Whirlpool Ind

8/8/2019 Whirlpool Ind

1/20

July 01 ,2010

Industry : Consumer Durables Industry View : Overweight Initiating Coverage

Preferred play on Indias consumer story

BuyWhirlpool of India

Ankit Jain

[email protected]

+91 22 6635 1214

Disclaimer:The information in this document has been printed on the basis of publicly available information, internal dataand other reliable sources believed to be true and is for general guidance only. While every effort is made toensure the accuracy and completeness of information contained, the company makes no guarantee and

assumes no liability for any errors or omissions of the information. No one can use the information as the basisfor any claim, demand or cause of action. LKP Securities Ltd., and affiliates, including the analyst who haveissued this report, may, on the date of this report, and from time to time, have long or short positions in, andbuy or sell the securities of the companies mentioned herein or engage in any other transaction involving suchsecurities and earn brokerage or compensation or act as advisor or have other potential conflict of interestwith respect to company/ies mentioned herein or inconsistent with any recommendation and related informa-tion and opinions. LKP Securities Ltd., and affiliates may seek to provide or have engaged in providingcorporate finance, investment banking or other advisory services in a merger or specific transaction to thecompanies referred to in this report, as on the date of this report or in the past.

Key Data

Market Cap (Rs.mn ) 33400

52-Week Range (Rs.) 283 / 45

Avg. Daily Trading Value (Rs.mn) 35Promoters (%) 75

FII Holding (%) 0

DII Holding (%) 5

Public & Others Holding (%) 20

One Year Indexed( %) 1 Month 3 Months 12 Months

Whirlpool of India 2 55 437

BSE Relative (2) 57 418

0

50

100

150

200

250

300

Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10

Whirlpool India BSE Sensex

Relative price performance

Fiscal Year Ending 3/09 3/10 3/11E 3/12E

Revenue (Rs.mn) 18,615 24,421 30,566 36,842

EBITDA (%) 2.9 6.0 6.8 7.7

PAT (%) 3.8 6.0 6.4 7.0

EPS (Rs.) 5.6 11.5 15.4 20.4

EPS Growth (%) (3.9) 106.2 34.7 31.9

P/E (x) 47.1 22.9 17.0 12.9

P/B (x) 11.9 9.4 7.2 5.4

EV/EBITDA(x) 61.5 22.1 15.5 11.1

ROCE (%) 21.7 49.2 61.2 62.9

ROE (%) 27.5 44.0 46.5 46.9

Dividend Yeild (%) 0 0 0.4 0.6

Current Market Price (Rs) 262

12 Month Target Price (Rs) 356

Potential upside (%) 36

Reuters WHIR.BO

Bloomberg KELV IN

Group BSE500

Whirlpool India, owned 75% by the $19bn US based home appliances giant,

Whirlpool Corporation, is a consumer centric innovative company with

differentiated product offerings through a 360 degree approach in creating

brand visibility in home appliances.

Investment Argument

Whirlpool India with over 2,500 employees across 3 state-of-the-art facilities

has the unique ability in launching new products with captivating designs in

washing machines, refrigerators and air conditioners . This is clearly reflected

in the fact that Whirlpool generated over Rs 2bn cash (Rs 1.45bn) from

operations last fiscal while emerging as a debt-free entity.

Rapid urbanisation and growth in per capita income would in our view drive

growth in the consumer durable segment. Although we expect washing

machines to remain an urban centric product, we expect the volume mix to shift

towards the fully automatic models and its share to rise significantly. We however,

expect the addressable market size of refrigerators to increase going forward

and the mix to shift towards the high end frost-free segment which would aid

the growth of Whirlpool in India.

Whirlpool is best placed to expand its footprint aided by modern trade given its

brand equity, ROE of 44%, ROCE of 49% and vast distribution strengths. WhirlpoolIndia has no comparable peer in India and would in our view trade at a premium

to its parent which operates in highly matured consumer durables markets.

Valuations

We expect Whirlpool to grow its net profits at a CAGR of 31% over the next two

years on the back of an expected 22.8% CAGR growth in revenues.

We initiate coverage on Whirlpool of India, trading at 12.9xFY12E earnings of

Rs 20.3 with a BUY rating and have a one-year price target of Rs356 on the

stock which offers an upside potential of 36%.

Key RiskIncrease in input costs of basic raw materials.

Reduction in unsecured financing by institutions could impact volume growth.

Emerging competition from modern trade private labels.


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Whirlpool of India Ltd.

