Whirlpool of India. Institutional Equities. Initiating Coverage BUY. At A Durable Inflection Point

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1 Initiating Coverage Whirlpool of India Reuters: WHIR.BO; Bloomberg: WHIRL IN At A Durable Inflection Point We believe the home appliance industry is at an inflection point and poised for a strong demand uptick whereby Whirlpool of India (WIL) is likely to be the key beneficiary. The home appliance industry is likely to post a 15% CAGR in volume terms over the next five to seven years from its subdued penetration level currently. Higher GDP growth, rising disposable income, increased urbanisation, improving rural electrification as well as rising affordability and growing necessity of white goods are key factors which will drive demand. WIL intends to outpace industry growth and aims to double its revenues by FY2 through the launch of new products, plugging portfolio gaps, scaling up other product categories and expanding its distribution reach. While we expect WIL to post a 16% revenue CAGR over, strong focus on profitability and disciplined working capital cycle and trade terms will lead to a 24.1% earnings CAGR over the same period. We initiate coverage on WIL, valuing it at 35x earnings (past three years median P/E is 31x) with a target price of Rs1,35. We have assigned Buy rating to the stock. Home appliance industry on the cusp of a turnaround: We believe the home appliance industry is on the cusp of a strong and sustainable longterm growth trajectory driven by factors such as higher GDP growth, rising disposable income, increased urbanisation and improving rural electrification. We expect the home appliance industry to post a 15% CAGR in volume terms over the next five to seven years. India s per capita GDP has increased from Rs55,366 in FY1 to Rs116,531 in, translating to a 11.2% CAGR whereas the average selling price of refrigerators, washing machines and airconditioners increased by only 6.4%, 5.% and 5.4%, respectively. Rising affordability and growing necessity of white goods is likely to spur consumer demand and improve the penetration levels for these three categories which remain low at 23%/11%/5%, respectively. WIL is favourably placed to reap the benefits: With core strengths like strong brand perception, superior quality products, focus on profitability, inhouse manufacturing and healthy market share in key products, strong parentage and technology support from Whirlpool Corporation (the world s leading home appliance brand), WIL is favourably placed to reap the benefits of upcoming consumer demand uptick. WIL aims to double its revenues by FY2 through the launch of new products (entrylevel topload washing machine, inverter AC), plugging portfolio gaps (frontload washing machine, highend refrigerator), scaling up of other product categories and expanding its distribution reach (retail presence to be increased by 5% over the next three years from 18, outlets currently). Outlook and valuation: WIL is a strong financial franchise with 24.1% earnings CAGR over, strong operating/free cash flow (Rs12.3bn/Rs9.6bn over ), lean working capital cycle, healthy margin profile (gross/ebitda margin of 41.1%/12.7% in ), healthy return ratios (RoCE/RoIC of 28.4%/117.6%, respectively, in ) and high cash balance (up from Rs67.5 in forming 6.5% of CMP to Rs141.5 in forming 13.6% of CMP) which will aid its valuation. The stock has traded at a median P/E of 31x over the past three years. We have valued WIL at 35x earnings with a target price of Rs1,35, up 25% from CMP, and assigned Buy rating to it. 16 March 217 BUY Sector: White Goods CMP: Rs1,4 Target Price: Rs1,35 Upside: 25% Chirag Muchhala Research Analyst chirag.muchhala@nirmalbang.com Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$bn) 132.3/2. 52 Wk H / L (Rs) 1,198/641 Daily Vol. (3M NSE Avg.) 55,131 One Year Indexed Stock Performance Mar16 May16 Jul16 Sep16 Nov16 Jan17 Mar17 Price Performance WHIRLPOOL OF INDIA Nifty 5 1 M 6 M 1 Yr Whirlpool of India Nifty Index Source: Bloomberg Y/E March (Rsmn) Net revenues 32,938 34,881 39,174 45,987 54,264 EBITDA 3,313 3,81 4,818 5,748 6,892 PAT 2,15 2,474 3,178 3,887 4,729 EPS (Rs) EPS growth EBITDA margin P/E (x) P/BV (x) EV/EBITDA (x) RoCE RoE RoIC

2 Home appliance industry current status and future outlook The home appliance industry in India is significantly underpenetrated. As per CRISIL estimates, the home appliance industry comprising colour televisions (CTVs), refrigerators, washing machines and airconditioners (ACs) posted a 13.2% CAGR in value terms over FY1 and stood at Rs58bn as of end. This translates to 32.8mn units in volume terms. The penetration level across product categories remains low. While CTV has the highest penetration level among the four categories at 5%, refrigerator penetration level is 23%25%. For washing machines and ACs, the penetration level is much lesser at 11% and 5%, respectively, as per industry estimates. We believe the home appliance industry is on the cusp of a strong and sustainable longterm growth trajectory driven by factors such as higher GDP growth, rising disposable income, increased urbanisation, improving rural electrification as well as rising affordability and growing necessity of white goods. We expect the home appliance industry to post a 15% CAGR in volume terms over the next five to seven years. Even in the near term, over the next two to four quarters, consumer spending is likely to rise as the negative sentiment of demonetisation fades away while positive drivers such as payout of Seventh Central Pay Commission, moderate inflation and low interest rate regime stimulate consumer demand. Impending rollout of GST is likely to be another positive trigger owing to lowering of the tax rate on white goods (currently at 25%27% for manufacturers across product categories) which will be passed on to consumers. Further, one unified market place under GST will provide an opportunity to the industry to optimise the supply chain network, improve productivity and ultimately lower costs. Exhibit 1: Home appliance industry synopsis Home appliance Size (Rsbn) CAGR (FY1 ) Size in units (mn) Penetration Top 3 players Colour television % % Sony, Samsung, LG Refrigerator % %25% LG, Samsung, Whirlpool Washing machine % 5. 11% LG, Samsung, Whirlpool Airconditioner % 4. 5% Voltas, LG, Samsung Source: Industry, Nirmal Bang Research Exhibit 2: Rise in industry size over FY1 (Rsbn) FY1 Airconditioners Refrigerators Washing machines Source: Industry, Nirmal Bang Research 2 Whirlpool of India

