Recommendation BUY Snapshot CMP (Rs.) Rs.79 Target Price (Rs.) Rs.100(Upside 27%) Stock Details BSE Code Bloomberg Code Market Cap (Rs. cr) Free Float (%) 52- wk HI/Lo (Rs) Avg. Volume NSE (Monthly) Face Value (Rs) Dividend (FY 13) Shares o/s (Crs) 505726 IN IFBI 316 25 119/38 28933 10.0 Relative Performance 1Mth 6Mth 1Yr IFBI IN(%) 20.0 37.6 (24.3) NIFTY(%) 2.6 11.9 7.2 130 120 110 100 90 80 70 60 50 40 30 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 IFB INDS LTD NSE CNX NIFTY INDEX Shareholding Pattern as of 30 September 2013 Promoters Holding 74.9% Institutional (Incl. FII) 0.9% Corporate Bodies 7.8% Public & others 14.2% Vishal Jajoo Sr. Research Analyst (+91 22 3926-8136) Email id: vishal.jajoo@nirmalbang.com NA 4 IFB Industries is the leader in front load washing machines. The company has effectively extended the brand to other household products like dishwashers, microwave ovens, split air conditioners, refrigerators, among others. Investment Rationale Concerns with regard to rupee deprecation over done: The weaker rupee led to a forex loss of Rs.13.6 crore resulting into a muted PAT of Rs.3.66 crore during H1FY 14. With stability in rupee coupled with the initiatives taken by the company, we expect improvement in the operating margins of the company going forward. Encouraging response to new launches and channels: The response to newly launched products like air conditioners and refrigerators has been quite encouraging. The sale of company s products through IFB Points stood at 16 per cent in Q2FY 14 compared to 9 per cent in FY 13. Capital expenditure programme to benefit going forward: The has completed the expansion-cum-modernisation programme at Goa. The benefits of the same would be visible from the coming quarters. Strong Balance Sheet: IFB Industries is net-debt free and has a strong Balance Sheet with net cash of Rs.20.6 crore, post capex of Rs.41.6 crore. Valuation & Recommendation The company posted revenues of Rs.897.3 crore during FY 13, an increase of 14.3 per cent y-o-y. The PAT for the year stood at Rs.31.5 crore, translating into an EPS of Rs.7.62. During H1FY 14, the company clocked a PAT of Rs.3.7 crore on revenues of Rs.457.6 crore, translating into an EPS of Rs.0.89. With the capex done, we expect the performance to improve from here, on the back of stabilization of rupee, strong quarter in terms of sales, higher focus on containing raw material as a percentage of sales. A clean balance sheet coupled with focused promoters (holding: 75 per cent), we value the same at 13x FY 13 earnings to arrive at a price target of Rs.100 per share (27 per cent upside) over the next six months Particulars (Rs Cr) Net Sales Growth (%) PAT EPS (Rs) P/E (x) FY'10 603.1 20.50 53.7 14.09 5.7 FY'11 777.5 28.92 50.8 13.89 5.8 FY'12 942.1 21.17 31.1 8.42 9.5 FY'13 1,081.7 14.82 30.1 7.6 10.5 2 P a g e
INVESTMENT RATIONALE Concerns with regard to rupee depreciation are behind the company The first-half of the current financial year saw steep depreciation of the rupee. The rupee depreciated 15 per cent during H1FY 14 and has stabilized for the last two months at around Rs.62 levels. As tabulated below, the forex spending pattern of the company clearly highlights the fact that a weak rupee impacts the performance very negatively. Forex loss of Rs.13.6 crore during H1FY 14, resulting into a muted PAT figure of Rs.3.6 crore The company has reported a forex loss of Rs.13.6 crore during H1FY 14 resulting into a muted PAT figure of Rs.3.6 crore on net sales of Rs.457.6 crore. The rupee having stabilized more or less at around Rs.62 levels should augur well for the company coupled with the price hike taken from September 1, 2013 onwards. IFB Industries is making efforts in localization of components with an intention of reducing raw material as a percentage of sales. All these, should lead to an improvement in the financial performance going forward. Particulars (Rs Cr) FY 10 FY 11 FY 12 FY 13 Expenses in forex 139.4 101.4 97.4 123.9 Earnings in forex 0.45 1.74 2.35 2.3 (Source: Capitaline, Nirmal Bang Research) Capital expenditure programme to benefit going forward The gross block during H1FY 14 has gone up by Rs.41.6 crore. The company has completed the expansion-cum-modernisation of the washing machine factory at Goa. This expansin has ensured state-of-the-art new generation washing machines of higher capacities and the excess capacity would be used to market for OEM sales through buyers in Europe, Africa, Asian countries, among others. In order to increase efficiency of the Goa plant, the company is investing in injection moulding plant and top loader project. Thus, the benefits of the expansion would be witnessed going forward. With the festive season on, things gradually seem to be looking up and the company with its new product launches air conditioners and refrigerators is strategically placed to reap the benefits of the same. Encouraging response to new product launches The initial response to the new launches has been encouraging. The company, which has a strong focus on research and development, has been effectively able to leverage the brand name in selling the new products. However, initially on account of the new product development expenses, the same could not contribute meaningfully to the bottomline. With a strong quarter for consumer durables sector, we expect the new launches to start contributing meaningfully to the bottomline as well. 3 P a g e
