Monday, June 25, 2012

>INDIA BATTERY SECTOR: looks inopportune; top two battery producers i.e. Amara battery and exide industries

 The sector‟s capacity addition over the past two years now looks inopportune, especially given the current slowdown in the auto OEM industry, which is likely to post slower growth in FY13E after strong performances in the past three years.

 Unless replacement demand grows strongly, we expect the deceleration in OEM demand (constitutes one-third of total battery demand) to lead to sub-optimal utilisation levels.

 Rising competitive pressure may worsen pricing discipline in the industry.

 Maintain In-Line ratings on Exide and Amara Raja.

 We (Standard Chartered) advice investors to shift to other players in the ancillary segment such as Apollo Tyres and Bharat Forge.

 With the top two battery producers significantly increasing capacities in the auto segment (35% increase in the 2W segment and 19% increase in the 4W segment), we believe replacement segment demand would have to be extremely strong to offset subdued OEM demand.

 With Exide focused on regaining lost market share, we do not expect other players including Amara Raja to sit idle. In our view, such a scenario could lead to a price war in FY13, which may worsen pricing discipline, until market shares of key players stabilise.

 INR depreciation currently offsets the benefit from softening lead prices. Although price escalation is built into OEM contracts, battery producers would have to incorporate currency volatility into their pricing assumptions for the replacement segment. They may find it difficult to raise prices to fully cover costs, in our view, in a heightened competitive scenario.

 While Exide‟s operating performance has improved over the past few quarters, it has been below expectations. Tougher competition has substantially impacted Exide‟s pricing power. We had earlier valued Exide at a bear-cycle valuation of 13x one-year-forward earnings. Given the steady improvement in margin and market share, we now value it at 14.5x Sep ‟13E earnings – a 20% discount to its long-term average of 17.5x – to arrive at our revised price target of Rs139 (Rs127 earlier).

 FY12 was one of Amara Raja‟s best years – it gained 250bps market share in the auto-replacement segment and reported strong margins, leading to strong 52% earnings growth. Nevertheless, we expect operating margin to decline on adverse product mix, tougher competition and currency fluctuation. Hence, we expect muted earnings growth of 6% in FY13. Given this, the stock appears fairly valued at 11x FY13E earnings and 6.7x FY13E EV/EBITDA. We maintain In-Line with a revised price target of Rs305 (Rs172 earlier).

 Given rising competitive intensity and likely lower capacity utilisation, we advise investors to shift from the battery segment to other opportunities in the auto ancillary space such as Apollo Tyres and Bharat Forge.

To read report in detail: INDIA BATTERY SECTOR

>YES BANK: Operates in four segments: treasury, corporate / wholesale banking, retail banking and other banking operations

Yes Bank Ltd. is engaged in providing a range of banking and financial services. The bank operates in four segments: treasury, corporate / wholesale banking, retail banking and other banking operations. Following the success of its version 1.0 strategy, the bank has embarked on a version 2.0 strategy.

• Total business continues to grow at more than industry growth rate Despite having major exposure to the corporate loans which largely includes infrastructure credit, the advances continues to beat the industry credit growth. The growth in the industry’s corporate credit moderated during the last few quarters to around 14% Y-o-Y. However, bank’s advances have grown at a CAGR of 22% as on March 31st 2012 since FY09. However, during FY12, the advance growth of the bank too moderated form its historical trends, following the rate hike pressure during the year.

• Asset quality remains strong As on March 31st 2012, total gross NPA of the industry stood at around Rs 1.2tn, which has grown by around 40% Y-o-Y. Notwithstanding, the asset quality of the bank has remained firm as GNPA of the bank has grown by only 4% Y-o-Y in FY12.

• Stable NIM due to increase in CASA Yes Bank is one of the few banks which increased the saving a/c rates following its deregulation. As a result, the CASA share, which remained the lowest in the industry at 10% has jumped to 15% in FY12. The bank has stated that it plans to take it to 20% in the upcoming periods. Going forward, we therefore believe that higher CASA share will protect its margin.

• Diversification in retail business Historically, the bank has majorly positioned itself in the big ticket corporate loan with almost nil exposure to the retail segment. However, during the last 2 years the bank has started diversifying into the retail segment. Increase in the retail exposure is likely to help maintain its margins.

To read report in detail: YES BANK

>Investment Strategy to beat inflation

The inflationary environment is continuing for more than 18 months now. The RBI, through its tightening of its monetary policy, has already increased the interest rate 13 times in the recent past. Inflationary expectations continue to be a challenge not only for policy makers but also for the common man who is struggling to retain his purchasing power, savings and return from investments. There are challenges for the investor in both finding means to earn a positive real rate of return from his investment and in identifying the asset class.

