India's Electrical Sector Powering Ahead on Infrastructure Growth and Changing Demographics

I N D I A R ES E A RC H I N I T I AT I N G C O V E R A G E ELECTRICALS
April 2011
Indian Consumer Electricals Sector Lighting up India
Amol Rao +91 22 4031 3435 amol.rao@antiquelimited.com
Consumer Electricals
INDEX
Foreword ......................................... 1 Havells India Limited .......................... 7 Bajaj Electricals Limited .................... 15 V-Guard Industries Limited ................. 23
Antique Stock Broking Limited
FOREWORD
The acceleration in growth of the Indian economy over the last decade is a well documented fact. With GDP registering a CAGR of 13% over the last 10 years (on a nominal basis), per capita income (on a nominal basis) has trebled, resulting in higher consumption levels across products and services. This has not only been reflected in the higher discretionary spending, but also spurred upgrades in purchases of nondiscretionary items. Using this as the backdrop, we are initiating coverage on three companies (viz. Havells India, Bajaj Electricals, and V-Guard) from the consumer electricals space, which we believe would be outperformers going ahead. We believe that some of ongoing developments at the ground level, will contribute to immense consumption driven growth in this sector. We have enumerated the same below:
Structural changes to generate demand

Demand from construction Urban housing: While the strong correlation between economic growth and urbanisation is well established, rising levels of urbanisation in India are also a result of the historic low base in the country. Going forward, significant demand for urban housing stock is expected to be generated on the back of economic growth, wherein greater portion of the incremental workforce joins the service sector. Additionally, the increasing nuclearisation of urban families and easy access to housing finance channels are also expected to spur demand for urban housing units over the following decade. Estimates put the average annual growth in urban housing units at 2m over 2011-15, which lead us to believe that there exists reasonably robust long term demand bound for household wiring, electricals, electrical appliances and associated equipment like switches, switchgears, etc.
Though relatively smaller than commercial real estate, housing sector greatly influences electricals sector
India: Trend of urban population

1,200 900 600 300 1901 1921 1941 1961 1981 2001 30.0 25.0
India: Trend of urban household stock (m. nos)

88
76
20.0
64
15.0
52
10.0
40 2001 2003 2005 2007 2009 2011e 2013e 2015e
Population (m, LHS)

Source: Crisil Research
Urban pop (% of total)(RHS)
Consumer Electricals India: Rural housing stock (m no.s)

180 165 150 135 120 2011e 2013e 2015e 2001 2003 2005 2007 2009
Rural housing: The implementation of government programs like the 'Indira Awaas Yojana', over the Xth and XIth Plans has been one of the primary reasons for increasing construction of permanent (pucca) dwellings in rural India. Additionally, the steady trend of conversion of semi-permanent (kutcha) houses into pucca units has also resulted in the rise of rural housing stock. This has spurred purchases of basic electricals like bulbs, FTLs and fans. Rollout of schemes like the 'Rajiv Gandhi Grameen Vidyutikaran Yojana', has boosted consumption of electricals and associated appliances like UPS and water pumps. Under this scheme, more villages in the rural hinterland are being electrified, wherein electricity is supplied for a stipulated period every day. This has been the primary reason for the increased sales of electricals and appliances in rural India.
Source: Crisil Research
Number of electrified villages in India (FY10-11)

160,000 120,000 80,000 40,000 0 North India South India East India West India Central India -
Composition of electrified households (FY10-11)

24 18 12 6
North India South India
East India
West India
Central India
Already Electrified
Source: Rajiv Gandhi Grameen Vidyutikaran Yojana, GoI
Un- Electrified
Above Poverty Line
Below Poverty Line
Demand Matrix: Electricals and appliances

Application Household Commercial Industrial Social
Source: Industry, Antique
Product GLS, CFL, FTL, Fans, Switches, Cables & wires Luminaires, Hi-power lights, Signages, Hoardings HT/LT cables, Luminaires, Motor pumps, Switchgears HT/LT cables, Conductors, Street lighting
Given the configuration of houses in rural and semi-urban dwellings, our interaction with dealers and various participants in the electricals industry point out to the immense potential demand for electricals and appliances in the backdrop of the above mentioned developments. Standard configuration and requirement of dwellings (800 sq. ft.)
Component Cables Switches (x) Switchgears (x) Fans (x) FTL (x) Bulbs/CFLs (x)
Source: Industry, Antique
Units 250m 22 2 3 4 4
Consumer Electricals Higher power generation The economic transformation of the previous decade has witnessed a huge surge in energy demand in India. While domestic power generating capacity has been scaled up significantly in the past few years, we still have a peak power deficit of 13%. India's per capita power consumption is estimated to be ~606 units and going forward, is expected to grow at 8-9% pa over the next 24-36 months. In order to keep pace with the growing demand and partially bridge the supply gap, aggressive capex is lined up, wherein 38,000MW of power generation capacity has been lined up for commissioning over the next three years. While the improved supply of power in the foreseeable future will largely benefit industrial and commercial users, we believe that at the household level, incremental supply of 19bn units of electricity will be released for consumption pa over the next three years. We believe that this improved availability and assured supply of electricity will spawn demand of electricals and fixtures on account of initial installations from first time consumers and upgrades from existing consumers. We expect purchasing to be more pronounced in the semi-urban and rural areas of the country, where the bulk of electrification work is being carried out. Capacity addition targets and estimates
300,000
Improved availability of electricity to boost demand for electricals
225,000
150,000
75,000
FY07
Source: CEA, Antique Research
FY208
FY09
FY10
FY11E FY12E
FY13E
FY14E
FY15E
Transformation in social dynamics to boost consumption

Alteration in income pyramid Indias GDP is projected to register a CAGR of 7.3% from 2005-2025 (Source: MGI: The Bird of Gold: The Rise of Indias Consumer Market) on back of increasing productiveness and competitiveness of Indian businesses in conjunction with economic reform. In the background of population growth, it is estimated that by 2015, this economic growth would translate into ~20% of Indias population or 268m people, being economically classified as middle class (v/s 55m people in 2005).
Demographic shift to play crucial role in consumption patterns of populous
Consumer Electricals Indias changing demography (m people)

1,600
1,200
800
400
0 1985 1995 Below Poverty Line Poor 2005 2015e Middle / Upper middle Class 2025e Rich
Source: McKinsey Global Institute, The Bird of Gold: The Rise of Indias Consumer Market, May 2007
Consequently, this gradual alteration in the countrys income pyramid is reflecting in domestic consumption patterns and increasingly materialising into robust and sustainable demand for housing, consumer durables and similar products. This is also reflecting in the offtake of ancillary products like wires, cables, household electricals and electrical appliances, which are follow-up purchases. Change in consumer preferences A variety of factors like increase in literacy, urbanisation and affordability, in conjunction with higher standards of living and heightened quality consciousness, have contributed to a gradual change in consumption patterns over the last decade. While this shift has been more pronounced in urban India, the proliferation of satellite television has resulted in an emergence of this phenomenon in rural India as well. We believe that these factors have a direct bearing on the consumption of household electricals and appliances, more so in the future, as companies having extensive distribution, visible brands and appropriately priced products will find favour from Indian consumers. Increasingly, consumers will opt for brands that offer value for money and energy efficiency, apart from other utilities like a robust after sales network. Matrix of consumer preferences
Literacy, urbanisation and consumerism to influence brand selection
AFFLUENCE
Premium National/ International Brand Energy Efficient National Brand Local/Regional Brand Low Quality/ Unbranded REALISATION
Source: Antique Research
Conclusion
Going forward, we believe that the electricals and electricals appliances segment is headed for a period of consolidation, with a gradual weeding out of smaller and unorganised players, as scale and branding become paramount for survival. We believe that the balance in the industry will gradually tilt in favour of pan-India players having a large manufacturing base, well rounded product basket and visibility in the marketplace. Mindful of the same, we have covered a mix of large and mid-sized players in this report. While a balanced product profile, efficient operations and extensive distribution are common threads running through all companies, another salient feature is the pedigree of corresponding managements of all these companies. From innovation to market expansion, these companies have demonstrated the hunger for growth and capability to weather tough market conditions. This inspires confidence in their ability to emerge at the top of the sector in the face of intense competition and market consolidation. We, at Antique, firmly believe that relatively low elasticity of demand of household electricals and the vital nature of their consumption in housing, make the sector an interesting play on the dual themes of the Indian consumption cycle and rapid urbanisation. We hope our recommendations merit serious consideration as lucrative investment opportunities in FY12e. Antique Electricals Companies Peerset
Company Havells India Limited Bajaj Electricals Limited V-Guard Industries Limited
Source: Antique
Scale and branding to determine level of success in marketplace
M. Cap (INRm) 50,534 27,200 5,476
CMP (INR) 405 279 183
Target Price (INR) 495 327 241
Upside (%) 22 17 32
Rating BUY BUY BUY
Havells India Limited