Gradual shift towards through company s own channels leading to improved profitability IFB Industries had started IFB Points, exclusive franchise-run retail stores, about 24 months ago. These stores contributed to around 16 per cent of the net sales of the company in Q2FY 14 compared to 9 per cent during FY 12. The company had been slow in setting up these retail stores during H1FY 14 but a number of such stores will get added to the existing ones, during the secondhalf of the year. These should not only lead to higher sales but also better profitability since sales from exclusive stores have better margins. Strong Balance Sheet IFB Industries has a very strong Balance Sheet. The company incurred a capex of Rs.41.6 crore during H1 of this financial year. Post this, the net cash and cash equivalent stood at Rs.20.6 crore. Promoters have increased stake in the company Last year, the promoters have increased stake in the company, taking the total to the maximum threshold limit of 75 per cent. The placement happened at a price of Rs.84 per share. Out of the total proceeds of Rs.42 crore, Rs.20 crore has been utilized for capital expenditure and Rs.22 crore for working capital. Increase in stake by the promoters, further re-affirms the confidence in the company. Present correction in the share price offers an excellent opportunity to enter The company is done with the capital expenditure programme with the H1FY 14 registering an increase of Rs.41.6 crore in the gross block. The response to the new launches has been encouraging leading to a surge in the topline growth. However, the weak rupee and the new launches had suppressed the bottomline. We think that most of the concerns are overdone and the share price has reacted considerably, reflecting the financial performance. With the best quarter for the appliances division, things seem to be looking up and we expect improvement in margins, leading to better profitability, going forward. Therefore, the correction in the share price of IFB Industries (52-week high: Rs.120) offers an excellent entry point from an investment perspective. COMPANY BACKGROUND IFB Industries Ltd was incorporated in the year 1974 as Indian Fine Blanks Limited in collaboration with Hienrich Schmid AG of Switzerland. The company was established with the objective of manufacturing fine blanking tools press tools and fine blanked components used in a wide range of precision engineering industries. In the year 1985, the company took 4.8 acres of land on lease at Gangarampur in West Bengal for the manufacture of high technology machines as well as for future expansion-cum-diversification programmes. 4 P a g e
5 P a g e In the year 1988, the company set up a new division, namely project and construction division to take up projects abroad as well as in India. In addition, the company in association with P A Rentrop Hubert and Wagner GmbH & Co KG West Germany set up a joint venture company called RHW India Private Limited in India for the manufacture of automatic seat adjustment mechanism. In the year 1989, the company entered into collaboration with Bosch-Siemens Hausgerate GmbH, Germany for production of fully automatic washing machines and for the manufacture of the state-of-the-art domestic appliances. The company changed their name from Indian Fine Blank Ltd. to IFB Industries Ltd with effect from July 19, 1989. IFB Industries set up a company called European Fine Blanking Ltd. at Wrexham in North Wales, UK with their European partners for the manufacture of fine blanking tools and components for the UK and other European markets. The company has two divisions: 1. Appliances divison and 2. Auto-ancillary division. The appliances division is engaged in manufacturing and marketing of fully automatic washing machines, dryers mainly in domestic market as well as trading of dishwashers, microwave ovens, split air conditioners, refrigerators, cooker hoods, built in hobs and modular kitchens. It should be noted that earlier IFB Industries was focused on only one particular product: washing machines. The company has come a full circle with a host of products in the category, with refrigerators and