IFB Industries Ltd. Absolute : LONG Relative : Overweight Initiating Note Regular Coverage 17% ATR in 12 months

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1 IFB Industries Ltd. Absolute : LONG Relative : Overweight Initiating Note Regular Coverage 17% ATR in 12 months 215 Equirus All rights reserved Rating Information Price (Rs) 617 Target Price (Rs) 724 Target Date 31 st Mar '16 Target Set On 11 th Mar 15 Implied yrs of growth (DCF) 15 Fair Value (DCF) 61 Fair Value (DDM) Ind Benchmark BSESMCAP Model Portfolio Position NA Stock Information Market Cap (Rs Mn) 24,982 Free Float (%) 25.4 % 52 Wk H/L (Rs) /67.2 Avg Daily Volume (1yr) 176,638 Avg Daily Value (Rs Mn) 51 Equity Cap (Rs Mn) 45 Face Value (Rs) 1 Bloomberg Code IFBI IN Ownership Recent 3M 12M Promoters 75. %. %. % DII 3.2 % 1.4 % 2.3 % FII.4 %.2 %.4 % Public 21.5 % 1.6 % -2.6 % Price % 1M 3M 12M Absolute 25. % 25.2 % 75.4 % Vs Industry 22.9 % 24.7 % % Whirlpool 5.1 % 15. % % Hitachi 16.8 % 45.9 % % Consolidated Quarterly EPS forecast Rs/Share 1Q 2Q 3Q 4Q EPS (14A) EPS (15E) Well placed to ride the recovery cycle; Initiate with Long IFB Industries Ltd. (IFB) is a brand name synonymous with washing machines with Indian consumer. It has ~41% market share in the front loading washing machine category. We expect IFB to witness 23% revenue CAGR over FY15E-18E mainly due to: 1) Improvement in sales volumes with revival in consumer sentiment; 2) Tie-up with OEM for contract manufacturing of front loads; 3) Indigenous manufacturing of top loads; 4) Launch of new product categories like ACs and 5) Aggressive expansion of distribution network and investment in IFB points. We expect Gross/EBITDA margin to expand by 64/35 bps to 43.5%/11.4% by FY18E led by: 1) Positive operating leverage 2) Softening of commodity prices; 3) Higher in-house manufacturing; and 4) Relatively stable currency. Accordingly, ROE/Core ROIC is expected to improve to 25%/35% by FY18E from 18%/14% in FY15E. We initiate coverage with a long rating with Mar 16 PT of Rs. 724 based on 28x Mar'16 TTM EPS of Rs Improvement in sales volumes with revival in consumer sentiment and introduction of new product categories to help IFB post 23% revenue CAGR over FY15E-18E: The washing machine industry in India saw a mere 2% CAGR over FY With the expected improvement in consumer sentiment on account of positive macro-economic indicators, IFB is set to improve its sales volume due to its leadership position in the high growth front load segment. Furthermore, indigenous manufacturing of top loads, supply to OEMs in front load and contribution from new product line like AC is likely to support the growth momentum. Furthermore, aggressive expansion in distribution network coupled with investment in IFB points will further aid growth and improve its presence pan India. Efforts to rationalize costs will improve profitability: IFB has made conscious effort to rationalize cost by increasing indigenization and reducing the share of traded goods by commencing in-house manufacturing of top load washing machine from Q3FY15. Aided by softening of commodity prices the gross margin is set to further expand by 65 bps in FY16E to 43.6%. Improvement in sales volume will provide a better operating leverage along with a stable currency that will mitigate the forex losses. We expect EBITDA margin to improve by 35 bps to 11.4% by FY18E. The efforts are already panning out as during 9MFY15, Gross/EBITDA Margins improved to 42.5%/7.7% from 41.8%/4.3% in FY14. Lean balance sheet, improvement in return ratios and robust FCF generation on account of lower capex: IFB only has negligible debt for its working capital needs. With high sales growth, improving utilization and improving profitability the ROE/Core ROIC is set to improve to 25%/35% by FY18E from 18%/14% in FY15E. Also, with improving profitability and completion of capex for indigenizing top load, we expect IFB to see 115% FCF CAGR over FY15E-18E. With the growth momentum in place the stock has seen a recent re-rating and is currently trading at 24x its Mar 16 TTM EPS which implies significant discount of 32%/17% to Whirlpool/Hitachi respectively. We initiate coverage on the company with Mar 16 PT of Rs 724 based on 28x Mar 16 TTM EPS of Rs Consolidated Financials Consumer Durables 1) Dominant player in front load category 2) Export supply contract to OEM 3) In-house manufacturing of Top Load 4) Successful launches of new products 5) Robust margins improvement 1) Shift towards higher value front load category 2) Favorable macro-economic indicators 3) Robust 15% volume CAGR in Front Load category Rs. Mn YE Mar FY14A FY15E FY16E FY17E Sales 1,215 12,87 15,971 19,529 EBITDA 596 1,17 1,641 2,168 Depreciation Interest Expense Other Income Reported PAT ,47 1,452 Recurring PAT ,47 1,452 Total Equity 3,372 4,28 5,75 6,527 Gross Debt Cash 1, ,84 2,879 Rs Per Share FY14A FY15E FY16E FY17E Earnings Book Value Dividends.... FCFF P/E (x) P/B (x) EV/EBITDA (x) ROE (%) 15 % 18 % 23 % 25 % Core ROIC (%) 1 % 14 % 23 % 3 % EBITDA Margin (%) 6 % 8 % 1 % 11 % Net Margin (%) 5 % 5 % 7 % 7 % March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 1 of 25 Before reading this report, you must refer to the disclaimer on the last page.