Investment rationale
All lit up and ready to shine

Havells India Limiteds (HIL) product profile in the electricals space spans the entire value chain from cables and wires to switchgears. Over the years, it has kept adding products to its portfolio while maintaining strong focus on quality. These factors have contributed to HIL becoming a One-Stop-Shop for customers, enabling it to capture a larger chunk of the Indian consumer spend on household electricals. Strong brand recall and distribution Companys marketing strategy is centered around brand recall. Its ad spends are on par with multinational peers and designed to showcase individual products. HIL has backed this up with a formidable distribution network in Tier 1-2 cities and is now focusing on increasing its penetration in the rural hinterland. Sylvania bogey exorcised HIL had acquired the global operations of Sylvania in Apr07 for Euro227m. After losses incurred during the slowdown of FY09, HIL restructured Sylvanias operations and headcount. As a result, the latter is now profitable at the PAT level and its operations and cash flows are expected to improve going forward. Robust operational cash flows to boost valuations With steady cash generation from Indian operations and operational profitability achieved in Sylvania, we estimate cash flows to improve substantially from FY11e onwards. Consequently, debt retirement over the next few years should reflect in an improved EV on the consolidated level.
18 April, 2011
RECO CMP Target Price Potential Upside

Market data
Sector Market Cap (INRm) Market Cap (USDm) O/S shares (m) Free Float (m) 52-wk HI/LO (INR) Avg Daily Vol (000) Bloomberg Reuters
Source: Bloomberg
: : : :
BUY INR405 INR495 22%
: : : : : : : : :
Consumer Electricals 50,534 1,122 125 46 447/264 368 HAVL IN HVEL.BO
Returns (%)
1 m Absolute Relative
Source: Bloomberg
3 m 5 4
6 m (9) (5)
12m 18 10
10 4
Shareholding pattern
DII 2% FII 1 6% P ro mo ter 62% Others 20%
Valuation and outlook

While new product launches and improved penetration into foreign markets will serve as kickers for earnings, the successful monetisation of its two strong brands are crucial to improve financial metrics. Given its ability to successfully negotiate challenging situations, we are confident that HIL will accomplish the same. We recommend a BUY on the stock with a target price of INR495. Key financials
Year ended 31st Mar Revenues (INR m) EBITDA (INR m) EBITDA Margin (%) EBITDA growth (%) PAT (INR m) PAT growth (%) EPS (INR) EPS growth (%) P/E (x) P/BV (x) EV/EBITDA (x) RoE (%)
Source: Company, Antique
Source: BSE
Price performance vs Nifty

130
2009 54,775 2,886 5.3 (16.7) (1,601) (199.5) (12.8) (199.5) (31.6) 8.2 11.5 (24.5)
2010 54,315 3,222 5.9 11.7 696 (143.5) 5.6 (143.5) 72.6 12.6 9.7 13.7
2011e 61,229 4,851 7.9 50.5 2,313 232.3 18.5 232.3 21.9 8.6 11.7 46.8
2012e 67,300 7,072 10.5 45.8 3,998 72.9 32.0 72.9 12.6 5.4 7.5 52.2
115 100 85 70 Aug-10 Sep-10

Havells
Source: Bloomberg
Nov-10
Jan-11
Mar-11
Nifty
Company Update
Company Profile
Introduction
Havells India Limited (HIL), incorporated in 1983, is promoted by Mr. Q. R. Gupta and one of India's premier electrical equipment companies. It has a comprehensive and contemporary product profile that encompasses cables and wires, switchgears and electrical durables like CFLs, fans, water geysers, switches, etc. Over the years, superior product quality standards, strong distribution reach and aggressive marketing efforts have resulted in HIL being one of the most preferred consumer electrical brands in the country. HIL has an international presence through Sylvania, which it acquired in Apr'07 for a consideration of Euro227m. The primary driver for the same was access to markets like Europe, L. America and some parts of Asia, where Sylvania's brand was well established to leverage companys design and development capabilities. HIL: Standalone revenues and EBIDTA (INRm)
80,000 60,000 40,000 20,000 0 FY07 Sw itchgears
Product quality and value for money are key offerings of HILs product basket
5,200 3,900 2,600 1,300 0 FY10 FY11e FY12e Electricals Operating Profit (RHS)
FY08 Cables
FY09 Lighting
Sylvania: Revenues and EBIDTA (INRm)

40,000 30,000 20,000 10,000 0 FY08 Lighting
5,200 3,900 2,600 1,300 0 FY09 FY10 Sw itchgears FY11e FY12e
Sylvania taken over in Mar07 from private investors
Operating Profit (RHS)
Business Summary
Product Portfolio
HILs vast product portfolio spans several verticals. Though seemingly diverse, its products are priced and designed in a manner to encompass the widest possible range of applications, enabling it to maximise its grab of consumer discretionary spend on household electricals. HIL: Business segments
Segment Cable and Wires Switchgears Lighting and Fixtures Products Power Cables, Copper Cables, Control Cables LV Switchgears and Modular Switches CFL and Luminaries introduced) Sylvania
Consumers Retail Consumers and Power Utilities Retail Consumers and Industry Retail and Commercial Retail Industry, Commercial and Retail
Revenue Drivers Investment in Power and Real Estate Real Estate Growth and Power Distribution Real Estate Housing Growth and rising aspirations Housing Growth in Europe and Latam
Competitors Finolex, Polycab, KEI Legrand, Scnhneider, Siemens Philips, Osram, GE, Wipro CG, Orient, Khaitan Osram, Philips, GE
Electrical Consumer Durables Fans (Geysers to be CFL, Luminaries and HID
Cables and wires: HIL manufactures cables (for industrial applications) and wires (for household applications). Its cable portfolio consists of Low Tension (1.1-11 KV) cables as well as High Tension (11-66 KV) cables. Even though this category is highly commoditised and extremely price sensitive with intense competition from the unorganised sector, HIL persists with it in order to offer its customers a well-rounded product profile. Interestingly, product quality and brand perception have consistently enabled the company to command a premium of 2-3% over peers in this product category. HIL derives ~20% of its overall revenues from this vertical, with margins of 8-9%. HIL: Performance of Switchgears
2,400 2,100 1,800 1,500 1,200 1QFY08 40.0 35.0 30.0 25.0 20.0 1QFY09 1QFY10 1QFY11
HIL: Performance of Cables &Wires

3,000 2,700 2,400 2,100 1,800 1QFY08 14.0 9.0 4.0 -1.0 -6.0 1QFY09 1QFY10 1QFY11
Revenues (INR m)
Contribution (%) (RHS)
Revenues (INR m)
Havells India Limited Switchgears: HIL is a leading manufacturer of switchgears in India. With market leadership in categories like miniature circuit breakers (MCBs), residual circuit breakers (RCBs) and other associated equipment in the domestic switchgears space, it has a market share of ~20% in this vertical. It also manufactures industrial switchgears, albeit on a smaller scale. This is due to industry dynamics wherein a majority of sales is direct (B2B) in nature, necessitating a large salesforce. Consequently, it has a a meagre 9% market share in this segment. As a whole, this vertical contributes ~15% of HIL's revenues in FY10 with rich gross margins between 32-36%, making it the most lucrative product vertical for the company. Lighting & luminaires: HIL manufactures CFLs and energy saving FTLs (Fluorescent Tube Lights) with a wide array of luminaires and fixtures. HIL is one of the top five domestic players in this segment. HILs domestic lighting and luminaires contribute ~7% of overall revenues and command margins of 17-18%. HIL's international presence in this segment is through Sylvania, which it took over in Mar'07. Sylvania enjoys tremendous brand equity, extensive and contemporary product profile and impressive access to markets in over 40 countries, spanning Europe, Latin America and Far East Asia. Sylvania's lighting and luminaires product portfolio contributes ~50% of HIL's overall revenues, and its margins have staged a smart recovery from lows of 1% in FY08 to ~18% in FY10.
High margins in switchgears on account of higher portion of retail sales
Products like irons and food grinders to be introduced soon
Electrical consumer durables: Till recently, this vertical comprised fans, which Havells launched in CY04. The company currently has a 14% share in this product and is one of the few pan-India players. Recently, HIL launched hot water geysers and has hit upon the strategy of selectively launching a new product in this vertical every 12-18 months. HIL: Performance of Cables & Wires
1,400 21.0 1,100 800 500 200 1QFY08 40.0 34.0 28.0 22.0 16.0 1QFY09 1QFY10 1QFY11
HIL: Performance of Switchgears

