156 -35 0 0 0 Add: Other Income 0 0 7 16 22 PBT 1,098 814 524 581 695 Margin % 7.8% 4.4% 2.7% 2.8% 3.1% YoY growth % -25.9% -35.6% 11.0% 19.7% Source: Company, PL

We estimate tepid sales growth for Lloyd in FY20 and some pick up in FY21. We estimate sustained pressure on profitability due to higher distribution and brand investments and competitive pressures. We expect PBT for FY20 to decline by 35.6%. We have cautious to negative stance on Lloyds in the medium term.

September 9, 2019 12 Havells India

Lloyd: Room Air Conditioners (~75% of sales); Needs to innovate

Lloyd faces tough competition from market leader Voltas & incumbent MNCs Product Market size (Rs bn) Lloyd's share (%) Market Position Competitors, Market Share (%) Category Penetration Level Room Air Conditioners 120 13% #3-4 Voltas, LG, Daikin 5% Source: Company, PL

Lloyd is in the midst of repositioning itself from a “mass” to “mass premium brand”

Source: Company, PL

Competitive Landscape: Highly competitive Strategy: Distribution expansion & In-house production HAVL is the 3-4th largest player in the Room Air Conditioner HAVL is in the midst of repositioning Lloyd from a mass to mass market with a share of ~13%. Voltas remains market leader with premium brand by reducing the price gap and introducing new ~24% market share followed by LG. There has been an increased features. It has roped in Bollywood’s power couple in a bid to shift towards inverter ACs as consumers are now preferring connect with the younger audience. Going ahead focus shall be energy efficient models. RAC market is crowded by >20 players on innovation & IoT “smart” products. With its ~Rs5bn RAC facility given strong growth potential. We believe rising disposable now operational in Rajasthan, Lloyd is expecting lower costs, and income rising necessity of AC in tropical conditions will enable 12- better quality control. It is looking at expanding distribution in LFS 13% volume CAGR over next 5 years. However, increasing and online to gain share. competitive intensity & input costs (custom duty, INR depreciation) will prevent any margin expansion.

Lloyd LED TV: Little hope of survival?

In an industry fraught with technological disruption (latest from Xiaomi), Lloyd has negligible presence Product Market size (Rs bn) Lloyd's share (%) Market Position Competitors, Market Share (%) Category Penetration Level LED TV 300 3% - Samsung, LG, Sony 60% Source: Company, PL

Lloyd is striving to make place in mass premium segment; however, faces an uphill task

Source: Company, PL

September 9, 2019 13 Havells India

Competitive Landscape: Xiaomi entry hits Industry Strategy: Unlikely to remain a focus area Indian Flat Panel Display (FPD) TV industry is highly competitive HAVL was looking at providing complete portfolio and to fill in the with LG, Samsung & Sony holding nearly 65% of market share. vacuum created by the exit of Videocon brands (Videocon, Lloyd has a negligible presence with 3% market share. The LED Phillips). However aggressive entry of Xiaomi (35% smart TV TV industry which was battling with entry of mid-tier players share since launch) and price erosion has significantly impacted Micromax, VU & private labels, has been hit by huge discounting players like Lloyd. Lloyd will continue to import/locally source TVs by Xiaomi. The risk of technological obsolescence remains high and has little chance of scaling up in this category. as has been visible with phase out of CRT, Plasma and LCD in a span of 10 years.

Lloyd: Washing Machines; Might survive but unlikely to score big gains

Dominated by MNCs, Lloyd has next to zero presence; will continue as filler product Product Market size (Rs bn) Lloyd's share (%) Market Position Competitors, Market Share (%) Category Penetration Level Washing Machines 70 - - LG, Samsung, Whirlpool 10% Source: Company, PL

Currently, Lloyd imports its entire bouquet of Washing Machine.

Source: Company, PL

Competitive Landscape: MNC domination Strategy/Outlook: Just a Part of white goods portfolio Indian Washing Machine (WM) market is highly competitive with Lloyd largely imports its entire bouquet of Front Load, Top Load, LG, Samsung & Whirlpool holding combined market share of and Semi-Automatic washing machines since it has a negligible 68.9%. With IFB, Godrej, Haier & Hitachi being the other presence in the space. Lower amount of technology play makes prominent players. Lloyd has a negligible presence in the market. the chances of success better than TV segment. However, once Increasing product awareness, affordable pricing & innovative it reaches a reasonable scale, Lloyd plans to set up a products has aided the strong growth of WM. Semi-automatic is manufacturing facility as it can give it better control over quality. the more popular category in India when compared to Fully- automatic machines.

September 9, 2019 14 Havells India

Core Segment growth peaked out in FY19

HAVL’s core business comprises of Cables, Switchgear, ECD and Lighting. This segment of business is 82% of sales and has grown at a CAGR of 12.4% over FY16-19. The core business grew at 9.3% over FY15-18 but by 19.8% in FY19 led by ECD (27%), Switchgear (18%) and Cables (20.5%) even as Lighting grew by only 10.7% due to price erosion in LED. 19.8% sales growth in core business in FY19 was like a one off and is Core business growth was led by increasing distribution, new launches in ECD like unlikely to be repeated water heaters, water purifiers and grooming products etc. HAVL also started expanding its distribution in tier 2/3 cities and launched REO brand to capitalise on demand following electrification and improving availability of power. HAVL also benefitted from housing growth as it has strong presence in housing segment in switchgear and cables.

HAVL created a clear brand architecture whereby Havells was positioned as a premium brand, REO at the bottom and Standard as a mid- market brand. Cables prices for these brands were at a discount of 5-15% than Havells. The discounting for switchgears/switches has been 5-45%. However, lighting and select durables will be sold under Havells brand only.

. Cables growth acceleration will be a function of gains in EHV segment.

. Switchgear sales will be reflective of urban housing, margins are a risk

. ECD faces tough competition in new segments

HAVL is not playing pricing game in lighting, however industry pricing needs to be watched out for.

EBIT margins are a key risk Expect steady growth to continue Switchgears (Rs mn) FY18 FY19 FY20E FY21E FY22E Cables & Wires (Rs mn) FY18 FY19 FY20E FY21E FY22E Revenue 14,245 16,802 17,642 19,936 22,727 Revenue 26,834 32,346 36,389 41,302 47,084 YoY growth % -2.9% 18.0% 5.0% 13.0% 14.0% YoY growth % 0.3% 20.5% 12.5% 13.5% 14.0% EBIT 5,572 6,464 6,704 7,576 8,636 EBIT 4,380 5,217 5,822 6,608 7,533 Margin 39.1% 38.5% 38.0% 38.0% 38.0% Margin 16.3% 16.1% 16.0% 16.0% 16.0% YoY growth % -0.7% 16.0% 3.7% 13.0% 14.0% YoY growth % 34.5% 19.1% 11.6% 13.5% 14.0% Source: Company, PL Source: Company, PL

Will margins bounce back? Strong Revenue CAGR of 21.7% over FY19-22 Lighting & Fixtures (Rs mn) FY18 FY19 FY20E FY21E FY22E ECD (Rs mn) FY18 FY19 FY20E FY21E FY22E Revenue 11,687 12,934 14,357 15,936 17,848 Revenue 15,696 19,939 24,724 29,916 35,899 YoY growth % 14.3% 10.7% 11.0% 11.0% 12.0% YoY growth % 10.5% 27.0% 24.0% 21.0% 20.0% EBIT 3,356 3,694 4,092 4,542 5,087 EBIT 4,202 5,349 6,675 8,077 9,693 Margin 28.7% 28.6% 28.5% 28.5% 28.5% Margin 26.8% 26.8% 27.0% 27.0% 27.0% YoY growth % 26.6% 10.0% 10.8% 11.0% 12.0% YoY growth % 20.3% 27.3% 24.8% 21.0% 20.0% Source: Company, PL Source: Company, PL

September 9, 2019 15 Havells India

Core segments to ride on BHARAT opportunity

With the NDA government pushing for better electricity supply to household across states, especially rural India, the demand for electrical products like wires, cables, switch, fans etc. is expected to grow. HAVL is gearing up to capitalize on this sustained growth opportunity in Bharat (rural India and small towns).