3 As seen in Exhibits 3 and 4 below, the affordability of white goods is on the rise as the extent of increase in per capita GDP far outpaced the rise in average selling price (ASP) of white goods products over the past seven years. Per capita GDP increased from Rs55,366 in FY1 to Rs116,531 in, translating to 11.2% CAGR over the past seven years. During the same period, the average selling price of refrigerators, washing machines and ACs increased by only 6.4%, 5.% and 5.4%, respectively. Thus, the affordability of white goods is much higher today compared to earlier years and is likely to improve further going forward. Rising affordability along with growing necessity of home appliances is likely to be a key trigger which will spur consumer demand and improve the penetration level of white goods. The affordability indicator (per capita GDP divided by average selling price of individual category) has increased consistently for all three categories refrigerator, washing machine and AC. For refrigerator, the affordability indicator rose from 5x in FY1 to 6.8x in. For washing machine, the affordability indicator increased from 5.7x in FY1 to 8.5x in. For ACs, affordability indicator grew from 2.9x in FY1 to 4.3x in. Exhibit 3: Rise in per capita GDP versus ASP of white goods (Rs/Unit) 12, 1, 8, 6, 4, 2, FY1 Refrigerator ASP (Rs/Unit) Washing machine ASP (Rs/Unit) Airconditioner ASP (Rs/Unit) per capita GDP Note: ASP Average selling price Source: Industry, Nirmal Bang Research Exhibit 4: FY1 CAGR in per capita GDP and ASP of white goods Refrigerator Washing machine Airconditioner per capita GDP CAGR (FY1) Note: ASP Average selling price Source: Industry, Nirmal Bang Research 3 Whirlpool of India

4 Whirlpool of India business overview Whirlpool entered India in the late 198s as part of its global expansion strategy. It forayed into the market under a joint venture with the TVS Group and established the first Whirlpool manufacturing facility in Puducherry for washing machines. In 1995, Whirlpool acquired Kelvinator India, marking its entry into the refrigerator market as well. In the same year, the company also acquired majority shares in its TVS joint venture and later in 1996, Kelvinator and TVS acquisitions were merged to create Whirlpool of India (WIL). This expanded the company's portfolio in the Indian subcontinent to washing machines, refrigerators, microwave ovens and airconditioners. Headquartered in Gurugram, WIL is one of the leading manufacturers and marketers of major home appliances in India. The company owns three stateoftheart manufacturing facilities at Faridabad, Puducherry and Pune. Currently, refrigerators form the largest part of WIL s product portfolio, accounting for 61% of its gross revenues. Washing machine and AC are other large product categories accounting for 2%/9% of gross revenues. The balance 1% of revenues come from microwave ovens, builtin kitchen appliances, other appliances (air and water purifiers, small domestic appliances), spare parts & accessories as well as income from services. Core strength of WIL Brand perception: The brand perception of WIL is very strong in India. The brand is known for its robustness, good quality products and superior performance. WIL also enjoys a lot of repeat purchases and wordofmouth publicity from existing consumers, a testimony to the fact that its performance measures up to consumers expectations. The more heartening fact is that WIL has built its brand equity over the years through productpull strategy by delivering quality products and not through aggressive advertisingpush strategy. WIL s advertisement spending, as a percentage of sales, stood at only 1.7% in, amounting to Rs68mn, much lower than its peers like LG and Samsung who spend 4%5% of their sales on advertising. Focus on profitability: WIL has strong focus on profitability and does not believe in compromising margins to attain volume growth. WIL looks at categoryspecific margins and there is a red line below which it will not sell. Any product in its portfolio which does not give good returns is identified and action is taken on it. One of the key criteria to judge the performance internally is that the average selling price of products should grow more than the rise in costs. Inhouse manufacturing: The two core products of WIL refrigerator and washing machine which together account for 81% of revenues, are manufactured in India. WIL does not prefer to depend on outsourcing for its two core products. Inhouse manufacturing content in case of refrigerator and washing machine is as high as 95%. It has two factories for refrigerators at Faridabad and Pune and one for washing machines at Puducherry. Across its three factories in India, the overall capacity utilisation is 6%7%. The core competency of WIL lies in managing costs which it achieves by having inhouse manufacturing facility instead of the outsourcing model. Strong parentage: WIL s parent, Whirlpool Corporation, is the world s top home appliance company. While WIL has its own research & development facility and spends.7% to 1.5% of its sales on R&D, it also gets strong support of latest cuttingedge technology and product innovation from its global parent. The royalty and technological knowhow fees paid by WIL to its parent also stand at a reasonable level of 1.3% of sales in / each, and are much lower than 3%4% royalty paid by other MNC peers to their parent. The management of WIL does not expect the current rate of royalty and technological knowhow fees to change materially. 4 Whirlpool of India