1,200 1,000 800 600 400 1QFY08 16.0 11.0 6.0 1QFY09 1QFY10 1QFY11
Revenues (INR m)
Revenues (INR m)
10
Business Model
The solidity of HILs business model comes from the three pillars of operations viz. manufacturing, marketing and distribution: Manufaturing locations
Location Alwar Noida Baddi Haridwar Neemrana Sahibabad
Product Cables & wires Capacitors, Lighting & Fixtures Switchgears Fans Motors, Lighting & Fixtures Switchgears
Manufacturing: Since its inception, HIL has maintained a policy of in-house manufacturing. It has plants for all products except lighting fixtures, which it partly outsources. This is due to companys policy of optimum utilisation of raw material and stringent quality standards. As a matter of policy, HIL has always entered product areas that are sizeable enough to justify in-house manufacturing. Consequently, it has a contemporary product repertoire coupled with impeccable quality. Going forward, the company has decided to outsource the manufacturing of selected new products in order to cut down on the lead time to markets. By opting to monitor quality standards and focus on advertising and distribution, HIL is slowly adopting an Asset-Light model. We believe this will be beneficial for balance sheet and operating metrics as it will enable the company to leverage its core competencies to the hilt and simultaneously boost return ratios. Marketing: Over the years, HIL has built a strong brand for itself through aggressive national advertising. With ad spends comparable to some FMCG players, HILs products are marketed as technologically superior and Value-for-Money propositions. Consequently, HIL is currently amongst the Top Five consumer electricals brands in the country. Distribution: The cornerstone of HILs spectacular growth in revenues over the past six years has been the successful leveraging of its distribution network. With over 4,300 distributors and 35,000 retailers spread the country, HIL has one of the most extensive setups in the industry. Over the years, the company has cultivated its dealers through trade friendly practices, enabling to launch a wide variety of products in seemingly different verticals. The efficiency and reliability of its distribution channels are borne out from its market share in most product categories and improved revenues and operating profits which have registered a CAGR of 17% and 29% over the past four years (FY07-10). For its domestic operations, HIL securitises its receivables through a consortium of banks. With near-zero delinquencies from its domestic dealers, the company gets attractive rates for the same. As a result, on the domestic front, HIL almost operates on a negative working capital cycle. Despite the size and scale of Sylvanias operations, which spans numerous countries, HILs consolidated working capital cycle is near zero. From FY09, the company has maintained inventory levels and receivables at less than 60 days and 50 days respectively, while liberal terms from creditors (~110) have resulted in a comfortable working capital cycle.
HIL: India Marketing Spend (INRm)

1,000
750
500
250
FY05
FY07
FY09
11
Sylvania - International operations turning a corner

HIL acquired Germany-based SLI Sylvania for an enterprise value of Euro227m. Sylvanias operations were a part of OSRAM, a division of Siemens. Post restructuring of the Siemens group, SLI's ownership rested with financial investors. The SLI acquisition was routed through a 100% SPV i.e., Havells Netherlands BV with the following objectives: Capitalising on Sylvanias design and engineering capabilities Monetising Sylvania's brands, viz. Sylvania, Concord marlin, Luminance, SLI Lighting, Zenith and Linolite and expanding breadth of product offerings in India and globally. Entering new geographies in Europe and Latin America and parts of Far East Asia and leveraging Sylvanias distribution network in Europe to propel the growth of its switchgears business.
Products like irons and food grinders to be introduced soon
The total consideration for the acquisition routed through HILs subsidiary Havells Netherlands was Euro227m. Of this, pension liability amounted ~Euro35m, which was to be paid when it arose. Thus, against an immediate liability of Euro192m, HIL raised debt which was a mix of non-recourse (Euro120m) and recourse type (Euro72m). Of the latter, ~Euro50m was funded through equity infusion, by way of ~4.2m shares issued to Warburg Pincus at INR625/sh. Sylvania Acquisition
(Euro m) Equity Value - (i) Debt - (ii) Cash Outflow (i+ii) Pension Liabilities Total Enterprise Value
105 87 192 35 227
However, things turned sour when Sylvania started bleeding operationally during the economic downturn of FY09. The company defaulted on a couple of monthly repayments of working capital borrowings to a consortium of international banks. Consequently, HIL undertook a two phased restructuring program. Restructuring programmes
(Euro m) Phoenix Parakram Cost 12 18 Savings 18 17 Objectives Headcount reduction (1,200 people), closure of 3 plants and 8 warehouses, reduction in working capital Headcount reduction (400 people), outsourcing from China & India
Consequently, Sylvania has posted an EBIDTA and PAT of INR939m and INR53m respectively for 9MFY11 (v/s EBIDTA loss of INR402m and net loss of INR3.8bn in 9MFY10).
12
Our view
HILs Indian operations have always been on a firm footing, with the company clocking consistent improvement in revenues over the past four years. Backed by an aggressive advertising campaign and new product launches, HILs monthly revenues currently hover between INR2-2.5bn. The increase in volumes and tight controls over costs have ensured a steady increase in HILs OPM from 9% in FY07 to 12.6% in FY10. Till recently, Sylvanias operations and financials were proving to be a drag on overall valuations for HIL. The efficacy of measures like higher focus on sales in emerging markets in L. America, outsourcing of production and right-sizing of the workforce is evident from last quarters results and we expect these to continue contributing towards improvement in operating metrics. Additionally, we feel that Sylvanias brands have yet to be monetised to the fullest and that the foray into L. America and the Far East will help fetch richer realisations and margins. Going forward, we expect HILs consolidated revenues at INR61bn, with an EBIDTA of 8% and PAT of INR2.3bn. The crucial factor is the generation of sustainable cash flows with which HIL will retire Sylvanias debt. In FY12e, we expect the company to maintain its growth trajectory, with revenues of INR67bn, OPM of 10.5% and PAT of INR4bn. At the CMP of INR405, HIL is trading at a PER and EV/EBIDTA multiple of 12.6x and 7.5x respectively, discounting its FY12e numbers. We have valued the company using the Sum-of-Parts method and have assigned EBIDTA multiples to HILs and Sylvanias profits. HIL: Valuation
Havells (Stand-Alone) Sylvania 4,433 12 53,195 1,200 51,995 417 EBIDTA (INRm) EBIDTA multiple EV (INRm) Net Debt (INRm) Equity Value Value/sh (INR) - (B) 2,639 7 19,527 9,765 9,762 78 495
Sylvania has turned a corner post restructuring
Lower multiple for Sylvania on account of lower profitability
EBIDTA (INRm) EBIDTA multiple (x) EV (INRm) Net Debt (INRm) Equity Value Value/sh (INR) - (A)
Source: Antique
Havells India Ltd. (Consolidated) (A+B): Value /sh (INR)
We are optimistic about the overall operations of HIL and believe that the gradual reduction in Sylvanias debt over the next few years coupled with the buoyancy in Indian operations will trigger a re-rating in the stock. We recommend a BUY with a price target of INR495, which reflects an upside of 22% from current levels.
13
Financials
Profit and loss account (INRm)
Year ended 31st Mar
Revenues Expenses Operating Profit Other income EBIDT Depreciation Interest expense (+) Exceptional items Profit before tax Taxes incl deferred taxation Profit after tax Diluted EPS (INR)
Cash flow statement (INRm)

2010
54,315 51,093 3,222 222 3,444 837 979 1,628 1,628 932 696 5.6
2008
50,029 46,563 3,466 250 3,716 694 1,036 1,986 377 1,610 12.9
2009
54,775 51,889 2,886 86 2,972 905 1,253 814 (1,986) (1,172) 429 (1,601) (12.8)
2011e
61,229 56,378 4,851 100 4,951 892 867 3,191 (66) 3,125 813 2,313 18.5
2012e
67,300 60,228 7,072 100 7,172 1,072 696 5,403 5,403 1,405 3,998 32.0
Year ended 31st Mar

PBT Depreciation & amortisation Interest expense Interest / Dividend Recd Other Adjustments (Inc)/Dec in working capital Tax paid CF from operating activities Capital expenditure (Purchase) / Sale of Investments Income from investments Inc/(Dec) in share capital Inc/(Dec) in debt Dividends & Interest paid
2008
1,986 694 939 (32) 62 (3,498) (391) (239) (7,725) 32 2,779 7,487 (275) 9,991 2,059 299 2,358
2009
(1,172) 905 1,084 (18) (369) 2,168 (400) 2,199 (1,676) 33 18 (1,626) 1,397 (684) (1,229) (515) 57 2,358 2,415
2010
1,628 837 871 (16) (2,252) 2,543 (699) 2,913 (1,077) 16 (1,061) (1,761) (1,035) (2,796) (944) 2,415 1,471
2011e
3,125 892 867 (100) (320) (813) 3,652 (441) 100 (341) (925) (1,305) (2,230) 1,081 1,471 2,553
2012e
5,403 1,072 696 (100) (241) (1,405) 5,426 (500) 100 (400) (3,100) (1,134) (4,234) 792 2,553 3,345
Profit before tax & excp. Items 1,986
CF from investing activities (7,693)
Balance sheet (INRm)

Year ended 31st Mar
Share Capital Reserves & Surplus Networth Debt Deferred Tax Liability Minority Interest Capital Employed Gross Fixed Assets Accumulated Depreciation Net Assets Capital work in progress Goodwill Investments Inventory Debtors Cash & Bank balance Loans & advances and others Other assets Current Liabilities & Provisions Creditors Other liabilities & provisions Net Current Assets Miscellaneous Exp (not w/o) Application of Funds 14,652 490 8,087 1 19,789 13,934 373 5,907 1 18,328 15,555 321 2,512 0 14,934 17,227 321 3,914 0 15,884 18,403 321 4,947 0 16,345
2008
290 6,433 6,723 12,962 (76) 19,609 27,262 19,944 7,318 1,005 3,346 32 10,419 8,227 2,429 2,124 29
2009
301 5,821 6,122 12,278 (97) 2 18,304 28,961 20,427 8,534 308 3,579 7,947 7,573 2,473 2,141 79
2010
301 3,690 3,991 10,664 266 2 14,923 26,963 18,089 8,874 336 3,212 8,246 6,982 1,481 1,578 102
2011e
624 5,253 5,877 9,739 266 2 15,884 27,440 18,982 8,458 300 3,212 9,396 7,824 2,563 1,578 102
2012e
624 8,814 9,437 6,639 266 2 16,345 27,940 20,054 7,886 300 3,212 10,038 8,599 3,355 1,578 102
CF from financing activities Net cash flow Opening balance Closing balance
Growth indicators (%)

