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MIRC Electronics - Initiating Coverage - Kotak

Posted On: 2018-01-28 09:57:28

MIRC Electronics (MIRC) is one of India's oldest home appliance players, with a presence in TVs, room ACs and washing machines. The company's brand "Onida" is one of the most enduring one in the consumer space (fourth most trusted brand in the consumer durables category - by Brand Trust Report 2016). Given the favourable demographics coupled with rising disposable income, the demand for consumer durables is expected to remain robust. Realising the market potential, MIRC is making efforts in cutting costs and monetizing surplus assets. With a much stronger balance sheet in FY18, the company now plans to significantly raise marketing spends in coming months. We expect 15%/51% sales/EBIDTA CAGR over FY17-FY19E. The company is forecast to turnaround in FY18 after several years of losses. The stock trades at reasonable valuations of ~27.5x/20.4x and ~17.5x/13.8x FY18E/FY19E EPS and EV/EBIDTA respectively. Initiate coverage with BUY with a target price of Rs 70, valuing the stock at 28x FY19 earnings.

Key Investment argument

- Strong demand drivers in place: The Consumer Electronics and Appliances (CEA) market has been witnessing robust growth trends in the past 5 years. Moving forward, the market is expected to foresee double digit growth reinforced by the surging rural consumption, reducing replacement cycles, increasing penetration of lifestyle appliances, and availability of multiple brands at various price points. The CE market revenues is expected to grow at a cumulative average growth rate (CAGR) of 17.2% from FY16 to FY21 while the Appliances segment is expected to grow at a CAGR of 11.6% over the same period, resulting in a CAGR of 16.5% for the overall CEA market. In comparison to global growth averages, this is almost double that of other economies.

- Product innovation driven by deep market understanding: Due to its long presence in the Indian industry, the company has a good understanding of the consumer preferences. It recently launched the Onida KY Thunder TV, which delivers 1200 watts of sound and addresses the needs of indian consumer who is also keen to enjoy good quality sound. Sensing the potential of the inverter ACs, the company has launched Regalio-Smart Wi-Fi AC with inverter technology.

- Focus on core business and efficiency: With the manufacturing world increasing moving towards greater automation, MIRC is also making efforts to remain lean and efficient. It has done a meaningful rationalisation of its manpower in FY17 by offering VRS at its Wada plant. The company is also actively seeking to monetize its surplus land and property, with a view to invest the proceeds in driving the core business of Room ACs and TVs.

- Well placed to leverage its strong balance sheet: The company has raised Rs 721 mn through preferential allotment of shares at Rs 37.5 per share. We expect the company to utilize the issue proceeds to raise marketing spends in the coming months.

- Aiming for contract manufacturing: Recently, the government has increased customs duty on various electronics items including TVs. The idea is to boost domestic manufacturing, as electronics imports form a significant component of the non-oil imports. The implementation of GST has also come as positive for the organized industry. MIRC has excess land and manufacturing capacity at its Wada plant, which it plans to utilize for contract manufacturing.

Valuation

MIRC is well-placed to grow at a steady pace in the future on account of 1) Robust long term demand drivers in place for the company's products like room ACs and TVs 2) Strong balance sheet will enable the company to focus on brand building and promotions, which will drive sales 3) Given the robust infrastructure of the company, it is also aiming for contract manufacturing for other consumer durables, which can be a revenue stream for the company.

The stock is currently trading at 27.5x and 20.4x FY18 and FY19 earnings respectively, which is at a discount to listed peers.

We value MIRC at 28x FY19 earnings and arrive at a price target of Rs 70, resulting in an upside of 37% from current levels.

Shares of MIRC ELECTRONICS LTD. was last trading in BSE at Rs.58 as compared to the previous close of Rs. 55.85. The total number of shares traded during the day was 358328 in over 1747 trades.

The stock hit an intraday high of Rs. 58.6 and intraday low of 55.1. The net turnover during the day was Rs. 20620241.


Source: Equity Bulls

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