2 Company Snapshot How we differ from Consensus EPS Sales PAT - Equirus Consensus % Diff Comment FY15E % Very limited consensus and hence not FY16E % FY15E 12,87 12,627 1 % FY16E 15,971 15,181 5 % FY15E % FY16E 1, % directly comparable. Our Key Investment arguments: Revival in consumer sentiment, leadership position in front loads, indigenous manufacturing of top loads and introduction of new product categories to aid 23% revenue CAGR over FY15E-18E. Indigenization, improving capacity utilization, softening of commodity prices and a stable currency will aid Gross/EBITDA Margin to improve to 43.5%/11.4% by FY18E from the levels of 41.7%/5.8% in FY14. Net debt free status, improving ROE/Core ROIC to 25%/35% levels by FY18E and robust FCF generation due to lower capex. Key Assumptions: Rs. Mln. FY 14 FY 15E FY 16E FY17E FY18E Revenue Front load WM 5,664 7,422 9,72 12,81 14,989 Revenue TL WM ,294 1,766 Net Revenue 1,215 12,87 15,971 19,529 23,94 EBITDA 596 1,17 1,641 2,168 2,738 EBITDA Margin (%) 5.8% 7.9% 1.3% 11.1% 11.4% PAT ,47 1,452 1,876 PAT Margin (%) 4.9% 5.1% 6.6% 7.4% 7.8% Units Sold: Volume of Front Load WM 226, , ,7 415,22 487,334 Volume of TL WM 39,299 42,5 54,665 71,64 92,384 Risk to Our View: Adverse currency movement, low capacity utilization Key Triggers Revival in consumer sentiment, improvement in sales volumes, indigenous manufacturing of top load washing machines Sensitivity to Key Variables % Change % Impact on EPS EBITDA Margin (%) -1 % -12 % DCF Valuations & Assumptions: Rf Beta Ke Term. Growth Debt/IC in Term. Yr 7.7 % % 2.5 % 12. % - FY15E FY16E FY17-19E FY2-24E FY25-29E Sales Growth 25 % 25 % 22 % 18 % 13 % NOPAT Margin 4 % 6 % 7 % 7 % 7 % IC Turnover RoIC 14.4 % 22.6 % 33.1 % 34. % 33.4 % Years of strong growth Valuation as on date (Rs) Valuation as of 31st Mar' Based on DCF, assuming 15 years of 18% sales CAGR and 32% average ROIC, we derive current fair value of Rs. 528 and Mar 16 fair value of Rs. 61. Company Description: Incorporated in 1974 as Indian Fine Blanks Ltd., IFB Industries currently manufactures markets and trades in home appliances like fully automatic front and top load washing machines, microwave ovens, ACs etc. It also manufactures and markets fine blanking products for the auto industry. Set up by a technocrat named Mr. Bijon Nag in Kolkata, it has manufacturing facilities in Kolkata and Bangalore for fine blanking division and in Goa for Home appliances division. It also imports various products from countries like Italy, China, and Korea etc. Comparable valuation Mkt Cap Price Target EPS P/E BPS P/B RoE Div Yield Company Reco. CMP Rs. Mn. Target Date FY14A FY15E FY16E FY14A FY15E FY16E FY14A FY15E FY14A FY15E FY16E FY14A FY15E IFB Long , Mar ' % 18 % 23 %. %. % Whirlpool NR 74 89,235 NR NR % 27 % 27 %. %. % Hitachi Long 1,264 34,353 1,39 Mar ' % 27 % 33 %.1 %.1 % March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 2 of 25

3 Investment Rationale Exhibit 2: Reversal of factors that led to subdued growth over FY11-14: A growing middle class along with improvement in consumer sentiment to lead washing machine industry volume CAGR of 11% over FY15E-2E: Washing machine industry in India stood at ~5 mn units in FY14 (Exhibit 1). Overall, the washing machine industry saw 13% volume CAGR over FY9-15E. But FY9-11 saw a massive 3% volume CAGR fueled by higher GDP growth and higher household consumption expenditure. While growth over FY11-14 was dampened due to various factors like rising inflation, decelerating GDP growth below 5%, reducing household consumption expenditure and massive rupee depreciation over the period (Exhibit 2). These factors dampened consumer sentiment and industry saw a negligible growth rate of mere 2% over FY The recent data indicates reversal of factors that led to subdued growth over FY With the inflation cooling-off to around 5.5%, GDP growth inching above 5.5% and rupee stabilizing around 63 to USD the favorable macro-economic scenario is likely to boost consumer sentiment. With the reversal in cycle the industry is expected to grow at ~18% in FY15E. With the new demand returning in the market, we expect washing machine industry to grow at 11% volume CAGR over FY15E-2E. Exhibit 1: Washing machine industry likely to see 11% CAGR over FY15E-2E: FY 9 FY 1 FY 11 FY 12 FY 13 FY 14 Source: Adi-media research, Equirus Securities FY 15E FY 16E FY 17E FY 18E FY 19E Estimated WM sales (Mln units) Industry Growth (%) FY 2E 4% 35% 3% 25% 2% 15% 1% 5% % -5% -1% -15% Source: Bloomberg, Aided by improving macro environment a growing middle class is set to bring back volume growth to market: We expect the washing machine industry to witness 11% volume growth over FY15E-2E. With the rising income levels we expect a gradual increase in the target households i.e the households falling under the upper (income >Rs. 5 lacs) and middle income group (income >Rs..9 lac to Rs. 5 lacs) (Exhibit 3). These target households are likely to bring in higher replacement demand and generate new demand in the industry. We expect the current penetration of ~14.9% to improve to ~23.5% by FY2E. Exhibit 3: Rising middle class likely to boost volume growth: *Penetration assumed on the basis of 11 years of durable life for a washing machine. Source: Mckinsey, Equirus Securities, Adi-Media Research FY1 FY5 FY1 FY11 FY12 FY13 FY14 FY15E FY2E No of households (in mn) Target households (in mn) No of WMs sold (in mn) No of WMs in the system (in mn) WM Penetration (%) 3.3% 4.8% 8.9% 1.4% 12.% 13.3% 14.7% 14.9% 23.5% March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 3 of 25