5 Exhibit 5: Revenue growth trend (Rsmn) 4, 35 35, , 25 25, , , , 4.3 (1.7) , (5) FY9 FY1 9MFY17 Net revenue % growth YoY Exhibit 6: Margin trend FY9 FY1 9MFY17 Gross margin EBITDA margin PAT margin Growth drivers of WIL Aims to double sales by FY2: WIL aims to double its revenues by FY2 through the launch of new products, plugging portfolio gaps, scaling up of other product categories and expanding its distribution reach. This will translate to a revenue CAGR of 19% in value terms. The large part of this growth is likely to be volumedriven while the industry is likely to take inflationlinked price hikes in proportion to the rise in commodity costs. Along with doubling sales growth, WIL s management intends to retain industryleading margins, which will get a further impetus through rising scale of operations. Plugging product portfolio gaps: WIL has plugged key portfolio gaps in its core categories of refrigerator, washing machine as well as AC over the past six months. In refrigerator category, WIL has launched highend refrigerators (Rs5,Rs1,, range) as well as bottommount refrigerators. In washing machine category, WIL had a large portfolio gap as it was absent from frontload washing machines which account for 25% of the market size. WIL has launched frontload washing machines in South India, the core market of WIL accounting for around 35% of its sales, and is in the process of launching them nationally in a few months. Also, WIL launched entrylevel topload washing machines (priced at Rs1,) to further strengthen its portfolio. In ACs, WIL has launched inverter ACs (currently account for 1%15% of market size) as their penetration is likely to rise from 218 onwards post introduction of new BEE norms. Distribution network expansion: The two core products of WIL refrigerator and washing machine are currently sold at around 18, to 19, retail outlets. The current retail presence accounts for only around 6% of the total retail universe in India which comprises 3, to 33, outlets that have been largely tapped by WIL s peers like LG & Samsung. WIL intends to increase its retail presence by 5% in three years. The rich experience of its new managing director, Mr Sunil D souza, from PepsiCo could be handy in enhancing WIL s distribution network. Higher distribution reach helps in achieving higher market share and volume growth. Scaling up new product categories: Excluding refrigerators, washing machines and ACs, the other product categories account for only 1% of WIL s revenues. They comprise microwave ovens, builtin kitchen appliances (hobs, ovens, dishwashers, washers & dryers etc), other appliances (air and water purifier, small domestic appliances), spare parts & accessories as well as income from services. WIL intends to increase the contribution from these other categories from 1% currently to 2% over the next few years. 5 Whirlpool of India

6 Profitability trend of WIL Having a strong focus on profitability, WIL does not believe in compromising margins to attain volume growth. The core competency of WIL lies in managing costs which resulted in the company attaining industryleading margins and becoming one of the most profitable white goods franchise. It has posted a strong improvement in gross margin from 35.8% in FY9 to 41.6%/41.3% in /9MFY17, respectively. This also led to a rise in EBITDA margin from 7.6% in FY9 to 1.9% in, with 9MFY17 margin further improving to 12.4%. While trade discount as a percentage of sales is high at 16.3% in 9MFY17, it is lower than that of industry peers LG and Samsung who offer 18% to 2% trade discount. Refrigerator and washing machine are highmargin products because of economies of scale and inhouse manufacturing whereas margins of AC and microwave oven are lower as the business is run on trading model. WIL enjoys the highest margin (twice companylevel margin) on spare parts and accessories which accounted for 3.8% of gross revenues. Exhibit 7: Gross revenue breakup across product categories FY9 FY1 Sales (Rsmn) Refrigerators 13,396 16,98 19,35 18,386 2,966 21,13 25,871 27,622 Washing machines 3,679 5,136 6,592 7,44 7,237 7,184 8,456 9,71 Airconditioners 1,382 1,98 3,541 3,271 2,511 2,117 2,864 4,24 Microwave ovens Other appliances ,452 1, Spare parts/accessories and others 1,231 1,485 1,47 1,421 1,555 1,453 1,597 1,713 Income from services Total 2,94 26,83 32,78 32,292 34,314 34,994 41,712 45,341 YoY growth Refrigerators (3.4) Washing machines (.7) Airconditioners (7.6) (23.3) (15.7) Microwave ovens (2.2) (6.2) Other appliances (65) (29.1) (17.3) (28.7) (24.5) Spare parts/accessories and others (5.3) (6.6) Income from services (6.2) Total (1.5) Note: Gross revenues includes trade discount, excise duty and other operating income Exhibit 8: Revenue mix product categorywise FY9 FY1 Refrigerator Washing machine Airconditioner Microwave Others appliances Spare parts Income from services 6 Whirlpool of India

7 Volume Value Refrigerator the core product of WIL Refrigerator segment is the largest product category of WIL, accounting for 61% of gross revenues in. The refrigerator market size in India is estimated at 11mn units annually with a penetration level of 23%25%. Unlike the AC segment, which is highly fragmented, in refrigerators top 5 players account for 9% market share. At the highend, WIL, LG and Samsung are key players, while at the lowend Videocon and Godrej have a good market share. LG is the market leader in refrigerators followed by Samsung, while WIL is believed to have a market share of 17%. Refrigerator category is poised for a healthy and sustainable longterm growth. Compared to a 11.2% per capita GDP CAGR over FY1, the average selling price of refrigerator increased by 6.4% over the same period. Thus, the affordability indicator for refrigerators improved from 5x in FY1 to 6.8x in (refer Exhibit 9). The key factors in favour of refrigerators compared to other white goods categories are: (a) Refrigerator is more affordable with its price range starting from Rs1,, (b) Refrigerator is not a seasonal product and has 24x7 daily usage, and (c) It has no alternatives unlike washing machines or ACs which have substitutes. With increasing electrification in semiurban and rural areas along with refrigerator becoming a necessity rather than a luxury product, sales growth is expected to be faster fueled by firsttime buyers. Average life of a refrigerator is seven to eight years after which replacement demand kicks in, giving incremental avenues to tap existing customers. Exhibit 9: Affordability indicator of refrigerators (Rs/Unit) 12, 1, 8, (x) , , 2. 2, 1. FY1 ASP (Rs/Unit) per capita GDP Affordablity. Note: ASP Average selling price Source: Industry, Nirmal Bang Research Exhibit 1: Industrywide sales mix of refrigerators Direct cool Frost free Source: CRISIL, Nirmal Bang Research Exhibit 11: Volume and value mix of refrigerators FY21E FY21E Direct cool Frost free Source: CRISIL, Nirmal Bang Research 7 Whirlpool of India

