After the corporate tax cut, this stock has been one of the best performers

Highlights
–  Most of the new products will be premium
–  Network expansion is under way
–  Competition can impact margins

–  The stock commands rich valuations

Whirlpool, one of India’s major home appliance manufacturers-cum-retailers, reported a strong performance in the quarter gone by. Besides product innovations, a growing distribution network, benefits of tax reduction and a healthy capital structure will work in favour of the company. The stock may be looked at despite being expensive.

Q2 FY20 review

Positives

–  Revenue growth was robust on the back of new products and growth at a rate faster than the industry. Gross margin expanded due to benign raw material costs and emphasis on high-value products. These factors led to better operating profitability.

–  Tax rate, at 12.3 percent during the quarter, was significantly lower vis-à-vis the Q2 FY19 tax rate of 34.8 percent. This resulted in a better bottomline and margin.

Negatives

–  Operating and employee expenses, as percentage of sales, increased YoY (year-on-year). This restricted EBITDA (earnings before interest, tax, depreciation and ammortization) margin uptick.

–  Interest cost rose to Rs 4.33 crore during the quarter, as against Rs 26 lacs in Q2 FY19.


Why consider the company?

For white goods, consumer financing is available across the country. The government’s thrust towards electrification is evident. Owing to higher disposable incomes, buyers have been replacing products in a shorter period of time than before. Collectively, these positives hint at promising prospects for the industry as a whole.

Market share gains

To achieve this objective, the management has outlined the following strategies:-

– Refreshing the product portfolio

– Strengthening the distribution channels

– Making investments in brand building

– Ramping up of emerging categories (water purifier, ACs, kitchen hoods and hobs)

– Undertaking capacity upgradation in the core categories (refrigerators, washing machines)

Should these strategies be successfully implemented, Whirlpool’s growth should be 5-6 percent higher than the industry’s growth rate.

Revitalizing products

Whirlpool’s product mix is gradually transitioning towards premium white goods. Innovation (ie. differentiated features) should help the company create a niche for itself.

For instance, in recent times, Whirlpool launched an all new range of direct cool auto-frost refrigerators, semi-automatic washing machines with built in heaters, and ‘Do It Yourself Filter Replacement’ technology water purifiers. There are plans to conduct pilot launches of bar refrigerators and chest freezers as well.

More touch points

Currently, Whirlpool has close to 35,000 points of sale across India. Besides expanding the coverage, the management is working towards increasing the per store turnover rate through better execution of marketing drives. A large chunk of the top line growth would be attributable to tier 2 and 3 regions.

The proportion of online sales, which stands at around 11 percent annually, is slated to increase in the coming fiscals.

Joint venture with Elica

After acquiring 49 percent stake in Elica PB India Pvt Ltd in June 2018, Whirlpool is witnessing traction in kitchen product sales. Moreover, Elica’s distribution channel is 4 times bigger than that of Whirlpool. This, in turn, provides the latter a good opportunity to expand its reach.

Capex

Whirlpool’s existing factories are operating at close to full capacity. Over the next 5 years, the company plans to incur Rs 600 crore to expand its existing product capacities (refrigerators and washing machines) and foraying into new and relatively smaller product lines (purifiers, dishwashers, ovens etc) on a bigger scale.

Risks

Whirlpool derives most of its revenue from southern and western India. This leads to a high degree of geographic concentration.

In the white goods industry, presence of numerous domestic and international brands indicates that taking price hikes (mainly in connection with higher raw material costs) may not be always possible. Consequently, if sale volumes are not up to the mark, it will impact margins.

As of now, Whirlpool fully imports front load washing machines and premium refrigerators. Till its local manufacturing operations pick up pace, the scope to derive additional operating leverage, one of the company’s key strengths, may be restricted.

Valuation

Whirlpool’s stock, which trades at 41.5 times its FY21 projected earnings, deserves its rich valuation multiple. Apart from the above-mentioned moats, this is on account of robust fundamentals, cash flow generation capabilities, cost efficiencies, working capital optimisation and earnings boost (jointly because of steady revenue growth and reduction in tax rate).

The company’s performance stands out at a time when consumption slowdown is a prevalent theme across the country. A glance at the stock’s price performance chart during the last 12 months clearly shows the significant re-rating in the stock (from 44.8 times trailing 12 month earnings as on 22nd November, 2018 to 57.6 times a year later).

After an impressive H1 FY20 show in terms of top line accretion (17.94 percent increase YoY) and YoY margin improvement (EBITDA margin – 10.17 percent vs 9.12 percent, PAT margin – 8.96 percent vs 6.65 percent) , Whirlpool is expected to continue its upward momentum in the second half of the fiscal year as well. The management has been pretty upbeat about the festive season offtake too. Accordingly, in our view, the stock should be able to hold its own in spite of mild market volatility.

Nevertheless, the steep rally, especially post 19th September 2019 (tax cut announcement date)  leaves little room for any sharp upside from here on, at least in the near future. Investors with a long term horizon may consider going long.​

Source: Moneycontrol

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