Stock corner: ‘Hold’ Whirlpool of India, risks remain despite good Q1 prospects

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Updated: July 9, 2019 7:55:23 AM

In terms of consumer usage, most appliance categories in India are under-penetrated, leaving notable headroom for growth. However, the competitive landscape in durables is characterised by high organised penetration (75%+).

whirlpool shares, mutual fund, whirlpool stocks, axis bank, whirlpool shares, whirlpool profit, whirlpool revenue We expect WHIRL to deliver revenue/EPS growth of 15/13% y-o-y, with op margin expanding by 20bps y-o-y to 15% in Q1FY20e.

WHIRL has seen a sharp uptick of 20%+ since mid-May. While strong summers could deliver a good Q1FY20e, we remain circumspect about underlying industry risks such as rising competition (new entrants, incumbents), overall demand softness (also highlighted by mgmt. in Q4) and volatility in key commodities & INR. While we like WHIRL’s strong positioning, business levers & pristine B/S, positives seem priced in at current stretched valuations of 42x/35x PE on FY20/21e.

Industry dynamics
In terms of consumer usage, most appliance categories in India are under-penetrated, leaving notable headroom for growth. However, the competitive landscape in durables is characterised by high organised penetration (75%+).

WHIRL’s positioning
WHIRL is an established player in Refs & WMs, with opportunity to expand in inverter ACs. The company’s product mix is fairly diversified which helps mitigate demand risks emanating from seasonal patterns. WHIRL’s sales are supported by an array of product launches, backed by technical know-how, also given its strong parentage (subsidiary of WHR, NYSE). WHIRL has a superior B/S, marked by nil D/E, optimum working cap., strong return ratios and sizeable cash & investments (~`17 bn in FY19). This cash can be utilised for (i) increasing dividend payout, (ii) capex for increasing production capacities, (iii) pursuing organic growth or (iv) inorganic opportunities.

Competition; key risks
As per media reports over recent quarters, new players are foraying into various appliance categories in India; also select incumbents are investing in enhancing capacities, distribution & new launches to strengthen foothold. Thus, intensifying competition could potentially result in pricing pressures. Further, volatility in key commodities & INR remains a risk.

Q1FY20e
Over Apr-Jun’19, soaring temperatures coupled with the lower base of FY19 are expected to aid robust industry sales growth for cooling product categories (such as ACs and Refs). We expect WHIRL to deliver revenue/EPS growth of 15/13% y-o-y, with op margin expanding by 20bps y-o-y to 15% in Q1FY20e.

Maintain Hold
Over FY19-21e, we expect WHIRL’s sales/PAT to clock CAGR of 14/21%, with 60bps margin expansion to 12.5% by FY21e, aided by optimising of product mix and operating leverage on the back of volume growth. Maintain estimates and Hold with PT of `1,560. Key upside risks include higher volume growth & margin expansion. Note that the low free-float & liquidity in WHIRL are key monitorables.

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