Rural electrification, increased power supply to stimulate demand for electrical products

Rural electrification has been one of the key focus area of Govt in the recent years, more so post 2014. Electricity has reached all 0.6mn villages in India under ‘Deen Dayal Upadhyaya Gram Jyoti Yojana’ (DDUGJY). The government has also achieved ~100% last mile connectivity by providing connections to households under Pradhan Mantri Sahaj Bijli Har Ghar Yojana’ (Saubhagya), except in cases where people have not shown inclination to get electricity connections.

All Urban/Rural households now have access to electricity supply

Rural Urban 98% 100%100% 100% 93% 88% 90% 86% 80% 70% 60% 55% 50% 44% 40% 30% 20% 2001 2011 2017 2019

Source: Ministry of Power, PL

In addition to electricity reaching the interiors, there has been improvement in quality of power driven by significant reduction in load shedding and lower voltage fluctuations, more so in rural India and small towns. We believe that increase in access and availability will increase demand for essentials like cables, wires, switches and fans initially. We believe increased supply of electricity coupled with rising disposable income will increase demand for other basic appliances like mixer grinder, air coolers and televisions in Phase II. Phase III could see increase in demand for direct cool refrigerators and eventually room air conditioners.

Phase I Phase II Phase III

• Wires • Mixer/Grinder • Direct Cool • Cables • TV Refrigerator • Switch • Air Cooler • Room AC • Fans

September 9, 2019 16 Havells India

With the electrification drive in the states of Bihar and Jharkhand, the growth in television households was the highest in these states at 24%, followed by Assam, Sikkim and North East at 21%. Although electrification will have long term gains, sharp increase in density of TV’s suggest that bump up in demand for basic goods like LED bulbs, fans etc. will play out sooner than was expected earlier.

10 states with 24hrs rural power supply Rural power supply on an upward trajectory Rural Power Supply (hr/day) May18 Jun-19 Power Supply (hr/day) May-18 Jun-19 Gujarat 24.0 24.0 Nagaland 20.0 22.0 Himachal Pradesh 24.0 24.0 Bihar 18.2 21.9 Kerala 23.0 24.0 Rajasthan 22.0 21.0 Maharashtra 23.3 24.0 Odisha 19.0 20.1 Punjab 24.0 24.0 Assam 19.0 19.0 Tamil Nadu 24.0 24.0 Karnataka 19.0 18.6 Telangana 24.0 24.0 Meghalaya 21.5 18.5 West Bengal 24.0 24.0 Uttar Pradesh 17.9 18.0 Tripura 23.5 24.0 Jharkhand 16.8 17.4 Uttarakhand 23.9 24.0 Sikkim 17.0 16.5 Madhya Pradesh 23.0 23.5 Haryana 13.6 16.4 Andra Pradesh 23.1 23.2 Jammu & Kashmir 14.5 16.0 Chattisgarh 23.0 23.0 Mizoram 10.0 14.7 Manipur 22.5 22.5 Arunachal Pradesh 14.3 14.3 Source: National Power Portal, PL Source: National Power Portal, PL

HAVL to initiate rural push through mass brand ‘REO’

HAVL has been an urban centric company focusing on premium and mass premium segment of products. 100% village and household electrification and improved availability of power has opened up immense growth opportunities in rural India and small towns. In addition, media reach and internet has created awareness about quality and brands, which works to the advantage of organised players. HAVL has taken several strategic steps to capitalise on the growth opportunity in rural India and small towns (10k-50k population).

. Distribution Expansion: HAVL has started a pilot project to expand rural distribution in UP, Odisha and Rajasthan. Currently it has presence in 1,000 villages and small towns and is looking at increasing reach to 3,000 by 2020. Rural distribution will be modelled like an FMCG company with a stockist or super stockist who is supplying to the retailers.

. Focus through mass priced REO and Standard brands: Since HAVL has premium positioning, in a bid to prevent brand dilution, HAVL is entering these markets through ‘REO’ and ‘Standard’ brand. While Switchgears, Switches, Wires & Cables (~50% of sales) shall be sold under these brands, Lighting products will remain under Havells brand only.

. REO/Standard products at 5-45% discount to Havells: Cables offered under REO/Standard brand are priced 5-15% lower than Havells cables. Similarly, the MCB’s are priced 11-45% lower than Havells. Despite lower prices, REO and Standard products are not expected to be margin dilutive as they have lesser features/aesthetics than HAVL brand products.

September 9, 2019 17 Havells India

REO-Standard PVC cables at average discount of 5-15% to HAVL Single Core PVC Cable, (List Price in Rs/90m) Nominal area of Havells REO diff (%) Standard diff (%) conductor (sq.mm) 0.75 870 780 -10.3 820 -5.7 1.0 1,160 995 -14.2 1,095 -5.6 1.5 1,725 1,490 -13.6 1,630 -5.5 2.5 2,785 2,410 -13.5 2,630 -5.6 4.0 4,090 3,600 -12.0 3,865 -5.5 6.0 6,150 5,380 -12.5 5,810 -5.5 Source: Company, PL

REO-Standard MCB at average discount of 15-27% to HAVL Single Pole MCB (List Price in Rs per unit) Rating Havells REO diff (%) Standard diff (%) 6A-32A 245 137 -44.1 180 -26.5 40A 479 325 -32.2 415 -13.4 63A 526 405 -23.0 465 -11.6 Double Pole MCB (List Price in Rs per unit) Rating Havells REO diff (%) Standard diff (%) 6A-32A 680 540 -20.6 595 -12.5 40A 1,056 750 -29.0 915 -13.4 63A 1,139 900 -21.0 1,000 -12.2 Four Pole MCB (List Price in Rs per unit) Rating Havells REO diff (%) Standard diff (%) 6A-32A 1,532 1,155 -24.6 1,285 -16.1 40A 2,050 1,520 -25.9 1,735 -15.4 63A 2,148 1,695 -21.1 1,840 -14.3 Source: Company, PL

REO-Standard switches at average discount of 8%-40% to HAVL Switch (List Price in Rs per unit) Type Havells REO diff (%) Standard diff (%) 1Way Switch 44 30 -31.8 40 -9.1 2Way Switch 102 58 -43.1 97 -4.9 1Way Bell Push 118 63 -46.6 105 -11.0 Mega Bell Push 155 81 -47.7 145 -6.5 Source: Company, PL

September 9, 2019 18 Havells India

Switchgears (17% of sales): Immense growth potential, margins at a risk

HAVL is market leader in Rs22bn MCB industry; holds 14-15% market share in premium modular switches Organized Product Market size (Rs bn) HAVL's share (%) Market Position Peers Penetration Level MCB 22 27-28% #1 Legrand, Schneider High Switches* 22 14-15% #3 Panasonic (Anchor), Legrand Medium Source: Company, PL *Premium Modular plate switches

Switchgear sales dominated by residential segment (70% of sales)

Switchgear Sales Mix %

Non- Residential 30%

Residential 70%

Source: Company, PL

Competitive Landscape: Leader in Residential segment HAVL’s Strategy & Outlook: Long Term growth positive MCB: HAVL is the largest player with a market share of ~27-28% HAVL’s MCBs have a strong presence in trade channel/dealers followed by Legrand & Schneider. Technology intensive nature of and residential segment contributes ~70% of total revenue. the product has resulted in high share of organised players Havells is expanding in industrial segment and has tied up with (~90%). Switchgear is a highly urbanised product which is yet to Hyundai. Switchgear demand is impacted due to slowdown in real enter small towns and rural India in a major way, which signifies estate and construction activity. huge growth potential in the medium term. Havells is following a multi-brand strategy (Havells, Crabtree, Modular Switches: With a market share of ~14-15% HAVL is the Standard) to cater to consumers across price segments. In its third largest player after Anchor (Panasonic) & Legrand. Rising semi-urban/ rural push, HAVL is offering switches & switchgears disposable income & growing preference for aesthetically under the REO brand with value pricing to expand the market. designed modular switches will enable 11% CAGR of Industry over FY18-23.