LKP Research

Index

Investment Rationale 3

Investment Risks 6

Valuations 7

Company Background 8

Business Model 9

Industry Overview 10

Refrigerators 11

Washing Machines 13

Room Air Conditioners (RACs) 14

Microwaves 16

Financial Outlook 17

Financial Summary 19


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Investment Rationale

Growth in household appliances to be led by strong growth in population

India is the worlds second fastest growing (~8%) economy and the rapid increase in

urbanization and in number of households from 231 mn in 2010 to about 254 mn by

2015 is expected to help Indian home appliances industry to expand from Rs 229 bn in

2010 to Rs 397 bn by 2014. The growth will also be supported by the rising rural

penetration levels of electrical home appliances and their replacement demand.

Change in the share of wallet of the consumer

The increase in income levels and improving lifestyle will lead to increase in discretionaryspends as well, directly benefiting some other high-opportunity segments such ashome improvement etc. Hence, with the shift in the consumers spend, we expect thenon routine expenditure (which is still low in both urban and rural centers) to witnesshigher growth going forward. The up-trading in rural areas will increase the share ofspend to non-routine lifestyle improving and convenience products.

Household appliances - Industry size Increase in households

Source: NCEAR, CRISIL & LKP Research

Rs.bm FY04 FY09 FY14P

CTV 68 110 185

Room air conditioners 23 47 95

Refrigerators 31 51 81

Washing machines 11 21 36

Household appliances 133 229 397

Five year CAGR 11.5% 11-12%

Routine and Non-Routine Expenditure (Rs/annum/household)

Source: NCEAR, LKP Research

Breakup of Indian Population by age-group Demographic breakup and urbanization rate

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Rural Urban All India

Routine expenditure on food Non-food routine expenditure Non-routine expenditure

0

200

400

600

800

1,000

1,200

1,400

1985 1995 2005 2015E 2025E

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Age 0-14 (LHS) Age 14-65 (LHS)

Age 65 + (LHS) Growth (%, RHS)

0

160,000

320,000

480,000

640,000

800,000

1985 1995 2005 2015E 2025E

0.0

9.0

18.0

27.0

36.0

45.0

Urban population (000s) (LHS) Rural population (000s) (LHS)

Urbanization level (%, RHS)

0

70,000

140,000

210,000

280,000

350,000

1990 2000 2010E 2020E

0.0

1.5

3.0

4.5

6.0

7.5

Household total number (000s) (LHS)

Household average size (no.'s)RHS


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Low penetration levels of consumer durables

Consumer durables and other luxury products in India are highly urban centric and havereally low penetration levels in rural areas. With majority of the population residing in

rural or semi-urban areas in India, the overall penetration levels for consumer durables

still remain low. At all India levels, only 33% of households own color television sets,

22% have refrigerators, 19% have cellular phones and only 7% have cars. With the

expanding reach of companies through media and advertising, it provides a wider

platform for consumer durable companies to tap this vast potential.

Whirlpool of India operates in three main segments of refrigerators, air conditioners and

washing machines. Color televisions, which have got the highest penetration amongst

the commonly used consumer durables,form the significant part of the revenues for all

other key industry players. We believe that presence of Whirlpool in low penetratedproducts, its innovative offerings at affordable prices for both rural and urban consumers

will auger well for its strong volume growth in future.

Ownership of Consumer Durables

(% of households)

12

34

54

56

89

88

53

80

46

3

19

17

19

48

76

69

38

8

Car

Motorcycle

Color

Television

Mixer/Grinder

Ceiling Fan

Wrist Watch

Bicycle

Pressure

Cooker

Refrigerator

Urban Rural

Share of mid and high income households increases

Source: NCEAR, LKP Research

37%

85%

24%

83%

33%

11%

32%

13%30%

4%

44%

5%

0%

20%

40%

60%

80%

100%

Urban Rural Urban Rural

2009 2014P

Rs 0.2 mn

Key Consumer Durables shares by volume

Source: NCEAR, IBEF, LKP Research

Also, changing environmental conditions like prolonged summers and increase in female

working population will boost the demand for companys convenience products like

microwaves, dishwashers and washing machines going forward.

Source:IBEF, LKP Research

Colour Television

30%

Refrigerators

18%Air-Conditioners

13%

Washing Machines

5%

Others

34%


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LKP Research

Increase in affordability through easy financing options

The ease of plastic money has also boosted the discretionary spend in the organized

retail environment. The home appliances/consumer durable accounts for ~10% of the

total organized retail sales. The majority of the card based transactions happens at the

organized retailing outlets for buying big ticket home convenience goods, as many card

distributing financial institutions offers cash back offers on big ticket purchases. With

the expected high growth of over 15% in organized retail over the next few years, weremain bullish on the strong growth in volumes for consumer durable companies and

on Whirlpool given its pipeline of new innovative products across key segments.

