Investec Securities
IFB Industries (Hold)
CMP: ₹880.35
Target: ₹970
IFB has focussed on augmenting manpower, expanding distribution reach, strengthening brand franchise, and improving product development capabilities in the last few years. While it now generates gross margins similar to peers, its EBITDA margins are sharply lower (5-8 per cent versus 9-15 per cent) due to smaller scale. There is potential for IFB to introduce new products to leverage brand and extract op-leverage benefits over the next few years.
Competitive intensity is increasing, thanks to the entry of Indian (Voltbek, Lloyd) as well as Chinese (Haier, Midea) players. Chinese companies are now committing capex in India, and Haier has shown strong success signs since it started manufacturing in the country. Front Load Washing Mach market is also now getting crowded, with customs duty increase on ACs/ microwaves posing an additional challenge. We consequently build-in only 60ppt EBITDA margin expansion for IFB over FY18-21E to 7.8 per cent, as we see potential gross margin pressure (competition) partly offsetting scale advantages.
Strong balance sheet; return ratios to stay range-bound. IFB has a net cash balance sheet, with strong control over working capital. However, capex is likely to rise sharply as it sets-up its room AC facility. This, together with only modest margin improvement, should keep its RoEs under check (<20 per cent over FY18-21E).
At 36x FY20 PE, IFB’s stock does not look cheap, especially in the context of intensifying competition. Our FY20E-21E PAT estimates are 20 per cent below consensus. Initiate with ‘hjold’ and target price of ₹970/sh (28x FY21E PE).