The risk-averse investor tends to invest in debt-related instruments like FDs etc over a period of time. This is because in absolute terms people see their savings grow but over time there is a reduction in the purchasing power due to inflation. With food inflation hovering in the zone of 16% and WPI around 8.5% even after change in the base year, it has become almost impossible to maintain the purchasing power. Fixed income debt instruments which provide returns in the range of 8-12% with moderate risk are currently giving negative real returns or in other words are not able to beat inflation (Investment return – inflation = real rate of return). Over and above this, the investor needs to pay income tax on income from investments thus suppressing the returns further. In such an inflationary environment, investors need to make investments where they can beat inflation. Hence, investors must allocate a sizable portion of their funds in assets such as equity which have proven in the past their potential to give positive returns even after inflation.

History has shown that equities have been the best investment class over any long-term period. However, most of the people you would have asked, especially retail investors, would have said that they have lost money in the stock market. Why is it so? Firstly, we need to understand that the market in the short run is a function of human sentiments rather than the fundamental value of the underlying companies. It is there where most of people lose out as they get carried away by other people’s mistakes. In the long term, the equity markets tend to mirror the economic growth of the economy but people tend to time the market, and that is where they lose out.

To read report in detail: INVESTMENT STRATEGY


Impressive growth-oriented mining company
We (Centrum) met with Mr. A.L. Thakor, GM-Lignite in Ahmedabad and discussed the future prospects of GMDC in detail. We were impressed with the volume growth story of the company with industry beating steady volume CAGR (well above 10 percent), flexibility in taking lignite price hikes unlike other mining majors (esp Coal India), outsourcing-based cost model and lower overall employee cost with no wage hike overhang, impressive growth prospects in bauxite and attractive valuations. Please see the main contours of our discussion on various divisions:-

Lignite Division
Volumes - Lignite volumes are expected to grow by ~15pct in FY13E to 13MT and then reach 14.5MT in FY14E. The growth in production is expected to come mainly from Bhavnagar and Mata no Madh mines.

The company also expects to open 6 new mines (3 in Kutch district and 3 in South Gujarat) in the next 3 years after getting all approvals resulting in an increase in capacity by 5-6 MT by FY15E. GMDC expects volume growth CAGR to remain well above 10% for the next several years based on current visibility of projects. We remain impressed with the volume growth story of the company.

Pricing - GMDC expects to hike prices for lignite in Q2FY13E. It will take into account coal India's F grade coal prices, import landed cost of coal and domestic coal prices for non-power sector into account for deciding on lignite prices. The company indicated that unlike in coal, price hikes in lignite (done by GMDC) are not resisted by either its customers or the regulatory authorities. We see this as a major positive for the company.
Beneficiation (Value addition) - GMDC has undertaken beneficiation trial for 1.5MT of lignite at its Bhavnagar mine and the project is expected to start operations from Q1FY14E. There is no capex involved as the project is completely outsourced to a third party vendor. The cost of beneficiation would be ~Rs150/tonne and GMDC expects to increase the calorific value of lignite by ~1000Kcal/Kg which would result in an increase in realizations of ~Rs400/tonne, leading to net value addition of Rs250/tonne. Also, around 2-3% of rejects generated would fetch ~Rs20000/tonne. The company has indicated that this was done for the first time on a trial basis to improve the quality of lignite and produce an environment friendly fuel. GMDC indicated that if this model proves successful at Bhavnagar, it could be implemented
across all projects in the next few years to enhance revenue and quality of lignite produced by GMDC. If successful, we see this as a major revenue enhancing opportunity for GMDC (addtional 20-25% revenue on beneficiated lignite) in the coming years from existing mines without any capex.

Bauxite Division
Volumes - Bauxite division is expected to witness higher volumes going forward and the company expects ~1.5 MT of bauxite production in FY13E, up from 0.9 MT in FY12. Bauxite calcination would not be undertaken and bauxite would be sold in the open market where demand remains robust.
Pricing - GMDC expects bauxite realizations of ~Rs850/tonne and the cost of mining is ~Rs400-450/tonne. JV with NALCO - GMDC has a JV with NALCO for setting up a 1 mtpa alumina plant in Gujarat. GMDC’s equity share is 26% and its investment would be ~Rs3400mn, out of which cash portion would be Rs1700mn (financed through internal accruals) and the rest would be invested through bauxite supply in the initial period. GMDC will supply 3 mtpa bauxite for the project at market prices and would be able to enjoy ~40% operating margins. In addition, GMDC would be able to get its share of profits (26%) from alumina sale on the project.

