Setting up a manufacturing base in China should further help profitability.

Havells India’s announcement of a 50:50 joint venture with a Chinese company to make lighting products for the global operations of Sylvania, its fully owned subsidiary, has helped its own stock stay firm, even as the Sensex has declined 1.5 per cent since the news.

Analysts are positive on the move. It would enable Havells to source lighting products at a lower cost and further boost Sylvania’s profitability, besides catering to the Chinese market later.

Sylvania accounts for half of Havells’ consolidated revenue. Through the former, Havells has significant interest in the lighting industry, manages a global business in the segment across 40-odd countries, with prestigious brands — apart from Sylvania, those such as Concord and Luminance. The Sylvania brand is largely sold in Europe and South America, while the company is gradually expanding in West Asia and Africa. While South America and Asia are seeing good traction, Sylvania’s revenue growth will be muted due to problems in Europe, which brings 70 per cent of its revenue.

Sylvania had incurred losses in 2008-09 and 2009-10 due to the global financial crisis. However, after a restructuring exercise, which included reducing manpower costs, shifting to low-cost locations and renegotiation of debt covenants between January 2009 and December 2010, the company improved profitability dramatically in 2010-11. It is expected to maintain the 7.4 per cent operating margin it clocked in the first half of 2011-12 for the full year.

To improve profitability further, it needs to be more cost-efficient and globally competitive. Pritesh Chheda, analyst, Emkay Global Financial Services, notes Sylvania outsources 60 per cent of its requirement from low-cost destinations. There is, he says, scope to increase this outsourcing by another 20 per cent. Havells’ manufacturing facility in China through this JV with the 88-year-old Shanghai Yaming Lighting would help achieve this objective.

According to Qimat Rai Gupta, chairman and managing director of Havells, the JV would leverage on the technology and manufacturing strengths of its partners, thereby providing energy and cost-efficient products for Sylvania globally and an opportunity to sell in China at a future date.

The JV, with a $50-million (Rs 265 crore) investment, shared by both partners equally, is to start initial commercial operations in April 2012, with full scale output by November. The company expects to generate revenue of $100 mn in the next three years.

Multiple triggers
Havells trades at 12 times 2012-13 estimated earnings, towards the higher end of its historical (three-year) one-year forward price-earnings multiple of four to 16 times. However, the stock offers many positive triggers in the medium and long term. The company has turned around its European operations in 2011-12. An improvement due to the Chinese JV would lead to re-rating of the stock. Havells is also well on track to achieve its target of 20 per cent sales growth in 2011-12 in India and maintain margins, despite competition. This trend will continue in 2012-13.

Says Hitesh Parekh, analyst, FairWealth Equity Research, “Successful Sylvania restructuring, steady domestic growth and launch of consumer appliances will drive Havells’ growth in the next few years.” The company’s electrical consumer durables division (15 per cent of standalone revenue), which makes products such as fans, water heaters, steam irons and toasters, is expected to be the key revenue growth driver in future but subject to successful acceptance of product launches.

In the long term, Havells’ launch of Sylvania products in India will be another trigger for fuelling growth in the lighting business (15 per cent of standalone revenue). Similar to what happened in the first half of 2011-12, analysts expect strong growth momentum in the domestic market and sustainability of Sylvania’s profitability in the second half as well.

Source: Business Standard

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