Recommendations » India

Whirlpool of India Ltd. review and analysis by Keynote Capitals

By Keynote Capitals

 

Whirlpool of India Limited is a subsidiary of Whirlpool Corporation, USA and is one of the leading manufacturers of home appliances in the country primarily engaged in manufacturing and selling consumer durables such as Refrigerators, Washing Machines, Air Conditioners, Microwave Ovens and semi-finished goods caters to consumers in India and abroad.

 

Executive Summary

Consumer spending and Urbanisation:

Consumer spending is one of the important aspect that determines the economic growth and development of a country. In India, the pattern of consumer spending includes increase in earnings and higher disposable income with individuals, consumption preference, availability of credit such as loans, credit cards etc., awareness of branded products and rapid urbanisation.

Domestic demand:

Whirlpool of India Limited enjoys the market share of around 25% in refrigerator segment. The company has expertise in manufacturing frost free refrigerators. Therefore, the shift towards the high end frost free segments would aid in the growth of the company. The change in the lifestyle and increase in working women population creates huge opportunities for fully automatic washing machines and microwave ovens. The company is expected to grow 30% in washing machine and 60% in microwave oven segments in next two financial years. We expect the net sales and PAT to grow at CAGR of 22% and 31% respectively in 2010-12E on account of increase in demand and consumption.

 

 

Comfortable Cash Position:

The company is having a cash to the tune of Rs.62 crores.  There is neither a short term nor a long term debt on the company and hence will not have the burden on interest cost. As a result, we expect the improvement in PAT margin. In FY 2010, ROCE & ROE was 58.01% and 43% respectively and we also expect the increase in next two years.

Distribution network and Brand Name:

The company has significant presence in Tier 2, 3 & 4 towns and expanding its networking through alliances with HUL and Rebook to run successful co-branded promotions.

Valuations:

At CMP Rs305.6, stock trades at 20.5x at FY11E EPS and 15.5x at FY12 EPS, and at EV/EBITDA of 13.1x and 10x for FY11E and FY12E respectively. We initiate coverage on stock with fair value of Rs340.

 

Company Background

Whirlpool of India Ltd was incorporated in the year 1960 as Kelvinator of India Ltd. The company was formed in collaboration with Kelvinator International Corporation, USA for the manufacture of refrigerators compressors and allied products.

The company owns three state-of-the-art manufacturing facilities at Faridabad, Pondicherry and Pune. Each of these manufacturing set-ups features an infrastructure that is witness of Whirlpool’s commitment to consumer interests and advanced technology. The company exports their product to Russia and East European countries and exports small appliances to the USA under the Kitchen Aid brand.

Company Achievements:

1. It was voted as one of the top 25 best in India 2009 by Hewitt.

2. The Indo-American Chamber of Commerce rated Whirlpool as the Best US Company in India.

3. Whirlpool was conferred the Frost & Sullivan 2009 Business Development Strategy Leadership Award for Residential Point-of-Use Water Treatment Systems in India.

4. White Magic 1-2-3 Washing Machine was voted Product of the Year and received an award for the ‘Best Innovative Product’ in the Washing Machine category. (This is the second time that Whirlpool has been with the ‘Best Innovative Product’ by Product of the Year awarded in 2009.

5. Whirlpool was voted The Most Trusted Brand by Reader’s Digest in a survey that included quantitative as well as qualitative rounds of consumer research.

6. Whirlpool’s Genius and White Magic 1-2-3 won GOOD DESIGN®, the world’s most prestigious world design award. This award comes from The Chicago Athenaeum Museum of Architecture and Design and Metropolitan Arts Press Ltd., which presents GOOD DESIGN® awards annually to the most innovative and cutting-edge industrial, product and graphic designs produced around the world.

Exports

The Company’s Export business has achieved a turnover of Rs197Cr in 2009-10, which represents a 10% growth in turnover over 2008-09. This was achieved in spite of the global recessionary conditions prevailing in most parts of the world. In volume terms too the company recorded 11% growth over last year implying no deterioration in price & mix. The reason behind its success was due to the strategic focus on countries which are less affected by the economic recession, primarily the Oceania region (Australia+New Zealand) and the neighboring markets in the SAARC region.

Business Model

Company has sound business model with variety of consumer durable products catering to different income group of society and geographical regions. Major chunk of revenue is contributed by Refrigerator and Washing Machine divisions.

