MIRC ELECTRONICS LTD PRIVATE CLIENT RESEARCH INITIATING COVERAGE JANUARY 23, 2018

Transcription

1 PRIVATE CLIENT RESEARCH JANUARY 23, 2018 Sanjeev Zarbade Stock details BSE code : Market cap (Rs mn) : Free float (%) : 42% 52-wk Hi/Lo (Rs) : 64.7/11.8 Avg. daily volume mn : 4.1 Shares o/s (m) : Summary table (Rs mn) FY17 FY18E FY19E Sales 7,476 8,590 9,950 Growth % (3.2) EBITDA EBITDA margin % PBT PAT EPS (Rs) Growth % (109.5) 1, CEPS (0.2) EPS (Rs) (0.7) Book value (Rs/share) Dividend per share (Rs) ROE % (9.7) ROCE % Net cash (debt) (1,484) (400) 287 Net Working Capital (Days) EV/Sales (x) EV/EBITDA (x) Cons P/E (x) (74.6) P/Cash Earnings (275.8) P/BV (x) Source: Company, Kotak Securities Private Client Research Share holding pattern Public 33% Foreign 2% Bennett Coleman 7% Source: Capitaline One-year performance (Rel to Sensex) Promoters 58% MIRC ELECTRONICS LTD PRICE: RS.51 RECOMMENDATION: BUY TARGET PRICE: RS.70 FY19E PE: 20.4X MIRC Electronics (MIRC) is one of India s oldest home appliance players, with a presence in TVs, room ACs and washing machines. The company s brand Onida is one of the most enduring one in the consumer space (fourth most trusted brand in the consumer durables category by Brand Trust Report 2016). Given the favourable demographics coupled with rising disposable income, the demand for consumer durables is expected to remain robust. Realising the market potential, MIRC is making efforts in cutting costs and monetizing surplus assets. With a much stronger balance sheet in FY18, the company now plans to significantly raise marketing spends in coming months. We expect 15%/51% sales/ebidta CAGR over FY17-FY19E. The company is forecast to turnaround in FY18 after several years of losses. The stock trades at reasonable valuations of ~ 27.5x/20.4x and ~ 17.5x/13.8x FY18E/FY19E EPS and EV/EBIDTA respectively. Initiate coverage with BUY with a target price of Rs 70, valuing the stock at 28x FY19 earnings. Key Investment argument Strong demand drivers in place: The Consumer Electronics and Appliances (CEA) market has been witnessing robust growth trends in the past 5 years. Moving forward, the market is expected to foresee double digit growth reinforced by the surging rural consumption, reducing replacement cycles, increasing penetration of lifestyle appliances, and availability of multiple brands at various price points. The CE market revenues is expected to grow at a cumulative average growth rate (CAGR) of 17.2% from FY16 to FY21 while the Appliances segment is expected to grow at a CAGR of 11.6% over the same period, resulting in a CAGR of 16.5% for the overall CEA market. In comparison to global growth averages, this is almost double that of other economies. Product innovation driven by deep market understanding: Due to its long presence in the Indian industry, the company has a good understanding of the consumer preferences. It recently launched the Onida KY Thunder TV, which delivers 1200 watts of sound and addresses the needs of indian consumer who is also keen to enjoy good quality sound. Sensing the potential of the inverter ACs, the company has launched Regalio-Smart Wi-Fi AC with inverter technology. Focus on core business and efficiency: With the manufacturing world increasing moving towards greater automation, MIRC is also making efforts to remain lean and efficient. It has done a meaningful rationalisation of its manpower in FY17 by offering VRS at its Wada plant. The company is also actively seeking to monetize its surplus land and property, with a view to invest the proceeds in driving the core business of Room ACs and TVs. Well placed to leverage its strong balance sheet: The company has raised Rs 721 mn through preferential allotment of shares at Rs 37.5 per share. We expect the company to utilize the issue proceeds to raise marketing spends in the coming months. Source: Capitaline Aiming for contract manufacturing: Recently, the government has increased customs duty on various electronics items including TVs. The idea is to boost domestic manufacturing, as electronics imports form a significant component of the non-oil imports. The implementation of GST has also come as positive for the organized industry. MIRC has excess land and manufacturing capacity at its Wada plant, which it plans to utilize for contract manufacturing. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.