Power Division
50 MW power plant (Nani Chher) - Company's 50 MW captive power plant at Nani Chher is operating at 50% PLF and GMDC is looking to outsource the operations of the plant to A third party vendor. COP is expected at Rs1.8/unit under the outsourcing model and long term PPA stands at Rs2.25/unit for the power plant.

Wind Power - GMDC is setting up an additional 50 MW wind power capacity at a capex of Rs3bn (financed through internal accruals) and this is expected to be commissioned in H2FY13E.

Other Operational highlights
Employee cost is expected to come down in FY13E as the company expects reduction in workforce by ~150 employees (~8% of total workforce of 1900). Around 50 employees are expected to retire and another 100 are expected to take VRS in FY13E. Next wage revision is due only after 4 years and so no wage cost inflation overhang exists with GMDC.

GMDC is doubling its flourspar production capacity at a capex of ~Rs120mn. Production expected in FY13E/14E is 30000/40000 tonne.


>DLF: Deleveraging hinges on launch of high-value residential projects

Non-core Asset Sales Right Move, But Not Enough 
DLF has sought its shareholders’ approval for divestment of its wind power business. As per media reports, the deal is likely to be closed in the next four-six weeks and might fetch Rs10bn. Further, DLF last week reported it has divested its entire stake in Adone Hotels and Hospitality for Rs5.7bn. Such non-core asset sales are in line with our expectation, helping its overall debt reduction strategy to some extent. We have factored in Rs35bn of non-core asset sales and expect the gearing level to decline marginally to 0.76x in FY13E from 0.83x in FY12. For any meaningful debt reduction, it has to be supported by strong pre-sales or higher non-core asset sales than expected. We remain sceptical on the pace of DLF’s non-core asset sales in the current environment and the deleveraging hinges on improvement in the launch of high-value residential apartments. Any delay in the launch of such high-value residential apartments would lead to equity dilution. We retain our Sell rating on DLF. 

Negative cash flow remains a concern: At the post 4QFY12 results conference call, DLF’s management had given a target of Rs30-40bn of non-core asset sales by the end of 1HFY13, which includes likely disinvestment of Aman Resorts, NTC mill land (Lower Parel, Mumbai) and wind power business. It also increased the overall target for asset divestment from Rs45bn to Rs100bn. Despite non-core asset sales of Rs30.5bn over FY10-12, cash flow after accounting for interest costs and capex remained negative at Rs16bn, indicating worsening cash flow situation from core operations. This was on account of cost escalation and shift in the product mix towards low-value plot sales, thereby impacting margins and pre-sales in FY12. 

Deleveraging hinges on launch of high-value residential projects: FY12 pre-sales were skewed towards low-value plot sales, resulting in an 18% YoY fall in pre-sales, despite a 32% YoY volume growth. We expect a similar trend to continue as the company intends to defer project execution risk apart from the risk of delay in approvals in the current environment. However, the management has given guidance regarding the launch of 2mn sq ft of high-end residential flats in Gurgaon Phase V (Magnolias) project in 2HFY13. We are factoring 30% of Magnolias launch in our pre-sales estimates in FY13E as absorption of such high end residential under current environment will be challenging in our view. 

Valuation: At the current market price, DLF trades at a 9% discount to our one-year forward NAV (Rs 204/share). We retain our Sell rating on the stock with a target price of Rs174 (15% discount to our NAV).

>RELIANCE INDUSTRIES: Niko cuts reserve KG-D6 reserve estimates by 80%

Niko cuts reserve KG-D6 reserve estimates by 80%
Niko Resources, a 10% JV partner in Reliance Industries (RIL) KG-D6 block has cut 2P reserve estimates for the block by 80% to 1.93tcf. The key reasons for this downgrade has been 1) Field performance at the D1/D3 field during 2011 demonstrated higher than expected pressure draw‐downs 2) assessment of reservoir performance concluded that, contrary to the previous geological model, the current D1/D3 producing wells did not appear to be receiving any contribution from outside the main channel areas 3) the enhanced inter‐connectedness of the main channel sands has resulted in increased water production and hence lowered the ultimate recovery.

