Havells forays into contract manufacturing

The CMD has shared the following –

  • Havells India is going to venture into electronic manufacturing service (EMS) or contract manufacturing space for appliances such as air-conditioners and washing machines to cater to the increasing demand of global brands to have an Indian manufacturing base (and hence reduce dependence on China).
  • On a pilot basis, the company has already started manufacturing and product designing of air-conditioners for some of the global brands in markets like the Middle East and the US.
  • The Company is already investing heavily into building manufacturing lines and capacities for appliances for its own brand Lloyd. Currently, the idea is to utilise the spare capacity towards contract manufacturing.
  • The intention is to only focus on manufacturing for brand sold overseas to avoid any conflict of interest with own brands in the domestic market.
  • The company is targeting Rs 1,000 cr revenue from contract manufacturing over the next 3-4 years.
    • This would be estimated <5% of Havell’s total revenues

As of now, this initiative may seem small in the overall scheme of Havells. However, if it succeeds, I expect this to become significant over time. There are sufficiently large contract manufacturers globally and someone like Havells may have studied them diligently before venturing into this space.

One may argue that margins of a contract manufacturer is typically lower than a brand’s and hence this may be negative for Havells P&L. However, please note – this business can generate significant scale and in general are very capital efficient (i.e., high return on capital).

It’s an interesting development to watch closely.

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