Corporate: Cautious Optimism
Yes, it has a strong brand recall, grown consistently over the past decade and has aggressive expansion plans. So, is Havells India on track to double its revenues by 2022?
Photo Credit : Ritesh Sharma
India’s electrical goods industry has been plagued by demand short-circuit over the past 18 months or so. Hobbled by glitches in the implementation of the Goods and Services Tax (GST) for much of last year, demand for electrical goods and consumer durables suffered further outage due to the liquidity squeeze caused by the ongoing NBFC crisis. An extended winter this year which delayed the purchase of cooling products as well as impending elections added to the woes.
Things are not expected to get better anytime soon as the liquidity crisis is seen lingering for at least a couple of quarters more. So in such circumstances what are the players in the sector supposed to do? Sit quietly and wait for the headwinds to subside or pave the ground for future growth?
Havells India, the largest electrical equipment maker in the country, has taken the demand slowdown in its stride and proceeded to give shape to its long-term growth targets that were firmed up in late 2018. The company, which also makes consumer durable products, is planning to reinvent itself by developing next-generation products and solutions, as part of its target to double its revenues to Rs 20,000 crore by 2022. It has earmarked Rs 1,500 crore to be invested over a five-year period. Out of this, Rs 360 crore is being pumped into an AC manufacturing unit.
“Last financial year, we grew more than 20 per cent and have reached Rs 10,000 crore in revenues. So we don’t see that Rs 20,000-crore (revenue) vision as something which is not achievable. Both Lloyd as well as Havells’ businesses are on the right growth track,” Anil Rai Gupta, Chairman and Managing Director, Havells India told BW Businessworld.
According to Gupta, Havells is expanding into newer product categories and channels. “A lot of modern format retail is getting opened up and a lot of online channels are also getting opened up. Rural and semi-urban markets are opening up for us as well. I think there is good traction for our product categories and hence we are quite positive about what we have set out ourselves,” he says.
Gupta’s confidence is shared by the analyst community which believes that the company’s businesses are on a solid footing and their impressive growth in the last decade does not make the Rs 20,000 crore revenue target look impractical.
“Havells has emerged as one of the well-known pan-India brands in the FMEG space similar to Asian Paints in the paints industry.
They have created a strong brand recall among dealers/distributors/electricians and customers alike and have reaped the dividends of this through strong growth driven by increased reach and market share gain. They have grown their core business by more than 12 per cent CAGR over the past 10 years during a time when the real estate market has remained subdued and competitors haven’t grown that fast,” says Ravi Swaminathan, Analyst at brokerage Spark Capital.
Enough Room for Growth
Says Venugopal Garre, Senior Research Analyst at Sanford C. Bernstein: “Havells, in our view, is well positioned to capture the secular growth opportunity through its aggressive moves to expand into new product categories. It is perhaps the only Indian brand that is aiming to become a larger FMEG vendor, as its end-markets now straddle most of the FMEG market.”
While the acquisition of Lloyd is yet to generate value, Garre says he sees it as providing a distribution platform to penetrate deeper into white goods through the launch of new categories. In this connection, he point to Havells’ strength as a manufacturer of products. According to him, being a manufacturer, Havells has deep insights into the product, which enables it to invest in new product development (and R&D).
“We expect Havells to scale up materially over the next decade, benefitting from the increase in target market, market share gains and also from the likely benefit from a recovery in cyclical end markets such as real estate,” says Garre
The FMEG industry has grown substantially over the past decade and currently boasts a market size of more than $25 billion. With penetration of white goods and modern kitchen appliances in end markets remaining low, there is room 10-12 per cent annual growth, which will drive the industry size to $100 billion over the next two decades. Branded vendors in the traditional electricals space should gain share, while Indian brands should become more relevant in the MNC-dominated white goods space.
“The FMEG business has evolved from being a run-of-the-mill / un-branded industry to a brand-based category as customers have become more brand conscious due to better product quality, reliability and safety,” says Swaminathan of Spark Capital.
