Whirlpool of India. Institutional Equities. Analyst Meet Update. Aims To Sustain Strong Growth Trajectory; Retain Buy BUY

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1 Analyst Meet Update Whirlpool of India Reuters: WHIR.BO; Bloomberg: WHIRL IN Aims To Sustain Strong Growth Trajectory; Retain Buy We attended the analyst meet held by Whirlpool of India (WIL) recently. We remain optimistic on WIL s strong growth prospects. With the consumer durable market in India expanding, the company s management aims to achieve strong double-digit growth and exceed the industry growth rate aided by a strong product portfolio, strengthening distribution network as well as gaining market share. WIL intends to strengthen its position in refrigerators and washing machines as well as scale up adjacent product categories by launching new variants regularly, enhancing its range and reach as well as focusing more on premium categories. WIL also aims to expand its capacity to meet rising demand and achieve strong organic growth. We continue to remain optimistic about WIL outpacing industry growth along with maintaining its superior financial franchise. We have kept our earnings estimates intact and rolled forward our valuation to FY2E financials, retaining Buy rating on WIL with a revised target price of Rs1,775 (Rs1,62 earlier) based on 36xFY2E earnings. Key takeaways from the meeting are as follows: Consumer durable industry status The management believes that the consumer durable industry is the reflection of quality of life led by the people. The industry did very well during the period 25 to 21, but slowed down from 211 onwards and turned negative in 213 and 214. Now, the industry is again doing very well and witnessing a robust recovery. As a matter of co-relation, the growth rate of the consumer durable industry is generally in line with GDP growth till GDP grows by 5%-6%. But when GDP starts growing upwards of 7%, the consumer durable industry witnesses disproportionate growth as the standard of living of the people rises. There are several triggers that are yet to fully play out for GDP growth like Seventh Central Pay Commission payout, OROP payout, two good years of agriculture and monsoon, big push to public infrastructure as well as rising electrification. These factors are likely to lead to a rise in consumption in India in the near future. Further, the consumer durable industry is also likely to benefit from rising affordability of appliances, availability of easy finance and increased replacement demand. WIL posted strong double-digit growth in seven out of the past eight quarters, with the exception of demonetisation quarter. Most of the growth was volumedriven, with WIL gaining market share. The company expects the strong doubledigit growth to continue and intends to grow ahead of the industry. WIL s growth strategy 27 November 217 BUY Sector: White Goods CMP: Rs1,515 Target Price: Rs1,775 Upside: 17% Chirag Muchhala Research Analyst chirag.muchhala@nirmalbang.com Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$bn) 193/3. 52 Wk H / L (Rs) 1,53/836 Daily Vol. (3M NSE Avg.) 6,821 One-Year Indexed Stock Performance Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Price Performance (%) 1 M 6 M 1 Yr Whirlpool of India Nifty Index Source: Bloomberg WHIRLPOOL OF INDIA Nifty 5 The management has formulated a right strategy to achieve its desired objective of strong growth and has set very clear long-term and short-term goals across business verticals and functions. The strategy is classified into four sub-categories such as: (a) Brand revitalization, (b) Refresh product portfolio, (c) Create growth opportunities, (d) Strengthen the foundation.