2 Valuation MIRC is well-placed to grow at a steady pace in the future on account of 1) Robust long term demand drivers in place for the company s products like room ACs and TVs 2) Strong balance sheet will enable the company to focus on brand building and promotions, which will drive sales 3) Given the robust infrastructure of the company, it is also aiming for contract manufacturing for other consumer durables, which can be a revenue stream for the company. The stock is currently trading at 27.5x and 20.4x FY18 and FY19 earnings respectively, which is at a discount to listed peers. We value MIRC at 28x FY19 earnings and arrive at a price target of Rs 70, resulting in an upside of 37% from current levels. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

3 COMPANY BACKGROUND MIRC electronics ventured into TV manufacturing in 1981 with a collaboration with JVC of Japan. The company realized that a unique trait of Indian viewers was that they liked TVs that had good features in sound quality. Thus the company s focus remained on providing sound quality meeting the requirement of Indian households. Starting with a goal of manufacturing televisions sets, the company transformed into a complete consumer durable company with a wide product portfolio including Flat panel TVs (LED & LCD TVs), Air Conditioners, Washing Machines, Microwave Ovens, DVD & Home Theatre systems, Mobile phones, Projector systems and LED lights. The company s brand Onida has been an enduring one in the Indian consumer durable space, and has won the trust of millions of consumers with its high quality products. The advertisements that Onida brought out broke all conventions and are a defining feature of the organisation. The company created amongst the most powerful icons in advertising, the Onida Devil, and amongst the most memorable taglines, Neighbour s envy. Owner s pride. However, post liberalization, the company has struggled and has been making losses in recent years. In addition to this, there was a major fire in 2012 at one of the company s factory located at Roorkee, Uttarakhand, affecting the entire operations of the factory. In the FY the company charged a sum of Rs 50 mn as an exceptional item in the profit & loss account. Manufacturing Facilities MIRC has world class manufacturing facilies at Wada (Maharashtra) and Roorkee (Uttrakhand) with a capacity of over 3.4 Million Televisions and 2.4 lakhs Washing Machines respectively. The Wada plant is spread over 2.40 sq.m (55 acres) and is close to Mumbai. The plant has a manufacturing capacity of 1.8 million display devices and capacity can be scaled up to 3 million at minimal capex. The plant has locational advantage as it being situated in close proximity, 100 km from JNPT and is 80 km from Mumbai Airport. The plant consists of equipment from quality machinery suppliers like SMT (Universal), Glue Dispenser (Camelot), Final assembly line Hirata Japan, Plastic molding Japan Steel Works and EPS Packing cushion Kurtz Germany. Management The company s board presently comprises of eight directors, which consists of four executive directors and four non-executive Independent Directors. Mr Gulu Mirchandani is the chairman and Managing Director and also one of the promoters of the company. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 3

4 BUSINESS MIX The company s focus from the beginning has been to provide good quality products. The company manufactures TVs and Washing Machines in-house but imports ACs from GREE, which is one of the top four Chinese manufacturers. The company has 3% and 8% market share in TVs and ACs respectively. Revenue mix Washing Machine 9% Microwave 5% Room AC 46% TV 40% Source: Company Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 4

5 INDUSTRY, MARKET SIZE AND GROWTH DRIVERS Indian Consumer Electronics and Appliances (CEA) market has been witnessing sustained double digit growth rate in the past few years. Increasing product awareness, affordable pricing, innovative products and the high disposable incomes have aided in the strong growth in the CEA market in India. Rapidly shrinking replacement cycle for consumer durables is observed as sustaining demand in urban India. The existing low penetration rates and the increasing usage of consumer durables have catapulted rural India to the high demand (30% annual growth) generating segment. Drivers and Restraints of Indian CEA market Source: Frost and Sullivan Market Size Estimates and Forecasts The CEA market has been witnessing robust growth trends in the past 5 years. Moving forward, the market is expected to foresee double digit growth reinforced by the surging rural consumption, reducing replacement cycles, increasing penetration of lifestyle appliances, and availability of multiple brands at various price points. The CE market revenues is expected to grow at a cumulative average growth rate (CAGR) of 17.2% from FY16 to FY21 while the Appliances segment is expected to grow at a CAGR of 11.6% over the same period, resulting in a CAGR of 16.5% for the overall CEA market. In comparison to global growth averages, this is almost double that of other economies. India CEA Market Forecast, FY13 to FY21 (INR Billion) FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 Source: Frost and Sullivan Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 5