8 FY9 FY1 The refrigerator industry has two product categories, namely direct cool (DC) and frostfree (FF). DC refrigerators are singledoor units, occupying lesser space, available at lower price points and preferred by pricesensitive consumers in semiurban and rural areas. Capacitywise, entrylevel category of 184 litre or less forms 23% of the market, while the largestselling category is litre, accounting for 65% of the market. The demand for FF refrigerators is largely urbancentric, having twodoor or threedoor units with a separate deep freeze compartment. Capacitywise, litre refrigerator accounts for the largest chunk of the market at 5% while 2713 litre and 3135 litre products also have a reasonably good market share of 24% and 17%, respectively. Overall, the market share breakup between DC and FF categories is 73:27 in volume terms and 59:41 in value terms for the industry. Exhibit 12: Direct cool refrigerators capacitywise sales mix Exhibit 13: Frostfree refrigerators capacitywise sales mix L or less L 226L and above Source: CRISIL, Nirmal Bang Research L or less 22627L 2713L 3135L 351L and above Source: CRISIL, Nirmal Bang Research To plug its product portfolio gap in the refrigerator segment, WIL plans to launch highend refrigerators (Rs5,Rs1,, range) and bottommount refrigerators. Both these types of refrigerators will be imported. Currently, WIL s Faridabad plant in Haryana manufactures DC refrigerators and is operating at 1% capacity utilisation. The second plant at Ranjangaon, Pune, makes FF refrigerators and is operating at 6% utilisation. The Ranjangaon plant has started manufacturing some models of DC refrigerators because of capacity constraints at Faridabad plant. We expect the healthy growth momentum in refrigerator sales to continue and forecast 16.5% value growth for WIL over. We expect 13.5% volume CAGR over and inflationlinked 3% CAGR price hike over the same period. Exhibit 14: WIL s refrigerator revenue growth trend (Rsmn) 45, , , 5 3, 4 25, , , ,.7 1 (3.4) 5, (1) Refrigerator gross revenue % growth YoY Contribution to gross sales 8 Whirlpool of India

9 Volume Value Washing machine enhancing presence Washing machine is the secondlargest product category for WIL, contributing 2% to gross revenues in. The washing machine market size in India is estimated at 5mn units with secondlowest penetration among household appliances at 11%. Unlike the AC segment, which is highly fragmented, in washing machines the top 5 players account for 8% market share. At the highend, LG, Samsung and WIL are key players, while at the lowend Videocon and Godrej have a good market share. LG is the market leader in refrigerators followed by Samsung while WIL is likely to have a market share of 13%. WIL s market share is also impacted because it did not have a presence in frontload washing machine category, which constitutes 25% of industry, where IFB is the market leader. Washing machine category is poised for strong longterm growth and its penetration is likely to rise rapidly. Compared to a 11.2% CAGR in per capita GDP over FY1, the average selling price of washing machine increased by only 5% over the same period. Thus, the affordability indicator for washing machines improved from 5.7x in FY1 to 8.5x in (refer Exhibit 15). Driven by rise in household income, rising urbanisation, increased number of nuclear families, rising manpower costs (domestic help) in urban areas, rising trend of working women and availability of consumer finance are all likely to aid strong growth in the washing machine category over the next few years. Average life of a washing machine is seven to eight years after which replacement demand kicks in, giving incremental avenues to tap existing customers. Exhibit 15: Affordability indicator of washing machines (Rs/Unit) 12, 1, 8, (x) , , 2.6 2, FY1 ASP (Rs/Unit) per capita GDP Affordablity Note: ASP Average selling price Source: Industry, Nirmal Bang Research.4 Exhibit 16: Industrywide sales mix of washing machines Exhibit 17: Volume and value mix of washing machines Fully Automatic Semi Automatic FY21E FY21E Semi Automatic Fully Automatic Source: CRISIL, Nirmal Bang Research Source: CRISIL, Nirmal Bang Research 9 Whirlpool of India

10 FY9 FY1 The washing machine category has two subcategories, namely semiautomatic and fullyautomatic. Semiautomatic washing machines are available at lower price points and are preferred by pricesensitive consumers in semiurban and rural areas. They require manual intervention and are preferred in areas having water supply problems. Fullyautomatic washing machines are easy to operate, need minimum manual intervention and are a preferred choice in urban areas. Currently, the market share breakup between semiautomatic and fullyautomatic categories is 61:39 in volume terms and 43:57 in value terms for the industry. In both categories, consumer preference is moving towards highcapacity models. The 6kg to 7kg is the most prevalent category, accounting for 65% of sales while the above 7kg category accounts for 32% of sales. The shift in product mix will result in an increase in realisation across the industry. Exhibit 18: Capacitywise sales mix of washing machines Source: CRISIL, Nirmal Bang Research WM <= 6kg 6kg<WM <= 6.5kg 6.5kg<WM <= 7kg WM > 7kg WIL posted moderate gross revenue CAGR of 7.8% in washing machines over. However, it has plugged two key portfolio gaps in washing machines in the past six months. WIL has launched frontload washing machines (25% of industry size) in its key market of South India by supplying 3, units which were fully sold out. It is on course to launch washing machines nationwide in a few months. Further, WIL has also launched entrylevel topload washing machines (priced at Rs1,) to further strengthen its portfolio. With rising retail touch points, introduction of entrylevel topload models and a foray into frontload washing machine category, we expect WIL to post a strong revenue CAGR of 17.8% over. We expect a 14.8% volume CAGR over and inflationlinked price hike CAGR of 3% over the same period. The Puducherry plant of WIL is currently operating at 6% capacity utilisation. Exhibit 19: WIL s revenue growth trend in washing machines (Rsmn) 15, , , , , , , , (.7) (1,) (5) Washing machine gross revenue % growth YoY Contribution to gross sales 1 Whirlpool of India