2 For revitalising the brand, WIL s focus is on a superior product portfolio with better functionality and communicating the same to consumers through right advertising and promotion. An equal focus is also placed on execution strategy on the ground through shop-floor activities to aid buyers purchasing decision. To refresh its product portfolio, WIL is focusing on better functionality, features as well as aesthetics and plans to expand the product portfolio both in premium range and mass-market range. Some of the successful new launches include: (a) New direct cool single-door refrigerator (named VitaMagic) which is the only one in the industry with electronics. (b) New 4 litre frost-free refrigerator (named Intellifresh) which is best-in-class from consumers usability angle and is doing very well. (c) New high-capacity semiautomatic washing machine (named Ace XL). (d) New front-load washing machine made in Europe. (e) Inverter air-conditioner or AC (named 3D Cool). To create growth opportunities, WIL intends to expand its range in terms of product categories as well as in terms of sales and distribution network. As regards product categories, WIL intends to further strengthen its position in core categories of refrigerators and washing machines as well as scale up adjacent categories such as air-conditioners, air-purifiers, dish-washers and built-in kitchen appliances as well as spares and accessories. Air, water and cooking are the three main product segments that WIL is focusing on. WIL also intends to enhance its sales, distribution, and supply chain as well as service centre networks to create growth opportunities. To strengthen its foundation, WIL is focusing on: (a) Reach and extraction by expanding the width of distribution network (increased branch network from 22 to 38 branches) and depth of distribution by increasing the sales per store. (b) Quality and cost by improving the quality of products for a better user experience as well as lowering costs for consumers in terms of maintenance and service. (c) Making WIL a future-ready organisation in terms of the right structure, capability and talent. To achieve these strategies, WIL has invested in its sales network (distribution reach expansion and increasing people on the shop floor), capacity (further investment likely), products (plugging portfolio gaps and enhancing premium range), leveraging global systems (made-in-europe front-load washing machines) and capability (on products front as well as improving efficiency of the organisation). Other key takeaways Growth dynamics - WIL expects strong growth in the consumer durable industry which is likely to be volume-driven because of low penetration level. The penetration level of refrigerator is 2% (4% urban and 8% rural), that of washing machine is 8% (2% urban and 4% rural) while in case of ACs it is low at only 3%-4%. For WIL, currently 2% of sales is through replacement demand while 8% comes from firsttime buyers. Hence, growth from Tier 2 and Tier 3 markets is likely to outpace growth from metro cities. Consequently, WIL is enhancing and expanding its distribution network to capture these markets. Capacity expansion WIL aims to expand its operations at its three existing plants instead of setting up a fourth plant. Among products, capacity enhancement is planned in direct-cool refrigerators, top-load washing machines and semi-automatic washing machines. WIL has not incurred a lot of capex in the past seven to eight years, but is now planning to ramp it up as the growth is strong while capacity utilisation level is high. Cash utilisation The three avenues where WIL will be utilising its cash henceforth will be: (a) Organic growth by increasing capacity, launching new products as well as new platforms of manufacturing. (b) Dividend payout. (c) Evaluating the opportunity for complementary acquisition. Strategy for AC business Currently, ACs are not manufactured in-house as WIL does not have the requisite scale. However, WIL controls the design and specifications of ACs when it outsources them. WIL s AC portfolio has grown in double digits in the past two years and the company aims to ramp it up significantly henceforth. The AC market size in India is only 5mn units compared to 4mn units in China and the penetration level is very low at 3%-4% and hence robust growth is expected. WIL is prepared for the energy label change in ACs from 1 January 218 and will have products in both inverter and noninverter AC categories. 2 Whirlpool of India