Year ended 31st Mar
Revenue EBITDA PAT EPS
2008
223.3 137.8 57.6 57.6
2009
9.5 (16.7) (199.5) (199.5)
2010
(0.8) 11.7 (143.5) (143.5)
2011e
12.7 50.5 232.3 232.3
2012e
9.9 45.8 72.9 72.9
Valuation (x)
Year ended 31st Mar
PE P/BV EV/EBITDA EV/Sales Dividend Yield (%)
2008
31.4 7.3 9.1 0.7 0.6
2009
(31.6) 8.2 11.5 0.6 0.6
2010
72.6 12.6 9.7 0.6 0.9
2011e
21.9 8.6 11.7 0.9 0.7
2012e
12.6 5.4 7.5 0.8 0.7
Current Assets, Loans & Advances
Margins (%)
Year ended 31st Mar
EBITDA EBIT PAT
2008
6.9 6.0 3.2
2009
5.3 3.8 (2.9)
2010
5.9 4.8 1.3
2011e
7.9 6.6 3.8
2012e
10.5 9.1 5.9
Financial ratios
Year ended 31st Mar 2008
33.8 26.2 1.9 2.9
Per share data

Year ended 31st Mar
No. of shares (m) BVPS (INR) CEPS (INR) DPS (INR)
2009
(24.5) 10.8 2.0 1.6
2010
13.7 15.7 2.7 2.7
2011e
46.8 26.3 1.7 4.7
2012e
52.2 37.9 0.7 8.8
2008
58 116.1 39.8 2.5
2009
60 101.8 (11.6) 2.5
2010
60 66.3 25.5 3.8
2011e
125 47.1 25.7 3.0
2012e
125 75.6 40.6 3.0
RoE (%) RoCE (%) Debt/Equity (x) EBIT/Interest (x)

Source: Company Antique
14
Bajaj Electricals Limited

Charge of the old guard
Bajaj Electricals Limited (BEL) is one of the largest and the most renowned Indian players in the consumer electricals space, with a vast portfolio comprising household electricals and consumer appliances. It also undertakes engineering projects on a turnkey basis, which includes street lighting, illumination solutions for commercial facilities and rural electrification. Robust business model More than 75% of BELs electrical products are outsourced from small scale units, as BEL concentrates on design and development, in addition to sales and distribution. This Asset-Light model helps curtail capex requirement, which is significant considering the short lifecycle of consumer electricals and appliances. Projects division leverages expertise in electricals It has successfully leveraged its expertise in electricals by venturing into turnkey engineering projects in the illumination space. Its projects range from street lighting to solutions for sporting and industrial facilities. More importantly, cash flows from the electricals business are invested in the working capital intensive projects business, thereby minimising the need for external borrowings. Favourable macro factors generate positive headwinds A slew of government projects ranging from upgradation of urban infrastructure to electrification of Indias rural hinterland provide a rosy backdrop for impending buoyancy in the electricals and projects space. This, coupled with BELs ability to easily scale up both businesses, generates a scenario for an imminent improvement in companys earnings. 18 April, 2011

Market data
Sector Market Cap (INRbn) Market Cap (USDbn) O/S shares (m) Free Float (m) 52-wk HI/LO (INR) Avg 6m Vol (000) Bloomberg Reuters
Source: Bloomberg
: : : :
: : : : : : : : :
Consumer Electricals 27,200 604 99 37 347/188 119 BJE IN BJEL.BO
Returns (%)
1m Absolute Relative
Source: Bloomberg
3m 34 33
6m (13) (9)
12m 32 23
26 18
DII 1 2%

A track record of consistent growth, management pedigree and excellent execution capabilities, inspire our confidence in BELs prospects. It trades at a P/E of 16.3x and EV/EBIDTA of 9.3x, discounting FY12e earnings. We initiate coverage with a BUY recommendation and price target of INR327 with a 12-month perspective, which represents an upside of 17%. Key financials
Year ended 31st Mar Revenues (INR m) EBITDA (INR m) EBITDA Margin (%) EBITDA growth (%) PAT (INR m) PAT growth (%) EPS (INR) EPS growth (%) P/E (x) P/BV (x) EV/EBITDA (x) RoE (%)
P ro mo ter 65%
FII 8%
Others 1 5%
Source: BSE

130
2009 17,658 1,799 10.2 23.8 894 22.3 9.2 22.3 30.4 11.1 13.8 42.6
2010 22,286 2,434 10.9 35.3 1,253 40.1 12.8 40.1 21.7 5.5 11.4 33.9
2011e 26,313 2,435 9.3 0.0 1,340 7.0 13.7 7.0 20.3 4.6 11.2 24.6
2012e 29,765 2,882 9.7 18.4 1,666 24.3 17.1 24.3 16.3 3.7 9.3 25.2
115 100 85 70 Aug-10 Sep-10

B EL
Source: Bloomberg
Nov-10
Jan-11
Mar-11
Nifty
Initiating Coverage
Company Profile
Introduction
Bajaj Electricals Limited (BEL), promoted Mr. Shekhar Bajaj, is one of Indias oldest consumer electricals companies. Incorporated in 1938 as Radio Lamp Works Limited, it was renamed Bajaj Electricals in 1960. Around this time, BEL started marketing electrical appliances sourced from small scale industries (SSIs). While retaining this practice over the years, the company has tied-up with international brands like Morphy Richards and Nardi to market their products in India. BELs distribution reach is extensive considering its wide network of 1,000 distributors, 3,000 dealers and 250,000 retail outlets in India. BEL also undertakes engineering projects (EP), having executed lighting projects for airports, stadia, factory complexes. It is also involved in two other verticals viz. street lighting and electricity transmission infrastructure, whereby it designs, supplies, erects and integrates electric masts and poles, transmission and telecom towers, etc. In FY10, BEL raised INR1.6bn through a QIP in order to retire some high cost debt and meet the spurt in working capital funds for its EP business. Revenues from Consumer Electricals & Appliances (INRm)
24,000
BEL has one of the widest distribution networks in the industry
18,000 12,000
6,000 Mar'06 Mar'07 Lighting

Mar'08 Luminaires
Mar'09 Fans
Mar'10
Mar'11e
Mar'12e
Consumer Appliances
Revenues from Engineering Projects (INRm)

12,000
9,000
6,000
3,000
Mar'06
Mar'07
Mar'08
Mar'09
Mar'10
Mar'11e
Mar'12e
16
Business Summary
Product portfolio
Consumer Electricals and Appliances Over its seven decades of operations, BEL has continuously strived towards garnering a larger portion of consumer spends on electricals and appliances. Consequently, the company has opted to concentrate wholly on the design and development of products and monitoring of quality. Its outsourcing model has enabled it to routinely introduce new products in various verticals while cutting the lead time to the market. It has leveraged its brand and customer service initiatives over the years to emerge as one of the most trustworthy consumer brands in the country. BELs consumer electricals business can be segregated in the following manner: BEL: Verticals and Peerset
Vertical Lighting Luminaires Fans Consumer Appliances Product GLS Lamps, Fluorescent Tube Lights, CFLs, Ballasts & Starters, LED Torches, Miniature Lamps LEDs, Industrial / Commercial / Decorative Luminaires, Street / Flood Lighting Ceiling Fans, TPW Fans, Industrial / Exhaust Fans, Commercial Air Circulators Iron, Ovens / Toasters / Grillers OTG), Water Heaters, Mixers Grinders, Juicers, Food Processors, Blenders, Water Purifiers & Filters, Microwave Ovens, Gas Stoves, Electric Kettles, Coffee Makers, Tea Makers 17% 26% Crompton, Polar, Havells, Orient, Khaitan Philips, Kenstar, Black & Decker, Crompton, Usha, % of Rev 12% 12% Competitors Philips, Crompton, Wipro, Osram, Havells Philips, Crompton, Wipro, Thorn
Lighting: The domestic market for lighting products is estimated at INR36bn, with growth pegged at 10% pa. It consists of primarily general lighting service (GLS) bulbs, fluorescent tubelights (FTL), and compact fluorescent lamps (CFL), with specialised lamps (torches, LED lamps, etc.) accounting for a small portion of offtake. BEL is a leading domestic player in lighting products, with a presence and a top brand recall across all major product categories. It sources GLS and FTL products from its sister concern Hindustan Lamps Ltd., U.P., while CFLs are sourced from another sister concern, Starlite Lighting Ltd, Nashik. This segment accounted for ~12% of companys revenues in FY10.
India: GLS Market