 

 

 

1) Refrigerator:

Launch of a new, premium range of 24 Frost Free Refrigerators in capacities varying from 300L - 480L under Whirlpool Proton, including a unique fully automatic 3-door format. This division has grown in terms of quantity and sales @CAGR of 12% and 17% respectively in 2007-10.

 

 

 

2) Washing Machine:

Resounding success of White Magic 1-2-3, a fully automatic top load washing   machine range launched in 6-7 kg capacity, which grew  by 5 percentage points. Complete revamp of the Semi-Automatic Washing Machine range, including the introduction of a plastic cabinet line-up. This division has grown in terms of quantity and sales @CAGR of 21% and 23% respectively in 2007-10.

 

 

 

 

3) Air Conditioner:

Launch of 35 new Split Air Conditioners marketed under the Mastermind Chrome & Aviator and 5 new Window Air Conditioners (Mastermind Deluxe and Royale). This division has seen reduction in growth of its quantity and sales @CAGR 33% and 38% respectively in 2007-10.

 

 

 

4) Microwave Ovens:

Launch of 8 microwaves in Convection and Grill, marketed as Whirlpool Magi cook. This division has   grown in terms of quantity and sales @CAGR of 111% and 58% respectively in 2007-10.

 

 

Industry Outlook

India has a huge potential for the consumer durable industry as the penetration level of many appliances are very low. The Indian consumer electronics market stood at an estimated US$ 5 Billion as of the end of 2009, and is projected to grow at a CAGR of around 15% during our forecast period (2010-2013) to reach at US$ 9.5 Billion. During 2009-10, the production of consumer electronics industry is estimated to be Rs30,150Cr as against Rs25,550Cr in 2008-09, registering a growth of about 18%. The Indian consumer durable industry has experienced several changes for the last few years on account of greater affordability and change in lifestyle, better housing, commercial advertisements, easy financing schemes etc. witnessing revolution in the Indian consumer behavior pattern.

India has an increasingly affluent middle class population that, on the back of rapid economic growth, which made the country’s consumer electronics industry highly dynamic. The consumer preference has shifted towards products and devices that come with smart technology, innovative design and sleek look. The demand for technologically advanced devices has risen owing to the benefits of making life easier with saving time and energy.

Whereas, the market survey shows that the consumption or usage of consumer electronics goods, like refrigerators, televisions and air conditioners are low ie. Refrigerator (18%), washing machine (6%), microwave oven (about 1%) and air conditioner (less than 2%). Hence there are more potential to tap the market for these goods in future.

The industry has posted 30% growth in Q1 2010 against the corresponding period in 2009 (Q1 2009) due to substantial increase in sales during summer season. The summer hasregistered the highest rise in sales of air conditioners and refrigerators, although there has been an increase in prices of AC and appliances due to high commodity prices such as copper, steal, etc and hike in VAT by few state governments. Despite the price increase, almost all the categories recorded handsome growth.

 

 

 

 

Refrigerator

Refrigerator is basically an integral part of any household appliance in Urban India. Refrigerator Volume is expected to grow by CAGR 13% p.a for next 4-5 years to 7.4million form current level of 5 million. In terms of revenue it is expected to grow @ 15% y-o-y basis to touch at Rs90bn in 2015 from existing level of Rs50bn. Its average cost is around 8,000-40,000 depending on models. Refrigerator sales in terms of volume will increase substantially as customer will buy more frost-free models with higher capacity (more than 300 liters) due to increase in disposable income, better lifestyle and climatic condition in India. The rural penetration is expected to treble by 2015 from the current 5% level.

 

 

 

 

Washing Machines

Demand for Washing Machine has been increasing day-by-day as there is increase in working women in urban India post liberalization. Washing machines volume growth is expected to touch 4.1mn by 2016 from current 2.4 mn with a CAGR growth of 9% .Washing machines revenue is expected to touch Rs40bn by 2015 from approximately Rs20bn in 2009 with a CAGR growth of around 13%.

 

 

 

Product mix will change in favor of fully automatic washing machine with available water  supply and time consumption in reloading the dryer tub.. The market share of semi automatic model is expected to reduce by 16% in 2030 from the existing 61% level. Washing machine average prices are around Rs8,000 to 30,000 depending on product specification and category. Is has also having advantage of lesser cost of maintenance and power consumption

 

 

 

 

 

 

Air Conditioner

Now a day’s AC has been considered as an essential item rather than luxury item for middle and higher income groups. As per Crisil Research, the volume of  AC market is expected to grow by CAGR 13% p.a for next 4-5 years, However, due to good product mix, the  value growth is expected to be 17%. The recent capex plans for non-residential air conditioning opportunity over the next 5 years is estimated to be Rs380 bn. Over all, economic growth as well as huge capex plans by the Government, will certainly boost commercial air conditioning industry over the next few years.