Card-Based Payment Transactions (in mn nos) Card-Based Payment Transactions (in Rs bn)

Source: RBI, LKP Research

Value added offerings to result in increase in volumes and realizations

Whirlpool is the leader in the refrigerator and washing machines category. However, due

to intense competition it has lost some market share in these segments in last three

years, but has witnessed the consistent volume growth. The company, with the technical

support of its parent has recently launched value added products within refrigerators

and air conditioner segments, which have been well received by the market. The relatively

new, microwave segment has also been doing well and offers a huge potential to scale

up going forward. The new value added products have better realizations and offer

better margins to the company as well, which will auger well for the robust revenue

growth and expansion in margins in the future.

0

60

120

180

240

300

2005-06 2006-07 2007-08 2008-09

0.0

10.0

20.0

30.0

40.0

50.0

Credit card payments (LHS) Debit card payments (LHS)

Growth - credit cards (%, RHS) Growth - Debit cards (%, RHS)

0

140

280

420

560

700

2005-06 2006-07 2007-08 2008-09

0.0

12.0

24.0

36.0

48.0

60.0

Credit card payments (LHS) Debit card payments (LHS)

Growth - credit cards (%, RHS) Growth - Debit cards (%, RHS)

Product mix of key industry players

Source: CRISIL, LKP Research

30 32

51 51

17 1864

7 77

1829 32

4125

11

26

7

171117

0%

20%

40%

60%

80%

100%

LG Samsung Videocon Mirc Whirlpool

Colour Televisions Ref rigerators A ir Conditionars Washing Machines Others


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LKP Research

Investment Risks

Increase in input costs

Steel sheets and air compressors form the key raw materials for the company. Though,

the price of compressors have been pretty much stable in last three years, steel strip

prices have witnessed a lot of volatility over the same period. After softening of steel strip

prices for sometime in FY09, they are again set to rise upwards driven by the rising iron

ore and coking coal prices. Any steep increase in input costs for steel, may adversely

impact the margins of the company.

Indexed prices of raw material

Source: EAI Industry,LKP Research

Reduction in unsecured financing by institutions

In the past, the white goods sales have been boosted by the easy financing options

(such as 0% interest loans) made available to consumers by many of the financial

institutions. However, due to the non-recovery of some of these disbursed loans, many

of these institutions have now started reducing their exposure to such unsecured loans.

This may adversely impact the overall volume growth of the consumer durables due to

the lack of funding options.

Emerging competition from modern trade private labels

The organized retailers, recently, have resorted to manufacture and market their own

private labels across all categories including home appliances to counter the impact of

increasing competition within organized retail and adverse macroeconomic conditions.

These private labels, being cheaper than the other branded products available in the

market attract consumers at the bottom/middle of the income pyramid, eating into the

pie of branded players. Any significant growth of private labels like Koryo (Pantaloon),

Croma (Tatas Infinity Retail) etc could impact the growth of the branded players in the

future.

80

100

120

140

160

Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09

Steel Sheet Compressors


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LKP Research

Valuations

Whirlpool of India has posted growth, both in its revenues and profits post its turnaround

in FY08 driven by strong realization growth, entry into new product categories and launch

of innovative products. The company mainly operates in three key segments of

refrigerators, air-conditioners and washing machines, unlike all the other consumer

durable companies in India, who are still dependent on the sale of color television for

majority of their revenues.

This makes Whirlpool the unique and focused player operating in the home convenience

product segments. Recently, the company has also launched other home convenience

products such as dish washers, dryers, water purifiers and UPS etc, to mark its entry

into the emerging product categories.

Whirlpool of India has also paid accumulated dividend on its 152 mn preference shares

@10% each for last five years (FY06-FY10), as no dividend was paid on these preference

shares since allotment due to past accumulated losses. This paves the way for

distribution of profits to equity shareholders of the company given the strong growth in

profits going forward.

With the expected strong growth in the consumer markets driven by increase in number

of households, increase in disposable income and increasing aspiration levels, we are

bullish on the prospects of Whirlpool of India. We initiate coverage on the stock with a

BUY rating and a one year forward price target of Rs 356 based on 17.5x FY12E earnings.

The parent company, Whirlpool Corp, is listed in five other nations across the US and

Europe and only in India across Asia Pacific region. Both the US and Europe are highly

organized and matured consumer durable markets and have many other listed peers.

However, in India, Whirlpool of India has no other direct listed peer in the pure consumer

durable play and hence deserves premium valuation in the domestic markets ascompared to its listed parent which is trading at ~10.0x its CY11E earnings.