Switchgear Industry is de-growing since Nov2018 due to slowdown in construction activity. Liquidity issues and pressure on large builders and contractors is impacting demand as the product has usage mainly in new construction. HAVL has adopted a two pronged strategy to increase growth 1) push for Standard and REO branded switchgear (price discount of ~11-45% than Havells) to cater to affordable housing segment and 2) expanding super stokists and distributors in small towns. Our industry and channel checks suggest that consumers don’t mind paying high price as they seek to fulfill the need of protection from short circuits and fire. We believe that such a positioning (except cartelization) is unsustainable and entry of new players in this industry will result in gradual moderation in switchgear contribution margins from current levels of 38-39% (~25% after proportionately adjusting for its share in unallocated expenses).

September 9, 2019 19 Havells India

Cables and Wires (32% of sales): Innovations and EHV entry key to growth

HAVL is focused on increasing distribution reach, penetrate semi-urban/rural markets through “REO” Competitors, Market Product Market size (Rs bn)* HAVL's share (%) Market Position Organized Penetration Level Share (%) Residential 80 16% #3 Finolex, Polycab Low Industrial 120 10% #3 Polycab, KEI Medium Source: Company, PL

Cables & Wires sales split equally between Domestic & Industrial segments; Clever ad campaigns

Cables & Wires Sales Mix %

Industrial Domestic 50% 50%

Source: Company, PL

Competitive Landscape: Measured competition Strategy/ Outlook: EHV and branding holds key In the ~Rs346bn organized cables & wires market, HAVL is the HAVL’s plans to expand portfolio and enter new segments (EHV) third largest player with ~8% market share followed by KEI as it currently caters to ~58% of overall organized cables & wires industries. Polycab (18%) is the largest player offering a wide market. HAVL continues to focus on innovation and launched heat range of products. HAVL has higher share from domestic and fire resistant cables (HRFR) in regular product range. segment in comparison to competitors. In a bid to penetrate the semi-urban/rural markets, HAVL has Led by government initiatives in power & infrastructure, cables & launched wires at a lower price point under the REO brand. The wires industry is expected to grow at a CAGR of 15% over FY18- management is focused on increasing its distribution reach in the 23 to Rs1033bn. Increase in technological & product western region where HAVL’s presence is currently weak. complexities, promotion & branding by leading cable manufacturers is likely to increase organized share of cables to 74% (66% currently).

HAVL has launched value for money cables for residential usage under the brand REO which are priced at 10-15% discount to Havells brand. Havells has positioned products on innovation platform and is looking at increasing distribution reach in tier 2/3 cities and also western India where it is weak. We believe increasing share in western India would be a tough task given that it is a strong hold of Polycab and Finolex. We believe Havells needs to venture into high end industrial cables to increase growth rates. However, rising usage of Busbar trunking in high rise buildings and Industrial projects is a key risk to the industry, albeit in long term.

September 9, 2019 20 Havells India

LED lighting (13% of sales): Poor pricing power and easy Imitations limit margin upside

HAVL enjoys 10-14% market-share in an industry plagued by intense competitive intensity and price erosion Product Market size (Rs bn)* HAVL's share (%) Market Position Competitors, Market Share (%) Organized Penetration Level Lighting & Fixtures 65 10-14% #2-4 Philips, Crompton, Bajaj, Wipro Medium Source: Company, PL

Innovations have limited shelf life in Lighting

Lighting Sales mix % B2G 16%

Consumer Lighting 49% Profession al Lighting 35%

Source: Company, PL

Competitive Landscape: Intense price based competition Strategy/Outlook: Innovation and Penetration a focus area With a market share of ~10-14%, HAVL ranks between ~#2-4 in HAVL has designed an exhaustive product range keeping in mind India’s lighting industry. Phillips (#1), Crompton, Bajaj, Syska & consumer consideration & preference. With a thrust on innovation, Wipro are the other large players in the market. LED is now the HAVL is looking to set up its 2nd R&D facility in the tech city of dominant lighting technology across all applications as Bangalore (1st being in Noida). In order to ease the negative impact of sustained reduction in prices and Govt push (Ban on fluorescent price erosion (LED’s) & RM inflation on margins, HAVL is focusing on lamps and free/subsidised distribution) has resulted in innovation & deeper penetration (increase distribution reach). In consumer shift. Innovation, Premiumisation and aesthetics are consumer lighting (~50% of lighting sales), HAVL is improving primary key to offer a differentiated value proposition (Eg. Anti-bacterial & secondary reach while in professional lighting (B2B + B2G) it is bulbs by Crompton) in a market flushed with Chinese imports focused on product innovation & use of latest technology. and easy product imitations.

Lighting segment has been under pressure due to slow Govt orders and pricing pressures in B2C segment. Rising competition from Chinese products and lack of product differentiation has been one of key limitations. Havells does not want to play the volume based push strategy in this business and has been focusing on increasing presence in the fixtures, battens and decorative lighting. We note that easy availability and regular launch of new products in fixtures can accelerate growth as the fixtures segment is dominated mainly by unorganized players.

We believe that pricing power in lighting and fixtures would remain limited given that the products can be easily imitated and value pricing plays a far important role than branding. We expect steady sales growth of 11% CAGR; margin recovery will be slow given highly competitive nature of the industry.

September 9, 2019 21 Havells India

Electrical Consumer Durables (20% of sales): Aiming for the skies

Market leader in premium fans; focusing on innovation in a bid to offer differentiated value proposition in ECD Product Market size (Rs bn)* HAVL's share (%) Market Position Competitors, Market Share (%) Organized Penetration Level Fans 69 16% #3 Crompton, Orient, Usha High Water Heaters 14 15% #2 Racold, AO Smith Low Other Appliances 52 2-3% NA Bajaj, Phillips Low Source: Company, PL

Water Purifiers, Kitchen appliances and Grooming products added to the portfolio

Source: Company, PL

FANS: Industry eying Premiumisation Strategy/Outlook: REO to drive mass move Fans account for ~55% of ECD sales for Havells. HAVL is the Rising competition in the premium segment and huge scope in third largest player in fans, with dominant leadership in the tier2/3 cities has forced Havells to 1) consolidate its position in premium segment (~25% of market). Crompton leads the overall premium segment through new models/products (Enticer smart market with a share of ~24-25%. Havells redefined fans with its fans, Stealth cruise & Trinity) and 2) increasing offerings under premium offering in an old and laid back category. However, the REO brand in mass segment to capitalise on growth opportunity Industry dynamics are changing as all key players like Crompton in rural India and small towns. Havells is targeting to increase and Orient etc. have started focusing on the premium segment overall share to 20%. Increasing focus of major players will with multiple offerings. We expect steady demand as Rural expand premium segment, however rising competition can electrification and improved power availability is a key trigger. impact sales growth, pricing and limit scope of margin expansion.

Water Heaters; Competitive Intensity on the rise Strategy/Outlook: Product Differentiation is key HAVL is the second largest player (15% share) in the ~Rs14bn HAVL launched Adonia water heaters (colour changing LED market where Racold is leader with ~30% share. Crompton and technology) in a bid to further expand its market share. The orient are increasing offerings in this segment which will increase category offers huge growth potential given presence of large competition. local/unorganized players and huge scope of innovation and branding.