11 Volume Value Airconditioner strong scalability likely Airconditioner (AC) is the thirdlargest product category for WIL, accounting for 9% of its gross revenues in. The AC industry market size in India is estimated at 4mn units with lowest penetration among household appliances at only 5%. The AC industry is highly fragmented with a presence of around 15 credible brands and a lot more lowpriced brands because of high import content. As the two largest components of AC, namely compressor and plastic unit, are imported from China, making AC is essentially assembly work without any entry barrier. Voltas is the industry leader with a 22% market share while LG is close second. Collectively, both players have 4% market share. WIL posted strong revenue growth of 35%/4% YoY in /, respectively, and has market share of 4% currently. Considering the low penetration level of ACs in India at only 5%, the AC industry is likely to post a sustainable longterm CAGR of 2% at least for the next 1 years. Compared to a 11.2% CAGR increase in per capita GDP over FY1, the average selling price of AC increased by only 5.4% over the same period. Thus, the affordability indicator for AC improved from 2.9x in FY1 to 4.3x in (refer Exhibit 2). The growth in AC industry is likely to be driven by rising global warming (as it is a seasonal product mainly used in harsh summer season), rising urbanisation and increase in household income. Average life of an AC is eight years after which replacement demand kicks in, giving incremental avenues to tap existing customers. However, the demand for ACs is likely to remain largely urbancentric because of its higher price (starts from Rs2,) and availability of cheaper alternatives like aircoolers. Exhibit 2: Affordability indicator of airconditioner (Rs/Unit) 12, 1, 8, (x) , , 1.4 2,.9.4 FY1 ASP (Rs/Unit) per capita GDP Affordablity.1 Note: ASP Average selling price Source: Industry, Nirmal Bang Research Exhibit 21: Industrywide sales mix of airconditioner Split ACs Window ACs Source: CRISIL, Nirmal Bang Research Exhibit 22: Volume and value mix of airconditioner FY21E FY21E Window 5 6 Split Source: CRISIL, Nirmal Bang Research 11 Whirlpool of India

12 The AC category has two subcategories, namely window and split AC. Over the past few years, the share of window AC steadily reduced from 4% in to 27% in in volume terms. Split ACs are preferred over window ACs despite being priced more by 1.2x to 1.3x times because of their zero noise level, lower running costs (electricity consumption) and easier portability. Among all white goods products, Indians are most conscious of energyefficient star rating standards in AC as it is a power guzzler. India s energy efficiency rating is comparable with global standards. Currently, the market share breakup between split and window AC categories is 73:27 in volume terms and 78:22 in value terms for the industry. The penetration of inverter AC is on the rise globally aided by new technology of variable flow as against fixed flow in split ACs. Inverter ACs account for 5% of the market in China as compared to 1% of the market in India. While inverter ACs are expensive compared to 5star split ACs, their penetration is likely to rise in India from next year once the new BEE norms come into effect from 1 January 218. Under the new norms, inverter AC will be also be rated while other categories of ACs will see their current rating going down by two notches. Thus, the current 5star AC will become a 3star AC from 218 onwards. This will narrow down the price gap between inverter and split ACs. Further, inverter AC offers 3% higher energy efficiency which will drive its faster adoption. LG has taken a lead globally by deciding to sell only inverter ACs from 217 onwards and totally exit from split and window ACs. Exhibit 23: Capacitywise sales mix of airconditioners Exhibit 24: WIL s revenue growth trend in airconditioners AC <= 1 ton 1 ton 1.5 ton 2 ton and above (Rsmn) 7, , 8 5, , 4 3, (7.6) , , (15.7) (2) (23.2) (4) FY9 FY1 Air conditioner gross revenue % growth YoY Contribution to gross sales Source: CRISIL, Nirmal Bang Research WIL is only present in residential ACs and not in commercial or VRF category. AC product portfolio of WIL witnessed a major overhaul in with the launch of all new 3D Cool Xtreme range of split ACs and a healthy rise in advertisement spending dedicated for ACs. WIL posted strong revenue growth of 35%/4% YoY in /, respectively, and has a market share of 4% currently. WIL intends to grow its market share, but will continue to focus on profitability. To tap future demand, WIL has also launched inverter AC and bridged the gaps in its product portfolio. WIL imports indoor AC units from China while outdoor AC units are subcontracted to a local manufacturer. The same practice will continue till WIL achieves scale. The AC business of WIL will also get a boost from rising retail presence. Currently, only a part of 18, to 19, retail outlets offering WIL products (refrigerator and washing machine) sell its ACs. WIL intends to enhance its AC presence to all these outlets in addition to the new distribution network expansion it has embarked upon. WIL posted a healthy 17% revenue CAGR in ACs over. In line with the strong industry growth, we expect WIL s current growth momentum to sustain and factoring in 17.3% revenue CAGR over. 12 Whirlpool of India

