Published on 18/06/2020 12:06:24 PM | Source: Motilal Oswal Financial Services Ltd

Neutral Havells India Ltd For Target Rs.515 - Motilal Oswal

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Brief overview of Lloyd AC factory

Lloyd’s Ghilot facility near Neemrana was featured in the ‘The Great Indian Factory’ show on Discovery Channel on Sunday evening. The facility is fully operational, with a world-class manufacturing and assembly process for air conditioners (ACs). We have listed the processes and practices followed across the plant in this report.

* About Lloyd: Havells entered the Consumer Durables market with the acquisition of Lloyd’s brand at INR16b in 2017. With this, Havells got access to products such as ACs, LED TVs, and Washing Machines. At the time of the acquisition, Lloyd ACs – the fourth largest player in the industry – had a volume market share of 12%. ACs formed around 70% of Lloyd’s total revenue, LED TVs 25%, and Washing Machines 4%. On account of price erosion in LED TVs over the past two months, the contribution of ACs to Lloyd’s revenue has increased to 80%. The management intends to launch Refrigerators by the end of 2020, thus further diversifying its offerings.

* Facility in line with Havells’ philosophy: Just like most of the core categories in the Havells portfolio are manufactured in-house (>90%), Lloyd’s facility at Ghilot has been constructed on similar lines to reduce dependence on imports from China. The end-to-end manufacturing of ACs is carried out across this facility, right from the injection molding of raw material to the final assembly of the ACs. The plant has the capacity to manufacture 1m ACs per year, translating to around one AC per 23 seconds. The facility spans 2.5 lakh square feet and has incurred an investment of ~INR4b (56m USD). It operates entirely through solar rooftops and panels, resulting in ‘zero’ waste production. Around 70 robotic operations are used across the plant, with artificial intelligence and digital technology used in various machines interconnected through WiFi technology. Automated guided vehicles (AGVs) are used extensively to transfer material and subassembly parts across the plant. The facility manufactures the lowest power-consuming AC model. In the subsequent sections, we focus on the key manufacturing processes and practices across the plant.

* Injection molding process: This process is used to manufacture inner door units (IDUs) and outer door units (ODUs). The facility has nine injection molding machines of 1–1.3 tons. These machines are used in the production of the sub-parts of the IDUs and ODUs such as outer and inner bases, frames, grills, and fans. All the molds used in the machines are designed inhouse. Around 120 sets of IDUs and ODUs are produced per hour. All the machines are equipped with servo motors, ensuring minimum breakup and smooth operations.

* Robotic press, copper tubing, heat exchanger: The facility has the first-ever robotic press machine in any AC plant in India. The process involves the pressing of aluminum sheets for ODUs, and cutting and bending of copper tubes. With high-speed machines, the robotic press process produces one part per 8 seconds. The press machines have been procured from Japan and are far more superior to industry standards; the machine can perform up to 300 strokes per minute. The use of such a high-end process increases the efficiency of the heat exchanger. A vertical expander machine puts the aluminum fins and copper tubes together. Per day, around 2,800 sets of heat exchangers are produced.

* Painting: The process has a cycle time of 15 seconds, with four sets of plastic parts painted per minute and up to 3,000 sets per day. The process uses the eco-friendly zirconium chemical. After painting, the parts are passed through the heat drying process at 130–150 degrees Celsius.

* Packing and stacking: All the finished parts are brought to the assembly line through AGVs. 42 rigorous tests are performed on the final product, with the ODU subjected to 15 minutes of performance testing, much higher than the industry standard of 3–4 minutes. The assembly of critical parts such as the heat exchanger is performed via the robotics arm for precision. Most of the assembly process involves high-speed robots capable of packing and dispatching around 2,800 AC units per day.

* Valuation and view: We forecast FY20–22E revenue/EBITDA/PAT growth of 6%/9%/5% (on the conservative side) as FY21 is expected to be a washout year. Note our adj. PAT growth is lower than EBITDA growth as tax rates should normalize to 25.2% from 18.7% in FY20. We maintain a Neutral rating with TP of INR515 as we await a better entry point in the stock.


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