Appliances: late entrant Strategy/Outlook: Tough to scale up Small appliances market (~Rs52bn) is dominated by Phillips and HAVL is realigning distribution with increasing availability of its Bajaj. HAVL (since 2012) has a negligible presence in the space products through Kitchen Appliance stores and launching with only ~2-3% market share. Other players include Morphy regional specific products. HAVL has entered host of new Richards, Kenstar and USHA. The category has seen entry of products including RO&UV water purifiers (launch in 100 cities), Prestige, Pigeon and Wonderchef and a host of other kitchen Juicers, blenders, irons, Mixers, Air Fryers, Toasters and ware brands. Philips clearly dominates the premium segment and Tea/Coffee makers etc. HAVL has positioned its products as a its acquisition of Preethi has consolidated its position in south premium offering given that the segment offers huge scope for India. Philips offers the most comprehensive range of Small upgradation and has limited brand presence of Philips and appliances including juicers, air fryers, citrus presses and has Wonderchef at the top. However, given the strong brand entered air purifiers, garment steamers, Humidifier and small perception of Philips built over decades and personality led vacuum cleaners. Wonderchef, riding on the popularity of chef positioning of Wonderchef, it would be a herculean task for Sanjeev Kapoor is one of the fast emerging brands in the kitchen Havells to make a significant dent in this segment. Water appliance segment and has recorded sales of Rs3bn with a target purifier segment seems tough to crack with presence of Eureka of Rs8bn in five years. Forbes, Kent, Philips and HUL in this service driven category.

September 9, 2019 22 Havells India

Grooming Products; Huge growth potential Strategy/Outlook: Tough to crack Grooming products have a market size of Rs18-20bn and are Havells is targeting premium positioning in grooming products growing at a CAGR of 25-30%. Grooming products have been a and will compete with Philips, Braun (Gillette) and Panasonic stronghold of Philips and Braun with little presence from domestic mainly. We note that Havells has priced its products at 10-15% players. We believe that the changing consumer attitude towards discount to Philips, however it will have to compete with other personal grooming is increasing demand for female centric players and domestic brands. Havells needs to create a distinct products like Hair Dryers, Hair Epilators etc. Similarly, male positioning to succeed like it had done in fans. However, as grooming products like Electric shavers, trimmers, body Havells is not a first mover in this, making strong inroads in the groomers are finding rising demand with growing need to look grooming segment will be a long and arduous journey. and feel good.

Mass premium positioning of products competing with the likes of Philips, Wonderchef Personal Grooming Products Key Competitors HAVL Positioning Electric Shaver, Multi Grooming Kit, Beard Male Grooming Phillips, Braun, Nova, Syska, Panasonic, Vega Mass Premium Trimmer, Nose & Ear Trimmer, Body Groomer Hair Styling, Hair Dryer, Skin Care, Female Female Grooming Phillips, Braun, Vega, Syska, Panasonic Mass Premium Depilation Baby Grooming Baby Hair Clipper Phillips, Panasonic, Yijan, Glendan Mass Premium

Appliances Products Key Competitors HAVL Positioning Air Fryer, Induction Cooker, Oven Toaster Morphy Richards, KenStar, Wonderchef, Cooking Griller, Sandwich Maker, Pop Up Toaster, Mass Premium Prestige, Phillips Electric Cooker Juicer Mixer Grinder, Mixer Grinder, Blender, Prestige, Preethi, Phillips, Bajaj, Morphy Food Preparation Mass Premium Food Processor, Juicer Richards, Kenstar, Wonderchef, Phillips Brewing Coffee Maker, Kettle, Tea Maker Wonderchef, Phillips, Morphy Richards Mass Premium Garment Care Steam Iron, Dry Iron, Garment Steamer Morphy Richards, KenStar, Phillips Mass Premium Source: xxx

ECD segment contributes ~20%/22% to sales/EBIT of Havells. ECD sales have grown at a CAGR of 18% in the past 4 years, with tepid growth in 2016 and 2018. Fans account for ~55% of sales while kitchen appliances and water heaters account for ~13% each of category sales. Water purifiers and grooming products account for ~4-5% each. Entry into new products is driving growth of ECD segment. Havells has been able to increase presence in water heaters. While expanding product portfolio offers opportunity to grow sales, intense competition in grooming and kitchen appliances can act as a near term drag. We believe that Havells is trying to enter multiple segments at the same time, even as some of its competitors have well defined niches. We remain cautious on the increased aggression into new product segments.

September 9, 2019 23 Havells India

Innovation and Differentiation cornerstone of growth strategy

HAVL started as a switches and fuse company which ventured into new segments like Fans, Lighting, domestic appliances (water heaters, Water Purifiers, Kitchen Appliances, Male and female grooming). It has also entered into technology-based product extensions in new categories like LED lighting and home automation. HAVL is using advanced data analytics and technology to develop products to fill need gaps. HAVL’s R&D Centre is focused on developing intelligent, eco-friendly and energy efficient products. Havells plans to increase the R&D spend from current 0.8% to 2% which will be instrumental in new product development. HAVL’s aggressive push for innovation and new launches is reflected in:

. IOT-enabled devices including Indoor smart light meeting requirements of HCL (Human centric light). HAVL is also developing intelligent and connected products ranging from smart home lighting, air conditioners, fans and water heaters which can be controlled from remote location including voice assistance platforms to provide ease of control through voice command.

. High-end automation solutions for new homes and retrofits for existing homes.

. ‘Bluetooth’ enabled fans, ‘QR codes’ in products to tackle counterfeit, interactive lighting solutions among others.

. Smart and connected appliances such as Adonia and Droid water heater.

. Technological tie-up with Hyundai for Magnetic Contractors

The results are visible as Lighting & ECD recorded sales CAGR of 15% and 21% respectively over the last decade. We expect these initiatives to enable 21.7%/11% growth in ECD/Lighting over FY19-22E

Innovative product launches: Fast cooling RAC, energy efficient fans & IoT enabled water heater

Source: Company, PL

Trim LED clip-on; product expansion in kitchen appliances

Source: Company, PL

September 9, 2019 24 Havells India

HAVL is investing in distribution expansion/ Automation E-Sampark Mobile App HAVL has been making significant investments to improve the depth and quality of marketing and distribution. Continuous investment in the cutting-edge technology and innovation has helped HAVL to stay ahead in the highly competitive landscape. HAVL has always viewed IT as an enabler and of strategic advantage in order to gain market share, connect deeper with customers and increase efficiency & profitability. HAVL is looking at increasing the use of technology with several online and mobile based applications to bring customers and partners closer:

. HAVL has a strong domestic presence across 45 cities with nearly 6,500 sales professionals. Now it has access to 2,283 towns with population exceeding 25,000 which represent 50% of such towns in India.

. HAVL has 10,500+ dealers and has opened 500 Galaxy stores which offer HAVL products under one roof. HAVL sales team undertakes 7,000 channel partners and 75,000 retailer visits/month.

. HAVL has nurtured strong relationship with dealers by brand building, efficient service network, innovative schemes and expansion in portfolio from wires to switchgear, lighting and ECD. This has provided strong stickiness to the dealer and distributor network for the company.

. E-Sampark – A retailer app that supports direct communication between HAVL and its retailers. Digitised consumption and redemption of loyalty programme and will help save significant manpower and cost previously incurred to help manage the loyalty programme.

M-Konnect Mobile App . M-Konnect App – It is a dealer APP which enables placement of orders, update on products, promotions, schemes, claim settlement and resolution of concerns. 80% of orders are now booked from mobile application.

. Distribution Management System – It Works as mini ERP system to distributors, providing benefits like real time monitoring of receivables, tracking of targets, faster settlement of secondary schemes & better inventory management.

. Enterprise Data Warehouse - It is the Centralised data repository that stores transactional data. EDW is designed for decision-support, analytical reporting, ad-hoc queries and data mining thereby converting enterprise wide data into business insights for quick decision making.

. HAVL is now working on advanced analytics in air conditioners which will enable them to predict service need, push notifications to service staff and consumers, allocate resources in advance, reducing downtime and providing a personalised and friction-free consumer experience.

These initiatives have helped the company delight its customers, achieve better channel partner relationship and improve engagement with employees. The investments in the artificial intelligence, natural language processing, IOT and IIOT ensures that the company is building future ready products and services.

