Whirlpool India has turned aggressive on its top line, with plans to double sales in four years. It has raised its capex targets to add capacity for refrigerators (RF) and to increase the contribution from ACs, kitchenware, etc, to 20% of sales, from 14% currently.
RoE has been stable, at 24-25% over recent years, but has been depressed as 75% of capital employed is cash—ex-cash, ROCE was 54% in FY16.
The business prospects and balance sheet look stronger than ever, with the upcoming Pay Commission, Q3 festive season and rural electrification focus likely to drive strong demand for durables. We roll
forward our target price to R1,030, to FY18e. Reiterating buy.
Rural markets and ACs to drive growth
The company aims to double sales in four years via expanding capacity for refrigerators, where capacity utilisation is near full, as well as doubling contributions from other segments.
It expects new launches in kitchenware, and is likely to aggressively chase growth in ACs.
In rural markets, durables like refrigerators and consumer electronic goods are likely to see growing demand from first-time buyers, on the back of rural electrification.
The rural market accounts for 69% of Indian houses and yet contributes to a mere 10% of overall sales.
Whirlpool plays through trade discounts
Trade discounts have increased substantially in the past two years, from 11% to 15%, and Whirlpool is competing aggressively, especially as the AC contribution has increased.
However, Whirlpool seems to have compensated margins via lower warranty and advertising expenditure.
The NWC cycle has improved, further highlighting its dominant position, especially with creditors. RoE has remained stable over recent years, at 24-25%, but has been depressed due to excess cash—75% of capital employed currently.
Royalty to sales has been stable, at 0.9%, and the company has not paid any dividends. For raw materials, import content has increased to 17% (due mainly to AC).
Maintaining buy with new TP of R1,030/sh
With high valuations (29x FY18e PE), the price does not reflect high levels of pessimism, but nor does it factor in the growth potential from the 7th Pay Commission-linked spending likely in 2HFY17 and the GST benefits likely from FY18. We value Whirlpool India using a DCF, with WACC/COE at 13.5%, to arrive at a TP of R1,030/sh. Key downside risks are high inflation/interest rates, RM price fluctuation, and high competition from foreign players.
Commentary from the annual report
The consumer durables industry witnessed a revival in demand in 2015-16, supported primarily by urban demand, against the backdrop of a dynamic atmosphere as a result of multiple factors, like rising disposable income, easy finances and the growing popularity of e-commerce platforms. Consequently, the industry registered vibrant growth of 25% during the festive season (Q3 only).
Making vs importing: Despite favourable government policy changes, like custom duty reductions on refrigerators and MWO components, and initiatives like Make in India, there has been no significant near-term price impact for consumers.
However, these developments are in the right direction in terms of supporting domestic manufacturing, and could subsequently bring down the cost of manufacturing in the long term.
Positive on exports/new markets for 2016-17: During the year in review, the global demand scenario has remained weak, especially in emerging markets, which are the company’s key export destinations.
This is reflected in the company’s FY16 export revenue, which was flat over the previous year. The company managed to make a significant breakthrough in select African markets like Morocco with its innovative washer models. This augurs well for the company’s business during the ensuing year.
Differential service: Whirlpool has rolled out the differential service model in Delhi and Mumbai.
The differential service experience is all about understanding the consumers’ needs for different product categories, like Direct Cool, Frost Free, MWO, RO, AC and washing machines, and trying to offer them the right service solutions, thereby providing them a great service experience.
Focus on employee satisfaction leading to better customer relationships: Whirlpool was judged as a ‘Best Employer’ by Aon Hewitt in 2015, for the second time in a row.
It continues to focus on the training, development and engagement of its service technicians on an ongoing basis, believing that a highly trained and motivated service technician is the key to driving better customer satisfaction.
Rural markets will drive growth: Management seems to agree with our view that rural electrification will drive growth for refrigerators in the rural markets.
The AR reads, “In rural markets, durables like refrigerators, as well as consumer electronic goods, are likely to witness growing demand in the coming years, as the government plans to invest significantly in rural electrification.
The rural market accounts for 69% of India’s households and yet currently contributes to a mere 10% of overall sales in consumer durables.
The increasing electrification of rural areas would augment the demand and fuel industry growth through first-time sales.
Hence, there is a strong need to undertake demand generation.”
Replacement cycles smaller: India is no longer a market with limited products and few features. With such a rapid churn-out of technological advancements, the replacement cycle has reduced from 9–10 years to 4–5 years for most of the goods in this sector.
AC the fastest-growing segment: The air conditioner (AC) segment is one of the fastest-growing categories in the home appliances segment, projected to register a CAGR of 10% over the next four years.
Window AC sales have declined sharply, to less than 20% of the overall AC market, and the shift is mostly from the lower-starred to the higher-starred and inverter categories.
Despite higher initial purchase costs, inverter ACs have been positioned as a pocket-friendly proposition over the long term, promising lower electricity bills.