4 Leadership in front load washing machine segment + indigenous manufacturing of top load washing machines + brand leverage in new product categories to aid revenue CAGR of 25% over FY15E-18E in home appliance segment: Attractive pricing, features and warranty will help IFB to maintain leadership position in the fast growing front load washing machine segment: The Washing Machine industry in India stood at ~5 mn units in FY14. Front load washing machine formed only 11% of the industry with a market size of ~.55 mn units. Globally, front load washing machines are more popular as they consume less water and are more energy efficient as compared to top load washing machines. With increasing awareness among Indian consumers regarding benefits of front load washing machines, the segment is likely to see 15% volume CAGR over FY15E- 18E higher than industry CAGR of 1%. Historically, IFB was the pioneer in the front load washing machine industry in India and used to command an abnormally high market share of more than 55% until FY9. Since then, with the entry of MNC players like Samsung and LG, its market share has corrected to ~41% in FY14. But it is still the market leader for front load washing machines with sales of.23 mn units and a market share of ~41% in FY14. In the price sensitive washing machine market, IFB s USP lies in offering superior product quality at an attractive price. This is apparent from the fact that IFB front loads are attractively priced as compared to its competitors (Exhibit 4). Furthermore, IFB also offers full product warranty of 4 years along with a 1 year spare parts warranty which is the highest in the industry. IFB has the full product range in the front load segment with capacities ranging from kg. Our channel checks also indicate that the company proactively launches new models with updated features periodically. From Q3FY15 the company has launched new products in the mid to high range segment. With the revival in consumer sentiment, IFB is likely to garner 45% market share by FY18E. Strong in-house R&D capabilities help to introduce products with latest technology: IFB was a pioneer in the front loading washing machine industry in India. It has a strong in-house research team of ~5 people which enables it to make products confirming to the needs of Indian consumer. The company is also quick in adoption of new technologies. Due to this IFB has been able to maintain a leadership position in frontloading washing machine segment. Despite strong competition from players having a MNC parent backing, IFB has been able to garner a leadership position due to strong in-house R&D. Total research expenses stood at ~1% of net sales in FY14. Efficient capacity utilization post starting of contractual manufacturing for OEMs: IFB has total installed capacity of ~.3 mn units of front load washing machines in a single shift per annum. Though the front loading washing machine market in India is growing at a fast pace it was still at.55 mn units in FY14. In order to utilize its capacities efficiently, IFB has recently entered into an agreement with a Japanese OEM to manufacture front load washing machine on a contractual basis. These machines will be sold in the markets of South East Asia by the Japanese OEM. IFB is likely to supply ~3, units in FY16E and gradually will scale it upto ~5, units by FY18E. It has also appointed sales persons in the Middle East to negotiate contracts for OEM manufacturing. Contractual manufacturing is a huge positive for the company as it will help in efficient capacity utilization, better negotiation with suppliers etc. Improvement in volumes post revival in consumer sentiment and with the start of contractual manufacturing, fast growing front loading industry, offering products with attractive pricing and features and strong in-house R&D will aid IFB to maintain its leadership position in front load segment. We expect 26% revenue CAGR over FY 15E-18E from the segment: (Exhibit 5). Exhibit 4: Attractive pricing as compared to peers in the popular 6-8 kg segment of front load washing machines: Company Model Capacity Prices LG 7.5 kg Rs Samsung 7 kg Rs Siemens 7 kg Rs Bosch 7 kg Rs IFB 7 kg Rs Source: March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 4 of 25

5 Exhibit 5: IFB likely to post 26% revenue CAGR over FY15E -18E: 2, 15, 1, 5, FY 9 FY 1 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E: Source: Equirus Securities, Company Front Load Washing Machine Sales (Gross) (Rs. Mln.) Commencement of indigenous manufacturing will help IFB to improve presence in high volume top load segment; we expect robust 37% revenue CAGR over FY15E-18E: Top load washing machines comprise ~89% of the washing machine market in India with total sales volume of 4.45 mn units in FY14. The washing machine industry in India is highly price sensitive. Because of its competitive pricing as compared to front load machines the top loads enjoy a higher market share in India as opposed to global trend. Within the top load segment, IFB operates in the niche fully automatic segment which formed only ~4% of the top load industry in FY14. IFB is planning to aggressively target the high volume Indian top load market by indigenously manufacturing top load washing machines. IFB has invested Rs. 55 mn to setup initial capacity of 15, units per annum in a single shift at its Goa facility and started production from Q3FY15. Previously it used to import its entire top load product line and trade in it. Indigenizing production will give the ease of inventory management, timely availability of goods, production flexibility etc. It will also help in launching new models with latest updated technology, increase the number of available models and have the entire range from 6.5kg to 9 kg capacities. Previously when it used to import, it did not have the flexibility of introducing new models frequently and with the required features and pricing. IFB will continue to offer full product warranty of 4 years and motor warranty of 1 years on its top loads which is highest in the industry. With indigenization we expect IFB to capture ~1.3% of the total top load segment by FY18E and see robust 37% revenue CAGR over FY15E-18E: (Exhibit 6). Exhibit 6: Top Load washing machines to see 37% revenue CAGR over FY15E- 18E: 2, 1,5 1, 5 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E Source: Equirus Securities, Company Top Load Washing Machine Sales (Gross) (Rs. Mln.) Exhibit 7: Pricing as compared to peers in the top load segment: Company Model Capacity Prices LG 6 kg kg Rs Samsung 6 kg kg Rs IFB 6 kg kg Rs. 249 Whirlpool 6 kg kg Rs Videocon 6 kg kg Rs Onida 6 kg kg Rs Source: Flipkart.com Leveraging brand IFB in other home appliance categories; a market leader in some of the niche categories: Though IFB is operating in the niche segment of fully automatic front and top load washing machines, it has etched a mark for itself in the washing machine industry. IFB is leveraging this brand by venturing into other home appliance categories like microwave ovens, clothes dryer and dishwashers. Microwave oven is an under penetrated category with a market size of Rs. ~12.2 bn in FY14 and penetration of only ~5.3% (Exhibit 8). The low penetration level in India March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 5 of 25

