Havells for investment post the Sylvania stake sale announcement?

Havells is a leader in the Indian market for Electronic Consumer Durables. It’s switchgear and MCB segments are the best in the Industry. Post the 80% proposed sale of Sylvania(Foreign subsidiary) for a sum of Rs. 1,000 crore it will become debt free(Current debt : ~ 420 crore). Furthemrore, Sylvania was loss making and therefore was a drag on the bottom-line as well. PAT of FY 2014-15(standalone) was ~ 465 crore. The Total interest burden for last year was ~ 64 crore. If the debt is paid off, 64*(1-0.3) ~ 45 crore will get added to the bottom-line simply because of interest-saving post-tax. There will also be savings under the operational and staff-expenses heads. However, I am unable to quantitatively ascertain how much these savings might be. The Indian business of Havells is much more efficient than Sylvania as can be seen from the link below. Sylvania had a loss of 11.5 million Euros (~ Rs. 80 crore asssuming 1 Euro = Rs. 70 INR) last year as per Indian GAAP.

So, we can clearly see that the PAT of the company can be a minimum of 500 crores simply because of the Interest saving on a standalone basis. Currently, the market capitalization of Havells is ~ 19,000 crore. Furthermore, the Cash Flow of the company over the last two years has been superb due to efficient Working Capital Managment (Debtors have sharply decreased). This cash has been used to reduce debt.

Considering these facts, and any other relevant information, what might be a good valuation to invest in Havells?

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Can we get an idea what will be the ROIC of the company post stake sale in Sylvania? That should jump a lot. Hence, PE re-rating likely?

Hi Aditya!

I cannot put an exact figure to the ROIC, but the ROE of the Standalone company has consistently been around 20% through 2009-2015. This is despite the fact that Cables, which is the largest percentage of its sales(~41%) is directly related to the Economy, which hasn’t been in the best of shape over the same period. Furthermore, with the thrust of the Government on using LED lighting, I feel there could be a substantial improvement in this segment also.

The ROE figures of Havells in the period of 2005-2008 used to be well above 30%. Admittedly, it is a much bigger company now. But could it go back to those levels again? If it does PE re-rating could very well take place on a growing earnings base.