Stock calls: Whirlpool of India - Making a splash

If you believe in India’s consumption story, and the growing buying power of its middle-class, bet your money on the stock of consumer durable major Whirlpool of India.

With low penetration of white goods in the country (20 per cent for refrigerators and 9 per cent for washing machines), growth looks promising for makers of white goods.

Efforts to drive the country’s economic growth and the stimulus to the public — be it for farmers through subsidies or loan waivers, or for government employees through the Pay Commission — all add to the spending power of the people, and translate into demand for white goods.

Whirlpool expects to grow in double digits over the next two years, and double its sales by 2019-20 through product launches, increased spending on marketing and expanding the dealer-distribution network.

From our buy recommendation in December 2015 at ₹660, the stock has more than doubled to ₹1,480 now, helped by strong earnings growth and re-rating in valuation.

At current levels, though the stock seems pricey, it is justified by the good growth prospects of the company.

The stock trades at 40 times estimated earnings for 2018-19. On trailing 12-month earnings, the valuation is 60 times. The company’s average PE in the last three years is 43 times. Investors could buy the stock now, and accumulate more on corrections, if any, in the market.

In 2016-17, Whirlpool recorded growth of 14.5 per cent in revenue to ₹4,360 crore. In the first half of 2017-18, growth improved to 23.5 per cent y-o-y, thanks to good demand for its new product range in refrigerators and washing machines, pent up demand post-demonetisation and dealers re-stocking after GST in the September quarter.

In the September 2017 quarter, if we consider revenue net of excise duty for the September 2016 quarter, the growth was 37 per cent. This is thanks to an early Diwali as well as stronger consumer demand.

Whirlpool is looking to plug gaps in its product portfolio, especially in the premium-end segment, by launching new products this year. This could help stronger sales growth. The company is also looking to expand product portfolio in semi-automatic washing machines to attract consumers from tier II/III cities. In 2016-17, the company launched new ranges of refrigerators, washing machines and air-conditioners (premium Inverter AC - the 3D Cool Inverter). It also launched new variants of microwaves and water purifiers. It forayed into the small domestic appliances category and launched the slow juicer, hand blender, digital kettle and pop-up toaster.

Whirlpool intends to restrict its ad spends to only new launches and grow sales by focussing on expanding dealer-distribution network and pushing sales at the shop floor by training the sales team. Over the last three years, while the company’s ad expenses as a percentage of sales have gone down, trade discounts (offered to dealers to promote sales at the shop floor) have risen.

Ad expense as a percentage of total salesdeclined from about 2 per cent in 2014-15 to less than 1.5 per cent in 2016-17. But trade discounts as a percentage of sales have been rising — from 14.7 per cent in 2014-15 to 16.7 per cent in 2016-17.

Whirlpool has been seeing good growth in its exports too in recent times, though it is still not a material contribution to overall revenue.

A chunk of its export is of semi-automatic washers to Morocco and refrigerators to Saudi Arabia. In 2016-17, export revenue for the company grew 25 per cent over the previous year.

In addition to West Asia, the company did well in the Philippines, where its new range of refrigerators and washers was received well and shipments grew by about 50 per cent. Exports to Nepal and Bangladesh were also up significantly.

Whirlpool intends to expand operations at its existing plants. It plans capacity enhancement in direct-cool refrigerators, semi-automatic washing machines and top-load washing machines.

The company’s cash-rich balance sheet should help in its capex plan. As of end-September, cash reserves were about ₹877 crore. The company also intends to push sales through the e-commerce channels.

Currently, though, only 3-4 per cent of total revenue comes through its portal and through e-commerce sites, such as Amazon; it intends to grow it further through promotions.

Whirlpool’s operating profit margin was 9.8 per cent in the September 2017 quarter, unchanged compared to the year-ago period. But going ahead, there may be headwinds, given that commodity prices have already started to move up. Crude oil prices have also been scaling higher (impacts prices of plastic components).

Raw material cost as a percentage of sales stood at 60.6 per cent in the September 2017 quarter, up from 50 per cent last year.

New launches in the premium-end segment can help improve margins in the coming quarters. Given the strong prospects for sales growth, profit will not take a big hit because of lower margins.