6 provides an opportunity for a huge potential market to be tapped. Currently IFB imports and trades its entire range of microwaves from its various vendors in Thailand, Korea and China etc. Due to good quality, attractive pricing and specifications IFB has been successful in gathering ~17% market share in the Microwave oven category during 9MFY15. It is one among the top three players in the category and its products are attractively priced as compared to competition (Exhibit 9). Going forward we expect 2% revenue CAGR in this category from FY15E-18E. Exhibit 8: Opportunity and current market share in Microwave oven category: Exhibit 1: Leadership position in various product categories: Leadership position in various product categories: Market Share Clothes Dryer ~8% Dishwashers ~5% Recent foray into ACs which is likely to be a high growth category going forward: Product category: Market Size (INR Bln) Current Penetration Market Share FY14 FY 14 Microwave Oven 12.2 ~5.3% ~13% Source: GFK Neilsen, Company, Equirus Securities Key Competitors LG, Samsung, Whirlpool From FY13 the company has introduced new product category viz ACs with focus only on room ACs. The market size for ACs in India stood at ~Rs. 137 bn in FY14 with merely ~7% penetration (Exhibit 11). Given the low penetration in the AC industry in India and with revival in consumer sentiment the category is likely to see growth of ~15-2% over the next couple of years. Exhibit 9: Pricing and specifications as compared to competitors in microwave oven category: Companies Specifications Pricing LG 21L, 8W, Convection oven Rs Samsung 21L, 8W, Convection oven Rs. 199 Whirlpool 2L, 8W, Convection oven Rs IFB 2L, 8W, Convection oven Rs.1983 Godrej 2L, 8W, Convection oven Rs. 999 Bajaj 23L, 8W, Convection oven Rs. 749 Source: priedekho.com, Flipkart.com IFB also manufactures clothes dryer at its Goa facility. It is the market leader with ~8% of the market share. It is also a market leader in the dishwasher segment with ~5% of the market share. Though the dishwasher market in India is still in infant stage at Rs. 6 mn, the penetration level is still negligible. This offers IFB immense potential to grow going forward. Despite being a late entrant in this category, its products were well accepted by the market. ACs contributed ~11% of the revenue during 9MFY15 with sales of Rs. ~1, mn. It offers various incentives to promote its products like free installation services. Introducing products at various price points, good product quality, attractive pricing and an established brand name will help IFB to post 25% revenue CAGR over FY15E-18E in AC category. This will be higher than the industry growth rate of ~15%-2% (Exhibit 13). IFB has also conducted test trials in the refrigerator category and is expected to launch it soon. Currently they are test marketing the product in few select markets and are looking to launch it at an opportune time. In India, though the penetration level is among the highest in all consumer white goods at 31%, we expect it to improve further giving potential to grow further. Exhibit 11: Market size and penetration level in AC industry: Product category: Air conditioner Market Size (Rs. bn) FY FY 14 17E Expected CAGR FY 14-17E: Curre nt Penetr ation Current Market Share % ~7.2% New Entrant Source: Euromonitor, Company, Equirus Securities Key Competitors: Voltas, Bluestar, Godrej, Whirlpool March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 6 of 25

7 Exhibit 12: Pricing and specifications as compared to other players in Air Conditioner category: Companies Specifications Pricing LG 1.5 ton, 3 star rating Rs Voltas 1.5 ton, 3 star rating Rs. 399 Whirlpool 1.5 ton, 3 star rating Rs IFB Industries 1.5 ton, 3 star rating Rs. 3,542 Godrej 1.5 ton, 3 star rating Rs Blue Star 1.5 ton, 3 star rating Rs Source: priedekho.com Exhibit 13: 25% Revenue CAGR in AC Segment from FY15E-18E: 3, 2,5 2, 1,5 1, 5 FY 14 FY 15E FY 16E FY 17E FY 18E Source: Equirus Securities, Company AC Sales (Gross) (Rs. Mln.) Introduction of newer products will help it to better negotiate with MBOs and retailers for showcasing its products. It will also improve IFB s shelf space visibility, making it a one stop brand for complete home appliances solution. With introduction of latest models, established brand name in the category and revival in consumer discretionary spending we expect the company to see a higher revenue CAGR of 24% over FY 15E-18E as compared to 19% CAGR over FY9-15E. (Exhibit 14). This is visible in the 9MFY15 results as the net sales in the home appliances segment show a robust growth of 23% y/y. Exhibit 14: Sales in Home Appliances Segment likely to see a 25% CAGR over FY15E-18E: 3, 25, 2, 15, 1, 5, FY 9 FY 1 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E Home Appliance Segmnet Sales (Gross) (Rs. Mln.) Revival in auto industry to help IFB post 25% revenue CAGR from FY15E-18E from fine blanking segment: The performance of the fine blanking segment mainly depends on the growth in the automobile industry (Exhibit 15) as it mainly caters to the automobile sector in both 2- wheeler and 4-wheeler segment (Exhibit 16). IFB manufactures various components such as cushion plates for seat recliners, K12 tongue for seat belt assembly, door latches, gate assembly for gear transmission, gear shift selectors, interlocks and transmissions, rotor segments for motors etc. It supplies products to marquee clients like Maruti Suzuki, Ford India, Toyota Kirloskar Motors, Lucas TVS, Yamaha Motorcycles, Honda Motorcycles, Scooters India etc. Recently, the company also ventured into the after-market business under the brand name Ultramiles. It manufactures 2-wheeler motor cycle chain and sprocket kits which are directly supplied to the customer. Being a new player in the segment, it just achieved break-even in Q3FY15. Going forward the company expects to see good traction from this retail segment. The performance of the segment depends heavily on revival in the auto industry. With the improvement in sales volume of 2-wheeler and 4-wheelers, IFB has already seen a 38% y/y improvement in revenue for 9MFY15 and EBITDA margin has also expanded by 7 bps to 1.3% for 9MFY15. It currently has a healthy order book of Rs. 38 mn which is March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 7 of 25