September 9, 2019 25 Havells India

Channel Check takeaways

. SBU structure in place: HAVL has put in place a strong SBU structure with each business unit being headed largely by ex-telecom guys. In addition to this, there exists focused teams for each sub-category within a business unit.

Lloyd needs to improve product . Lloyd – Making sustainable gains a tough ask: Although Lloyd is re- quality and features in order to make branding itself through extensive ad-campaigns, it continues to lag in terms of inroads in white goods product quality and features. In order to be able to make any meaningful inroads in this highly competitive category (dominated by Samsung, LG, Hitachi, Daikin etc.) Lloyd needs to improve its product offering and ensure right placement of products.

Although Havells is leading new . ECD - HAVL leading the premiumisation drive: In the ECD segment, launches and innovation in Kitchen especially in Kitchen Appliances and Personal grooming, incumbents like appliances and grooming, any aggression by Philips and other Phillips aren’t really aggressively focusing on innovation. HAVL is driving incumbents can impact its growth innovation and Premiumisation across the category. However, any aggression by players like Philips, Kenstar etc. negatively impact HAVL.

. Switchgears margins at peak: With real estate marking slowing down, HAVL’s switchgear’s sales growth has moderated. HAVL has launched mass quality switchgears under the “REO” brand to cater to tier II/III markets.

. Increasing wallet share with channel partners through new launches: Although, HAVL products are priced at a premium, the channel partners remain extremely happy with the built, quality, innovation & after sale service offered. Leveraging this goodwill created over the years, new launches are more easily accepted by channel partners thereby increasing HAVL’s wallet share with them. HAVL’s retail loyalty program is also well-appreciated by channel.

. Distribution channel expansion: Although Lloyd is now present in most Large Format Retail stores (except Vijay Sales), lack of full product category display has limited shelf space gains.

Exclusive Havells Galaxy and Lloyd outlets

Source: Company, PL

September 9, 2019 26 Havells India

Financials & Valuations

Estimate CAGR of 13.3% in Sales over FY19-22

We expect Sales CAGR of 13.3% over FY19-22. We believe delayed recovery in real estate can impact switchgear/ cables, Govt ordering can impact growth rates in lighting and poor consumer sentiment in ECD beyond 1HFY20.

. Switchgear: While real estate slowdown is expected to impact Switchgears in FY20, expect recovery to enable mid- teens sales growth thereafter.

. Cables: We estimate a steady 13.3% sales CAGR for cables over FY19-22 led by entry in EHV segment under Havells and mass market push through REO.

. Lighting: We estimate a steady 11.3% sales CAGR in lighting which factors in lower pricing pressures in LED and gains in fixtures segment.

. ECD: We estimate 21.7% sales CAGR in ECD segment led by emerging categories like water heaters, Coolers and Kitchen appliances and moderate success in new categories like grooming products and water purifiers.

. Lloyds: We estimate 6.9% Sales CAGR as poor show in FY20 will drag the numbers. RAC will lead growth with double digit sales CAGR, however TV and Washing machines will report low to mid-single growth.

Core portfolio (Ex-Lloyd) contribute 82% of revenues

Sales Mix - FY19 Lloyd Sw itchgears 18% 17%

Electrical Consumer Durables 20% Cable 32%

Lighting & Fixtures 13% Source: Company, PL

ECD to lead revenue growth, Lloyd to remain a drag Revenues (Rs mn) FY18 FY19 FY20E FY21E FY22E Switchgears 14,245 16,802 17,642 19,936 22,727 YoY gr. -2.9% 18.0% 5.0% 13.0% 14.0% Cable 26,834 32,346 36,389 41,302 47,084 YoY gr. 0.3% 20.5% 12.5% 13.5% 14.0% Lighting & Fixtures 11,687 12,934 14,357 15,936 17,848 YoY gr. 14.3% 10.7% 11.0% 11.0% 12.0% Electric Consumer Durables 15,696 19,939 24,724 29,916 35,899 YoY gr. 10.5% 27.0% 24.0% 21.0% 20.0% Lloyd Consumer 14,141 18,556 19,112 20,812 22,672 YoY gr. - 31.2% 3.0% 8.9% 8.9% Total 82,603 1,00,576 1,12,224 1,27,902 1,46,230 YoY gr. 25.4% 21.8% 11.6% 14.0% 14.3% Source: Company, PL

September 9, 2019 27 Havells India

Commodity price pressures abating

HAVL has been impacted by sharp commodity price inflation over the past few years. Key commodity prices – Copper/Aluminium/Brent Crude have increased at a CAGR of 9%/11%/14% over FY16-19 thereby impacting gross margins by 340bps over FY16-19. However, commodity price pressure has abated since the beginning of FY20. Spot LME Copper prices are down 6%, Spot Aluminium LME 13% while Brent Crude prices are down 6%. However, the ensuing trade wars & INR/USD rates will determine the trend in the prices of key inputs like Copper, Aluminium, Paints & Plastics. We believe that the major pressure due to high commodity prices is over and expect moderate expansion in gross margins hereon. Despite focus on non- premium segments under the REO brand in core categories and low margins in Lloyd, we estimate an increase in gross margins by 40bps in FY20 and another 30bps in FY21.

LME copper prices down 6% since April-19 LME aluminum prices down 13% since April-19

Copper Spot (INR/MT) Aluminium Spot (INR/MT)

5,50,000 1,80,000 5,00,000 1,60,000 4,50,000 1,40,000 4,00,000 1,20,000 3,50,000 1,00,000 3,00,000 80,000 2,50,000 60,000

2,00,000

Jul-16

Jul-17

Jul-18

Jul-19

Jan-17

Jan-18

Jan-19

Mar-17

Mar-18

Mar-19

Sep-16

Nov-16

Sep-17

Nov-17

Sep-18

Nov-18

Sep-19

Jul-16

Jul-17

Jul-18

Jul-19

May-16

May-17

May-18

May-19

Jan-17

Jan-18

Jan-19

Mar-17

Mar-18

Mar-19

Nov-16

Nov-17

Nov-18

Sep-16

Sep-17

Sep-18

Sep-19

May-16

May-17 May-18 May-19

Source: PL Source: PL

Brent crude prices continue to remain soft

Brent Crude (US$/barrel) 100.00

80.00

60.00

40.00

20.00

-

25-Apr-16 25-Oct-17 25-Apr-18 25-Oct-18 25-Apr-19 25-Oct-16 25-Apr-17

25-Jun-16 25-Jun-17 25-Jun-18 25-Jun-19

25-Feb-18 25-Feb-19 25-Feb-16 25-Feb-17

25-Dec-16 25-Dec-18 25-Dec-17

25-Aug-17 25-Aug-18 25-Aug-19 25-Aug-16 Source: PL

September 9, 2019 28 Havells India

EBIDTA and PAT CAGR of 14.8% and 14.1% over FY19-22

We estimate EBITDA CAGR of 14.8% over FY19-22 led by gains from in-house manufacturing in Lloyd, benign input costs and peaked out expenses on distribution expansion and brand building. We estimate flat margins in FY20 but an increase of 20bps in FY21 and 20bps in FY22. We estimate PBT from operations will increase by 9.5% in FY20 and at a CAGR of 15.3% over FY19-22. PAT growth is estimated at 5.2% in FY20 and at a CAGR of 14.1% over FY19-22.

