Sunday, January 1, 2012

>Havells India announced a 50:50 JV with China’s Shanghai Yaming Lighting Co. Ltd. to set up a lighting products plant in China

Looking East for accelerated growth

Event: Havells India announced a 50:50 JV with China’s Shanghai Yaming Lighting Co. Ltd. to set up a lighting products plant in China. The JV will start operation by April 2012 under the name Jiangsu Havells Sylvania Lighting Co (JHSL) with an initial investment of US$50mn by the two partners. Our interaction with the management of Havells India reveals that the company will invest US$25-50mn in the JV over the next 3-4 years (through internal funding) and expect to achieve a turnover of US$100mn in the said period (US$20-25mn in FY2013 itself).

Our view: We take this JV as a positive development for the company as our preliminary analysis shows that the development is expected to be marginally EPS accretive for Havells India over the next couple of years. However, we view this JV to be significantly beneficial for the company over a medium-to-long-term horizon in terms of entrenching into the Chinese market with a local partner. We expect Havells India to record a turnover of Rs125-130cr in FY2013E and scale upto Rs450-500cr until FY2015E. While, we have limited clarity on the margins front, we have assumed JHSL to operate at the same margins as Havells India (China’s demographics is similar to India and the JV is formed on the existing business strength of Havells India). Going forward, we expect EPS accretion of upto 2-3% for Havells India from this JV over the next 2-3 years based on the limited information available.

Outlook and Valuation
Havells India’s current exports to China is to the tune of US$5-6mn in revenue terms. While we believe that the JV will help Havells establish a local presence in the Chinese market, thus aiding the company further to cater to the growing demand and need in China for lighting products, we have not factored the JV into our numbers yet due to lack of clarity. We expect Havells India to clock ~13% CAGR in Net Sales over FY2011-13E to Rs7,205cr (Rs5,613cr in FY2011) and also anticipate that the company would achieve a Net Profit CAGR of ~20% during the same period. At the CMP of Rs385 the stock is trading at a P/E of 12.8x and 11x its FY2012E and FY2013E EPS respectively. We maintain our Buy recommendation on the stock with a target price of Rs455 based on 13xFY2013E EPS of Rs35, indicating a potential upside of ~18% from the current levels.

Risks to the view

  •  Increase in input costs (Copper and Aluminum) and currency fluctuation could have negative impact on profitability
  •  Slowdown in Europe (contributes ~70% revenue of Sylvania’s sales) will impact profitability adversely

To read the full report: HAVELLS INDIA