8 likely to be executable over the next 6 to 9 months. We expect the company to post topline CAGR of 25% over FY15E-18E as compared to 2% CAGR over FY9-15E (Exhibit 17). Exhibit 15: Fine Blanking Revenue Growth in line with the auto industry growth: 4% 3% 2% 1% % -1% FY1 FY11 FY12 FY13 FY14 FY15E 2W sales growth (%) 4W sales growth (%) Auto industry sales growth (%) Fine Blanking Revenue Growth (%) Source: SIAM, Equirus Securities, Company Exhibit 16: Break-up of revenue from fine blanking segment: 5% 4% 1% 1% 1% 42% 47% Exhibit 17: Fine blanking revenue to grow at 25% CAGR over FY15E-18E: 6, 5, 4, 3, 2, 1, FY 9 FY 1 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E Fine Blanking Segment Sales (Gross) (Rs. Mln.) Expansion of distribution network and ease of service availability to further strengthen brand IFB IFB operates through five key channels to reach its customers viz. multi-brand stores, IFB exclusive stores (IFB Points), CSDs, dealers who are service providers and distributors. Revenue contribution from each of these channels is as follows: Exhibit 18: Revenue contribution to sales volume from various channels: Contribution to sales volume from various channels 9MFY15 Multi-brand stores 68% IFB Points 16% Source: company 2-wheeler 4-wheeler Electrical Heavy vehicles 3-wheeler Engineering Other E-commerce 2% CSD/defense canteens/institutions etc 6% Dealers (who are service providers) 1% Distributors 7% Source: Company March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 8 of 25

9 Aggressive expansion in relatively weaker geographies to improve pan India presence IFB has a total 7+ dealers across India and is particularly strong in South India which contributes ~5% to the sales. Having introduced new product range, company now wants to increase its presence in other geographies. IFB is planning to aggressively expand its distribution network by adding ~175 dealers per quarter, particularly in newer geographies. We believe this will help in increasing revenue contribution from Ex-South market. Also with starting of new product categories like ACs it is appointing dealers who are also service providers mainly in the northern and western regions where demand for AC is strong. Expansion in IFB points improving product visibility in Tier 2/3 cities Besides expanding the dealers and distributors network, IFB is setting up its own stores called IFB points. These stores are franchise operated and would help to increase reach in tier 2 and 3 cities where the multi-brand stores are not present. The company provides initial support like rentals and initial advertisement expenditure to the store owner and charges it to its P&L. The company also extends relatively higher credit days (~3 days) to IFB Points and to MBOs. Another benefit of setting up IFB points is that servicing issue can be resolved promptly. IFB Points were started around the year 212 and the contribution to sales has increased from 6-7% in FY12 to ~16% by 9MFY15. Currently they are ~289 IFB Points operational with ~7% operating in tier 2 & 3 cities. The company constantly evaluates performance of IFB Points on various parameters and puts greater emphasis on store viability and profitability. Addition/deletions of IFB Points are made accordingly. Out of the total operating IFB points currently ~85% of the stores are profit making. IFB is targeting that around 9% of the store should be profit making by FY16. To reach this level it is focusing more on ground level activities like staff training etc. Ease of service availability along with highest offered product warranty to support brand IFB: We believe apart from strong distribution network, ease of service availability is a key aspect for sale of consumer durable. IFB has ~654 service franchises spread over India, one of the highest among competitors. It plans to add 2 more service centers by Q4FY15. Also servicing can be done through the IFB points. The company also has a dedicated 24*7 call center to cater to its customers. In the washing machine segment IFB is also said to have the highest full product warranty of 4 years. In a price sensitive industry these factors help in building a reliable brand image and gaining more market share. Business of Brands : IFB has the highest A&P spend amongst comparable players To establish brand IFB in a highly competitive industry dominated by MNCs, IFB has one of the highest A&P spends among the listed players (Exhibit 19). IFB has a wide spectrum of products for which it commands a significant market share as opposed to players that are dominant in a single product category. Being a market leader in various categories and due to better advertising, IFB has created a strong brand recall among its customers which creates a customer pull and helps to maintain leadership position (Exhibit 2). Exhibit 19: A&P spends as a % of net sales across various players: 7% 6% 5% 4% 3% 2% 1% % Source: Company FY 9 FY 1 FY 11 FY 12 FY 13 FY 14 IFB Hitachi Whirlpool Exhibit 2: Leadership position in various product categories: Leadership position in various product categories: Market Share Front Loaders ~4% Clothes Dryer ~8% Dishwashers ~5% Microwaves ~15% March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 9 of 25

