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Recommendations India

Hitachi Home & Life Solutions 1QFY2015 performance highlights and results update

July 24, 2014, Thursday, 04:38 GMT | 23:38 EST | 08:08 IST | 10:38 SGT
Contributed by Angel Broking

For 1QFY2015, Hitachi Home & Life Solutions (India) (HHLS) reported a strong set of numbers. Its top-line improved significantly by 27.1% yoy to Rs.600cr, as against our expectation of Rs.504cr. Raw material cost as a percentage of sales improved significantly to 62.9% from 66.5% in 1QFY2014, thereby aiding EBITDA improvement. The EBITDA rose by 74.1% yoy to Rs.68.6cr and the EBITDA margin expanded by 308bp yoy to 11.4%. Consequently, the net profit for the quarter grew by 202% yoy to Rs.43cr.

Up-turn in economy to boost revenues: After an unstable past few years, the domestic economy is expected to improve along with the global economy. We believe that steady economic growth will lead to higher disposable incomes in the hands of the consumers. Also, the company will benefit on the back of demand improvement for its ductable air conditioners, from the commercial/institutional clientele, owing to pick up in construction activity.

EBITDA margin to improve gradually: With the turnaround in the economy, we expect operating leverage to come into play. We expect other operating expenses (as a percentage of sales) to come down by 295bp over FY2014-16E to 21.5% and we expect EBITDA margins to expand by 363bp over FY2014-16E to 8.0% in FY2016.

Outlook and valuation: We expect HHLS to post a 15.8% CAGR for revenues over FY2014-16E while the EBITDA is expected to improve to Rs.117cr in FY2016 from Rs.48cr in FY2014. Consequently, the PAT is expected to post a CAGR of 173% over FY2014-16E to Rs.60cr on a lower base of Rs.8cr in FY2014. At the current levels, the stock is trading at a PE of 16.9x its FY2016E earnings. We recommend a Buy rating on the stock with a revised target price of Rs.442, based on a target PE of 18x for FY2016E.