EV/EBITDA Band

Source: LKP Research

22.5x

15.5x

8.5x

1.5x

(5.5)x

(12.5)x

EV

(30,000)

(20,000)

(10,000)

-

10,000

20,000

30,000

40,000

50,000

1-Apr-05 1-Apr-06 1-Apr-07 1-Apr-08 1-Apr-09 1-Apr-10

PER Band

19.0x

15.5x

12.0x

8.5x

5x

1.5x

Price

-50

50

150

250

350

3-Apr-06 3-Apr-07 3-Apr-08 3-Apr-09 3-Apr-10


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LKP Research

Company Background

Whirlpool Corp. entered India in 1980s under a joint venture with TVS group and

established its manufacturing facility in Pondicherry. Whirlpool India, then acquired

Kelvinator India Limited in 1995 for entering into the Indian refrigerator market. In 1996,

Whirlpool India acquired the remaining share in JV with TVS and was merged with

Kelvinator to create Whirlpool of India with a 75% share in it. The company expanded its

product portfolio to washing machines, refrigerator, microwave ovens and air conditionerssince then.

Whirlpool India has over 2,500 employees in three state-of-the-art manufacturing facilities

at Faridabad, Pondicherry and Pune, and a strong network of ~2,500 distributors. The

company holds over 25% share in the Indian domestic market.

Exports contribute nearly 13% of the companys turnover to markets in Europe, the

Middle East and Africa. It is consolidating its position as the number one brand in South

Asia. The company has significantly increased its small appliances presence in the US.

Parent Company - Whirlpool Corporation

Whirlpool Corporation is the leader in the US$ 100 bn global home appliance industry,

with annual sales of over US$ 19 bn in CY09, 70,000 employees and 69 manufacturing

and technology centers around the globe.

The company manufactures its products in 13 countries and markets them in more than

170 countries under brand names such as Whirlpool, Maytag, Kitchen Aid, Gladiator,

Jenn-Air, Amana, Bauknecht, Brastemp and Consul.

Revenue Mix

66%

7%

18% 2%5%

2%

Refrigerators

Air-Conditioners

Washing Machines

Microw ave Ovens

Spares & Accessories

Others

Key Brands

Brands Presence Category description

It is the flagship home appliance brand of the company, under which it markets

Worldwide its home convenience products like refrigerators, washing machines, air

conditioners and washing machines.

Brand acquired by Whirlpool Corp in 2006 markets premium laundry,

USA refrigeration, and other kitchen appliances like cooking range and

dishwashers etc.

Brand acquired by Whirlpool Corp in 1986 markets high convenience

USA kitchen appliances like cooking aids, outdoor grills, stand mixers, refrigeration

products and dish washers etc.

Acquired in 2006 from Maytag Corp, is the leading brand in the technologial

kitchen appliances with products ranging from cook-tops to compactors.

Acquired in 2006 from Maytag Corp, is a kitchen appliances brand offering

products for cooking aids, refrigeration dish washers and laundry.

Acquired in 2000 is the leading brand in Brazil offering customized home

appliances as per the customer requirements.

Acquired in 2000 is one of the oldest mass segment home appliance brand

in Brazil.

Acquired in 1989, is the most preferred home appliance brand in Germany.

The brand was launched by Whirlpool Corp to offer solutions for the garagespace inhome and which is widely untapped.

USA

Brazil

USA

Brazil

Europe

USA

Source: Company, LKP Research


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LKP Research

Business Model

Whirlpool of India imports, manufactures and markets home convenience products

such as refrigerators, washing machines, air-conditioners, microwave ovens, dryers,

dishwashers, UPS and water purifiers.

The refrigerators, washing machines, air-conditioners and microwave ovens all put

together constitutes ~93% of the total revenues of the company. The company has

recently entered into the new high growth segments of UPS, water purifiers, kitchen tops

and dryers which are expected to witness high growth going forward.

Growth in Refrigerators Growth in Washing Machines

Growth in Air Conditioners Growth in Microwave Ovens

Source: Company, LKP Research

Value & Volume growth trends in key product segments

-5%

0%

5%

10%

15%

20%

25%

30%

35%

FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Value Volume

0%

5%

10%

15%

20%

25%

30%

35%


Value Volume

-50%

0%

50%

100%

150%

200%

250%


Value Volume

`

-40%

0%

40%

80%

120%

160%


Value Volume


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LKP Research

Industry Overview

Liberalization allowed many foreign players the opportunity to enter India offering high

growth supported by a huge consumer class. Currently, the two Korean companies, LG

and Samsung are leading the Indian consumer durable industry with LG holding the

major market share across all categories.

Color televisions (CTvs), Washing Machines, Refrigerators, Air Conditioners and

Microwave ovens forms the large part of the Indian consumer durables market. The

entire consumer durable industry can be classified as follows.