10 Q1FY7 Q3FY7 Q1FY8 Q3FY8 Q1FY9 Q3FY9 Q1FY1 Q3FY1 Q1FY11 Q3FY11 Q1FY12 Q3FY12 Q1FY13 Q3FY13 Q1FY14 Q3FY14 Q1FY15 Q3FY15 IFB Industries Ltd. Absolute LONG Relative Overweight 17% ATR in 12 Months Increased indigenization of products, indigenous manufacturing of top load washing machines and softening of commodity prices to aid gross margin expansion: IFB has been successful in indigenizing its products with the imported raw material content reducing from 33% in FY9 to 22% by FY14 (Exhibit 21). We further expect the indigenization to continue and reduce the imported RM to 2% by FY18E. Exhibit 21: Reducing imported raw material content: 1% 8% 6% 4% 67% 66% 78% 7% 72% 78% 79% 79% 8% 8% expansion of 64 bps by FY18E to from the levels of 42.9% in FY15E (Exhibit 23). For 9MFY15 IFB has already seen an expansion of 7 bps from the levels of 41.78% in FY14. Exhibit 22: Recent cool-off in commodity prices: Recent cool-off in commodity prices 2% % 33% 34% 22% 3% 28% 22% 22% 21% 21% 2% FY 9 FY 1 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E Imported RM (%) Indigenous RM (%) Inspite of indigenization, the depreciating rupee had adverse impact on its gross margins as the share of traded goods was increasing. With the in-house manufacturing of top-load washing machines from Q3FY15, we expect the imported traded goods to reduce from 37% of total sales in FY14 to ~29% of total sales by FY18E. Also with in-house manufacturing of top load the company will have better raw material purchasing efficiency and production flexibility for the top loads which will aid in gross margin expansion. This will largely negate the increase in share of traded goods viz. ACs. Also, Increase in commodity prices had adversely affected IFB s profitability in the past. To track the commodity prices we created a weighted average index with the following weights of commodities: 5% steel, 3% crude, 1% copper and 1% aluminum. After peaking in Q2FY14, the commodity prices have cooled off and the index is down ~3% y- o-y (Exhibit 22). The fall is mainly led by falling crude prices, (~(-)5% y/y), steel (~(- )21% y/y) and copper (~(-)17% y/y. We expect the lower commodity prices to benefit IFB and aid expansion in gross margins. These factors combined will help in gross margin Commodity price index Source: Bloomberg, Equirus securities Exhibit 23: Gross margins set to expand: 12, 1, 8, 6, 4, 2, FY 9 FY 1 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E Gross Profits Gross Margins 45.% 44.% 43.% 42.% 41.% 4.% 39.% 38.% 37.% March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 1 of 25

11 Improving utilization in front load washing machines and higher volumes in top load washing machine to provide higher operating leverage: IFB has total installed capacity of 3,, units/annum in a single shift. This can be easily ramped up to three shifts taking the total capacity to.9 mn units/annum in triple shifts. We expect increase in sales volume with the revival in consumer sentiment and shifting preference of Indian consumer to front load washing machines aligning with the global trend. Also with the start of contractual manufacturing of front loads we expect gradual ramp up from ~2, units in FY16E to ~4,5 units in FY18E. With increase in sales volume, we expect capacity utilization in front load segment to improve from present ~25% level to ~59% by FY18E. Exhibit 24: Improving asset turns with improvement in utilization: 3, 25, 2, 15, 1, 5, FY 9 FY 1 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E Net Sales (Rs. Mln) FA Turns (x) In a brownfield expansion, IFB has set up a top load washing machine manufacturing plant at its Goa facility with a capacity of 1,5, units/annum in a single shift at a total cost of Rs. 55 mn. This facility is operational from Q3FY15 and we expect it to function at ~62% capacity utilization in a single shift by FY18E. Also, Improvement in volumes will help the company to absorb its fixed costs which stand at ~18% of total sales in FY14. Efficient utilization level in both top and front load segment will help in better absorption of fixed costs which stand at ~18% of total sales in FY14. We expect a boost in EBITDA margins by 35 bps over FY15E-18E. With improvement in volumes in both top and front load washing machine, the assets will be better utilized which will help improve the asset turns (Exhibit 24). IFB is also taking measures to rationalize cost like indigenizing production etc. Stable Rupee to help boost EBITDA margin: IFB had forex losses in FY14/13/12 to the tune of Rs. 144/2.9/66.9 mn due to adverse rupee movement. The company has started hedging its forex requirements from Q4FY14. Also with a stable currency we expect the forex losses to minimize and hence boost margins. We expect the EBITDA margin to improve by 35 bps over FY15E-18E from 5.8% in FY14 to 11.4% by FY18E. (Exhibit 25). EBITDA margin for 9MFY15 stood at 7.7% showing an improvement of ~4 bps y/y. Exhibit 25: Improving EBITDA profit and EBITDA margins (%): 3, 2,5 2, 1,5 1, 5 FY 9 FY 1 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E 14% 12% 1% 8% 6% 4% 2% % EBITDA EBITDAM (including forex adj) EBITDAM (excluding forex loss) March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 11 of 25

12 IFB enjoys a lighter balance sheet with zero debt and best in class cash conversion cycle: IFB enjoys a debt free status with only short term debt of ~48 mn Rs. in FY14 mainly to finance its ongoing capex in top loading washing machines. IFB has strict control on its inventory and receivable days and as on FY14 Inventory/ receivable days stand at 55/25 days respectively. It offers products on strict terms to its dealers and distributors and avoids large retail chains where it has to give more credit period. It also enjoys high payable days from its suppliers of ~15 days in FY14 (Exhibit 26). As a result it has a favorable cash conversion cycle as compared to its peers (Exhibit 27). Exhibit 26: Stable working capital cycle and cash conversion cycle FY 9 FY 1 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E Inventory Days Receivable Days Payable Days CCC Improvement in volumes along with improving profitability will boost the return ratios With the sales volume picking up in both the top load and front load segment there will be better utilization of assets. Also improving profitability on account of lower input costs, stable currency and better absorption of fixed costs will boost the ROE and Core ROICs. We expect ROE/Core ROIC to expand from 15%/9.7% in FY 14 to 25%/35% by FY 18E. (Exhibit 28 & 29). Exhibit 28: Improving ROE with improving profitability: 2, 1,5 1, 5 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E PAT (Rs. Mln) ROE (%) 3% 25% 2% 15% 1% 5% % Exhibit 27: Favorable cash conversion cycle as compared to peers FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E -5. Exhibit 29: Improving Core ROIC and its components: 4% 3% 2% 1% % FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E Hitachi Symphony IFB NOPAT Margins (%) Core ROIC (%) Fixed Asset Turnover (Days) Working Capital Turnover (Days) March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 12 of 25