Niko envisages weak production trend at KG-D6 to continue
Niko has envisaged that the declining trend in gas production at D1, D3 and MA would continue in the years to come. It expects the average production to fall from more than 105mmcfe/day in FY12 to about 42mmcfe/day by FY18. However, it expects production to commence from KG-D6 satellite fields and NEC- 25 from FY15 and FY18 respectively, which would more than offset the decline at KG-D6.

Risks to core business persists
The widening Euro debt crisis, slower than expected recovery in US economy and weakening growth in inflation hit emerging economies such as India and China has raised concerns over the demand outlook for petrochemicals and petroleum products. For petrochemicals, increasing low cost gas based capacities in the Middle East will put additional pressure on margins. New refining capacities in Asia Pacific region will impact GRMs over the near term.

Maintain MP rating, cut target price to factor in lower reserves
To factor in the cut in reserve and production estimates, we lower our NPV value for KG-D6 field to Rs41/share from Rs56/share earlier. Our production estimates for FY13 and FY14 now stand at 28mmscmd and 25mmscmd respectively. We have lowered our EPS estimates for FY13E from Rs63.6 to Rs61.8 and for FY14E from Rs71.3 to Rs67.4. We maintain our Market Performer rating with a revised 9- month price target of Rs730.


>STRATEGY: Global worries remain, domestic environment to improve going ahead

4QFY2012 and FY2012 earnings snapshot: Sensex companies reported adjusted earnings growth of 19.2% yoy for 4QFY2012, against our expectation of 13.8%, aided by unexpected earnings surprise by ONGC. Excluding the ONGC’s suprise, earnings grew by 13.7% yoy, compared to our expectation of 15.1%, as lower-than-expected earnings of metal and telecom companies (sectoral earnings declined for both) largely offset better-than-expected performance of auto companies (primarily Tata Motors), Sun Pharma, SBI and ICICI Bank. Overall for FY2012, the earnings performance story was directionally similar to that witnessed in 4QFY2012, with lower-than-expected sectoral earnings of cyclical and structurally stressed sectors largely offseting better-than-expected yearly performance of few sectors like Private banks, auto, pharma, FMCG and IT. In fact, excluding Tata Motors (which was aided more by its foreign subsidiary) and SBI (which had a low base of earnings in FY2011), overall earnings growth for Sensex companies came in at just 9.6%.

Global worries remain, but domestic environment to improve going ahead:
Concerns about a crisis in Eurozone, which had earlier abated somewhat, have risen again on the back of recent developments in Europe (particularly regarding elections in Greece and the intensifying banking crisis in Spain), which coupled with series of lower-than-estimated economic data have led Indian markets to fall in April-May 2012. However, going ahead we expect the domestic macro environment to improve on the back of easing commodity prices, moderating inflation, further monetary easing in the form of repo rate cuts and narrowing current account deficit. Weak demand outlook have led to a significant decline in commodity prices including crude oil. The decline in global commodity prices, which generally gets reflected in inflation levels domestically with a lag, is expected to lead to a further decline in manufacturing inflation, while current forecasts suggest good monsoon levels which is expected to keep food inflation under control.

CAD to narrow going ahead: Indian exporters are expected to benefit significantly from INR depreciation, as it has improved their competitive edge vis-a-vis global competitors such as China. Also, imports are expected to decline on 1) lower domestic demand on account of slowing capex activities; 2) moderating global commodity prices including crude oil prices; and 3) reduction in gold imports (~10% of total imports) as gold is unlikely to generate similar supernormal returns as it did in last few years. Hence, we expect the trade deficit (in USD terms) also to narrow from here on, leading to a reduction of 50-100bp in current account deficit.

Outlook and valuation: Overall, for FY2013, we expect corporate earnings to be aided at the revenue level by better growth prospects than in FY2012, at the earnings level due to directionally better inflation scenario and lower interest costs. We expect Sensex companies to deliver EPS growth of 11.4% in FY2013E (12.2% CAGR over FY2012-14E). We continue to prefer rate sensitives like financials, infra and auto sectors, which are likely to benefit the most from the expected correction in interest rates and also select export-oriented IT and Pharma companies. We arrive at our 12-18 months Sensex target of 19,800, maintaining our conservative multiple of 14x FY2014E earnings. Our target implies an upside of ~19% from current levels.