The overall consumer durable industry is expected to grow at a 11%+ CAGR to Rs 400bn over the next four years from Rs 230 bn at present. The growth will be supported by a

higher growth in rural markets than urban centers due to the lower penetration levels.

The rising income levels, double-income families, shorter replacement cycle and

increasing consumer awareness are expected to be the key growth drivers for the industry

volume growth. Value growth is expected to be boosted largely by a shift in segmental

mix in favor of high-end products and introduction of energy saving models at higher

price points that would help in increasing average realizations across segments.

CAGR (Per cent) 2003-04 to 2008-09 2008-09 to 2013-14 P

Product Volume Value Volume Value

Colour television 12.7 10.1 7-8 10-11

Refrigerators 7.7 10.6 7-8 9-10

Washing machines 11.5 13.8 9-10 11-12

Air conditioners 20 14.6 12-13 15-16

Household appliances 11.5 11-12

Household appliances growth snapshot (%)

Source: CRISIL , LKP Research

Source: LKP Research

ConsumerDurables

a. Refrigeratorsb. Washing Machines

c. Air Conditioners

d. Audio Equipments

a. Mixers/Grinders

b. Microwave Ovens

c. Iron/Fans

d. Kitchen Appliances

a. Television

b. Mobile Phones

c. MP3/DVD Players

d. VCD Players

White Goods Kitchen Appliances/

Brown Goods

ConsumerElectronics


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LKP Research

Consumer durables dynamics

Durables / Unit Average Maintenance / Power Perceived Availability Consumer Urban/

price Running cost consumption utility of alternatives segment Rural centric

Colour television Low Low Low High No Households/ Commercial Urban/ Rural

Refrigerator Medium High High High Yes Household Urban

Washing machine Medium Medium Medium High Yes Household Urban

Room air conditioner High High High Medium Yes Households/ Commercial Urban

Two wheeler High Medium NA Medium Yes Personal Urban/ Rural

Mobile phones Low Low Low High Yes Personal Urban/ Rural


Refrigerators

Refrigerator sales are expected to grow at a CAGR of 10% to Rs 81 bn by 2014 from Rs

51 bn at present, primarily through growth in volumes. The growth will also be supported

by increased realizations due to marginal increase in prices coupled with slightly

improved segmental mix with up-gradation to high capacity and better refrigerator models.

We expect refrigerator volumes to grow at a rate of over 8% CAGR to reach 6.6 mn units

by 2014 driven by rising household income, increase in nuclear families and increasing

population of working women. Demand for higher capacity models is expected to reduce

the replacement cycle, triggering replacement demand, in urban markets. The urban

markets are expected to grow by around 8% over the expected growth rate of 18% in the

rural markets in the next 5 years.

The refrigerator category will witness the improvement in realizations with a segmental

shift towards high-end large size and frost-free segment. The contribution of frost-free

models in total refrigerator sales has been increasing.

The share of the frost-free segment is expected to increase to around 40% of the

industrys total sales by 2014 from 31% in 2009, driven by replacement demand and

demand for higher end models.

Refrigerator - Value break-up (Rs bn) Refrigerator Volumes (in mns)


3.2

4.6

6.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY04 FY09 FY14P

30.8

51.1

80.7

254.6

0

15

30

45

60

75

90

FY04 FY09 Value Increase in

realizations

Increase in

volumes

Value

FY14P


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LKP Research

Refrigerator - Volume proportion Refrigerator Value proportion

84% 69%60%

16%31%

40%

0%

20%

40%

60%

80%

100%

FY04 FY09 FY14E

Direct Cool Frost Free

75%55%

44%

25%45%

56%

0%

20%

40%

60%

80%

100%

FY04 FY09 FY14E

Direct Cool Frost Free

In FY09, the addressable market for refrigerators in urban India stood at 37 mnhouseholds in terms of affordability with a penetration of 75%, leaving 9 mn untapped

households within the addressable market. The size of the addressable market is

expected to grow to 53 mn households by 2014.

Urban refrigerator market (Households in mn) Rural refrigerator market (Households in mn)


Direct cool - Capacity-wise sales volume Frost-free - Capacity-wise sales volume


Sales volume breakup (in capacity)

2845

3831

0

20

40

60

80

FY09 FY14E

Untapped addressable households

Tapped addressable household

5 7

153 167

0

40

80

120

160

200

FY09 FY14E



80.3 75.2 73.463.8 58.0

15.0 18.7 20.527.5 32.2

4.7 6.1 6.1 8.7 9.8

0%

20%

40%

60%

80%

100%

FY05 FY06 FY07 FY08 FY09


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LKP Research

Refrigerator - Market share (%)


Washing MachinesWashing machine sales are expected to reach Rs 36 bn by 2014 from Rs 21 bn in 2009,

growing at a CAGR of 12% over the same period. The increase in volumes and increase

in realizations rise in prices coupled with improved segmental mix are expected to

attribute for this growth.