3 Entry in adjacent categories - WIL will be launching dish-washers shortly (sourced from Europe), expanding its built-in kitchen appliance range (expects exponential growth as lifestyle improves) while it is working on the water purifier category. Focus on premiumisation - WIL intends to focus more on the premium category across its product segments with new product launches at regular intervals. Currently, 1%-15% of sales in each product category are in premium segment for the consumer durable industry which is likely to expand significantly. WIL will also continue to refine its mass market portfolio, both in terms of features as well as aesthetics. Exports - WIL registered strong growth in international sales driven by strong performance in the MENA region led by export of semi-automatic washing machines to Morocco and refrigerators to Saudi Arabia. WIL also ramped up exports to South East Asian countries like the Philippines, Nepal, Bangladesh and Sri Lanka. The outlook on exports is promising, driven by the global parent s strategy of focusing on emerging markets. E-commerce - It accounts for 3.5%-4% of total sales through its own online W store as well as top e- commerce market places such as Amazon and Flipkart. In some categories, WIL has a higher market share in online sales versus off-line. The management expects strong growth in the e-commerce channel and has also increased digital marketing spending to aid growth. Advertising and promotion - The management indicated that it is wisely allocating advertising and promotion (A&P) expenditure. It chose to restrict spending during the demonetisation phase as any advertisement spending during that period would have been futile. Similarly, during the GST rollout the company refrained from A&P expenditure as retailers were focusing only on liquidating their inventory. The management aims to increase branding and advertising spending going forward, which is mainly for announcing new product launches and features etc. WIL focuses a lot more on shop-floor activities to aid buyers purchasing decision as it believes 75% of the buying decisions made by consumers are influenced on the shop floor. Europe sourcing Whirlpool Corporation (global parent) is a market leader in Europe in volume terms with a large manufacturing presence in Eastern Europe at low-cost locations. Two product categories of WIL are dependent on sourcing from Europe - namely front-load washing machines and built-in kitchen appliances. Key challenge - In the past two years, WIL has managed commodity, currency as well as material procurement very well. The main external challenge is likely to be raw material cost headwind. Outlook and valuation WIL offers strong scalability in the rapidly growing consumer durable industry owing to significant distribution network expansion as well as enhancing its product portfolio. We expect WIL to register 19%/26% revenue/earnings CAGR, respectively, over -FY2E. WIL is a strong financial franchise with robust operating/free cash flow (Rs17.8bn/Rs12.6bn over -FY2E), lean working capital cycle, superior margin profile, healthy return ratios (RoCE/RoIC of 3%/136%, respectively, in ) and high cash balance (Rs83.5/share in forming 5.5% of CMP, and likely to rise to Rs132/share in FY2E forming 8.7% of CMP) which will support its premium valuation. We have rolled forward our valuation of WIL to FY2E financials and retained Buy rating on the stock with a revised target price of Rs1,775 (Rs1,62 earlier) based on 36x FY2E earnings. 3 Whirlpool of India

4 FY13 FY13 FY2E FY2E Exhibit 1: WIL s revenue mix (%) FY9 FY1 FY11 FY12 FY13 Refrigerator Washing machine Air conditioner Others Exhibit 2: Trend in net revenues (Rsmn) (%) 8, , , , , 3, , , - Net sales % growth YoY Exhibit 3: Trend in margins (%) Gross margin EBITDA margin PAT margin 4 Whirlpool of India

5 FY13 FY13 FY13 FY2E FY2E FY2E Exhibit 4: Trend in return ratios (%) Exhibit 5: Trend in operating and free cash flows RoE RoCE RoIC (Rsmn) 8, 7, 6, 5, 4, 3, 2, 1, Operating cash flow Free cash flow Exhibit 6: Rising cash balance (Rsmn) 2, (Rs) 14 16, 12, , 4, Cash balance Cash per share (RHS) 5 Whirlpool of India

6 FY13 FY13 FY13 FY2E FY2E FY2E Exhibit 7: Trend in gross block and fixed-asset turnover (Rsmn) 2, 16, 12, 8, (x) , 1 - Gross block Fixed asset turnover (x) Exhibit 8: Trend in working capital cycle (days) Debtor Days Creditor Days Inventory Days Exhibit 9: Ex-cash net working capital position (Rsmn) 2.6 (%) 1, (.4) (5) (2.) (.6) (.4) (1) (1,) (2.6) (2) (3.8) (3) (1,5) (4) (2,) (5) Ex-cash net working capital As a % of sales 6 Whirlpool of India

7 Oct-14 Feb-15 Jun-15 Oct-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Oct-14 Feb-15 Jun-15 Oct-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Exhibit 1: Trade discount as a percentage of gross revenues (Rsmn) (%) 16, , 12, 1, 8, 6, 4, 2, FY13 FY2E Trade discounts As % of gross sales (RHS) Exhibit 11: One-year forward P/E (Rs) 1,8 1,6 1,4 1,2 1, (x) (3 year Average P/E = 33x) 2x 25x 3x 35x 4x stock price P/E 3 year Average P/E SD +1 SD +2 SD -1 Source: Nirmal Bang Research 7 Whirlpool of India

