Havells India Fundamental Analysis: A bright future ahead

With growing demand for premium housing and commercial properties, there is a significant increase in demand for electrical products. This demand is met by the market leader in electrical equipment manufacturing company, Havells India.

Company History and Product Segments:

Havells India was found in the year 1983, company has a wide range of products  from home and kitchen appliances, lighting for domestic, commercial and industrial applications, LED lighting, fans, modular switches and wiring accessories, water heaters, industrial and domestic circuit protection switchgear, industrial and domestic cables and wires, induction motors, and capacitors among others.

Major Revenue Streams:

Company’s major revenue contributing segments are, domestic cables, switches and switchgears, and personal home and personal grooming appliances. Each of the segment and products offered under it are discussed in detail below:

Domestic cables:

Domestic cables contribute 40% of company’s revenue. The domestic cables business is subdivided into two categories LT (Low tension) cables, used in running appliances of low power consumption and HT (High Tension) cables used in running high power appliances. in LT segment, Company specializes in making fire and heat resistant cables for domestic electric wiring and cabling. Havells India also makes CCTV cables, LAN cables and speaker cables.

Switches and Switchgears:

This segment contributes 24% to the top line of the company. this product segment is again subdivided in to two categories, switches (used for domestic purposes, such a s switches used to turn on/off the lights) and switchgears (includes circuit breakers such as MCB and RCCB used to protect home appliances from overload and short circuits). Havells has a wide variety of switches ranging from economy to premium price segment. In the switchgears segment, Havells has wide variety of MCBs that are used for various purposes. Havells also manufactures Distribution Boards which is used in distributing and managing domestic electricity.

Havells has now entered personal grooming segment through its existing distribution channel of 400 showrooms in the country as well as via E-commerce route. Company has launched shaver, trimmers, hair straightners and dryers.

So what makes Havells a great investment? Here is my analysis

Basic EPS:

Basic EPS is a measure of how much profit a company is making on per share basis. In other words, it’s a measure of how much money each share of the company will receive if all the profits earned during the year is distributed to its shareholders.

In the past decade, company’s Basic EPS has seen a growth of 11.66% CAGR per year from Rs. 19 per share in 2007 to Rs. 57.25 per share in 2016. In the past 5 years, company’s EPS has seen a faster growth of 18.52% CAGR per year.

Cash EPS:

Cash EPS shows how much cash the business is generating in a year. Cash EPS not only includes Cash received by the business for the products sold or services provided, it also includes any upfront payments, such as cash advance received by the business.

Cash EPS for the company has seen a growth of 12% CAGR per year from Rs. 20.82 per share in 2007 to Rs. 64.65 per share in 2016. In the past 5 years, company’s Cash EPs has grown at CAGR of 18.17% per year.

Revenue from Operations/Share:

Revenue from operations is a measure of how much revenue a company is generating from its core business. Revenue from operations does not include income from non operating activities such as sales of assets, sale of subsidiaries, income from investments made etc. Revenue from operations/share measures how much revenue a company is generating from its core business on per share basis.

Company’s Revenue from its operations on per share basis has seen a decent growth. In the last ten years from 2007 to 2016, company’s Revenue from operations per share has seen a growth of 4.24% CAGR per year, from Rs. 287.47 per share in 2007 to Rs. 435.25 per share in 2016. However, in the past 5 years, this ratio has seen a significant improvement of 8.53% CAGR per year.

Net Profit Margins:

Net profit margin is expressed in percentage and is a key ratio used to compare profitability of two or more companies working in the same sector or industry.Net profit margin is a measure of how much percentage of total sales remain with company as profit after all the expenses are paid.

Company’s Net profit margins have also seen a good growth in the past decade, from 6.61% in 2007 top 13.15% in 2016, a growth of 7.12% CAGR per year. In the past 5 years, company has seen a growth of 9.27% CAGR per year in net profit margins.

ROCE:

Return on capital employed or ROCE as it is sometimes called, is a measure of how efficiently the capital of a company is being used to generate profits. In other words, ROCE shows how much profits company has generated for the total capital employed in the business. ROCE is expressed in percentage terms, for example a company with ROCE of 20% means that out of every one hundred rupees of capital employed, company made a profit of Rupees 20.

Company has reported healthy and consistent Return on Capital Employed ranging from 25% to 30% in the last 10 years, in the past 5 years ROCE has improved from 17.59% in 2012 to 26.20% in 2016. A growing ROCE indicates that company is utilizing its capital wisely.

Debt/Equity:

Debt to equity ratio tells us how much of the total financing of the company comes from creditors (those who lend money at an interest) and investors (those who invest in the shares of a company). Higher debt to equity ratios is a indication that majority of company is financed by loans and other debt (such as debentures and bonds)

In 2016, Havells India is a completely debt free company. Company had significantly reduced its debt from 0.2 times in 2007 to 0.06 in 2012 and finally achieved zero debt level in 2016. This shows company is not only making good profits and is able to payback its debt, but will now be able to retain all its profits.

Dividend percentage to Net profit:

The dividend payout ratio measures the percentage of net income that is distributed to shareholders in the form of dividends during the year. In other words, this ratio shows the portion of profits the company decides to keep to fund operations and the portion of profits that is given to its shareholders.

Havells India is a good dividend paying company and has a decent dividend history. In 2007 Company’s dividend percentage to net profit was 13.15%, which in 2012 was 26.1% and in 2016 company paid 52% of its net profit as dividend to its shareholders.

Dividend/Share:

Dividend per share is the amount of dividends a shareholder receives on per share basis. Dividend per share includes all the interim dividends paid during the financial year as well as the final dividend paid at the end of the financial year. Dividend per share is calculated by dividing total dividends paid during the year from total number of shares outstanding.

Company has seen a good growth in dividend per share in the past decade, in 2007, company’s dividend per share was Rs. 2.5 per share, in 2012, it was Rs. 6.5 per share and in 2016 it improved further to Rs. 30 per share. Consistent and improving dividend on a per share basis is a clear indication of a healthy business.

Future Expansion Plans:

Havells India has recently bought Lloyds consumer, a consumer durables manufacturing company for Rs. 1,600 crores. With this, Havells has entered in consumer durables segment such as Air Conditioners and Washing Machines. This will provide Havells access to 10,000 dealer and distributor network, 400+ authorized service centers, and a deeper penetration in the home electrical appliances segment.

Havells has also announced its entry in personal grooming segment. Company plans to sell its personal grooming products through its 400+ showrooms and through E-commerce channels. Initially company will import its gadgets from its vendors I China, Hong Kong and Indonesia. Company will start manufacturing these products in the next 2-3 years.

What make Havells India a great investment?

• Strong brand name and distribution network
• Market leader in domestic wires and switchgears segment
• Rising demand for real estate, both residential and commercial will lead to increasing demand for electrical and wiring products
• Company has seen a consistent rise in its earnings and profits, profit margins have also improved significantly
• India’s major population is formed by young people, increase in income levels and lifestyle will see a rise in demand for consumer durable products and home appliances
• Company’s recent acquisition of Lloyds consumer will help company in entering a new market segment of ACs and Washing machines, making company a complete electrical solutions provider.
• Company’s launch of grooming products, both for men and women will provide a new revenue stream to the company. Company aims to capture 25% market share in personal grooming segment in the next  3 years.
•  The demand for personal grooming products has seen a rise in the past few years, especially in tier 2 and tier 3 cities.