Average realizations are expected to improve as volume mix shifts in favor of fully-

automatic washing machines. Although to the irregular nature of water supply across

both urban and rural regions has led to demand being confined largely to semi-automatic

models as fully-automatic models require continuous supply of running water, the share

of fully-automatic machines is expected to go up to 45% by 2014.

Washing machine - Volume proportion Washing machine - Value proportion


Growth in Washing machine Value (Rs bn) Washing machine Volumes growth (in mns)


1.3

2.2

3.4

0

0.8

1.6

2.4

3.2

4

FY04 FY09 FY14P

81%65%

55%

45%35%

19%

0%

20%

40%

60%

80%

100%

FY04 FY09 FY14E

Semi Automatic Fully Automatic

66%46%

35%

65%54%

34%

0%

20%

40%

60%

80%

100%

FY04 FY09 FY14E

Semi Automatic Fully Automatic

10.9

20.8

36.2

12.9

2.5

0

8

16

24

32

40


realizations

Increase in

volumes

Value

FY14P

0

5

10

15

20

25

30

LG Samsung Videocon Godrej Whirlpool Others

FY07 FY08 FY09


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LKP Research

Urban washing machine market (Households in mn) Rural washing machine market (Households in mn)

54

54

2212

0

20

40

60

80

FY09 FY14EUntapped addressable households


2 4

156 170

0

50

100

150

200

FY09 FY14E



Washing machine - Market share (%)


Room Air Conditioners (RACs)

Room air conditioners are expected to witness the highest growth because of their low

base and increasing share of split ACs in the segmental mix and reach the size of Rs

100 bn by 2014 from Rs 47 bn at present. The value growth for RACs has been lower

than the volume growth in the past few years due to intense competitive environment

from cheaper imports. However, we expect this trend to reverse in the next 5 years on theback of improving realizations arising from better segmental mix and the introduction of

new models and star-rated products that are priced at a premium.

Semi-automatic products mix Rural washing machine market (Households in mn)


20 12 9 7 6

7072 77 77 77

1716141610

0%

20%

40%

60%

80%

100%


7 kg

61 57 52 45 39

6155

484339

0%

20%

40%

60%

80%

100%


6 kg

0.0

5.0

10.0

15.0

20.0

25.0

30.0

LG Samsung IFB Videocon Godrej Whirlpool Others

FY07 FY08 FY09


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LKP Research

Room air conditioners Value growth contributors (Rs bn) Room air conditioners Volumes growth (in mns)


0.9

2.2

4.0

0

1

2

3

4

5

FY04 FY09 FY14P

Demand for RACs is expected to increase to 4 mn units by 2014 from 2 mn units in 2009,

clocking a growth of 12% between 2009-14 led by rising disposable incomes and

increasing demand from the commercial segment.

The average realizations are expected to improve led by a change in segmental mix in

favor of split ACs leading to a higher value growth.While window air conditioners (WACs)are expected to grow at 6% in volume terms, the split air conditioners (SACs) are expected

to lead the overall growth with a growth of 20% over the next 5 years. Growth in the split

ACs segment would come mainly from the commercial segment which accounts for

around 75% - 80% of the total split AC sales.

Air conditioner - Volume proportion Air conditioner - Value proportion


26%

53%67%

74%

47%33%

0%

20%

40%

60%

80%

100%

FY04 FY09 FY14E

Split AC's Window AC's

41%

66% 79%

59%

34%21%

0%

20%

40%

60%

80%

100%

FY04 FY09 FY14E

Split AC's Window AC's

In the AC market, the top four players accounted for ~65%-70% of the market in 2008-09.

Voltas has been the biggest gainer, increasing its market share from around 11% in

2005 to around 17% in 2009, followed by Samsung. Though LG is the market leader in

the AC segment, it has lost its share from around 33% in 2005 to about 27% in 2009.

AC - Market share movement (%)

Source: CRISIL Research, LKP

0.0

10.0

20.0

30.0

40.0

LG Voltas Samsung Videocon MIRC Whirlpool Others

FY07 FY08 FY09

24

46.9

95.16.2

42

0

20

40

60

80

100


realizations

Increase in

volumes

Value

FY14P


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LKP Research

Microwaves

In India, microwave ovens are one of the rarely used home appliances, which started

emerging very recently with the growth in population of working females and

predominantly remain an urban product. There are various kinds of Microwave Ovens

available in the market, like:

Compact Microwaves: Popularly known as portable microwaves, are the smallest

microwave units, mainly used to reheat food, cook light meals and make popcorn.

