Chinese JV co to earn $100m revenues in 2 yrs: Havells

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Havells India has signed a joint venture with a China's Shanghai Yaming Lighting Limited.

Anil Gupta, joint managing director, Havells India speaking to CNBC-TV18 about the j oint venture said, Havells already has a research and development base in China, but wanted a good manufacturing base to support its global requirements.

The company would be manufacturing lighting products through this joint venture company. Gupta expects the Chinese joint venture company to earn revenues worth USD 100 million in two years. 

Below is the edited transcript of Gupta's interview with CNBC-TV18. Also watch the accompanying videos.

Q: Can you give us more details about this JV? What exactly are you all planning to manufacture? What are you bringing to the table and what is the Chinese partner bringing to the table?

A: Havells had acquired Sylvania, globally in 2007 and we manufacture all kinds of lighting products like lamp, LED, CFL and lighting fixtures. This company called Shanghai Yaming Lighting Limited is based in Shanghai. It is a 88 year old company very specialised in manufacturing such products.

China is the lighting factory of the world. We needed to have a good manufacturing base in China to support our global requirements. We already had R&D set up in China, but we wanted manufacturing base. So, we wanted to tie up where we can provide our technology and use their manufacturing structure and expertise to manufacture products for the global markets, Chinese and Indian markets.

Q: For the past couple of years or 18 months the argument has been that local Chinese salaries are moving up, local Chinese inflation has moved up, the currency has not depreciated as much as the Indian currency. So Chinese margins actually have shrunk compared to India though there could still be a gap considering the base with which China began, could you tell us about business is it still so much more lucrative to do business out of China than India?

A: The aspect that we look at when we compare manufacturing is the cost arbitrage and it is not just fair to look at the cost arbitrage only. What we are looking at is the access to technology, access to technological manpower and the access to raw materials. There we believe that China is ahead of certain other countries and other parts of the world.

If you weigh the benefits of low cost manufacturing as well as access to technological manpower and raw materials China is a better option for us and for these product categories that we are manufacturing as compared to India at least this present moment. However, we do not rule out the possibility of manufacturing these products in India as well. This is because India is a huge market and over a period of time when the requirements for these kinds of products will go up in India we might manufacture in India as well.

Q: What is the update with Sylvania? You managed to improve your margins in the last quarter and do you think that can be maintained? We believe there is rising competition that has put some pressure on pricing, is that argument right, right now?

A: European business comprises of about 70% of the Sylvania turnover and with all this news about slowdown in Europe, we have turned around the business in Europe. While Sylvania was profitable last year as well but Europe was loss making, this year Europe has turned around and Europe has started making profits. Though we are not seeing any sales growth in Europe this year, our profitability has improved drastically. For next year also, our aim would be similar and we would continue to expand our margins in Sylvania global business.

As far as India is concerned, competition has increased in terms of raw material prices going up. But, the investment that we made into the brand and deepening our own infrastructure and brand distribution within the country, we have been able to maintain our margins. We continue to hope so in future. This year, Havells in India will be growing at all most more than 20% and that is what we are looking forward next year as well.

Q: Last quarter your margins surprised the street because you invested lower in your brands, the advertising was much lower. Do you expect to maintain the advertising spend at the Q2 level and the investment in brands has now peaked off, or do you think it could revived again?

A: Advertising continues to happen in bursts and so Q2 was low in terms of advertising. This year again we have taken up cricket series and co-sponsor in the India-Australia series as well. Brand would need continuous investment and we are continuing doing that. Quarter to quarter there could be differences, but overall our budget and brand spending is constant.

Q: I just want a few more details about the Chinese effort. You said you already have an R&D outpost over there. What is exactly the generation of income if any from that place and now how should Havells investor look at revenues flowing out of China? You put in how many million out of that USD 50 million? Is all that your money? How much are you putting in? What will be the returns to the Havells investor?

A: We look at China from three points away. One as a sourcing base. The other as a R&D and a manufacturing base and third as a market base. We had been sourcing from China for last many years now but it was last four years we started investing into a setup for R&D. We have over 150 engineers who are constantly developing new products in conjunction with our Indian and European R&D sector. So, all these three areas worked together on developing new products.

But this is now being expanded to have a manufacturing base as well. The third is the domestic market itself. This year we will be doing close to about USD 5-6 million there, but very soon we will be ramping it up. As far as the joint venture is concerned, this USD 50 million was the total investment size for the joint venture. Fifty percent of it will be invested from Havells India and the rest will be coming from Shanghai Yaming Limited. In the next two to three years we hope to ramp the revenues up to almost USD 100 million coming out of this joint venture.

Q: Accordingly what kind of percentage increase in revenues can we assume in the next two years for Havells?

A: We hope that in the next two years the domestic market would continue to grow at a pace between 13-20%. Globally, apart from China we will definitely see growth of 7-8% which has happened this year. Overall if we put altogether these new initiatives, we definitely want to expand and hope to expand at least at rate of 15% globally.

Q: Among all the segments that you operate in the cables and the lighting division is the one that's outperformed in terms of revenue growth. We have had very decent growth there. But sometimes the argument also veers to the fact that the profitability growth in that segment may not match the kind of revenue growth we have seen. Do you think that argument holds and also what's your outlook for each of the segment if you would just let it up?

A: As far as lighting is concerned, it is definitely going to hold profitability. We have expanded profitability in lighting by quite a decent margin this year. Fifty  percent of the cables and wires business was a commodity business, the rest was domestic wires where we can get the returns to the brand. So, there the margins would always be under pressure.

But, overall given the volumes of this business which will be close to about Rs 1,600 crore in cables and wires this year. It is definitely a profitable business. We are looking at expansion in margins this quarter where raw material prices have gone up, but we have been able to effectively manage our cost and pricing. In the coming quarters, we hope to see expansion in margins in cables and wires as well.

Q: What would those margins be?

A: In cables and wires our margins were 8-9% where we see that goes up to 12-13%.

Q: Overall your margins were?

A: Overall our margins were around 11%. This year we are looking at maintaining at about 11.5%.