13 Lower Capex needs post the recent expansion to help IFB see 44% CAGR in its CFO over FY14-18E: IFB recently added capacity of 1,5, units of top load washing machines at a cost of Rs. 55 mn. It already has an installed capacity of.3 mn front loading washing machines per annum in a single shift and hence there is no requirement of future capex. It can easily ramp up capacity to 2 or 3 shifts as required. Also, IFB enjoys a stable working capital cycle with favorable payable days from its vendors while it is very cautious in extending extra credit to its customers. All these factors will help the company to see 44% CAGR in its Cash Flow from Operations over FY14-18E. Exhibit 3: CFO to see 44% CAGR over FY14-18E: 2,5 2, 1,5 1, 5 FY 1 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E CFO (Rs. Mln) Forecast: Key Assumptions Exhibit 31: Key Assumptions: Rs. mn FY 14 FY 15E FY 16E FY17E FY18E Revenue Front load WM 5,664 7,422 9,72 12,81 14,989 Revenue TL WM ,294 1,766 Net Revenue 1,215 12,87 15,971 19,529 23,94 EBITDA 596 1,17 1,641 2,168 2,738 EBITDA Margin (%) 5.8% 7.9% 1.3% 11.1% 11.4% PAT ,17 1,415 1,831 PAT Margin (%) 4.9% 5.1% 6.4% 7.2% 7.6% Units Sold: Volume of Front Load WM 226, , ,7 415,22 487,334 Volume of TL WM 39,299 42,5 54,665 71,64 92,384 March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 13 of 25

14 Exhibit 32: IFB Outlook in its key product categories and category trend: Investment Risk & Concerns Product Category trend Category to see higher cagr of IFB Outlook To see 17% domestic volume cagr over FY15E-18E Front Loading Washing Machine 15% over FY15E-18E as To maintain leadership position with compared to industry cagr of 45% market share by FY18E. 1% over FY15E-18E. Start of contract manufacturing to further boost volumes Top Loading Washing Machine Category to grow at the To see robust 3% volume cagr with industry cagr of 1% over FY15Ecommemcement of indigenous 18E. Shift to be seen towards manufacturing of top loads the fully automatic category. Microwave Ovens To maintain leadership position with Low penetration of ~5.3% in ~15% market share and see 2% the category as on FY14 revenue cagr from FY15E-18E. Air Conditioners New entrant in the category, likley Low penetration of ~7% in the to see 25% revenue cagr over FY15E-- category as on FY14 18E from a low base Forex volatility: IFB imports a significant amount of its raw materials and finished products. It incurred forex losses to the tune of 11.3/3.4/14.4 Mln Rs in FY12/13/14. With a stable rupee the company will be able to mitigate its forex losses and improve its profitability. Rising input costs: If the input costs keep on rising, it would lead to rise in the product prices which would make them less affordable and hence defer growth. Prolonged macro slowdown: If the recovery in macro environment is further prolonged and there is no improvement in the private consumption expenditure by the people then it will impact companies like IFB which are primarily into consumer durables which are based on discretionary spending of the people. Increasing competition in the consumer durable segment: IFB has presence in the consumer durable categories like ACs, Refrigerators, Microwaves, and Washing Machines etc. where there is high competition from various multinational players. Though it is an established brand name and leader in the front load washing machine segment, it has to compete with various MNC and large domestic players in other product categories like ACs, top load washing machines, microwaves, refrigerators etc. Poor Infrastructure: Unavailability of power and water in various parts of the country would be a threat to the growth of consumer durable products like washing machines, ACs, refrigerators etc. March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 14 of 25

15 Corporate Governance Key highlights on the corporate governance in the company through its recent annual reports: Composition of the board of directors: The board of directors of the company constitute of 8 members including the executive chairman, Jt. executive chairman and MD, and CFO. Management Communication: Management uploads detailed quarterly presentation regarding the performance of the company. It also started to host conference calls post Q2 FY15. Dividend payout: IFB does not pay any dividend as it deploys the incremental capital in the business. Financial distress: In past, IFB had taken huge debt and allocated capital in unrelated business which had not done well due to which it was referred to the BIFR cell in 21 and had its debt payment schedule restructured with its lenders. The promoters infused equity on preferential basis and the company turned net worth positive in 29 and successfully came out of BIFR. Other businesses of promoters: The promoter has other unlisted company named IFB Automotive which is in the similar business of fine blanking as IFB Industries. Competitor Analysis Washing Machine industry in India is fully organized with the existence of various MNCs and Indian players like Bosch, Samsung, Whirlpool, IFB, Godrej, Electrolux, Videocon etc. In India the industry is divided into top loading, front loading washing machines, with automatic and semi-automatic variants. Though the market is skewed in favor of top loading and semi-automatic category, there is a gradual shift in the front loading and fully automatic category which has emerged as the high growth category. The front loading industry is expected to grow at 15% CAGR over FY15E-18E which is higher than the industry CAGR of 1% over FY15E-18E. IFB is the market leader in front loading washing machine category with market share of ~41% in FY14. Its products are attractively priced for the given features as compared to competitors. It is present more in the affordable segment than the niche luxury segment also it offers more SKUs as compared to new players like Bosch and Siemens (Exhibit 34). Exhibit 33: No. of products offered at various price points in front loading washing machine segment: (Rs.) LG Samsung IFB Bosch Siemens 2-27K NA NA 4 NA NA 27K-35K K-45K K+ 3 8 NA NA 1 Source: Company websites Auditors: The company gets its books of account audited by BSR & Co. LLP. In their report on FY14 accounts, the auditors have not made any qualifications or adverse remarks. Other companies audited by the auditors include Infosys, Wipro, DCB Bank etc. March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 15 of 25