13 FY9 FY1 FY9 FY1 Other categories WIL intends to increase the share of revenues from other categories from 1% in to 2% over the next few years. The key products under the other categories are summarised below. Microwave ovens: Microwave ovens, once seen as luxury appliance, are increasingly finding favour with the youth and those living away from their hometown. Entrylevel ovens are becoming an integral part of kitchens of various income levels in urban towns, Tier I and II cities. Nearly 1.2mn microwave units were sold in India in. The market is dominated by convection microwave ovens which account for 7% of sales, mainly in urban areas, followed by grill oven (2%) and solo (1%). The lowerend units (21 litre or less) contribute to volume and the higherend (32 litre and above) contributes to value. Microwave oven is a highly fragmented and highly traded market with the leaders being LG, Samsung and WIL. WIL is likely to have a market share of 8% in the microwave oven segment. In, microwave ovens accounted for 1.4% of gross revenues of WIL. Other appliances: For portfolio expansion, WIL s focus is on air, water and cooking segments. They comprise builtin kitchen appliances (hobs, ovens, dishwashers, washers & dryers etc), airpurifiers, waterpurifiers and other small domestic appliances (juicer, hand blender, popup toaster and electric kettle etc). The growth in other appliances is linked to the housing segment s growth. The products are sold through tieups with builders and retail showrooms and also via other kitchenspecific tieups. WIL has already tied up with 253 outlets to sell its products. Other appliances category posted a 14.3% CAGR over. Revenues from this category stood at 1.7% of gross revenues of WIL. Spare parts and income from services: WIL enjoys highest margin (double of companylevel margin) on spare parts and accessories which accounted for 3.8% of gross revenues. They include various spares and accessories provided by WIL at the time of sale of its home appliances or at the time of their repair. WIL also provides various services such as AMC services, product technology support, and other services for domestic and export markets which gets captured under income from services and accounted for 3.3% of gross revenues. Income from services also enjoys healthy margins (above the companylevel margin). KitchenAid: KitchenAid brand was acquired by Whirlpool Corporation in 1986 and currently has 28 products which include kitchen appliances like cooking aids, outdoor grills, stand mixers, refrigeration products and dish washers. KitchenAid appliances are known for their exquisite features of fine craftsmanship, durability, quality of material and robustness and are positioned at the premium end of the market. WIL launched the KitchenAid brand in India to complement its builtin kitchen appliances portfolio. Exhibit 25: WIL s revenue growth trend in other appliances (Rsmn) 1, ,4 25 1, , (17.2) (29.1) (28.7) (24.5) (5) (65.1) (1) Exhibit 26: WIL s revenue growth trend in spare parts (Rsmn) 2,5 3 2, , , (5) (5.3) (6.6) (1) Other appliances % growth YoY Contribution to gross sales Spare parts & accessories % growth YoY Contribution to gross sales 13 Whirlpool of India

14 FY9 FY1 FY9 FY1 Financials Exhibit 27: Revenue growth trend Healthy 16% revenue CAGR and sustenance of current margins likely over WIL posted net revenue CAGR of 8% over and has become one of the leading white good producers in India in revenue terms. However, we believe the home appliance industry is on the cusp of a strong and sustainable longterm growth trajectory driven by factors such as higher GDP growth, rising disposable income, increased urbanisation, improving rural electrification as well as rising affordability and growing necessity of white goods. Even in the near term, over the next two to four quarters, consumer spending is likely to rise as the negative sentiment of demonetisation fades away while positive drivers such as payout of Seventh Central Pay Commission, moderate inflation and low interest rate regime stimulate consumer demand. WIL aims to double its revenues by FY2 through the launch of new products, plugging portfolio gaps, scaling up other product categories and expanding its distribution reach. Hence, we expect WIL to post 16% net revenue CAGR over. Having a strong focus on profitability, WIL does not believe in compromising margins to attain volume growth. The core competency of WIL lies in managing costs, resulting in it attaining industryleading margins and becoming one of the most profitable white goods franchise. It posted a strong improvement in gross margin from 35.8% in FY9 to 41.6%/41.3% in /9MFY17, respectively. This resulted in a rise in EBITDA margin from 7.6% in FY9 to 1.9% in, with 9MFY17 margin improving to 12.4%. While we expect the white goods industry to undertake inflationlinked price hike in a rising commodity cost environment, still as a matter of prudence we have factored in a marginal decline in gross margin of WIL to 41.1% in. However, with rising economies of scale (16% revenue CAGR), benign royalty costs and moderate advertisement spending, we expect a moderate rise in EBITDA margin from 12.4% in 9MFY17 to 12.7% in. Along with improving operating leverage, rising other income owing to increased cash balance will lead to a rise in PAT margin from 8.1% in 9MFY17 to 8.7% in. Exhibit 28: Margin trend (Rsmn) 6, , 25 4, , , 4.3 (1.7) , (5) Net sales % growth YoY Gross margin EBITDA margin PAT margin Exhibit 29: Trade discount trend (Rsmn) 8, , , 5, 4, 3, 2, 1, FY9 FY1 9MFY17 Trade discounts % of gross sales Exhibit 3: Trend in advertisement spending (Rsmn) FY9 FY1 Advertisement expense % of sales Whirlpool of India