Switchgear margins have peaked out EBIT (Rs mn) FY18 FY19 FY20E FY21E FY22E Switchgears 5,572 6,464 6,704 7,576 8,636 Margin 39.1% 38.5% 38.0% 38.0% 38.0% YoY gr. -0.7% 16.0% 3.7% 13.0% 14.0% Cable 4,380 5,217 5,822 6,608 7,533 Margin 16.3% 16.1% 16.0% 16.0% 16.0% YoY gr. 34.5% 19.1% 11.6% 13.5% 14.0% Lighting & Fixtures 3,356 3,694 4,092 4,542 5,087 Margin 28.7% 28.6% 28.5% 28.5% 28.5% YoY gr. 26.6% 10.0% 10.8% 11.0% 12.0% Electric Consumer Durables 4,202 5,349 6,675 8,077 9,693 Margin 26.8% 26.8% 27.0% 27.0% 27.0% YoY gr. 20.3% 27.3% 24.8% 21.0% 20.0% Lloyd Consumer 2,683 3,176 3,154 3,434 3,741 Margin 19.0% 17.1% 16.5% 16.5% 16.5% YoY gr. 18.4% -0.7% 8.9% 8.9% Source: Company, PL

Revenue/PAT to grow at CAGR of 13.3%/14.8% over FY19-22E Particulars (Rs mn) FY18 FY19 FY20E FY21E FY22E Revenue from Operations 81,386 1,00,576 1,12,224 1,27,902 1,46,230 YoY gr. 32.7% 23.6% 11.6% 14.0% 14.3% Gross Profit 31,578 37,791 42,666 48,973 56,168 Margin 38.8% 37.6% 38.0% 38.3% 38.4% Other Expenses 21,085 25,869 29,351 33,442 37,884 % of sales 25.9% 25.7% 26.2% 26.1% 25.9% EBITDA 10,493 11,922 13,315 15,531 18,283 Margin 12.9% 11.9% 11.9% 12.1% 12.5% YoY gr. 27.3% 13.6% 11.7% 16.6% 17.7% Other Income 1,170 1,276 1,251 1,528 2,006 Depreciation 1,395 1,486 1,858 2,117 2,234 EBIT 10,268 11,712 12,708 14,942 18,054 Margin 12.6% 11.6% 11.3% 11.7% 12.3% YoY gr. 22.4% 14.1% 9.3% 17.0% 20.2% Interest 240 159 188 77 47 PBT 10,028 11,553 12,520 14,865 18,008 Tax 3,022 3,637 4,257 5,129 6,213 Adj PAT 7,006 7,915 8,263 9,737 11,795 Margin 8.6% 7.9% 7.4% 7.6% 8.1% Exceptional item 119 0 0 0 0 Reported PAT 7,125 7,915 8,263 9,737 11,795 Adj EPS (Rs) 11.2 12.7 13.2 15.6 18.9 YoY gr. 17.3% 12.9% 4.4% 17.8% 21.2% Source: Company, PL

September 9, 2019 29 Havells India

Quarterly snapshot: 1Q sales up just 4.5% and PAT declined 17.3%, 2Q unlikely to show respite Particulars (Rs mn) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20E 3Q20E 4Q20E Revenue from Operations 25,963 21,910 25,184 27,519 27,120 24,438 28,633 32,034 YoY gr. 39.5% 23.3% 28.1% 8.6% 4.5% 11.5% 13.7% 16.4% Gross Profit 9,755 8,391 7,522 10,211 10,131 9,164 10,881 12,490 Margin 37.6% 38.3% 29.9% 37.1% 37.4% 37.5% 38.0% 39.0% Other Expenses 6,632 5,766 4,577 6,982 7,375 6,232 7,158 8,600 % of sales 25.5% 26.3% 18.2% 25.4% 27.2% 25.5% 25.0% 26.8% EBITDA 3,123 2,625 2,946 3,229 2,757 2,933 3,722 3,890 Margin 12.0% 12.0% 11.7% 11.7% 10.2% 12.0% 13.0% 12.1% YoY gr. 81.1% 2.2% 12.3% -9.7% -11.7% 11.7% 26.4% 20.5% Other Income 292 343 331 310 397 300 300 362 Depreciation 350 391 353 391 469 465 465 460 EBIT 3,064 2,577 2,923 3,147 2,684 2,768 3,558 3,792 Margin 11.8% 11.8% 11.6% 11.4% 9.9% 11.3% 12.4% 11.8% YoY gr. 76.5% 2.8% 15.2% -9.7% -12.4% 7.4% 21.7% 20.5% Interest 26 37 36 61 47 35 35 70 PBT 3,039 2,540 2,888 3,086 2,637 2,733 3,523 3,722 Tax 935 754 931 1,018 898 902 1,163 1,327 Adj PAT 2,104 1,786 1,957 2,068 1,739 1,831 2,360 2,396 YoY gr. 73.3% 4.4% 12.9% -11.9% -17.3% 2.5% 20.6% 15.8% Source: Company, PL

Quarterly snapshot: Lloyd drags sales and margins in 1Q20, trend to continue Particulars (Rs mn) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20E 3Q20E 4Q20E Revenue Switchgears 3,758 4,231 4,162 4,651 3,775 4,316 4,370 5,181 YoY gr. 5.6% 28.3% 20.9% 17.9% 0.5% 2.0% 5.0% 11.4% Cable 7,499 7,665 8,203 8,979 7,785 8,240 9,434 10,931 YoY gr. 4.2% 34.6% 31.1% 16.8% 3.8% 7.5% 15.0% 21.7% Lighting & Fixtures 2,583 2,856 3,695 3,800 2,804 3,170 4,139 4,244 YoY gr. -5.1% -0.4% 28.7% 17.7% 8.6% 11.0% 12.0% 11.7% Electric Consumer Durables 5,042 4,579 5,552 4,765 6,235 5,953 6,940 5,595 YoY gr. 37.2% 42.4% 33.5% 2.6% 23.7% 30.0% 25.0% 17.4% Lloyd Consumer 7,081 2,579 3,572 5,324 6,520 2,759 3,750 6,083 YoY gr. 165.0% -4.4% 21.9% -8.8% -7.9% 7.0% 5.0% 14.3% Total 25,963 21,910 25,184 27,519 27,120 24,438 28,633 32,034 YoY gr. 31.0% 23.3% 28.1% 8.6% 4.5% 11.5% 13.7% 16.4% EBIT Switchgears 1,493 1,628 1,631 1,712 1,489 1,597 1,661 1,957 Margin 39.7% 38.5% 39.2% 36.8% 39.5% 37.0% 38.0% 37.8% YoY gr. 14.3% 19.5% 18.2% 12.4% -0.2% -1.9% 1.8% 14.3% Cable 1,279 1,070 1,294 1,575 1,288 1,318 1,509 1,707 Margin 17.0% 14.0% 15.8% 17.5% 16.5% 16.0% 16.0% 15.6% YoY gr. 48.8% -5.6% 20.9% 19.5% 0.7% 23.2% 16.7% 8.4% Lighting & Fixtures 711 847 1,089 1,047 809 872 1,138 1,272 Margin 27.5% 29.6% 29.5% 27.6% 28.9% 27.5% 27.5% 30.0% YoY gr. -7.1% 9.3% 33.1% 4.9% 13.8% 3.0% 4.5% 21.5% Electric Consumer Durables 1,423 1,250 1,412 1,265 1,729 1,548 1,874 1,525 Margin 28.2% 27.3% 25.4% 26.5% 27.7% 26.0% 27.0% 27.2% YoY gr. 74.3% 39.8% 14.8% 0.3% 21.6% 23.9% 32.7% 20.5% Lloyd Consumer 1,370 476 531 798 1,049 428 600 1,077 Margin 19.4% 18.5% 14.9% 15.0% 16.1% 15.5% 16.0% 17.7% YoY gr. 248.1% -9.6% 10.7% -37.8% -23.4% -10.2% 12.9% 34.9% Source: Company, PL

September 9, 2019 30 Havells India

Valuations leave little room for an error

HAVL saw massive re-rating from 28.3x 12 month forward PE post sale of Sylvania to 43x at the time of Lloyd acquisition and made a high of 58.5x in March 2019. The re-rating was due to emergence of HAVL as the emerging company in consumer durables which caters to entire spectrum of products ranging from switchgears, Cables, Lighting, ECD, consumer electronics and white goods. HAVL reported PAT CAGR of 15.8% in the past 3 years which is not significantly higher than other industry players. we estimate HAVL to report PAT growth of 5.2% in FY20 and 14.1% CAGR over FY19-22. HAVL currently trades at 47.7x 12 month forward EPS which has moderated from peak of 58.5x but is still at a 15% premium to average multiple of last 5 years.

