Whirlpool of India - Valuations belie outlook; risk-reward unfavourable - ICICI Securities

We maintain our SELL rating on Whirlpool of India (Whirlpool) considering: (1) increasing competition expected in refrigerator segment, which has been the main growth driver for the company; (2) relatively low growth in washing machine (washers), room AC and service revenues; and (3) high valuation with the stock trading at a historical high of 54x FY20E P/E (trailing) considering the EBITDA growth of 11.3/15% in last 3/5 years.

- Revenue growth continues to be driven by refs, but is difficult to sustain due to increasing competition. Ref revenue growth has been 13%/15% in FY19/FY20, higher than washers (12.6%/11.7% in FY19/20) and room AC (-28%/11.7% in FY19/20). Services revenue has grown by 10%/8% in FY19/FY20. Trade discounts remain at 18% of gross product revenue (~11.6% in FY14). Ref/Washer constitute 62/22% of the product mix with RAC/others making the remaining 6/10% as of FY20. Overall revenue growth remains around ~12/11% in FY19/FY20. Consensus market growth expectations have been typically ~12-13% for ref/washers. We continue to highlight that steady-state revenue growth will be lower than 15% for Whirlpool without market share growth. While market share growth has happened in the past, it is difficult now due to increasing competition (Voltbek/Lloyds).

- FY20 EBITDA margin remains at 11% despite improvement in gross margin. Gross margin reached a 3-year high of 39% in FY20 (in line with higher share of refs, the highest-margin product for Whirlpool). Knowhow plus royalty expenses increased marginally to 1.46% of sales while R&D/adspend remained low at 0.7%/1.9% of net sales in FY20. Employee cost and other expenses remain 10%/18% of net sales.

- Management initiatives remain around new product launches with focus on rural reach expansion and cost optimisation. There were several launches throughout FY20. The 'go to market' strategy continues to drive increased reach in tiers-2/3 cities while maintaining presence in large towns. Strong digitisation initiatives, especially in the logistics function, have ensured a much higher fill rate of products across channels.

* There has been work on cost optimisation across levels. Company has created low-cost robot systems for automated assemblies that are manufacturing better products with increased output. These affordable automated systems are flexible, adaptable and require minimum programming.

* Company has put resources in strengthening brand and efficiency enhancement projects in supply chain and service.

* Whirlpool added Rs3bn to fixed assets in FY20 including the capitalisation of new ref lines in Pune.

* There were multiple efficiency drives in working capital management as well.

- Change in management: Whirlpool's managing director Mr Sunil D'Souza resigned and was succeeded by Mr Vishal Bhola. Mr Bhola has over 20 years of work experience in the consumer durable industry.

- Remuneration for executive directors in FY20 rose marginally by 3% to Rs124mn. Executive remuneration paid in FY18 and FY17 was Rs254mn and Rs258mn respectively. Fall in executive remuneration was due to resignation of Mr Arvind Uppal (chairman and executive director) w.e.f. 31st Dec'17.

Shares of WHIRLPOOL OF INDIA LTD. was last trading in BSE at Rs.2096 as compared to the previous close of Rs. 2069.95. The total number of shares traded during the day was 1816 in over 336 trades.

The stock hit an intraday high of Rs. 2137 and intraday low of 2081. The net turnover during the day was Rs. 3848022.

Source : Equity Bulls

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