Countertop Microwaves: These are among the popular categories of microwave ovens

that can be put on a counter or table and hence named as countertop.

Convection Microwaves: These microwaves possess the features of standard

microwaves and convection ovens, used for cooking food faster and are generally

expensive.

Over the Range Microwaves (OTR microwaves): Popularly called built-in microwaves,

can be installed over a cook-top and requires an exhaust fan or chimney hood along with

over the range microwaves.

The companies in India offering microwave oven products includes LG, Electrolux, Haier,

IFB , Kenstar, Samsung, Whirlpool etc.

Microwave ovens have emerged as the fastest growing category in Indias Rs 250 bn

consumer durables market. In FY06, the category recorded a volume growth of 81.8%,

selling a total of 0.47 mn units and a value growth of 55% at Rs 37 bn. Currently, the

market of microwave ovens is estimated for over 2 mn units with both LG and Samsung

are the market leaders, controlling over 60% of the market.

Microwaves are witnessing aggressive growth because consumer durable companies

are also expanding the sector by launching new products and building awareness. The

category is also expanding because Indian consumers have started accepting microwave

ovens proper cooking devices rather than just reheating appliances.


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LKP Research

Financial Outlook

Revenue growth driven by volumes

With the expected strong double digit CAGR of 25% in refrigerators, 14% in washing

machines, 18% in air-conditioners and 57% in micro waves over FY10-FY12E, we expect

the overall revenues of the company to grow at a CAGR of +22% over the same period.

Revenue growth trend Overall volume and value growth

Source: Company. LKP Research

EBITDA and PAT growth

The launch of innovative value added products coupled with the increase in realizations

are expected to result in the 170 bps expansion in EBITDA margins of the company over

FY10-FY12E. Strong debt free balance sheet is further expected to add up to the overall

improved profitability of the company.

-

8,000

16,000

24,000

32,000

40,000


0.0

8.0

16.0

24.0

32.0

40.0

Revenue (Rs mn - LHS) Revenue grow th (%, RHS)-12%

-6%

0%

6%

12%

18%

24%

30%


Value Volume


EBITDA & margin trend

(900)

-

900

1,800

2,700

3,600


-5.0

0.0

5.0

10.0

15.0

20.0EBITDA (Rs mn - LHS) EBITDA margin (%, RHS)


PAT & Margin trend

(900)

-

900

1,800

2,700

3,600

FY06 FY07 FY08 FY09 FY10 FY11E FY12E-5.0

0.0

5.0

10.0

15.0

20.0Adj PAT (Rs mn - LHS) Net margin (%, RHS)


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LKP Research

Balance Sheet Analysis

At the end of FY10, the current liabilities of the company stood at Rs 6.5 bn or 45% of the

operating expenses, mainly on account of acceptances due to higher imports. With the

efforts to increase product penetration into rural and semi-urban India, the company has

rapidly increased its dealer and distributor network, which mainly works on credit period

of over 60 days. This along with receivables from the government authorities keeps the

loans and advances at around 6% of net sales. Going forward, with the stabilization of

Indian operations and building up of strength in domestic markets, we expect these to

reduce as a proportion of sales.


Debt position


Return ratios

-

14.0

28.0

42.0

56.0

70.0

FY08 FY09 FY10 FY11E FY12E

RoE (%) RoCE (%) RoA (%)

-

900

1,800

2,700

3,600

4,500

FY05 FY07 FY09 FY11E

-

1.2

2.4

3.6

4.8

6.0

Total Debt (Rs mn - LHS) D/E (x, RHS)


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LKP Research

Financial Summary

Income statement Balance sheet

YE Mar (Rs mn) FY09 FY10 FY11E FY12E

Total Revenues 18,615 24,421 30,566 36,842

Raw Material Cost (11,033) (13,604) (16,540) (19,564)

Employee Cost (1,359) (1,604) (1,924) (2,309)

Other Exp (5,675) (7,739) (10,013) (12,129)

EBITDA 547 1,475 2,090 2,839

EBITDA Margin (%) 2.9 6.0 6.8 7.7

Other Income 837 1,008 1,159 1,333

Depreciation (390) (397) (449) (478)

EBIT 994 2,086 2,800 3,694

EBIT Margin (%) 5.3 8.5 9.2 10.0

Interest (132) (14) (0) (0)

Profit Before Tax 862 2,072 2,799 3,694

PBT Margin (%) 4.6 8.5 9.2 10.0

Income Tax (157) (618) (840) (1,108)

Profit After Tax 705 1,454 1,960 2,585

Prior Period Adjust - (4) - -

Preferrence Dividend - (722) (279) (419)