We believe that P/E multiple of HAVL is high looking at future growth estimates and competitive pressures faced in various product segments. We value the stock at 33x Sept21 EPS and arrive at a target price of Rs566. We initiate coverage on the stock with Reduce rating. Sharp recovery in consumer demand and significant gains in Lloyd is a key risk to our call.

HAVL trades at a premium to its peers Sales growth (%) PAT growth (%) RoE (%) P/E (x) Name FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E Havells 23.6 11.6 14.0 11.1 5.2 17.3 19.8 18.5 19.3 52.3 49.7 42.4 Crompton Consumer 9.8 12.6 12.3 24.3 11.1 20.7 39.6 35.9 34.3 38.8 32.5 26.9 Voltas 11.2 10.1 11.4 -11.3 -3.6 39.2 13.0 12.5 14.5 40.1 39.1 30.5 Finolex Cables 9.3 8.7 12.4 -3.9 9.1 14.9 14.9 14.4 14.7 16.4 15.0 13.1 Polycab 17.9 13.6 12.4 39.6 14.7 12.0 19.2 16.8 16.3 17.2 15.7 13.4 Orient Electric 16.7 19.7 14.9 8.2 47.4 27.7 24.3 29.0 29.8 46.5 31.6 24.8 V-Guard 11.0 14.0 14.3 24.4 29.1 21.5 20.0 21.6 22.3 57.0 44.1 36.3 KEI 22.2 17.4 15.9 25.8 26.2 24.0 26.3 24.8 24.0 20.4 16.1 13.0 Bajaj Electricals 41.5 -6.8 5.7 99.8 -4.2 37.1 16.5 14.8 17.2 23.0 24.2 17.1 Blue Star 12.6 11.5 13.4 30.0 15.8 23.3 22.8 23.4 25.3 37.2 32.4 26.1 Whirlpool of India 12.3 14.9 14.2 16.1 22.0 18.0 20.7 21.2 21.2 51.4 42.2 35.8 Johnson Controls Hitachi 2.6 16.8 18.0 -14.2 53.1 29.9 15.0 19.5 21.0 50.1 32.7 25.2 Source: Company, PL

1 year forward PE trending towards average

P/E (x) Peak(x) Avg(x) Median(x) Min(x)

70.0 58.5 60.0 47.7 50.0 40.5 40.0 30.0 41.3 20.0 28.3 10.0

0.0

Apr-15 Apr-16 Apr-17 Apr-18 Apr-19

Dec-18 Dec-15 Dec-16 Dec-17

Aug-16 Aug-17 Aug-18 Aug-19 Aug-15 Source: PL

September 9, 2019 31 Havells India

ROE to gradually recover over FY20 RoCE to improve over FY19-22E

RoE (%) 32.0 RoCE (%) 31.3 21.0 31.0 20.5 30.0 29.5 20.5 28.9 20.0 19.8 29.0 28.3 20.0 28.2 19.3 28.0 19.5 19.2 27.0 26.1 19.0 18.5 26.0 18.5 25.0 18.0 24.0 17.5 23.0 FY17 FY18 FY19 FY20E FY21E FY22E FY17 FY18 FY19 FY20E FY21E FY22E

Source: Company, PL Source: Company, PL

Free Cash flows to increase post Lloyd capex Net cash per share to improve

Free Cash Flow Net Cash (Rs mn) Net Cash / Share (Rs) 14 15 35,000 60 11 53 30,000 10 7 50 25,000 38 5 40 20,000 0 25 23 30

(Rs bn) (Rs - 15,000 19 -5 20 -5 10,000

5,000 10

14,182 14,182

11,903 11,903

15,758 15,758 23,594 23,594 -10 33,141 FY18 FY19 FY20E FY21E FY22E - - FY18 FY19 FY20E FY21E FY22E Source: Company, PL Source: Company, PL

Negative working capital cycle sustains Dividend payout ratio to be maintained at 42-44% 0 Net Working Capital days Dividend Payout Ratio DPS (Rs) (RHS) -2 5.6 -4 44.0% 6.0 43.0% 4.75 -6 4.5 5.0 -8 42.0% 4.0 -8 -10 41.0% 3.5 4.0 -11 -10 40.0% 3.0 -12 -13 39.0% 38.0% 2.0 -14 -15 37.0% 1.0

-16 36.0%

43.1%

42.8%

42.9%

43.2% 43.2% -18 35.0% - FY18 FY19 FY20E FY21E FY22E FY18 FY19 FY20E FY21E FY22E

Source: Company, PL Source: Company, PL

September 9, 2019 32 Havells India

Annexure:

Board of Directors & KMP

Key managerial posts held by family members Name Management Role Family Member Representation on Board of Directors Anil Rai Gupta Chairman & Managing Director Yes Rajesh Kumar Gupta Whole-time Director (Finance), Group CFO Yes Ameet Kumar Gupta Whole-time Director Yes Surjit Kumar Gupta Non-Independent, Non-Executive Director

Other Board of Directors Puneet Bhatia Non-Independent, Non-Executive Director T V Mohandas Pal Non-Independent, Non-Executive Director Upendra Kumar Sinha Independent Director Dr Adarsh Kishore Independent Director Surender Kumar Tuteja Independent Director Jalaj Ashwin Dani Independent Director Pratima Ram Independent Director Vellayan Subblah Independent Director Vijay Kumar Chopra Independent Director Source: Company, PL

Auditors list Name S R Batliboi & Co LLP Statutory Auditors KPMG Internal Auditors M/s Sanjay Gupta & Associates Cost Auditors M/s MZ & Associates Secretarial Auditors Source: Company, PL

September 9, 2019 33 Havells India

Financials

Income Statement (Rs m) Balance Sheet Abstract (Rs m)

Y/e Mar FY19 FY20E FY21E FY22E Y/e Mar FY19 FY20E FY21E FY22E

Net Revenues 100,576 112,224 127,902 146,230 Non-Current Assets YoY gr. (%) 23.6 11.6 14.0 14.3 Cost of Goods Sold 62,786 69,558 78,929 90,062 Gross Block 34,173 39,173 41,173 42,673 Gross Profit 37,791 42,666 48,973 56,168 Tangibles 21,951 26,951 28,951 30,451 Margin (%) 37.6 38.0 38.3 38.4 Intangibles 12,222 12,222 12,222 12,222 Employee Cost 8,324 9,651 10,872 12,283 Other Expenses 8,477 9,501 10,939 12,525 Acc: Dep / Amortization 8,270 10,128 12,245 14,479 Tangibles 7,645 9,259 11,132 13,122 EBITDA 11,922 13,302 15,459 18,052 Intangibles 624 869 1,113 1,358 YoY gr. (%) 13.6 11.6 16.2 16.8 Margin (%) 11.9 11.9 12.1 12.3 Net fixed assets 25,903 29,045 28,928 28,194 Tangibles 14,306 17,692 17,819 17,330 Depreciation and Amortization 1,486 1,858 2,117 2,234 Intangibles 11,597 11,353 11,109 10,864

EBIT 10,436 11,443 13,342 15,818 Capital Work In Progress 2,327 2,000 1,500 1,500 Margin (%) 10.4 10.2 10.4 10.8 Goodwill 3,105 3,105 3,105 3,105 Non-Current Investments 885 902 914 837 Net Interest 159 188 77 47 Net Deferred tax assets (3,217) (3,721) (4,317) (5,036) Other Income 1,276 1,359 1,639 2,190 Other Non-Current Assets 1,462 1,766 1,680 1,724