15 FY9 FY1 FY9 FY1 FY9 FY1 Healthy fixedasset turnover despite higher inhouse manufacturing WIL manufactures its two core products, refrigerator and washing machine (81% of gross revenues) with a high inhouse manufacturing content of 95%. WIL enjoys capacity utilisation of 6%7% across its three plants in India, leading to a healthy fixedasset turnover of 3.1x in. Although WIL reported gross revenue CAGR of 9.5% over, gross block increased at a lower rate of 5.5% CAGR. Generally, the global norm is that capex should not exceed 3% of turnover which WIL follows. We expect 16.4% gross revenue CAGR over, but capex is likely to be moderate at Rs2.6bn over the same period. Rising scale of operations will be aided by optimising current plant capacity and increasing plant utilisation level, which will lead to fixedasset turnover rising to 3.8x in. Exhibit 31: Gross block and fixedasset turnover trend (Rsmn) 16, (x) 6 14, 12, 1, 8, , 4, 2, 2 1 Gross block Healthy return ratios owing to strong profitability Fixed asset turnover (x) WIL is a healthy financial franchisee with moderate capex requirement, debtfree balance sheet, and healthy profitability. WIL has high cash balance in its books, Rs8.5bn in which will rise to Rs18bn in on generation of healthy free cash flow. Cash per share is likely to rise from Rs67.5 in (6.5% of CMP) to Rs141.5 in (13.6% of CMP). The rising cash balance will suppress return ratios with RoCE declining from 3% in to 28.4% in and RoE falling from 23.8% in to 22.5% in. However, RoIC has sharply increased from 3.9% in to 9.8% in and is likely to rise further to 117.6% in. Exhibit 32: Trend in return ratios Exhibit 33: Rising cash balance (Rsmn) 2, 16, 12, 8, 4, (Rs) RoE RoCE RoIC Cash balance Cash per share 15 Whirlpool of India

16 FY9 FY1 FY9 FY1 FY9 FY1 Strong cash flow generation WIL has a strong track record of generating healthy operating and free cash flows. With healthy revenue growth, strong profitability and lean working capital cycle, WIL is likely to generate total operating cash flow of Rs12.3bn over as compared to Rs9.3bn during. Due to lower capex outlay of Rs2.6bn over, we expect WIL to generate total free cash flow of Rs9.6bn over as compared to Rs7.4bn in. Exhibit 34: Operating and free cash flow trend (Rsmn) 6, 5, 4, 3, 2, 1, Operating cash flow Free cash flow Lean working capital cycle to continue Since, WIL has reduced its cash conversion cycle to below 1 days owing to higher creditor days and moderate debtor days. In the past two years, excash net working capital position as a percentage of sales turned negative and stood at (2.8%) in. With healthy revenue CAGR of 16% over, we are factoring in a rise in working capital position on a conservative basis as a matter of prudence. For FY17/FY18/FY19, we expect excash net working capital as a percentage of sales to be.6%/1.6%/2.5%, respectively. Despite the increase, the working capital position will continue to be lean. Exhibit 35: Trend in working capital cycle Exhibit 36: Excash net working capital position (days) (Rsmn) 1, , (.4).6 1 (.4) (1) (5) (2.9) (2) (1,) (2.8) (3) (1,5) (4) Debtor Days Creditor Days Inventory Days Excash net working capital As a % of sales 16 Whirlpool of India

17 3QFY17 performance Exhibit 37: WIL s 3QFY17 performance Y/E March (Rsmn) 3Q 2QFY17 3QFY17 YoY QoQ (% ) 9M 9MFY17 YoY (% ) Gross sales 1,13 1,584 1,95 (.1) (4.6) 32,98 36, Less: excise duty (4.9) 2,815 3, Less: trade discounts & rebates ,645 (3.6) (6.1) 5,442 6,4 1.3 Net sales 7,517 7,877 7,542.3 (4.3) 24,722 27, Add: other operating income ,192 1, Net revenue from operations 8,29 8,434 8,12.9 (3.9) 25,914 29, Cost of materials consumed 3,475 4,14 3, (6.3) 11,795 13, Purchase of stockintrade , ,464 3, Inc/Dec in inventories 692 (275) (322) NA NA 1, (69.9) Employee costs 1,16 1,18 1, ,876 3, Other expenses 1,523 1,824 1, (1.4) 4,773 5, Total expenditure 7,377 7,537 7,258 (1.6) (3.7) 23,145 25, EBITDA (6.) 2,769 3, EBITDAM Depreciation (2.5) (5.7) Interest costs Other income PBT (5.3) 2,569 3, Tax , Extraordinary items (5) (5) PAT (5.6) 1,78 2, Other comprehensive income/(loss) (23) 6 Total comprehensive income ,684 2,367 NPM EPS (Rs) (5.6) WIL posted gross revenues of Rs1bn for 3QFY17, flat on YoY basis, on account of lower sales in November and December 216 because of demonetisation. In 9MFY17, gross revenues stood at Rs36.8bn, up 12% YoY. Net revenues stood at Rs8.1bn in 3QFY17, up 1% YoY and Rs29.3bn in 9MFY17, up 13% YoY. Gross margin rose 36bps YoY to 43.3% as a result of significant reduction in direct costs. It rose by 11bps to 41.3% in 9MFY17, in line with gross margin of 41.6%. Driven by higher gross margin, EBITDA grew 29% YoY to Rs843mn. EBITDA margin was up 23bps YoY at 1.4%. In 9MFY17, EBITDA margin was up 17bps YoY at 12.4%. Higher other income (up 39% YoY at Rs19mn) boosted bottomline as PAT jumped 45% YoY to Rs554mn. In 9MFY17, other income stood at Rs562mn, up 4% YoY, while PAT grew 38% YoY to Rs2.3bn. Trade discount & rebate as a percentage of gross sales continued to remain at similar level of 16.3% in 3QFY17/9MFY17 (versus 16.9% in 3Q & 16.5% in 9M). 17 Whirlpool of India