Crompton 5% BEL 8% Others 49% Surya 12%
India: CFL Market

Oreva Crompton 6% 5% BEL 8% Others 43%
Surya 12%
Philips 26%
Source: Company, Elcoma, Antique
Philips 26%
17
Bajaj Electricals Limited India: Luminaires Market

Crompton 13% Wipro 9% BEL 17%
Luminaires: This vertical consists of lighting products with specialised applications for industrial and decorative use, street and flood lighting, LED, etc. This market is estimated at INR25bn, with a robust growth of ~8% pa. BEL has almost four decades of operating experience in this vertical, which accounted for 12% of revenues in FY10. Its market share of 17% in this segment is second only to Philips. The company has a distribution agreement with Trilux Lenze of Germany for high-end technical lighting. BEL has supplied luminaires for a number of large projects, including Indira Gandhi Stadium, Jawaharlal Nehru Stadium, and TCS green-building projects in Chennai. Through tie ups with leading international players, BEL has recently added Building Management Systems (BMS) and Fire Detection Systems (FDS) to its product basket, whereby it is looking to monetise its existing relaionships with builders and architects and simultaneously build an all-encompassing service profile. While this business is still in a nascent stage, we believe that BMS and FDS have tremendous scalability and could be a significant money spinner after three to four years from now. Fans: Organised players control 60-65% of the domestic market for fans, with annual sales of INR19bn. The remainder is made up for by the unorganised players and imports from China. A combination of factors like revival of the housing industry, replacement demand and a gradual shift towards branded players has resulted in a growth of 25% p.a. in this industry. BEL is one of the market leaders in this vertical, deriving 17% of its revenues from the sales of fans. 75% of its sales is from fans manufactured in-house at its facility in Chakan, Maharashtra while the remainder is procured from Midea, China, which is one of the worlds largest manufacturers of TPW (Table, pedestal, Wall-mounted) fans. BEL is now focussing its efforts on increasing its sales of industrial fans and other premium end products in this vertical viz. designer and premium end fans Consumer appliances: Consumer appliances in India form a very large market and lucrative market (~INR60bn) and include products like irons, ovens-toasters-grillers (OTG), microwave ovens, food processors, tea/coffee makers, etc. This market is largely organised due to the consumers preference for branded products and warranty issues. Simultaneously, the reduction in prices of branded products, either due to imports from China or due to manufacturing efficiencies and benefits of economies of scale for domestic manufacturers, have contributed to the shift towards the organised segment. Lastly, demographic changes coupled with the increasing pace of urbanisation are leading to increasing use of electrical appliances in day-to-day life.
Philips 23% Others 38%
BEL has enjoyed tremendous success with Morphy Richard brand
In addition to selling products under its own brand, BEL has a technical collaboration and brand licensing agreement with UKs leading home appliances company, Morphy Richards, to sell its products in India. The company has also tied up with Nardi, Italy to sell gas based cooking ranges/ hobs. Consumer appliances are the second largest revenue generator for BEL, with ~25% of income coming from this segment. Its market share ranges in a bracket of 15-30% across products. It outsources manufacturing of all its products from dedicated vendors across the country, in addition to outsourcing from China.
18
Bajaj Electricals Limited Engineering and Projects BEL has a sizeable Engineering and Projects (EP) business, which has registered a CAGR of 30% over the last four years on the back of the heightened spend on domestic infrastructure. It operates in three arenas viz. towers for power and telecom, special projects for facilities lighting and high masts & poles, which collectively accounted for a third of its revenues in FY10. Towers: BELs towers business caters to the telecom and power transmission segments. Its operations include the manufacture and setting up for transmission towers, for which the company has manufacturing facilities at Ranjangaon. Companys clientele comprises marquee clients like PGCIL, Tata Power and various SEBs in the power transmission space in addition to several large telecom and tower companies like GTL, Ericsson, Nortel, Bharti, BSNL, Reliance, etc.
BEL has leveraged its reputation and technical competence in the EP business
Special Projects: Under this segment, the company undertakes lighting and electrification work. This includes rural electrification projects under the Rajiv Gandhi Gram Vidyutikaran Yojana (RGGVY), whereby it provides last mile connectivity in the rural hinterland of the country, in addition to installation of electrical fixtures in the targetted households. BEL has also executed projects for lighting solutions of power plants, industrial complexes, retails formats and sports stadia like those used in the recent 2010 Commonwealth Games in New Delhi. High Masts & Signages: BELs operation under this vertical include the design, erection and installation of streetlights under the Jawaharlal Nehru Urban Renewal Mission (JNNURM). Additionally, it erects corporate signages and manufactures high masts and poles for installation in factories and industrial complexes.
Business Model
Consumer Electricals and Appliances BEL has long relied on an outsourcing model, whereby ~75% of its products are sourced from dedicated vendors. This has helped it focus on product development and design, simultaneously freeing BELs management to focus on developing an extensive sales and distribution network. The outsourcing model is advantageous, as it has helped BEL rationalise capex requirement in the electricals space. This assumes significance given the increasingly shortening of consumer electricals lifecycle. Over the last four years, BELs revenues from electricals and appliances have risen at a CAGR of 25%, on the back of its formidable sales network and contemporary product portfolio. Currently, this division accounts for ~67% of BELs revenues, with products being sold through a network comprising 1,000 distributors and 3,000 dealers in addition to 25,000 retailers, backed by 235 service centres. To its credit, the company has steadily improved its OPM in this segment from ~7% in FY07 to 10% in FY10, through measures like improvements in supply-chain management and competitive sourcing.
19
Bajaj Electricals Limited BELs consumer electricals and appliances business operates on a negative working capital cycle of ~20-30 days, as the company monetises the goodwill it enjoys amongst its suppliers. While it enjoys 90 days of credit from its suppliers, its collection cycle from distributors is ~60 days. EP Order book (Dec-10)
Vertical High Masts & poles Transmission Towers Rural electrification Lighting Total
Source: Company
Engineering and Projects

INRm 1,200 5,150 3,200 1,200 10,750
BEL ventured into the EP space nearly five years ago, with a view to broadbase its revenue stream and leverage its supplies of project based, high end electricals and luminaires. These operations are supported by in-house manufacturing facilities for manufacturing high masts, poles, etc., and a highly qualified team of ~250 engineers for project design and execution. As mentioned earlier, its operations encompass a wide range of government and private projects, which range include rural electrification, industrial complex lighting, electric signages, electrical fitouts of installations and buildings etc. Revenues in this vertical make for a third of BELs revenues and have expanded at a CAGR of 30% over the past 4 years. On a blended basis, the OPM of this division is stable between 11-12%, depending on the nature of the order. On the flipside, the working capital cycle of this vertical is long, with payables at 120 days and receivables in excess of 180 days. However, BEL deploys cash from its electricals business for EP operations, thereby minimising the need for short term borrowings. As of Dec10, the EP divisions order book stood at INR10.75bn, to be executed within 15 months.
Quarterly segmental revenue and margin trend

3,600 2,700 1,800 900 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Lighting (INR m) Lighting PBIT (%) (RHS)
16.0 12.0 8.0 4.0 Cons Dur (INR m) Cons Dur PBIT (%) (RHS)
3,000 2,250 1,500 750 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
20.0 15.0 10.0 5.0 -
E&P (INR m)
E&P PBIT (%) (RHS)
20
Our View
With the imminent confluence of several macro-level factors such as jump in power generating capacity, increased spending on transmission infrastructure and heightened execution of social infrastructure projects, we believe the addressable market for electricals, luminaires and associated goods and services is on the verge of expanding significantly. In such a scenario, we expect BEL to be one of the largest beneficiaries by virtue of being one the foremost players in this arena. Over the last few years, the company has steadily built competencies in both businesses viz. electricals and EP, which should stand in good stead. As both businesses gather traction, we expect cash flows from the electricals and appliances division to be pumped into the EP business. Going forward, we expect revenues from electricals and appliances to register a CAGR of 17% over the next 2 years. We estimate revenues from the EP division to rise at a CAGR of 18% over the next 24 months as the company executes a significant portion of its order book of INR11.5bn. We estimate BEL to clock sales of INR26bn (+18%) in FY11 with an OPM of 9.3%. This would primarily be on account of higher sales across all categories of electricals (+18%) while the EP division clocks growth of 17%. We expect EBIDTA and profits to settle at INR2.4bn and INR1.3bn respectively. In FY12e, we expect revenues of INR30bn (+13%) with BELs electricals and EP divisions registering growth of 14% and 12% respectively. We estimate OPM to improve 40bps as long tailed projects near completion. We estimate companys EBIDTA and net profits to surge to INR2.9bn and INR1.6bn respectively for FY12e. We believe that the jump in working capital requirement in the EP business will be met entirely through cash flows of the electricals business. This coupled with the absence of capex and better asset sweating should see the company FCF positive in FY12e. We are convinced that BELs brand equity and track record will enable it maintain the tempo of revenue growth over the next couple of years. We strongly believe that there exists high visibility of revenue and profit growth, making BEL the most attractive play in consumer electricals, appliances and projects sectors.
We initiate coverage with a BUY recommendation and a price target of INR321
At the CMP of INR279, BEL trades at a P/E of 16.3x and EV/EBIDTA of 9.3x discounting its FY12e earnings. Assigning an EBIDTA multiple of 11x to its FY12e numbers, we arrive at a target price of INR327. Hence, we initiate coverage with a BUY recommendation and a price target of INR327 with a 12-month perspective, which represents an upside of 17%.
21
Financials
Year ended 31st Mar