Profit Before Tax 11,553 12,615 14,904 17,961 Current Assets Margin (%) 11.5 11.2 11.7 12.3 Investments - - - - Inventories 19,170 19,370 21,726 24,438 Total Tax 3,637 4,289 5,142 6,197 Trade receivables 4,048 4,520 5,081 5,769 Effective tax rate (%) 31.5 34.0 34.5 34.5 Cash & Bank Balance 12,848 16,063 23,799 33,246 Other Current Assets 1,475 1,627 1,919 2,193 Profit after tax 7,915 8,326 9,762 11,765 Total Assets 71,791 79,007 89,306 101,716 Minority interest - - - - Share Profit from Associate - - - - Equity Equity Share Capital 625 625 625 625 Adjusted PAT 7,915 8,326 9,762 11,765 Other Equity 41,800 46,738 52,925 60,476 YoY gr. (%) 13.0 5.2 17.3 20.5 Total Networth 42,425 47,364 53,551 61,102 Margin (%) 7.9 7.4 7.6 8.0 Extra Ord. Income / (Exp) - - - - Non-Current Liabilities Long Term borrowings 405 305 205 105 Reported PAT 7,915 8,326 9,762 11,765 Provisions 324 382 448 512 YoY gr. (%) 11.1 5.2 17.3 20.5 Other non current liabilities 203 203 203 203 Margin (%) 7.9 7.4 7.6 8.0 Current Liabilities Other Comprehensive Income - - - - ST Debt / Current of LT Debt - - - - Total Comprehensive Income 7,915 8,326 9,762 11,765 Trade payables 15,594 16,694 18,943 21,615 Equity Shares O/s (m) 625 625 625 625 Other current liabilities 9,614 10,338 11,639 13,143 EPS (Rs) 12.7 13.3 15.6 18.8 Total Equity & Liabilities 71,791 79,007 89,306 101,716 Source: Company Data, PL Research Source: Company Data, PL Research

September 9, 2019 34 Havells India

Cash Flow (Rs m) Key Financial Metrics Y/e Mar FY19 FY20E FY21E FY22E YearY/e Mar FY19 FY20E FY21E FY22E

PBT 11,553 12,615 14,904 17,961 Per Share(Rs) Add. Depreciation 1,486 1,858 2,117 2,234 EPS 12.7 13.3 15.6 18.8 Add. Interest 159 188 77 47 CEPS 15.0 16.3 19.0 22.4 Less Financial Other Income 1,276 1,359 1,639 2,190 BVPS 67.8 75.7 85.6 97.7 Add. Other (852) 232 737 816 FCF 0.2 10.9 18.1 21.8 Op. profit before WC changes 12,345 14,893 17,835 21,058 DPS 4.0 4.5 4.8 5.6 Net Changes-WC (4,752) 896 108 249 Return Ratio(%) Direct tax (2,468) (4,289) (5,142) (6,197) RoCE 28.9 28.3 29.5 31.3 Net cash from Op. activities 5,125 11,499 12,801 15,110 ROIC 25.8 25.9 32.5 42.8 Capital expenditures (5,009) (4,673) (1,500) (1,500) RoE 19.8 18.5 19.3 20.5 Interest / Dividend Income 876 - - - Balance Sheet Others 5,914 - - - Net Debt : Equity (x) (0.3) (0.3) (0.4) (0.5) Net Cash from Invt. activities 1,782 (4,673) (1,500) (1,500) Net Working Capital (Days) 28 23 22 21 Issue of share cap. / premium 180 - - 0 Valuation(x) Debt changes (135) (100) (100) (100) PER 52.3 49.7 42.4 35.1 Dividend paid (3,016) (3,387) (3,576) (4,213) P/B 9.8 8.7 7.7 6.8 Interest paid (132) (188) (77) (47) P/CEPS 44.0 40.6 34.8 29.5 Others - - - - EV/EBITDA 33.7 29.9 25.2 21.1 Net cash from Fin. activities (3,103) (3,675) (3,752) (4,360) EV/Sales 4.0 3.5 3.0 2.6 Net change in cash 3,803 3,151 7,549 9,250 Dividend Yield (%) 0.6 0.7 0.7 0.8 Free Cash Flow 117 6,826 11,301 13,610 Source: Company Data, PL Research Source: Company Data, PL Research

Quarterly Financials (Rs m) Y/e Mar Q2FY19 Q3FY19 Q4FY19 Q1FY20 Net Revenue 21,910 25,184 27,519 27,120 YoY gr. (%) 23.3 28.1 8.6 4.5 Raw Material Expenses 13,519 15,751 17,308 16,989 Gross Profit 8,391 9,434 10,211 10,131 Margin (%) 38.3 37.5 37.1 37.4 EBITDA 2,625 2,946 3,229 2,757 YoY gr. (%) 2.2 12.3 (9.7) (11.7) Margin (%) 12.0 11.7 11.7 10.2 Depreciation / Depletion 391 353 391 469 EBIT 2,234 2,593 2,838 2,287 Margin (%) 10.2 10.3 10.3 8.4 Net Interest 37 36 61 47 Other Income 343 331 310 397 Profit before Tax 2,540 2,888 3,086 2,637 Margin (%) 11.6 11.5 11.2 9.7 Total Tax 754 931 1,018 898 Effective tax rate (%) 29.7 32.2 33.0 34.1 Profit after Tax 1,786 1,957 2,068 1,739 Minority interest - - - - Share Profit from Associates - - - - Adjusted PAT 1,786 1,957 2,068 1,739 YoY gr. (%) 4.4 12.9 (11.9) (17.3) Margin (%) 8.2 7.8 7.5 6.4 Extra Ord. Income / (Exp) - - - - Reported PAT 1,786 1,957 2,068 1,739 YoY gr. (%) 4.4 0.7 (8.4) (17.3) Margin (%) 8.2 7.8 7.5 6.4 Other Comprehensive Income - - - - Total Comprehensive Income 1,786 1,957 2,068 1,739 Avg. Shares O/s (m) 626 626 626 626 EPS (Rs) 2.9 3.1 3.3 2.8 Source: Company Data, PL Research

September 9, 2019 35 Havells India

Notes:

September 9, 2019 36 Havells India

Notes:

September 9, 2019 37 Havells India

Notes:

September 9, 2019 38 Havells India

Price Chart

(Rs)

800

678

556

434

311

Mar -Mar17

Mar -Mar18

Mar -Mar19

Sep -16 Sep

Sep -17 Sep

Sep -18 Sep Aug -19 Aug

Analyst Coverage Universe Sr. No. Company Name Rating TP (Rs) Share Price (Rs) 1 Asian Paints Accumulate 1,522 1,479 2 Avenue Supermarts Hold 1,338 1,359 3 Britannia Industries Accumulate 3,068 2,602 4 Colgate Palmolive Reduce 1,159 1,275 5 Crompton Greaves Consumer Electricals BUY 297 225 6 Dabur India Hold 437 429 7 Emami Accumulate 386 310 8 Future Retail BUY 512 395 9 GlaxoSmithKline Consumer Healthcare Hold 7,972 7,473 10 Hindustan Unilever Accumulate 1,816 1,690 11 ITC BUY 367 265 12 Jubilant FoodWorks BUY 1,459 1,153 13 Kansai Nerolac Paints Accumulate 479 434 14 Marico Hold 357 363 15 Nestle India Hold 10,900 12,004 16 Pidilite Industries Accumulate 1,301 1,290 17 Titan Company BUY 1,173 1,047 18 Voltas Hold 609 601

PL’s Recommendation Nomenclature Buy : >15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

September 9, 2019 39 Havells India

ANALYST CERTIFICATION (Indian Clients)

We/I, Mr. Amnish Aggarwal- MBA, CFA, Mr. Paarth Gala- B.Com Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. (US Clients)

The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report. DISCLAIMER Indian Clients Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as “PL”) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com. This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co-managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Amnish Aggarwal- MBA, CFA, Mr. Paarth Gala- B.Com Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. US Clients This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer.

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