6 Key factors that are contributing to growth are Exponential rise in use of mobile phones, increasing penetration of smartphone in urban-rural markets, continuous up gradation and addition of features Continually spiralling replacement demand for all consumer electronic products Phenomenal penetration of Flat Panel Display (FPD) TVs replacement of Cathode Ray Tubes (CRT) by FPDs and up gradation of FPD TVs from LCD to LED to 3D/Smart/4K Significant growth in consumer durable purchase in rural India which is currently under penetrated. The digitization regulation is the driver for the uptake of STB both cable and satellite. Entry of numerous foreign and local brands that enhance the competitive spirit by ushering wide range of offerings at varied price points which increases the option available to consumers Easy financing and zero down payment schemes Penetration of e-tail and emergence of numerous delivery models. Proliferation on net banking is another critical propellant for the surge in e-tail purchases. Moreover e-tailers offer consumer electronic products at prices very competitive when compared to physical retail and thus encouraging more online purchases. Indian CE market mix (%) Digital Cameras 6% STB 7% Washing Machines 3% Others 1% TV 16% Mobiles 67% Source: Frost and Sullivan Product innovation and energy efficiency driving Room AC (RAC) sales in India The Indian RAC market has been witnessing robust growth trend in the past five years with a CAGR of 9.4% by volumes. In the next five years, the market is expected to witness a CAGR of 12.8% reinforced by the surge in rural consumption, shorter replacement cycles, energy-efficient RACs and availability of multiple brands at various price points. The RAC volumes are expected to increase from 4.7 million units in Fiscal 2017 to reach 8.6 million units by Fiscal Future demand for RAC is expected to be driven by better features and energy efficiency as two of the key buying criteria in Indian market. The large domestic demand has seen major global RAC brands focusing on India as a manufacturing base aided by supportive Government programs especially the Make in India program. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6

7 RAC demand trend in India (mn) FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 Source: Frost and Sullivan Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 7

8 REVENUE AND EARNINGS OUTLOOK Revenue to grow at 15% CAGR ( ) We expect revenue to grow at a CAGR of 15% ( ). The growth in revenue would be driven by the room AC segment which accounts for ~ 46% of revenues. Room AC revenue would be supported by TV and Washing Machine sales in FY19 as we expect the company to utilize part of the fund infused from preferential allotment for advertising and sales promotions. Revenue mix Rs mn FY16 FY17 FY18E FY19E TVs Growth % -18% 0% 15% Washing Machines Growth % 3% 5% 10% Room Acs Growth % 27% 20% 20% Mobiles Others Total , ,949.9 Source: Company and Kotak PCG PAT to grow at faster pace on improved margins. Realising that the company has redundancies in its manpower, it offered a golden handshake to its workers at its Wada plant in FY17. This is expected to make Rs mn reduction in wage costs. This in addition to improved fixed cost absorption should drive margin gains. We expect margins to improve by 320 bps in FY18. Moreover, the company has raised Rs 720 mn through preferential allotment to institutional investors. This will reduce the cost of borrowings and should lead to decline in interest outgo in FY19. Consequently, we project PAT to grow from loss of Rs 57 mn in FY17 to profit of Rs 426 mn and Rs 574 mn in FY18E and FY19E respectively. Strong balance sheet post fund infusion With sizeable room to raise capacity utilization at its Wada plant, we believe that the capex needs of the company are likely to remain modest. We thus forecast the company to remain free cash positive. In FY18, the company has raised Rs 720 mn through preferential allotment to institutional shareholders, which will further strengthen the balance sheet of the company. In addition to this, the company has also issued warrants of Rs 720 mn, exercisable at Rs 37.5 per share. Thus, we forecast, the company s net Debt/Equity ratio to drop substantially in FY18 and FY19. ROE and RoCE We expect RoE and RoCE to improve in FY17-19E on improved margins and rise in asset turnover. We forecast a healthy ROE of 20.4% and 19.5% in FY18E and FY19E respectively. ROCE is also forecast to trend upwards at 10.0% and 11.2% in FY18E and FY19E respectively. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 8

9 H1FY18 performance Rs mn Q2FY18 Q2FY17 YoY (%) H1FY18 H1FY17 YoY (%) Net Sales Other Income Raw Material Consumed Stock Adjustment Purchase of Finished Goods Employee Expenses Loss on Forex Transaction Other Expenses TOTAL EXPENDITURE PBIDT Interest PBDT Depreciation PBT Tax Reported Profit After Tax Extra-ordinary Items Adj Profit After Extra-ordinary item EBITDA % 9.3% 6.1% 7.4% 4.5% Raw material cost to sales (%) 68.7% 68.4% 71.2% 73.8% Employee cost to sales (%) 9.3% 12.2% 9.4% 9.5% Other expenditure to sales (%) 11.7% 14.4% 11.9% 12.1% EPS Source: Company Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 9