2010
22,286 19,852 2,434 29 2,463 92 314 2,056 (50) 2,006 754 1,253 12.8
2008
13,745 12,292 1,453 29 1,482 75 293 1,114 383 731 7.5
2009
17,658 15,859 1,799 57 1,856 85 370 1,401 1,401 507 894 9.2
2011E
26,313 23,878 2,435 40 2,475 106 255 2,114 2,114 774 1,340 13.7
2012E
29,765 26,883 2,882 40 2,922 118 176 2,628 2,628 962 1,666 17.1
Year ended 31st Mar

PBT Depreciation & amortisation Interest expense Interest / Dividend Recd Other Adjustments (Inc)/Dec in working capital Tax paid CF from operating activities Capital expenditure (Purchase) / Sale of Investments Income from investments CF from investing activities Inc/(Dec) in share capital Inc/(Dec) in debt Dividends & Interest paid
2008
1,114 75 338 (0) 48 (577) (378) 619 (252) 0 1 (251) (5) (337) (342) 26 294 320
2009
1,401 85 413 0 98 (99) (542) 1,356 (174) (92) 0 (266) (291) (580) (871) 218 320 538
2010
2,006 92 370 (0) 56 (1,506) (912) 106 (392) (50) 0 (442) 1,598 (618) (570) 410 74 538 612
2011E
2,114 106 255 (40) (504) (774) 1,157 (236) 40 (196) (488) (596) (1,085) (123) 612 489
2012E
2,628 118 176 (40) (596) (962) 1,325 (162) 40 (122) (300) (517) (817) 385 489 874
Profit before tax & excp. Items 1,114

Year ended 31st Mar
Share Capital Reserves & Surplus Networth Debt Deferred Tax Liability Capital Employed Gross Fixed Assets Accumulated Depreciation Net Assets Capital work in progress Investments Inventory Debtors Cash & Bank balance Loans & advances and others Current Liabilities & Provisions Creditors Other liabilities & provisions Net Current Assets Application of Funds 3,645 426 3,013 4,156 5,192 513 3,334 4,620 6,273 643 5,074 6,457 7,628 643 5,455 6,967 8,588 643 6,436 7,993 Current Assets, Loans & Advances 1,622 4,253 320 890 1,777 5,592 538 1,131 2,094 7,507 612 1,777 2,520 8,904 489 1,812 2,838 10,073 874 1,882
2008
173 1,575 1,748 2,367 41 4,156 1,440 524 916 3 224
2009
173 2,277 2,450 2,139 31 4,620 1,545 599 946 25 316
2010
195 4,749 4,944 1,518 (5) 6,457 1,700 683 1,016 1 366
2011E
195 5,748 5,943 1,030 (5) 6,967 1,836 790 1,047 100 366
2012E
195 7,073 7,268 730 (5) 7,993 1,999 908 1,091 100 366

Year ended 31st Mar
2008
27.4 67.1 89.3 89.3
2009
28.5 23.8 22.3 22.3
2010
26.2 35.3 40.1 40.1
2011E
18.1 0.0 7.0 7.0
2012E
13.1 18.4 24.3 24.3
Valuation (x)
Year ended 31st Mar
2008
37.2 15.6 17.6 1.9 0.6
2009
30.4 11.1 13.8 1.4 0.7
2010
21.7 5.5 11.4 1.2 0.9
2011E
20.3 4.6 11.2 1.0 1.1
2012E
16.3 3.7 9.3 0.9 1.1
Financial ratios
Year ended 31st Mar
RoE (%) RoCE (%) Debt/Equity (x)
2008
50.2 36.2 1.4 4.8
2009
42.6 40.3 0.9 4.8
2010
33.9 42.8 0.3 7.5
2011E
24.6 35.3 0.2 9.3
2012E
25.2 37.5 0.1 15.9
Per share data

Year ended 31st Mar
2008
86 20.2 9.3 1.6
2009
86 28.3 11.3 2.0
2010
98 50.7 13.8 2.4
2011E
98 60.9 14.8 3.0
2012E
98 74.5 18.3 3.0
EBIT/Interest (x)
Margins (%)
Year ended 31st Mar
EBITDA EBIT PAT
2008
10.6 10.2 5.3
2009
10.2 10.0 5.1
2010
10.9 10.6 5.6
2011E
9.3 9.0 5.1
2012E
9.7 9.4 5.6
22
V-Guard Industries Limited

Bound northwards
V-Guard Industries Limited (VGIL) is a leading player in electrical and electromechanical products viz. wires, cables, stabilisers, geysers, etc., with dominance in Tier 2, 3, and 4 cities in southern India. Robust business model VGIL follows an Asset-Light business model, wherein it outsources manufacturing of 65-70% of its products to small scale units, enabling it to focus on the design and development of new products, in addition to sales and distribution. This minimises companys capex requirement, which is significant in the backdrop of short lifecycle of consumer electricals. Superior reach in southern India More than half of VGILs network, comprising 177 distributors and 1,200 direct dealers, is located in southern India with a significant brand equity in Tier 2, 3, and 4 cities. Moreover, this region accounted for 85% of companys revenues in FY10. Geographical expansion to boost revenues The company has steadily been expanding its operations into northern India, in an effort to de-risk the geographical concentration of revenues as well as boost utilisation of its recently established facilities in the region.
Absolute Relative
Source: Bloomberg
18 April, 2011

Market data
Sector Market Cap (INRm) Market Cap (USDm) O/S shares (m) Free Float (m) 52-wk HI/LO (INR) Avg 6m Vol (000) Bloomberg Reuters
Source: Bloomberg
: : : :
: : : : : : : : :
Consumer Electricals 5,476 122 30 9 216/92 100 VGRD IN VGUA.BO
Returns (%)
1m 15 8 3m 9 8 6m (6) (1) 12m 78 65

VGIL is an interesting play on the front facing consumer electricals space in India. Its push into northern India would provide the backdrop for increased revenues and profits. Simultaneously, minuscule capex and higher asset sweating coupled with improving operational profitability should ensure that the company turns FCF positive in FY12e. At the CMP of INR183, VGIL trades at a P/E of 10x and EV/EBIDTA of 6.3x discounting its FY12e earnings. We initiate coverage with a BUY recommendation and a price target of INR241 with a 12-month perspective, which represents an upside of 32%. Key financials
Year ended March Revenues (INR m) EBITDA (INR m) EBITDA Margin (%) EBITDA growth (%) PAT (INR m) PAT growth (%) EPS (INR) EPS growth (%) P/E (x) P/BV (x) EV/EBITDA (x) RoE (%)
Source: Company, Antique Research
DII 6%
FII 2%
P ro mo ter 67% Others 25%
Source: BSE

150
FY08 2,781 298 10.7 13.7 374 104.9 12.5 104.9 14.7 4.6 17.7 47.9
FY09 3,168 314 9.9 5.3 173 (53.6) 5.8 (53.6) 31.6 4.3 16.2 14.2
FY10 4,541 504 11.1 60.4 255 46.9 8.5 46.9 21.5 3.9 12.0 19.0
FY11e 6,717 772 11.5 53.2 400 57.0 13.4 57.0 13.7 3.2 8.4 25.6
FY12e 8,436 1,025 12.2 32.8 550 37.4 18.4 37.4 10.0 2.5 6.3 28.4
135 120 105 90 Aug-10 Sep-10 Nov-10 Jan-11 Mar-11