18 Apr12 Aug12 Jan13 Jun13 Nov13 Apr14 Sep14 Feb15 Jul15 Dec15 May16 Oct16 Mar17 Apr12 Aug12 Jan13 Jun13 Nov13 Apr14 Sep14 Feb15 Jul15 Dec15 May16 Oct16 Mar17 Outlook and valuation We believe the home appliance industry is on the cusp of a strong and sustainable longterm growth trajectory driven by factors such as higher GDP growth, rising disposable income, increased urbanisation, improving rural electrification as well as rising affordability and growing necessity of white goods. Even in the near term, over the next two to four quarters, consumer spending is likely to rise as the negative sentiment of demonetisation fades away while positive drivers such as payout of Seventh Central Pay Commission, moderate inflation and low interest rate regime stimulate consumer demand. WIL aims to double its revenues by FY2 through the launch of new products, plugging portfolio gaps, scaling up other product categories and expanding its distribution reach. Hence, we expect WIL to post 16% net revenue CAGR over compared to 8% net revenue CAGR reported over. Having a strong focus on profitability, WIL s gross margin grew from 35.8% in FY9 to 41.3% in 9MFY17, while EBITDA margin rose from 7.6% in FY9 to 12.4% in 9MFY17. Despite high inhouse manufacturing (95% inhouse for refrigerators and washing machines), fixedasset turnover is expected to rise from 3.1x in to 3.8x in because of rising scale of operations aided by rising plant utilisation level (6%7% currently). Strong operating/free cash flow (Rs12.3bn/Rs9.6bn over ), lean working capital cycle, rising cash balance (from Rs67.5 in forming 6.5% of CMP to Rs141.5 in forming 13.6% of CMP) and healthy return ratios (RoCE/RoIC of 28.4%/117.6% in, respectively) will aid the valuation of WIL. The stock has traded at a median P/E of 31x over the past three years as it witnessed a sharp rerating since April 214 on the back of healthy revenue growth and improvement in margin profile. We expect WIL to post 16% revenue CAGR over. A 18bps EBITDA margin improvement over will translate to 21.8% EBITDA CAGR while rising other income will lead to a strong 24.1% earnings CAGR over. We have valued WIL at 35x earnings with a target price of Rs1,35, up 25% from CMP, and assigned Buy rating to it. The target PE of 35x factors in +.5 standard deviation from past 3 year s median PE and a PEG ratio of 1.5x. Exhibit 38: P/E charts (Rs) (x) (3 year Median P/E = 31x) 2x 25x 3x 35x 4x stock price Source: Bombay Stock Exchange, Nirmal Bang Research P/E 3 year Median P/E SD +1 SD +2 SD 1 Exhibit 39: Peer comparison P/E versus EPS growth Exhibit 4: Peer comparison P/E versus RoE (PE, x) (PE, x) 45 Symphony 45 Symphony 4 Whirlpool Hitachi 4 Hitachi 35 Bluestar 35 Whirlpool 3 Voltas 3 Voltas Bluestar ( EPS growth YoY, %) ( RoE, %) Note: Bloomberg consensus numbers for all companies; Source: Bloomberg, Nirmal Bang Research 18 Whirlpool of India

19 Company background Whirlpool entered India in the late 198s as part of its global expansion strategy. It forayed into the market under a joint venture with the TVS Group and established the first Whirlpool manufacturing facility in Puducherry for washing machine category. In 1995, Whirlpool acquired Kelvinator India, marking its entry into the refrigerator market as well. In the same year the company acquired majority shares in TVS joint venture and later in 1996, Kelvinator and TVS acquisitions were merged to create, Whirlpool of India (WIL). This expanded the company's portfolio in the Indian subcontinent to washing machines, refrigerators, microwave ovens and airconditioners. Headquartered in Gurugram, it is one of the leading manufacturers and marketers of major home appliances in the country. The company owns three stateoftheart manufacturing facilities at Faridabad, Pondicherry and Pune. Key management personnel Mr. Arvind Uppal chairman: He has over 25 years of experience in business development, international marketing and general management. Prior to joining WIL, he was with Nestle in India and overseas. He was appointed as chairman of WIL with effect from 27 January 21. Mr. Sunil D Souza managing director: He has over 25 years of experience working in various leadership positions, including in Pepsico and CocaCola. He joined WIL from PepsiCo Inc. where he held the position of general manager for the VIMAPS region Vietnam, Cambodia, Myanmar, Laos, Malaysia, Singapore, Indonesia, Brunei, Mongolia and Pacific. Mr. Sunil D Souza has rich and diverse experience in general management, strategy, sales, marketing and innovation in consumerdriven industries with Indian, international and multicultural experience. He is MD of WIL since 22 June 215. Mr. Anil Berera executive director & chief financial officer: He has over 3 years of rich working experience in finance, accounts, treasury, taxation and general management. Mr. Anil Berera joined the company in March 27 as chief financial officer for India operations and was promoted as chief financial officer & vice president (Asia South). He has held several key positions in finance and accounts in many organisations including PriceWaterHouse Coopers, Gillette and Becton Dickinson. Mr. Vikas Singhal executive director: Mr. Vikas Singhal, aged 45 years, has over 23 years of rich and diverse experience, working with top notch global organisations. Starting with Carrier Aircon, he was with Delphi Automotives, Owens Brockway and Piramal Enterprises in various leadership positions. Pror to joining WIL, he served as as vicepresident manufacturing and technology for Piramal Enterprises in its glass division. Key risks Significant slowdown in consumer spending could impact industry demand and affect HIL s revenue growth. Any unforeseen rise in competitive intensity, especially by LG and Samsung, could impact the margins of WIL. Any adverse change in terms of trade by WIL could lead to elongation in the working capital cycle. Any disruption in manufacturing plants of WIL could impact availability of products as the two core categories refrigerators and washing machines are manufactured inhouse. Wild fluctuations in commodity prices, if cannot be passed on to the consumers, could impact profitability. If WIL is unable to launch new products as per the revised ratings of BEE, than WIL s demand and market share may get disrupted. 19 Whirlpool of India