Havells Q4FY17 Concall Summary

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Financial highlights

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  • The annual EBITDA is 13.4% and quarter also is the same.EBITDA last year was 14.1%
  • The margins were impacted due to demonetization however they improved margins in the first two quarters
  • The company expects to achieve predemonetization margins and further improvement in 2018
  • The company keeps exploring new geographies but it is not driver of strong growth
  • There were some short-lived gains after demonetization due to decline of unorganized sector.
  • This year, the growth has been highest in the last four years and will continue with economy growth
  • Increase in Receivables was due to temporary growth in EESL business which will wash out and not due to structural change or response from channel
  • After GST, people will be forced to transition towards more branded, service-oriented companies. They do not underestimate the unorganized sector as GST rate on industry will determine the benefits to the company
  • The company has announced price hikes from April due to demonetization and increase in commodity prices but increase in margins would take significant time
  • The margin fall in this quarter is because of demonetization price hike was taken afterwards in April
  • The reduction in commodity prices would not affect the margins except for cables
  • There has been an increase in creditor days to improve the working capital cycle

 Business Segments

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  • BUs within the ECD have registered good double digit growth and they will maintain the momentum
  • They will provide range in each category rather than launching new categories
  • The response to air cooler is good but does not contribute much to ECD segment
  • The company is among three largest player in water heater segment and it registered high growth
  • They have around close to 200 crores revenue in water heater segment
  • Volume growth for cables is 11%
  • There has been double digit growth in premium category fans and they will focus on it
  • With government push on infrastructure and average private CAPEX, cable sector would grow for almost a decade
  • Switchgear segment which is led by EWA and MCBs has been muted for last few years but it has seen reasonable uptake and they are expecting double digit growth. There was growth of 11% this year
  • Guwahati facility is entirely dedicated to switchgears
  • Standard Brand is 400 crores with good response from channel and consumer
  • Standard has created niche in the market and there is good potential
  • Mass market brand Reo is in infancy stage with a good market response and will become beachhead products category with government’s focus on affordable housing
  • The growth in Reo is basically led by EWA in industrial and MCBs are in the high single digit growth
  • Lighting
    • The lamps business will grow but eventually decline and move towards fixtures due to LED
    • The exports have declined for lighting business, especially exports to Sylvania.
    • The growth in lighting business excluding exports is 9%.
    • In lighting business, domestic ex CFL / conventional technology growth is close to 29% lead by LED lamps and fixtures
    • LED revenue will be 70-75% of lighting for quarter and not too far for year
  • EESL
    • They have clocked about 128 crores in EESL this year. The margins are losing ground. They report it separately as they do not want to bloat the lightning segment
    • They continue EESL in niche segment to play on technology and complexity side
    • The company has no plans to supply fans to EESL
    • They have received some tenders in the EESL market in fans but they are not focusing on it so they have not estimated the size of market
    • The prices for LED have bottomed out due to EESL program and will move up in future
    • EESL can only benefit the sector now as market or channel or consumer is settled
    • There would be no wide movements because of EESL
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Lloyd Acquisition

  • Havells has completed acquisition of Lloyd’s consumer business.
  • They acquired Lloyd brand and not the manufacturing facilities
  • They will unravel consolidated growth margin and ad spend for FY18 in the next few months and quarter
  • They are integrating Lloyd to maintain growth momentum of Lloyd
  • Lloyd will be will be the division of Havells and reported as an independent segment into our results
  • Since air conditioning segment is high growth market, they will take forward the growth momentum of Lloyd in this segment
  • They will be focusing on strengthening the product basket of Lloyd in the way Havells has proliferated its range over the years
  • For Lloyd they would focus on growth rates, margins, and the working capital concurrently
  • The working capital requirement for Lloyd have not been decided yet
  • Lloyd has all range of invertor ACs
  • As Lloyd is low margin, the focus would be on margin expansion and growth of top line
  • The hiring process was for Havells’ capacity expansion and not due to Lloyd acquisition
  • They would not have to create a new sales force or a channel force for Lloyd
  • They will continue to procure from Lloyd and not disrupt supply chain

Strategy

  •  Further acquisition depends on opportunity
  • Using earlier sales force to generate demand at retail level by reducing time spent with dealers
  • They want to increase share of retailer’s shelves and would not engage in billing with them
  • They are growing their organic business
  • They have done senior level employment at several levels to make company future ready
  • They have created matrix structure of SBUs and will be managing the entire growth and the profitability of the business
  • CAPEX in Alwar for cables segment
  • CAPEX in Bangalore to diversify manufacturing base from being north-centric
  • CAPEX in Neemrana might be used to move certain manufacturing of Lloyd
  • They would set up manufacturing facilities for products to be sold under Lloyd Brand
  • The company keeps exploring new geographies but it is not a driver of strong growth
  • The company provide comprehensive dealer support and guarantee to all the dealer
  • The company will decide on the channel liquidation after GST implementation
  • The competitive intensity has increased in last 12 to 15 months

    Expenditure

    •  A&P spends have decreased YOY
    • There was change from 3.3% to 3.1% for the year and will be in range of 3.3 to 3.5%
    • They reduced ATL during demonetization to support the channel
    • There has been reduction of 90 bps YOY in other expenditure due to reduction in royalty payment which will sustain next year as well
    • The current Indirect tax is around 21-22
    • There has been 35% growth in employee cost due to new hiring
    • The hiring process is complete and there would no such increase in cost in future
    • There would be 150 to 200 crores increase in CAPEX for FY18 for facilities at Neemrana, Bangalore and Alwarand they have decided on spread
    • The last year CAPEX was abnormally high due to investment in large land
    • 40% sale comes from exemption zone. The effective rate is about 7.6% excise duty and the average sales tax is about 9.9% yearly at net level

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