Nifty
V-Guard
Source: Bloomberg
Initiating Coverage
Company Profile
Introduction
VGILs operations are well entrenched in southern India
V-Guard Industries Limited (VGIL), promoted by Mr. Kochouseph Chittilapilly, commenced operations in 1977 for manufacturing stabilisers. Over the years, the company steadily expanded its product profile by introducing new products viz. wiring cables, water heaters, UPS and several other electrical appliances like solar and gas water heaters, fans, etc. Companys brand V-Guard is well known in south India and well entrenched in Tier 2/3/4 cities in this geography. The company raised INR656m in FY08 through an IPO (issue price of INR82/sh of FV INR10) to set up new manufacturing facilities in Himanchal Pradesh and Tamil Nadu as well as two distribution centres. The company also has two windmills at Coimbatore with a generation capacity of 230KW operating at a PLF of ~33%. Revenue composition (INRm)
Others 13% Water Heaters 8% PVC Cables 26%
Pumps 17%
LT Cables 3% Solar Water Heaters 4%
Stabilisers 27%
Pumps 2%
Outsourced products form a major part of product profile
Over a period of time, VGILs product basket has evolved in such a manner that it encompasses the entire gamut of household and semi-industrial requirements. This has enabled the company to capture a larger chunk of consumer spend on household electricals, thereby capitalising on its brand image.
24
Business Summary
Product portfolio
VGIL operates on a lean manufacturing model, whereby it manufactures cables, wires and solar water heaters (~30% of revenues). It designs and outsources the manufacturing of other products like stabilisers, UPS, water heaters, pumps and other electrical appliances like fans to ~95 small scale units spread across the country. Manufacturing facilities
Manufactured Products PVC Wiring Cables LT Cables Pumps & Motors Fans & Water Heaters Solar Water Heaters
Outsourced Location Coimbatore, Kasipur Coimbatore Coimbatore Kala Amb (H.P) Coimbatore Products Stabilizers Pump Fan UPS EWH Facilities 60 11 6 12 6 Location Across India Across India Across India Across India Across India
Facilities 2 1 1 1 1
Given below is a brief summary of VGILs extensive product profile: Sales (INRm): PVC & LT Cables
1,200 900 600 300 0 Mar'06 Mar'07 Mar'08 Mar'09 Mar'10
PVC Insulated Cables: The domestic market for insulated cables/ wires is~INR40bn pa., with growth pegged at ~13%. These cables are used in residential complexes, buildings, households etc. This segment is characterised by stiff competition from the unorganised sector, which accounts for ~60% of the market. VGIL manufactures household cables at its facilities in Coimbatore and Kashipur and has continuously been ramping up its output over the years, with revenues registering a CAGR of 44% over the last 4 years. In FY10, VGIL operated its capacities of 310,000km at 70%. This vertical is the largest revenue contributor for the company (~26%) with an OPM of 7% as of FY10. Low Tension (LT) Power & Control Cables: LT cables are used for low voltage transmission of electricity and are typically used for last mile connectivity from the step-down transformer onwards. It has industrial and household applications and the market size of this segment is estimated at ~INR80bn, with the technological dependence inhibiting the presence of the unorganised sector. VGIL set up its LT cables line towards the end of FY09 and ended FY10 with a CUF of ~60%, which resulted in a negligible operating loss. Going forward, higher utilisation on back of a heightened sales and consequent lower per unit freight cost should enable it improve profitability at the operational level for the vertical. Solar Water Heaters: The solar water heater (SWH) market in India is nascent at ~INR3bn pa with small unorganised players catering to the household market and the industrial demand being met by the larger organised players like VGIL, Tata BP Solar and Racold. VGILs SWH unit is located in Coimbatore. It caters to a healthy mix of households and industrial users (~3:1) and registered revenues of INR163m (~4% of total revenues) with a robust OPM of 17% in FY10.
PVC Insulated Cables LT Pow er & Control Cables

Sales (INRm): Solar water heaters

175 150 125 100 75 50 25 0 Mar'06 Mar'07 Mar'08 Mar'09 Mar'10
25
V-Guard Industries Limited Sales (INRm): Stabilisers

1,250 1,140 1,030 920 810 700 Mar'06 Mar'07 Mar'08 Mar'09 Mar'10
Stabilisers: The growth of the stabiliser market in India is a direct fallout of the growing penetration of consumer white goods like refrigerators and televisions. A fragmented market of ~INR21bn, the organised sector accounts for ~50% of the market share. VGIL is one of the pioneer companies in this segment, with a pan-India presence and market share of ~15%. The company started operations in 1977 by manufacturing stabilisers and has achieved such proficiency that presently it concentrates solely on designing and developing variants of the product, while outsourcing production of the same. The company earned ~26% of revenues in FY10 from this segment, with an average OPM of ~20%, making it the most lucrative vertical. Pumps & Motors: The water pumps and motors market in India is ~INR40bn, with the agriculture and infrastructure sectors acting as primary drivers. Offtake of pumps is also heavily dependant on agricultural output and buoyancy in crop prices. Over the years, various factors like governmental programs in the form of agricultural schemes and increasing standardisation have resulted in the organised sector having 70% market share in this segment. Off lately, civic infrastructure has also been giving rise to demand for water pumps and motors, which are used for in urban agglomerations where piped water supply is erratic. VGILs product basket in the pumps and motors vertical is comprehensive, consisting of 150 models which range from 0.25HP to 25HP. It manufactures the higher HP motors, outsourcing the rest. This is one of the largest revenue contributors to VGILs topline, constituting ~19% of its revenues, with an OPM of ~11%. in FY10. Water Heaters: The offtake of electric water heaters (geysers) has been growing steadily at ~20% over the last 4-5 years on account of increasing electrification and increase in disposable income. Estimated at INR8bn, this market is dominated by the organised sector and is characterised by heavy advertising. VGIL has been present in this segment since 1996, with a dominant presence in southern India. Its entire product range is outsourced and accounted for ~9% of revenues, with an OPM of 15%. Others: In addition to the above, VGIL also products like UPS, inverters and fans in its repertoire. These account for ~14% of its overall revenues and command an average margin of 8-10%.
Sales (INRm): Pumps, Water heaters

800 600 400 200 0 Mar'06 Mar'07 Mar'08 Mar'09 Mar'10
Pumps
Water Heaters
Product profile and market scenario

Industry Mkt Size (INRbn) PVC Insulated Cables LT Power & Control Cables Solar Water Heaters Pumps Stabilisers Water Heaters Fans UPS
VGIL Competitors Finolex, Polycab, Havells, KEI Polycab, Havells, RPG, Unicab Tata BP Solar, Racold Texmo, UML, Kirloskar, CG, Havells Blue Bird, Premier Bajaj Electricals, Racold, Venus CG, Bajaj Electricals, Orient, Havells Numeric, Su-Kam, APC, Emerson % of Revenues 26% 3% 4% 17% 27% 8% 9% OPM 6% N.A. 17% 12% 20% 16% 4% 11%
Mkt sh. of Org. players 60% 85% 40% 70% 50% 60% 50% 80%
Mkt gr (%) 13% 15% N.A. 18% 15% 20% 15% 15%
40 80 3 40 21 8 20 20
26
V-Guard Industries Limited VGIL: Geographical spread of Revenue

100%
Business Model
As mentioned previously, VGIL outsources ~70% of its product profile, while concentrating on product design and aesthetics. Given the shortening lifecycle of consumer electricals, its design capabilities coupled with outsourcing operations. This has helped it rationalise its capex requirement and simultaneously branch out into new product lines. Over the last 4 years, VGIL has registered an enviable CAGR of 28% in revenues and profits, the key to which is its formidable sales network. Currently, the companys products are sold through 177 distributors, 8,000 retailers and 235 service centres, with 85% of sales concentrated in four southern Indian states of Andhra Pradesh, Karnataka, Kerala and Tamil Nadu. In FY10, ~15% (~INR680m) of VGILs revenues came from the northern India, which is a steep improvement from INR139m in FY08. The company plans to replicate its business model in northern India in an effort to leverage its brand and also reduce the risk arising from geographical concentration of revenues. Going forward, we estimate this figure to double to INR1.7bn, as VGIL expands its dealer network and taps into the northern hinterland. Typically, VGIL matches out its receivables and payables cycles of 60 days and maintains an inventory position of ~80 days. In FY11, as it forays into northern India, we anticipate a stretching of its working capital cycle on account of increased credit to distibutors. We expect this heightened need for working capital to be met by improved cash flows from sales in southern India, in addition to some amount of borrowings. VGIL: Distribution Network (in no.)
FY08 South West North East 78 16 8 10 112
75%
50%
25%
0% FY08 FY09 FY10 South India North India

FY09 53 9 5 67 90 26 21 12 149 265 83 103 43 494
FY10 100 24 37 16 177 610 303 157 186 1,256
Zone Distributor Direct Dealer Distributor
Direct Dealer Distributor Direct Dealer
27
Our View
Northern expansion to be the key
We expect 2HFY11 and 1HFY12 to be crucial quarters for VGIL as it enhances the scope of its operations. We foresee stretching of the working capital cycle as VGIL leverages the cash flows from its existing operations to fund the expansion of its distribution network in the northern hinterland. We estimate sales to pick up over the next 12 months as VGIL develops its brands and points of presence in northern India. We expect significant traction to emerge from sales of its manufactured products as the company targets higher utilisation of its cables and wires capacities. While we have factored in higher selling and distribution expenses into our calculations, we feel that higher utilisation of manufacturing capacities could generate a slight improvement in operational profitability in FY11 with significant improvement visible in FY12e, post stabilisation of operations. We estimate VGIL to clock sales of INR6.7bn (+48%) in FY11 with an OPM of 11.5%. This would primarily be on account of higher sales of manufactured products (+66%) viz. wires and cables, SWH and pumps as it breaks new ground in northern India. We estimate the share of manufactured products in total sales to stand at 40% (v/s 36% in FY10). With an OPM of 11.5%, we expect EBIDTA and profits to settle at INR772m and INR400m, respectively. As the company is set to gain a firm foothold in north India over the next 12 months, we expect it to focus on sales of manufactured products. We estimate revenues of INR8.4bn (+26%) with VGIL maintaining a mix of manufactured and outsourced products. The apportioning of fixed costs over a wider base of revenues should reflect in VGILs operational numbers in FY12e, as OPM improves to 12.2%. We estimate the companys EBIDTA and net profits at INR1bn and INR550m respectively in FY12. We believe that the jump in sales will not entail any additional working capital requirement. This coupled with the absence of capex and better asset sweating should see the company turn FCF positive in FY12e.
Macro developments to boost VGILs chances of success in north India
We are convinced that VGIL will continue to successfully monetise its brand equity in southern India while building up the same in the northern parts, which will enable it to succesfully tap the existing buoyancy in addressable markets. This imparts high visibility to revenue growth, making VGIL an attractive play on the increasing spend of Indian consumer class and industrial sector. At the CMP of INR183, VGIL trades at a P/E of 10x and EV/EBIDTA of 6.3x discounting its FY12e earnings. Assigning an EBIDTA multiple of 8x, we initiate coverage with a BUY recommendation and a price target of INR241 with a 12-month perspective, which represents an upside of 32%.
28
Financials
Year ended 31st Mar