16 Exhibit 34: Comparison of various features across players for the popular 6-9 kg fully automatic front loading washing machine category: IFB - Elite Aqua SX LG - F1B8NDL25 Bosch - WAE 26IN LCD Display yes yes yes Auto Tub Clean yes yes yes 1 year motor 4 year super warranty warranty and 2 2 year full product Warranty and 1 year spare part year full product warranty warranty warranty Washing programs >1 Wash care programs - 6 Motion DD Technology Water usage 52L NA NA Max. Spin Speed 12 rpm 12 rpm 1 rpm MRP Rs Rs. 369 Rs Capacity 7 kg 6.5 kg 7 kg Source: Company website, Channel Check Report: We conducted channel checks in different regions to gauge the market perception of IFB s product and its standing against competition. Good product quality, highest full product warranty of 4 years and attractive pricing has helped IFB to create a strong brand name. Consumers acknowledge that IFB is the pioneer of front loading washing machine segment in India and hence Pan-India brand IFB has become synonymous with washing machines. IFB has a huge hold over southern market as it is the only brand offering fully automatic front loading washing machines at an attractive price. IFB is using this market to test the new product launches namely Kitchen hobs, built in ovens, built in kitchen appliances etc. These are currently available only in the markets of Goa, Bangalore and Kolkata and are gaining momentum there. IFB is gaining a stronghold over North and West regions by aggressively expanding its dealer network there. Valuation The stock has seen a decent re-rating and is currently trading at ~44x its TTM Earnings and 5.5x its P/B. We give a PT of Rs. 724 at 28x its Mar 16 earnings of Rs giving an upside of ~17% on the stock. We expect the stock to see growth due to following reasons: Sales CAGR of 23% during FY15E-18E as compared to 17% sales CAGR from FY11-15E. With the revival in consumer sentiments, IFB is likely to see improvement in the sales volumes. Leadership in front load washing machine segment and market share in top load segment is set to improve with commencement of indigenous manufacturing. Leveraging brand IFB in new product categories like ACs and refrigerators and revival in auto industry to aid revenue growth in fine blanking segment. Various cost rationalization measures taken by the company by indigenization of raw materials and inhouse manufacturing of products along with better operating leverage have led to improvement in margins as 9MFY15 EBITDA Margins improved to 7.7% vs 3.7% y/y. We expect robust improvement in profitability with EBITDA Margins to expand by 12 bps in FY15 and further improve to industry standard of 11.4% by FY18E. We expect PAT CAGR of 42% over FY15E-18E. Improving ROEs from 15% in FY14 to 25% in FY18E and Core ROICs from 1% in FY14 to 35% in FY18E due to improvement in margins and improving asset turns. IFB is still trading at a huge discount to peers like Whirlpool and Hitachi (Exhibit 38). With a higher sales growth, improvement in profitability and return ratios we expect IFB to trade at historical high values. Leadership in its core business segment of front loading washing machines and conscious efforts to improve market share in other product categories makes IFB a secular play on the consumer durable sector. We value the stock at 28x its Mar 16 earnings of Rs with a PT of Rs Besides washing machines, the newly launched products i.e. ACs and Refrigerators were also well accepted in all its markets despite relatively low promotion by the company. IFB frequently launches new products with updated features in washing machine and microwave oven category. Price hikes are generally taken only with new product launches. March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 16 of 25

17 Mar/8 Sep/8 Mar/9 Sep/9 Mar/1 Sep/1 Mar/11 Sep/11 Mar/12 Sep/12 Mar/13 Sep/13 Mar/14 Sep/14 Mar/15 Sep/15 Mar/16 IFB Industries Ltd. Absolute LONG Relative Overweight 17% ATR in 12 Months Exhibit 35: TTM P/E vs. 2 year forward EPS Growth 1,1 1, Mar/8 Sep/8 Mar/9 Sep/9 Mar/1 Sep/1 Mar/11 Sep/11 Mar/12 EPS Growth Sep/12 Mar/13 Sep/13 Mar/14 Sep/14 Mar/15 Sep/15 Mar/16 5% 4% 38x 3% 3x 2% 2x 1% 12x % 6x -1% Exhibit 37: TTM P/B vs. 2 year forward RoE 1,2 1, (2) (4) (6) (8) (1,) Mar/8 Sep/8 Mar/9 Sep/9 Mar/1 Sep/1 Mar/11 Sep/11 Mar/12 RoE Sep/12 Mar/13 Sep/13 Mar/14 Sep/14 Mar/15 Sep/15 Mar/16 8% 7% 6x 6% 5x 4x 5% 2x 4% 1x 3% 2% 1% % Exhibit 36: TTM EV/EBITDA vs. 2 year forward EBITDA Growth EBITDA Growth 4, 35, 3, 25, 2, 15, 1, 5, - 1% 22x 8% 17x 6% 4% 2% % -2% 12x 8x 4x March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 17 of 25

18 Exhibit 38: Comparable valuations of companies in Consumer Durables space: Sales Growth (%) EBITDAM (%) ROE (%) P/B (x) P/E (x) EV/EBITDA (x) FY14 FY15E FY16E FY17E FY14 FY15E FY16E FY17E FY14 FY15E FY16E FY17E FY14 FY15E FY16E FY17E FY14 FY15E FY16E FY17E FY14 FY15E FY16E FY17E IFB 12% 25% 25% 22% 6% 8% 1% 11% 15% 18% 22% 25% Hitachi 18% 35% 27% 26% 6% 9% 11% 11% 3% 27% 33% 32% Whirlpool 2% 18% 17% 22% 8% 9% 1% 11% 18% 23% 24% 27% Symphony 36% 26% 3% 31% 24% 27% 27% 28% 43% 47% 5% 51% Havells 12% 8% 9% 14% 1% 1% 11% 11% 29% 23% 29% 3% Bajaj Electricals 19% 9% 16% 16% 2% 3% 6% 7% -1% 1% 17% 21% NM Source: Bloomberg, Equirus Securities March 12, 215 Analyst/s: Urvija Shah ( )/Ankit Kr Jain ( ) Page 18 of 25