Investors with a long-term perspective can use the price correction in Havells India to accumulate the stock at the current price of Rs 359. The company's entry into small appliances business in India, moderating prices of copper and aluminium and the successful turnaround of Sylvania — the company's European acquisition — are positives. The focus on Sylvania (40 per cent of the company's consolidated revenues) has shifted from Europe to the developing markets of Latin America and Asia. This would buttress sales growth and profit margins for the company. At the current price, the stock discounts its estimated FY-12 earnings (consolidated) by 12 times. This is at a marginal premium to the valuation of Bajaj Electricals.

In the June 2011 quarter, the company's consolidated revenues recorded a growth of 15 per cent to Rs 1,304 crore. Post-tax profits jumped 43 per cent, buttressed by improved profitability at Sylvania.

Strong domestic market

In India, Havells sells switchgears (low-to-medium voltage which find usage mostly in households), cables, luminaries and electrical consumer durables. While cables and wires contribute the highest (40 per cent) to revenues, the switchgears segment contributes most to profits (35-40 per cent).

The cables and wires segment reported a growth of 26 per cent in sales in the recent June quarter, thanks mainly to price increases by the company. The segment's margins stood at around 9 per cent compared with 7 per cent in the same quarter last year.

Now that both copper and aluminium prices have declined, higher product prices may help profit margins. Copper is down 15 per cent from its February high of $10180/tonne to $8600/tonne now. The company's lighting and fixtures segment, and the electrical consumer durables segment appear promising. In the lighting segment, growth is being driven mainly by sale of compact fluorescent lamps (CFLs). CFL demand is rising on growing awareness among people over energy-efficient lighting.

The segment reported a growth of 21 per cent sales in the June quarter. In consumer electronics, the company has recently made an entry into mixer-grinders, toasters and electric cookers (already in fans and water heaters).

With the company's brand well-acknowledged in the market, penetration into new product markets can be expected to happen fast. In the June quarter, the mild summer in North India saw fan sales grow at a disappointing 10 per cent and the segment reported an overall growth of 14 per cent (in March 2011 quarter, the segment reported a 40 per cent growth).

The switchgears segment, whose margins contribute the most to profits has been seeing flat sales for few quarters in a row. Closure of the contract from a UK company has been stated as the reason for this. Sales may, however, improve, given that the company is launching its switchgears in the international markets now. Real-estate demand may impact revenues, if it continues to remain lacklustre.

Shifting focus

After initiatives on containing costs and improving operating efficiency, Sylvania turned to profits at the net level in the June 2011 quarter. Though sales remained flat, operating profit jumped 37 per cent. Disappointing sales followed the poor demand in Europe. Europe now contributes 60 per cent of Sylvania's sales with the rest coming from Latin America and the US(sales to these markets reported an eight per cent growth in June 2011 quarter).

Havells is, however, shifting focus to emerging markets in Latin America and Asia to grow Sylvania's sales. The management has indicated that contribution of emerging markets to Sylvania's sales will grow to 50 per cent over next two years.

With almost 40 per cent of Havells' consolidated revenues coming from Sylvania now, positive developments in Sylvania are encouraging.

In the consolidated balance-sheet, outstanding debt was around Rs 1,117 crore in end-March 2011. This brings the debt-to-equity ratio to 1.5. In the June quarter, Sylvania repaid a term loan of €6 million and the outstanding debt in its balance-sheet now stands at €150.4 million. The with-recourse debt on Havells is €6.7 million (around Rs 44 crore).

With Sylvania showing improved cash flows and the domestic business outlook also looking up, it is likely that Havells may reduce its debt burden in the next two years.

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