air conditioners as the latest additions. In the auto component division, the company is engaged in manufacture and sale of fine blanked auto components. The company has expanded the capacity by installing four new fine blanking machines and modernizing the tool room in Bangalore. IFB Industries has continued to focus on the two wheeler segment and the share of the business from the two-wheeler segment as a percentage of total sales is increasing in each quarter. We expect appliances division to be the growth driver going forward on the back of new launches, high focus on innovation and concerns with regard to depreciating rupee fading off. As far as the auto-ancillary division goes, the end-user industry continues to be in bad shape and we do not expect recovery in the near future. INDUSTRY BACKGROUND The appliances segment is placed on a strong trajectory with sustained growth by way of higher disposable incomes, greater media exposure and increased retail penetration reaching the vast middle class of rural and semi-urban markets. Penetration of information technology and the internet into smaller cities and rural areas led to increased exposure to appliances among the vast majority of the population, boosting demand for consumer appliances. Innovations in the segment has enabled the entry of new categories into the country and led to the premiumisation of existing categories. Such initiatives also broadened consumer choices while manufacturers enjoyed stronger returns. Japanese players are more aggressive in investments in both, manufacturing and marketing than earlier years. Players like LG, Bosch and Samsung are investing in manufacturing facilities for front load washing machines. The auto component industry created substantial capacity anticipating a sustainable growth in the automobile sector in the country. Increase in input costs and threats from imports are two major concerns faced by the industry at present.
RISKS & CONCERNS Higher input cost The competitive nature of the industry makes it difficult to pass on increase in raw material prices at regular intervals. Since a portion of the components gets imported, a weak rupee also leads to hike in input cost. Higher crude oil prices Higher crude oil prices tend to push up household budgets, leading to difficulty in mobilizing household savings towards consumer durables. Lack of basic necessities in parts of the country Requirement of high amount of water and continuous availability of power is required for smooth functioning of gadgets, particularly washing machines. Lack of these basic amenities does not open up the exact market size for the sector as well as the company. Continuous focus on innovation required Products in high competitive category and having direct interface with the end-users require continuous focus on innovation. IFB is a leader in front-load washing machines. Looking at the potential in niche category, players like LG, Bosch and Samsung are investing in manufacturing facilities for front load washing machines. VALUATION AND RECOMMENDATION The company posted revenues of Rs.897.3 crore during FY 13, an increase of 14.3 per cent y-o-y. The PAT for the year stood at Rs.31.5 crore, translating into an EPS of Rs.7.62. During H1FY 14, the company clocked a PAT of Rs.3.7 crore on revenues of Rs.457.6 crore, translating into an EPS of Rs.0.89. With the capex done, we expect the performance to improve from here on the back of stabilization of rupee, strong quarter in terms of sales, higher focus on containing raw material as a percentage of sales. A clean balance sheet coupled with focused promoters (holding: 75 per cent), we value the same at 13x FY 13 earnings to arrive at a price target of Rs.100 per share (27 per cent upside) over the next six months. 6 P a g e
Particulars (Rs Cr) Net Sales Growth (%) PAT EPS (Rs) P/E (x) FY'10 603.1 20.50 53.7 14.09 5.7 FY'11 777.5 28.92 50.8 13.89 5.8 FY'12 942.1 21.17 31.1 8.42 9.5 FY'13 1,081.7 14.82 30.1 7.6 10.5 Particulars (Rs.Cr) FY'10 FY'11 FY'12 FY'13 Equity Share Capital 35.5 36.2 36.3 41.3 Reserves 118.3 174.9 205.9 274.4 Loan Funds 0 0 0 9.85 Other Liabilities 0 24.38 34.79 33.64 Gross Block 396.1 432.3 411.7 379.5 Net block 75.5 124.2 156.1 186.7 Capital work-in-progress 6.9 14.6 4.5 8.3 Investments 10.6 46.2 9.9 56.8 Inventories 85.3 88.8 109.3 131.9 Sundry Debtors 27.9 39.1 46.7 47.9 Loans & Advances 47.5 24.3 19.5 16.8 Current Liabilities 109.7 138.9 145.9 155.9 Provisions 23.2 4.6 2.8 3.6 Other Assets 0 25 41.3 45.3 7 P a g e
Disclaimer This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). The information, analysis, and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in, anyway be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors, or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. 8 P a g e