Sensex earnings performance aided by ONGC surprise; Ex. ONGC performance remain mixed
For 4QFY2012, on a yoy basis, Sensex companies' adjusted earnings grew by 19.2% yoy as against our expectation of 13.8%, aided by the unexpected earnings surprise by ONGC. Excluding the positive surprise from ONGC, earnings grew by 13.7% yoy, compared to our expectation of 15.1%, as lower-than-expected earnings of metal and telecom companies (sectoral earnings declined for both) nearly offset better-than-expected performance of auto companies (primarily Tata Motors), Sun Pharma, SBI and ICICI Bank. Sector wise, on a yoy basis, Sensex earnings growth was primarily contributed by BFSI stocks, followed by auto, oil and gas and IT stocks. Excluding SBI (which had a low base in 4QFY2011 due to exceptional pension-related expenses) and ONGC (on unexpected earnings surprise), overall earnings growth for Sensex companies came in at just 4.1% yoy, as against our anticipation of 6.7% yoy.

To read report in detail: INDIA STRATEGY


>Allcargo Global Logistics: Buyback announced…

The Board of Directors of Allcargo Logistics Ltd at its meeting held on June 20, 2012 has approved the buyback of equity shares of the company under the open market mechanism at a price not exceeding | 142.5 setting aside a consideration of not more than | 75 crore for such a buyback. If the company utilises the entire | 75 crore on buying back shares, the equity base would reduce by ~ 4%. The company does not have an aggressive capex plan for FY13E, which could be one of the reasons for the company to go for a buyback in this year. The buyback limits the downside of the stock price and shows the confidence of the
promoter in the company’s operations. However, it does not impact the fundamentals of the company and such a low quantum of buyback is unlikely to generate investor’s interest.

􀂃 Outlook
The new CFS facility at JNPT with a capacity of 1,00,000 TEUs is expected to be operational by the end of July. In the CFS business, the company experienced a slowdown in terms of volumes in Q4FY12. However, in April, it experienced a rebound and volumes are back to pre-January levels. The project and engineering division has an order book of ~ | 300 crore for the next 12-18 months. The company is yet to take a decision on the way in which the demerger of the NVOCC segment will take place.

At the current price of | 130, the stock is trading at a P/E multiple of 6.5x FY13E EPS of | 17.2. We believe the demerger of the NVOCC segment would be positive for the company. We have revised our estimates and lowered our P/E multiple to factor in the global slowdown and its impact on the company’s business. We recommend a HOLD rating on the stock with a target price of | 138, 8.0x FY13E EPS.


>Divi’s Laboratories Ltd.

We (Ventura) initiate coverage on Divi's Laboratories Ltd as a BUY with a Price Objective of `1,287 (target 21.0x FY14 P/E). At CMP of ` 952, the stock is trading at 19.6x and 15.5x its estimated earnings for FY13 & FY14 respectively, representing a potential upside of ~35% over a period of 18 months. Being a leading player in the CRAMs space, Divi’s will be a key beneficiary of the increased generic opportunities emanating from the patent expiry cliff on the back of its expertise in complex chemistry, efficient and cost conscious processes and relationships with the top 25 global innovators. We expect Divi's revenues and earnings to post a CAGR of 25.2% and 23.5% to `2915 crore and `814 crore, respectively by FY14. Further, timely approvals for ready to market products can be a game changer for the company and further accelerate the pace of growth.

 Continuous growth of the matured API product portfolio and impending sales of the new ready to market API’s to fuel growth

 In the generic API segment, Divi’s enjoys a significant market share in its key products and derives 47% of its revenue from the top 5 products, which are in the matured stage. The company also has a strong pipeline of ready to market products, in addition to its developmental pipeline, which provides Divi’s with strong revenue visibility over the long term. Seeing the robust growth potential in the API space, we expect revenues from this segment to grow at a CAGR of 19.6% to `1306.9 crore by FY14.

CRAMS on growth path leading to profitability
Backed by the strong relationship with the innovators, presence across the entire CRAMS value chain and its ability to support the innovator in late life-cycle strategies has enabled Divi’s to establish itself as a leading player in the CRAMS space. Further, the increased focus of MNCs on outsourcing led by cost arbitrage and strong R&D capabilities will only benefit Divi’s. We expect this custom synthesis business to grow at a CAGR of 25% to ` 1277 crore by FY14.

 Strong execution and effective control to ensure sustained margin
Compared to peers, Divi's have been able to maintain strong margins on account of its ability to swiftly execute capex and ensure quick capacity ramp up. Divi’s policy of adding capacities, only post clear visibility of orders ensures that there is no spare capacity and strong cash flows from the very 1st week of operations leads to ROCE being much higher than peers.