The Llyod Factor
After expanding its product portfolio to cover washing machines, chest freezers and television sets beyond air-conditioners, Lloyd, the consumer durable brand owned by Havells India, is now firming up plans to foray into the country’s hyper-competitive Rs 15,000-crore refrigerator market over the next 12-18 months. While the research and product development for refrigerators is underway, Havells expects its non-AC portfolio to account for around 50-60 per cent of Lloyd’s business. Towards this end, the company is looking to double its touch points from the current 7,000-8,000 over the next 3-5 years. Furthermore, it will also ramping up Lloyd exclusive stores across the country with an enhanced footprint in upcountry locations.
Explaining his product strategy, Gupta says, “On the electrical side, there will be continuous expansion of additional product categories, which will go into electrical installations on the consumer durable side. Lloyd was a very AC-oriented business. However, if you look at the last 20 years or so, the other players like LG, Samsung, Haier, etc., have used the same strategy of a single branding channel and expanded their product range in the same channel, which is what Havells has done. We had an electrical channel and kept on adding everything in the same channel like fans, lighting, etc.”
He adds: “So, with this new channel, we have a huge opportunity to expand into more product categories. So, for example, in the last two years, we’ve started putting a lot of focus on LED panels, washing machines, and now refrigerators. So these four major product categories give a complete package for consumer durable industry.”
According to Gupta, at present air-conditioning constitutes 75 per cent of Lloyd’s business. However, the company expects the share of the non-AC business to pick up soon.
“We are emphasizing on LED (TVs), washing machines and will soon be increasingly focusing on refrigerators. As a result, even as revenue will continue to increase, the contribution of non-AC business will go up. It will take another 12-18 months for us to launch refrigerators,” he says.
At present, the Lloyd brand contributes 20 per cent to the company’s consolidated revenue while the electrical business accounts for a whopping 80 per cent of the turnover. “We have been seeing a 20 per cent growth in the Lloyd business and expect to maintain a 15-20 per cent growth from this segment in the coming few years,” says Gupta.Focus on Bharat
Meanwhile, the company has shifted its focus from “India” to “Bharat” in a bid to expand aggressively in the country’s hinterland. It has been exploring new markets with deeper retail and service presence in the hinterland for some time. The basic premise has been to cater to towns with a population of less than 30,000 people. Currently, it has 9,000 direct dealers and 130,000 retailers under its wing.
“At present, 70 per cent of our business comes from urban markets. But now we have a huge opportunity because we are expanding our distribution network into tier-1, tier-2 and tier-3 towns where the growth is happening. In fact, we’ve now put in a completely new separate distribution system for rural (markets) in the last one and a half years. So there is a huge impetus for us in expanding our footprint in the semi-urban and rural markets,” says Gupta.
He adds: “I think we are quite well placed. That’s why brands like Reo will help us to get into the rural markets and Havells is a very well-known brand because of our advertising. So it’s not really a problem for us to get into these markets and set up distribution."
Will the Havells brand fit the bill in the non-metro cities? Of course, says Gupta. According to him, the biggest expense for any family is a house, and when they are building one they would like to use all the right quality products in it. “Havells is a mass premium brand. It is not a premium brand. We call it mass premium because it is affordable. But it is of good quality which the customer is now looking for. It’s not a luxury product. That’s why we differentiate ourselves as a mass premium brand,” he says, adding, “When a person is building a house, the percentage of his wealth or salary that he is putting into the house is even higher than what you find in the urban towns. That’s why they would not want to compromise on the quality of the switches or the MCBs or fans they’re putting in those.”
Getting Ready for the Future
While Havells is expanding its product lines and distribution base, it is also preparing for a future where everything in a home will be controlled by either phone or voice, and anything based on switches will become obsolete.
“One of the reasons we have set up an R&D centre in Bangalore is that the capability set is different from our principal R&D centre. So there will be more disruptive thought process there. It is not necessary that it’ll be completely disruptive, but it will be disruptive at least for our product category,” says Gupta.
Acknowledging that Internet of Things and connected homes are going be the next big thing in his industry, he says, “We are very well positioned because we have all the products for home in the electrical space or electronic space. Our products are best positioned for use in connected homes. So our products have to be made compatible to connected home technology, whether it’s Google or somebody else. All our products should be connected with that.”