Hi Valuepickrs!
Like Balakrishna, I have also stumbled upon Havells India as the first company to analyse, but alas, Iam two years late!
[Beginner alert: My views/findings may not be correct. But hey, itas a start! I invite you to correct/suggest/support each and every statement that I make in this post.]
Here are a few points that I noted during my study of the company:
1). Companyas growth prospects
a. Havells entered consumer centric products from industrial products due to better growth prospects: 20% vs 12%
b. Growth in the near future will predominantly come from improved capacity utilisation rather than from new investments. Capex has already been done to cater to future demand. This should boost the FCF from FY15 onwards.
c. Another source of growth is geographical expansion. Havells has a strong dealers’ base and is trying to expand to new geographies. A strong brand recall helps too. It needs to expand its network to rural India where the scope is huge. The number of Havells Galaxies needs to increase.
d. Unorganised sector in cables (35%) and LV switchgear (25%) are also areas for stealing the market share.
e. The company needs to continue to grow faster than its competitors (which it has done in the past so far)
f. 42% revenue comes from overseas Havells Sylvania brand. Improved economic scenario abroad will help increase earnings.
g. LED based lighting solutions and luminaries will remain a key growth area.
h. Inflation coming down, and cutting of interest rates will increase disposable income. aHome for everyonea and Rural empowerment drives will benefit Havells.
2). Positives of the company:
a. Company makes an effort to develop good relations with people:
-Customers through Havells Galaxy
-Dealers and electricians through aPower Plusa
-Employees through ESOPs and other facilities
b. Increasing expenditure on R&D and Promotions even during stressful years
c. The Sylvania turnaround story along with similar examples of Standard and Crabtree help grow confidence in the ability of the management
d. Raw materials such as copper, aluminium, GI, PVC are used which are cyclical commodities. Recent years have seen increase in their costs. Hence there is a good possibility for margin expansion when the cycle turns.
e. An overall positive opinion got from Havells Galaxy scuttlebutt.
f. The Sylvania debt is not being funded by the domestic business
g. Havellsas super-creative ads and quality have helped in strong brand building.
h. ROCE is 30%.
3). Negatives of the company:
a. The FY13 earnings were boosted using a one-time gain of 194 crores. This caused a 50% increase in EPS. YoY increase in Profits was a mere 5% when 194 crores are excluded. The DCF needs to be done without this gain contributing to the FCF. The company also paid less tax during this year.
b. AR 2014 doesnat say anything about the increase in the number of Havells Galaxies. AR 2013 wanted to double the number to 400 in two years. Present number is around 210. Sent a mail few days ago with queries to start a Galaxy. No response. There is no phone support for the same.
c. The target (after setting up of Sahibabad switchgear factory) of achieving 1800 crores revenue in three years is far-fetched #AR 2012.
d. QRG group (promoter) entering into Healthcare business by starting QRG Medicare is a cause of worry. However, the inspiration for this step is the successful model followed by Mayo Clinics, US.
e. Liquidity and solvency ratios are weak compared to Crompton Greaves and Finolex.
f. PolyCab, the largest cable maker has twice the number of dealers than Havells (5000 vs 2500)
g. The impressive ROE figures of the past were mainly due to the high financial leverage ratio.
4). Returns from the stock:
a. The current FII stake is 29.28% against the increased limit of 40%. Very low percentage of shareholding by Mutual funds and other financial institutions too. The stock has movement left in this area.
b. The DCF valuation shows that the stock is currently overpriced. Rs. 210 (Rs.1050 pre-split) seems to be a fair price.
Assumptions for the DCF:
Growth rate=10%
Discount rate=11%
Perpetuity growth rate=2%
Margin of safety=20%
c. Weighted average of P/Es of relevant industries = 33 = Havellsas current P/E.
To conclude, Havells is a good stock to hold on for the long term along with careful follow up. Most of the negatives are not really red flags but need constant checking.
Present valuations are high. But Iam doubtful whether to stick to DCF calculation output of 210 to buy. As they say, aGood companies are always costlya!.
For more details on the above points, you could see my analysis document.
Your views are invited.
Happy LEDiwali to all of you J
[Disc: I’m yet to use my long-opened demat account]
Regards
Nikhil
P.S: Best information got from the study: Havells is derived from the name ‘Haveli Ram’!!