 Valuation
At the CMP of ` 952, Divi's is trading at 19.6x and 15.5x its estimated earnings for FY13 and FY14, respectively. Divi’s is trading at a considerable premium to its counterparts in the domestic market i.e. Biocon, Jubilant as well as to the international players. However, considering the high margin business, steady organic growth, strong cash flows and high return ratios, we believe the premium is completely justified. We initiate coverage on Divi's Laboratories Ltd as a BUY with a Price Objective of `1287 (target 21.0x FY14 P/E) representing a potential upside of 35% over the next 18 months.



Investment Highlights
Tribhovandas Bhimji Zaveri Ltd. (TBZ) is a high growth potential story in the organised Indian jewellery sector backed by: 1) strong brand (the most important factor for trust amongst gold consumers); 2) innovative ability; and 3) aggressive expansion plans. We estimate TBZ to record strong earnings growth with a CAGR of ~52% to INR1.33bn during the next two years (FY12-14e) led by a net sales CAGR of 42% to INR28.0bn. We initiate coverage with a BUY recommendation and a target price of INR158, implying FY14e PE of 8x.

Store expansion to drive growth
TBZ is embarking on a strong retail expansion plan to drive growth during the next three years. The company which currently operates about 14 stores across 10 cities in 5 states (retail showroom carpet area of 47,796 sq ft), plans to add 43 showrooms (25 large format high street showrooms and 18 small format high street showrooms) by the end of FY15e, which would take the total number of showrooms to 57 (total carpet area ~150,000 sq. ft.) in 43 cities across 14 states. This would drive sales at a strong CAGR of 42% to INR28.0bn during the next two years.

Profitability on a structural uptrend
PAT margins would witness consistent improvement during the next three years with the application of the gold lease model. TBZ's interest outgo during FY13e and FY14e is estimated to drop to INR215m and INR360m, respectively, as against INR315m in FY12. This in turn would improve net margins by 53bps during FY13e and FY14e to 4.7%.

Valuation and outlook
At the CMP of INR110, the stock trades at a PE of 8.5x FY13e and 5.6x FY14e. On an EV/EBITDA basis, it trades at 4.2x FY13e and 2.7x FY14e. We believe that TBZ would trade at a premium over its peers like Shree Ganesh Jewellery (which has yet to create a branding in the domestic jewellery retailing) and Thangamayil Jewellery (which is more of a regional brand as compared to TBZ which has been able to create a presence across both the key geographies of west and south India). We therefore value the stock at a PE of 8x FY14e, providing a target price of INR158 and recommend a BUY.

To read report in detail: TBZL

>HAVELLS INDIA: Sylvania: Focus on profitability stays; Europe holds the key

We met the management of Havells India (HAVL) to get an update on the company’s business. Amidst tough times, management reiterated 15‐20% growth in domestic business in FY13 as it looks to double appliances sales. Sylvania is expected to post margin in the 7‐8% range in Europe, even as currency impact is likely to put margins under pressure in Latin America. Profitability and new markets like Africa and China are Sylvania’s prime focus. We maintain ‘BUY’ with a revised TP of INR 612.

Lighting, appliances to aid domestic business; imports to reduce
HAVL expects to double appliances turnover to ~INR1.5bn‐1.7bn during FY13E. The company has seen strong traction in fans sales in April‐May 2012 and expects to clock 10‐15% revenue growth during FY13E. Lighting and luminaries are expected to grow 20‐25%. Switchgear sales slowed due to slower sales in the UK market and the company does not expect major pick up in the export market. HAVL is looking to increase domestic sourcing to cushion the volatile currency impact.

Sylvania: Focus on profitability stays; Europe holds the key
European sales are expected to decline even as margins are likely to be maintained between 7% and 8% in FY13E. Profitability could be under severe pressure only if the revenue decline is beyond 10% in Europe. In Latin America, while sales growth has moderated, margin could be under pressure due to depreciation in local currency given large imports. HAVL expects maintenance capex of EUR10‐12mn (EUR3‐4mn every year) over the next three years in Sylvania in addition to EUR10mn‐12mn capex towards its JV in China during the same period.

Outlook and valuations: Positive; maintain ‘BUY’
With continued focus on profitability in Sylvania and expansion of product portfolio/geographical reach in domestic business, we believe HAVL in on the right track. We have increased growth assumptions by 2‐3% in FY13E and FY14E for domestic business. On revised consolidated EPS, the stock is trading at 14.6x and 12.7x FY13E and FY14E, respectively. We maintain ‘BUY/ SO’ with revised TP of INR612 (earlier INR594).

To read report in detail: HAVELLS INDIA