2010
4,541 4,037 504 14 518 71 51 395 395 140 255 8.5
2008
2,781 2,483 298 10 308 35 46 297 524 151 374 12.5
2009
3,168 2,854 314 36 351 40 47 263 263 89 173 5.8
2011E
6,717 5,945 772 15 787 75 101 612 612 212 400 13.4
2012E
8,436 7,410 1,025 15 1,040 79 120 841 841 291 550 18.4
Year ended 31st Mar

PBT Depreciation & amortisation Interest expense Interest / Dividend Recd Other Adjustments (Inc)/Dec in working capital Tax paid CF from operating activities Capital expenditure (Purchase) / Sale of Investments Income from investments CF from investing activities Inc/(Dec) in share capital Inc/(Dec) in debt Dividends & Interest paid
2008
524 35 46 (3) (297) (151) (165) (11) 70 (150) 3 (77) 609 (2) (147) 459 371 14 386
2009
263 40 47 (26) 0 (6) (78) 241 (418) 36 26 (356) (95) (135) (230) (345) 386 41
2010
395 71 51 (4) 6 (585) (125) (191) (253) 68 4 (181) 542 (137) 405 33 41 74
2011E
612 75 101 (15) (609) (212) (49) (178) 15 (163) 400 (205) 195 (17) 74 57
2012E
841 79 120 (15) (447) (291) 287 (52) 15 (37) (225) (225) 25 57 82
Profit before tax & excp. Items 227

Year ended 31st Mar
Share Capital Reserves & Surplus Networth Debt Deferred Tax Liability Capital Employed Gross Fixed Assets Accumulated Depreciation Net Assets Capital work in progress Investments Inventory Debtors Cash & Bank balance Loans & advances and others Current Liabilities & Provisions Creditors Other liabilities & provisions Net Current Assets Application of Funds 327 324 836 1,579 354 110 487 1,571 690 134 1,080 2,277 991 134 1,672 2,973 1,235 134 2,144 3,418
2008
298 880 1,178 359 42 1,579 590 153 438 155 150 434 379 386 289
2009
298 966 1,265 263 44 1,571 901 188 713 258 114 359 488 41 63
2010
298 1,116 1,415 805 57 2,277 1,379 256 1,123 29 46 985 756 74 89
2011E
298 1,412 1,710 1,205 57 2,973 1,486 331 1,155 100 46 1,404 1,213 57 124
2012E
298 1,857 2,156 1,205 57 3,418 1,538 410 1,128 100 46 1,750 1,523 82 159

Year ended 31st Mar
2008
25.1 13.7 104.9 104.9
2009
13.9 5.3 (53.6) (53.6)
2010
43.3 60.4 46.9 46.9
2011E
66.0 53.2 57.0 57.0
2012E
25.6 32.8 37.4 37.4
Current Assets, Loans & Advances
Valuation (x)
Year ended 31st Mar
2008
14.7 4.6 17.7 2.0 3.0
2009
31.6 4.3 16.2 1.8 1.4
2010
21.5 3.9 12.0 1.4 1.6
2011E
13.7 3.2 8.4 1.0 1.6
2012E
10.0 2.5 6.3 0.8 1.6
Financial ratios
Year ended 31st Mar
RoE (%) RoCE (%) Debt/Equity (x)
2008
47.9 23.2 0.3 5.9
2009
14.2 19.7 0.2 6.6
2010
19.0 23.2 0.6 8.7
2011E
25.6 27.1 0.7 7.1
2012E
28.4 30.1 0.6 8.0
Per share data

Year ended 31st Mar
2008
30 39.5 13.7 5.4
2009
30 42.4 7.2 2.5
2010
30 47.4 10.9 3.0
2011E
30 57.3 15.9 3.0
2012E
30 72.2 21.1 3.0
EBIT/Interest (x)
Margins (%)
Year ended 31st Mar
EBITDA EBIT PAT
2008
10.7 9.8 13.4
2009
9.9 9.8 5.5
2010
11.1 9.8 5.6
2011E
11.5 10.6 6.0
2012E
12.2 11.4 6.5
29
Important Disclaimer:
This report is prepared and published on behalf of the research team of Antique Stock Broking Limited (ASBL). ASBL, its holding company and associate companies are a full service, integrated investment banking, investment advisory and brokerage group. Our research analysts and sales persons provide important inputs for our investment banking and allied activities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without any notice. ASBL or any persons connected with it do not solicit any action based on this report and do not accept any liability arising from the use of this document. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. The research reports are for private circulation and are not to be construed as, an offer to sell or solicitation of an offer to buy any securities. Unless otherwise noted, all research reports provide information of a general nature and do not address the circumstances of any particular investor. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. ASBL its holding company and associate companies or any of its connected persons including its directors or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained, views and opinions expressed in this publication. ASBL its holding company and associate companies, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company(ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. ASBL, its holding company and associate companies, directors, officers or employees may, from time to time, deal in the securities mentioned herein, as principal or agent. ASBL its holding company and associate companies may have acted as an Investment Advisor or Merchant Banker for some of the companies (or its connected persons) mentioned in this report. The research reports and all the information opinions and conclusions contained in them are proprietary information of ASBL and the same may not be reproduced or distributed in whole or in part without express consent of ASBL. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Analyst ownership in stock No
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India's Electrical Sector Powering Ahead on Infrastructure Growth and Changing Demographics

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India's Electrical Sector Powering Ahead on Infrastructure Growth and Changing Demographics

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I N D I A R ES E A RC H I N I T I AT I N G C O V E R A G E ELECTRICALS

Indian Consumer Electricals Sector Lighting up India

Amol Rao +91 22 4031 3435 amol.rao@antiquelimited.com

Antique Stock Broking Limited

Structural changes to generate demand

India: Trend of urban population

India: Trend of urban household stock (m. nos)

Population (m, LHS)

Urban pop (% of total)(RHS)

Antique Stock Broking Limited

Consumer Electricals India: Rural housing stock (m no.s)

Source: Crisil Research

Number of electrified villages in India (FY10-11)

Composition of electrified households (FY10-11)

North India South India

Above Poverty Line

Below Poverty Line

Demand Matrix: Electricals and appliances

Antique Stock Broking Limited

Improved availability of electricity to boost demand for electricals

Transformation in social dynamics to boost consumption

Demographic shift to play crucial role in consumption patterns of populous

Antique Stock Broking Limited

Consumer Electricals Indias changing demography (m people)

Literacy, urbanisation and consumerism to influence brand selection

Source: Antique Research

Antique Stock Broking Limited

Scale and branding to determine level of success in marketplace

M. Cap (INRm) 50,534 27,200 5,476

CMP (INR) 405 279 183

Target Price (INR) 495 327 241

Rating BUY BUY BUY

Antique Stock Broking Limited

Havells India Limited

All lit up and ready to shine

RECO CMP Target Price Potential Upside

BUY INR405 INR495 22%

Consumer Electricals 50,534 1,122 125 46 447/264 368 HAVL IN HVEL.BO

Valuation and outlook

Price performance vs Nifty

115 100 85 70 Aug-10 Sep-10

Amol Rao +91 22 4031 3435 amol.rao@antiquelimited.com

Havells India Limited

Sylvania: Revenues and EBIDTA (INRm)

5,200 3,900 2,600 1,300 0 FY09 FY10 Sw itchgears FY11e FY12e

Sylvania taken over in Mar07 from private investors

Operating Profit (RHS)

Antique Stock Broking Limited

Havells India Limited

Electrical Consumer Durables Fans (Geysers to be CFL, Luminaries and HID

HIL: Performance of Cables &Wires

Contribution (%) (RHS)

Contribution (%) (RHS)

Antique Stock Broking Limited

High margins in switchgears on account of higher portion of retail sales

Products like irons and food grinders to be introduced soon

HIL: Performance of Switchgears

Contribution (%) (RHS)

Contribution (%) (RHS)

Antique Stock Broking Limited

Havells India Limited

HIL: India Marketing Spend (INRm)