The stock of consumer durable maker, Hitachi Home & Life Solutions (India), is available at a price-to-earnings ratio of 14 times (trailing earnings) after a price correction of over 40 per cent in the last five months. We see this price correction as an overreaction from the market to the company's results that were below expectations in the last two quarters. The stock looks a good investment at the current market price of Rs 178.

In the last quarter, Hitachi's profit was dented (down by over 90 per cent, year-on-year) by a 42 per cent jump in staff costs and marketing expenditure. Both were a function of Hitachi's entry into new air-conditioner segments and geographies in recent times. Staff costs increased as the company recruited and trained people for its 33 new service centres and 18 new sales offices. Hitachi's marketing and ad budget rose on its launch of ‘i-clean' and introduction of ‘Kaze' in metro cities. Like other consumer companies, Hitachi too operates on margins of 5-7 per cent only at the net level; front-ended expenses thus strain margins and profitability. Due to the recent performance, the company's 18 per cent sales growth in the nine months ended December 2010 saw its net profits declining by 45 per cent, year-on-year.

Hitachi, which has been present only in the premium air-conditioner market, is now making inroads into the mass-premium category with the launch of a new variant ‘i-clean' following the success of ‘Kaze' last year. Targeting the fast growing niche segments of the Tier-II cities, where buying power is on the rise, Hitachi is expanding its dealer network rapidly. The effort to expand market reach with plans to increase prices (3-4 per cent) from March, suggest that sales growth will accelerate in the coming quarters. The company does not suffer a high debt burden too — debt-to-equity is at a low of 0.3.

Sales outlook positive

At a time when inflation is a key challenge to most consumer goods makers, Hitachi appears better placed among white-goods makers as it addresses the high-end air-conditioner market where demand remains unaffected by inflation. The mass-premium category (where price is lower by Rs 3000-4000 compared to the high-end model with same features) would also not see material impacts.

Hitachi enjoys a share of 7.5 per cent in the room air-conditioner market in India and plans to increase this to 10 per cent by the end of this year. In this direction, the company has added close to 800 dealers in the last one year and has a total of 2000 dealers across the country now. Hitachi has also put up 33 new service stations in the country in a one–year period. With these stations fully operational now, there will be some pep to revenue in the coming quarters (the warranty on the machine is for one year after which the buyer has to get the air-conditioner serviced at his cost).

Attractive features at a reasonable price is the key differentiator for Hitachi's products. Both ‘Kaze', which was launched last year, and the latest ‘i-clean', an air-conditioner model with automatic filter-clean technology, are fully loaded versions of premium category products — they have all features of a high-end model but come at a price that is lower by around Rs 3500-4000 (on lower star rating — that denotes the model's energy efficiency).

Margin worry to ease

Rising raw material costs are a worry but the impending price hike may set-off the pressure from input costs. The company is looking to make a 3-4 per cent increase in price across product categories after March. As the competition too (Voltas) is taking such moves, this may not impact share in the market.

The staff recruitment and marketing expenditure that had hurt company's profits in the last two quarters are investments that are likely to pay off in the form of higher revenues and better distribution reach.

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