8 Financials Exhibit 12: Income statement Y/E March (Rsmn) FY2E Net sales 34,399 39,48 47,744 56,76 66,922 % growth Raw material costs 2,365 23,11 28,217 33,829 4,19 Staff costs 3,827 4,116 4,918 5,733 6,625 Other expenses 6,373 7,32 8,546 9,819 11,444 Total expenditure 3,564 34,519 41,68 49,381 58,88 EBITDA 3,835 4,888 6,63 7,379 8,834 % growth EBITDA margin (%) Other income ,18 1,338 Interest Depreciation ,71 1,187 Profit before tax 3,559 4,685 5,987 7,351 8,916 Tax 1,159 1,58 1,74 2,176 2,677 Net profit 2,4 3,15 4,247 5,175 6,239 PAT margin (%) EPS (Rs) % growth Exhibit 14: Balance sheet Y/E March (Rsmn) FY2E Equity 1,269 1,269 1,269 1,269 1,269 Reserves 1,388 13,562 17,45 21,151 26,168 Net worth 11,657 14,831 18,314 22,419 27,436 Total loans Deferred tax liability (net) 3 (159) (159) (159) (159) Liabilities 11,686 14,671 18,155 22,26 27,277 Net block 3,661 3,978 4,698 5,377 6,19 Capital work-in-progress Long-term Investments - 1,297 4,57 4,57 4,57 Inventories 6,835 8,888 1,5 11,585 13,486 Debtors 1,926 2,49 2,616 3,266 3,85 Cash 8,563 1,59 9,725 12,573 16,694 Loans & advances Other current assets 999 1,343 1,671 1,987 2,342 Total current assets 18,484 23,32 24,348 29,751 36,774 Creditors 8,728 11,223 12,523 14,88 16,446 Other current liab & provisions 2,98 2,78 3,38 3,45 3,911 Total current liabilities 1,826 13,931 15,561 17,538 2,357 Net current assets 7,658 9,11 8,786 12,213 16,417 Total assets 11,686 14,671 18,155 22,26 27,277 Exhibit 13: Cash flow Y/E March (Rsmn) FY2E EBIT 3,66 4,14 5,88 6,38 7,647 (Inc)./dec. in working capital (55) (578) (83) Cash flow from operations 3,838 4,597 4,538 5,73 7,564 Other income ,18 1,338 Depreciation ,71 1,187 Tax paid (-) (1,154) (1,769) (1,74) (2,176) (2,677) Net cash from operations 4,6 4,433 4,734 5,732 7,412 Capital expenditure (-) (838) (1,12) (1,5) (1,75) (2,) Net cash after capex 3,168 3,313 3,234 3,982 5,412 Interest paid (-) (52) (59) (62) (65) (68) Dividend paid (-) - (458) (764) (1,69) (1,222) Inc./(dec.) in borrowings (Inc.)/dec. in investments - (1,297) (3,273) - - Cash from financial activities (52) (1,814) (4,99) (1,134) (1,29) Others Opening cash balance 5,357 8,563 1,59 9,725 12,573 Closing cash balance 8,563 1,59 9,725 12,573 16,694 Change in cash balance 3,26 2,27 (865) 2,848 4,121 Exhibit 15: Key ratios Y/E March FY2E Per share (Rs) EPS Book value Valuation (x) P/E P/BV EV/EBITDA EV/sales Return ratios (%) RoCE RoE RoIC Margins (%) EBITDA margin EBIT margin PAT margin Turnover ratios Total asset turnover ratio (x) Fixed asset turnover ratio (x) Debtor days Inventory days Creditors days Solvency ratios (x) Debt-equity Whirlpool of India

9 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Rating track Date Rating Market price Target price (Rs) 16 March 217 Buy 1,4 1,35 7 April 217 Buy 1,22 1,35 17 May 217 Buy 1,19 1,4 6 July 217 Buy 1,174 1,4 8 August 217 Buy 1,191 1,4 2 September 217 Buy 1,335 1,56 9 October 217 Buy 1,349 1,56 27 October 217 Buy 1,4 1,62 27 November 217 Buy 1,515 1,775 Rating track graph Not Covered Covered 9 Whirlpool of India

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