>HAVELLS: Upbeat Outlook

■ Raising PO on higher EPS and re-rating
Our management meeting left us increasingly confident about margin expansion and 20%+ revenue growth. We have raised PO by 15% to Rs625 driven by (1) increase in our EPS for FY13 and FY14 by 5% and 8% respectively, and (2) increase in valuation basis of India entity by 10% to PE of 16.5x FY13E earnings owing to higher profitability. Our FY13 and FY14 EPS estimates are higher than consensus by 10% and 13% respectively. Stock at PE of 12.7x FY13E is attractive. Buy.


■ Margin improvement to continue
Havells has completed it’s investment in land and buildings for the next three years and is focusing on the expansion of margins and cash flow. The company is aiming to achieve 14%+ EBITDA margin in India and 10%+ EBITDA margin globally in two-three years. We have raised FY13/14e EBITDA margin to around 13.3% in India from 12.9% and maintain assumption of 8% globally.


■ Strong product pipeline for 20%+ sales growth
New product pipe line is very robust and is key to management target of over 20% revenue growth. The company has just launched air coolers. It will soon get into UPS, inverters and kitchen appliances. We have raised our 15% sales growth expectation to 18% in FY13 and 15.5% in FY14. Upside could come from faster
ramp up of new products.


■ Rising cash-flow to boost valuation
We expect the decline in capex, expansion of margin, and tight control over working capital to boost the cashflow of Havells like never before. Stronger cash flow will be key to a re-rating. We have valued Havells on a sum of part basis with (1) India entity at PE of 16.5x FY13E EPS of Rs31.9/sh, which is a 5% premium to Indian peers, and (2) Sylvania, the global entity at PE of 12.5x, and at a 15% discount to global peers.


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