 

 

 

 

 

 

 

Microwave Ovens

We expect Microwave oven sales to grow at CAGR of 9% during 2010-16 to reach 2.3 mn from current levels in terms of quantity. Micro ovens are typically urban centric products which are more resourceful due to instant food culture in super metros among young working crowd. Price range is around Rs5,000 to Rs20,000 depending upon product specification

 

 

 

 

Investment Rationale

Domestic Consumption:Current demographics will boost growth in sales of consumer durables for the company like Whirlpool which operates in this space which manufacture product such as refrigerator, washing machine, Air conditioner and micro ovens etc. Large working population will definitely increase demand for consumer durables as life style will be improved immensely due to increased income.  Refrigerator and washing machine segment of company in terms of volume is expected to grow @ 25-30% for next two years. We believe company Net Sales & PAT to grow at CAGR of 22% and 31% respectively on account of increase in demand and consumption for consumer durables.

 

 

 

 

Urbanization:Company manufactures and sells wide range of products from Refrigerators to Micro-Oven with the pace of growth in urban population.  Indian Urban population was 25.7% in 1991, grew to 27.8% in 2001 and expected to reach 33% by 2026 out of total population. We believe that it may likely to touch 590 mn by 2030.

 

 

 

 

 

 

 

Per Capita Income:The rise in disposable income of difference classes, increases the consumption of household goods in rapid manner.  Average house hold disposable income will grow from Rs1,13,744 in 2005 to Rs318,896 in 2025 compound annual growth of 5.3%. Income will rise from Rs1,66,922 in 2005 to Rs5,13,042 in 2025 with annual increase of 5.8%. Per capita in India is expected to grow substantially on account of recent implementation of 6th pay commission and revival in economy. It is often said that the progress of a country is gauged by the spending power of people living there. India’s middle class is expected to grow over ten times from its current size of 50 mn to 583 mn people by 2025.

 

 

 

Strong Branding & Distribution Network:Company has significant presence in tier 2, 3 & 4 towns where it expands its presence and has alliance with reputed companies like Hindustan Liver Limited & Rebook to run successful co-branded promotions.

Infrastructure Investment:Government of India has huge capex plans of USD 500 bn in the XI th five year plan and projected expenditure of Rs4.35bn through the Bharat Nirman initiative spent towards rural infrastructure such as electricity, housing, roads will open new markets for consumer electronics and appliances. The GOI has made a significant commitment to infrastructure development and has been delegated by the World Bank to invest the bulk of the proposed aid of USD 3 billion in the infrastructure sector. Apart from public sector investment into infrastructure, the GOI has introduced a series of reforms to attract private sector participation and foreign direct investment.

Introduction of Goods & Services Tax (GST):The introduction of GST in 2010 by government to bring down the indirect tax would help most of these savings to be passed on to the end consumers. This will increase the affordability and thus theconsumption.

 

 

 

 

 

Valuations:

Whirlpool revenue is expected to increase at a CAGR of 22% over FY10-FY12E, mainly due to strong domestic consumption and improved market for domestic consumer durables. Whirlpool profits are expected to grow at a CAGR of ~31% over FY10-FY12E.PAT margins are expected to remain constant from 5.88% as reported in FY10 to 6.3% during FY11E and 6.8% in FY12E due to overall recovery in domestic market. ROE and ROCE are expected to be 46% and 65% respectively during FY11E.

 Whirlpool is expected to post EPS of Rs14.91 in FY11E and Rs19.76 in FY12E. At CMP Rs305.6, stock trades at 20.5x for FY11E and 15.5x at FY12 EPS, and at EV/EBITDA  of13.1x and 10x for FY11E and FY12E respectively. Based on valuation, we expect the fair value of the stock is Rs340.

 

 

 

 

Key Concerns

(i) Stiff Competition from Korean Players & Domestics players in maintaining market share.

(ii) Increase in commodity prices will put pressure on margins.

(iii) Challenge of innovating new products.

(iv) Increase in Interest rate by central bank will reduce borrowing capacity to spend on consumer durables.