Net Income 705 728 1,680 2,167


Equity Share Capital 2,792 2,792 2,792 2,792

Reserves & Surplus 257 875 1,975 3,475

Networth 2,947 3,666 4,767 6,267

Total debt 1,102 2 2 2

Deferred tax liability 411 355 355 355

Current Liabilities 4,518 6,589 6,508 8,122

Provisions 592 1,124 1,237 1,360

Total Liabilities 9,571 11,737 12,869 16,107

Gross Fixed Assets 7,008 7,235 7,725 8,215

Net Fixed Assets 3,064 2,897 2,938 2,950

Capital WIP 20 133 26 29

Deferred Tax Asset 1,144 470 470 470

Current Assets 5,342 8,237 9,435 12,657

Inventories 2,999 4,625 5,919 7,699

Sundry Debtors 821 1,398 1,375 1,658

Cash and Bank 728 622 918 1,826

Loans & Advances 795 1,591 1,223 1,474

Net Current Assets 232 524 1,691 3,175

Total Assets 9,571 11,737 12,869 16,107

Capital Employed 4,461 4,023 5,124 6,624

Cash Flow


Pre-tax profit 862 2,072 2,799 3,694

Depreciation 388 395 449 478

Chg in working capital 320 (397) (872) (576)

Total tax paid (29) (0) (840) (1,108)

Other operating activities 0 (4) 0 0

CF from operations (a) 1,541 2,066 1,537 2,487

Capital expenditure (223) (340) (383) (494)

Chg in investments 0 0 0 0

Other investing activities (709) (14) (860) (1,085)

CF from investing (b) (932) (355) (1,242) (1,579)

Free cash flow (a+b) 609 1,712 294 908

Equity raised/(repaid) 800 101 1 (0)

Chg in minorities 0 0 0 0

Debt raised/(repaid) (983) (1,101) 0 0

Dividend (incl. tax) 0 (843) 0 0

Other financing activities 0 0 0 0

CF from financing (c) (208) (1,817) 1 (0)

Net chg in cash (a+b+c) 401 (106) 295 908

Key Ratios

YE Mar FY09 FY10 FY11E FY12E

Per Share Data (Rs.)

EPS 5.6 11.5 15.4 20.4

CEPS 8.6 14.6 19.0 24.1

BV/share 22.0 27.7 36.4 48.2

Growth Ratios (%)

Net Sales 7.2 31.2 25.2 20.5

EBITDA (9.1) 169.6 41.7 35.9

PAT (3.9) 106.2 34.7 31.9

EPS Growth (3.9) 106.2 34.7 31.9

Valuation Ratios (x)

PE 47.1 22.9 17.0 12.9

P/CEPS 30.4 18.0 13.8 10.8P/BV 11.9 9.4 7.2 5.4

EV/Sales 1.8 1.3 1.1 0.9

EV/EBITDA 61.5 22.1 15.5 11.1

Operating Ratios Days

Inventory days 58.8 69.1 70.7 76.3

Recievable days 16.1 20.9 16.4 16.4

Payables days 91.3 104.8 83.4 87.2

Net Debt / Equity (x) 0.1 (0.2) (0.2) (0.3)

Profitability Ratios (%)

ROCE 21.7 49.2 61.2 62.9

ROE 27.5 44.0 46.5 46.9

ROA 10.0 19.6 22.8 25.5

Dividend Payout 0.0 8.3 8.8 10.1


20/20

LKPLKPLKPLKPLKP

Research Team

S. Ranganathan Head of Research Pharmaceuticals , Agriculture 6635 1270 [email protected]

Ashwin Patil Research Analyst Automobiles & Telecom 6635 1271 [email protected]

Anisha Makani Research Analyst Infrastructure,Capital Goods,Engineering 6635 1273 [email protected]

Ankit Jain Research Analyst FMCG , Retail & Consumer Durables 6635 1214 [email protected]

Ami Shah Research Analyst Cement & Sugar 6635 1247 [email protected]

Chaitra Bhat Research Analyst Banking & Financial Services 6635 1211 [email protected]

Institutional Equities

Pratik Doshi Director 98210 47676 - [email protected]

Hardik Mehta Sales & Dealing 93203 08811 6635 1246 [email protected]

Dhruman Mehta Sales & Dealing 93207 63218 6635 1293 [email protected]

Varsha Jhaveri Sales & Dealing 93241 47566 6635 1296 [email protected]

Hitesh Doshi Sales & Dealing 93222 45130 6635 1281 [email protected]

Rachit Shah Sales & Dealing 93250 07714 6635 1310 [email protected]

Bharat Shah Sales & Dealing 98337 97256 6635 1261 [email protected]

Documents

Whirlpool Ind