10 VALUATION MIRC is well-placed to grow at a steady pace in the future on account of 1) Strong long term demand drivers in place for the company s products like room ACs and TVs 2) Strong balance sheet will enable the company to focus on brand building and promotions, which will drive sales 3) Given the robust infrastructure of the company, it is also aiming for contract manufacturing for other consumer durables, which can be a revenue stream for the company. The stock is currently trading at 27.4x and 20.4x FY18 and FY19 standalone earnings, respectively, which is at a discount to listed peers. We value MIRC at 28x FY19 earnings, based on 30% discount to peer average. Thus, we arrived at a price target of Rs 70, resulting in an upside of 37% from current levels. Peer valuation PE (x) EV/EBITDA FY18E FY18 FY19 FY19 ROE (%) MIRC IFB Whirlpool Havells Blue Star Source: Kotak Securities Private Client Research and Bloomberg Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 10

11 FINANCIALS Profit and Loss Statement (Rs mn) FY17 FY18E FY19E Revenues 7,476 8,590 9,950 % change yoy (3.2) EBITDA % change yoy Depreciation EBIT % change yoy (308.5) Net Interest Other Income Earnings Before Tax % change yoy (107.7) 1, Tax (0.5) as % of EBT (1.7) Net Income adj % change yoy (109.5) 1, Exceptional items (86.6) - - Reported Net Income (56.6) Shares outstanding (m) Adj. EPS (Rs) DPS (Rs) CEPS (0.2) Source: Company, Kotak Securities - Private Client Research Cash Flow Statement (Rs mn) (Rs mn) FY17 FY18E FY19E PBDIT Tax and adjustments (295) - (78) Cash flow from operations Net Change in Working Capital 199 (158) 113 Net Cash from Operations Capital Expenditure (4) - (100) Cash from investing Net Cash from Investing (40) Interest paid (236) (194) (138) Issue of Shares Dividends Paid Debt Raised (321) 26 (900) Net cash from financing (387) 553 (1,038) Net change in cash (24) 1,110 (213) Free cash flow cash at end 190 1,300 1,087 Source: Company, Kotak Securities - Private Client Research Balance Sheet (Rs mn) FY17 FY18E FY19E Cash and cash equivalents 190 1,300 1,087 Accounts receivable 1,283 1,412 1,636 Stocks 2,057 2,354 2,726 Loans and Advances Others Current Assets 3,730 5,267 5,541 Net fixed assets 1,136 1,039 1,039 Intangible assets Non current receivables Long term loans and advances Total Assets 5,452 6,894 7,167 Payables 2,187 2,450 3,050 Provisions Current liabilities 2,267 2,535 3,135 LT debt 1,674 1, Equity & reserves 1,511 2,659 3,232 Total Liabilities 5,452 6,894 7,167 Source: Company, Kotak Securities - Private Client Research Ratio Analysis (Rs mn) FY17 FY18E FY19E EBITDA margin (%) EBIT margin (%) Net profit margin (%) Adjusted EPS growth (%) - 1, Receivables (days) Inventory (days) Sales / Net Fixed Assets (x) ROE (%) (9.7) ROCE (%) EV/ Sales EV/EBITDA Price to earnings (P/E) (74.6) Price to book value (P/B) Price to cash earnings (275.8) Source: Company, Kotak Securities - Private Client Research Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 11

12 RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 12% returns over the next 9 months ACCUMULATE We expect the stock to deliver 5% - 12% returns over the next 9 months REDUCE We expect the stock to deliver 0% - 5% returns over the next 9 months SELL We expect the stock to deliver negative returns over the next 9 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark. FUNDAMENTAL RESEARCH TEAM Sanjeev Zarbade Ruchir Khare Amit Agarwal Nipun Gupta K. Kathirvelu Capital Goods, Engineering Capital Goods, Engineering Logistics, Paints, Transportation Information Technology Production sanjeev.zarbade@kotak.com ruchir.khare@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com k.kathirvelu@kotak.com Teena Virmani Ritwik Rai Jatin Damania Jayesh Kumar Construction, Cement FMCG, Media Metals & Mining Economy teena.virmani@kotak.com ritwik.rai@kotak.com jatin.damania@kotak.com kumar.jayesh@kotak.com Arun Agarwal Sumit Pokharna Pankaj Kumar Ashini Shah Auto & Auto Ancillary Oil and Gas Midcap Midcap arun.agarwal@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com ashini.shah@kotak.com TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale shrikant.chouhan@kotak.com amol.athawale@kotak.com DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 12

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