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Performance lagging peers

We maintain our SELL rating on Whirlpool of India (Whirlpool) considering: (1) increasing competition expected in refrigerator segment, main growth driver for the company; (2) relatively low growth in washing machine (washer), room AC and service revenues; and (3) high valuation (FY22E/23E PE stands 48x/40x) considering the EBITDA growth of 11.3/15% in last 3/5 years. Please see our annual report analysis on Whirlpool for more details (Link)

Significantly weak 9MFY21 compared to peers. Whirlpool has reported -11/-34% change in 9MFY21 sales/EBITDA compared to -6/8% of Crompton, -2/34% of Havells and -5/-6% of V-Guard. Gross margin has declined substantially to 37% in Q3/9MFY21 compared to 40%/39% in Q3/9MFY20. Could market share gain (mentioned by the company) come at the cost of margins? Maintain SELL with a revised target price of Rs1,849, based on 30x FY23E earnings.

* Revenue growth continues to be driven by refrigerators, but is difficult to sustain due to increasing competition. Refrigerator revenue growth has been 13%/15% in FY19/FY20, higher than washers (12.6%/11.7% in FY19/20) and room AC (-28%/11.7% in FY19/FY20). Services revenue grew 10%/8% in FY19/FY20. Trade discounts remain at 18% of gross product revenue (~11.6% in FY14). Refrigerator/Washer constitute 62/22% of the product mix with RAC/others making the remaining 6/10% as at FY20. Overall revenue growth remained around ~12/11% in FY19/FY20. Consensus growth expectations have been typically 12-13% for refrigerators/washers. We continue to highlight that steady-state revenue growth will be lower than 15% for Whirlpool without market share growth. While market share growth has happened in the past, it is difficult now due to increasing competition (Voltbek/Lloyds).

* Standalone EBITDA grew by a modest 5% in FY20 and at 11% CAGR in last three years despite market share gains. FY20 EBITDA margin remains at 11% despite improvement in gross margin, which reached a 3-year high of 39% in FY20 (in line with higher share of refrigerators, the highest-margin product for Whirlpool). Combination of lower discretionary spend, higher base and increasing competition has set up a challenging outlook for FY21/FY22.

* Strong cash balance should ideally lead to higher dividends in the absence of any inorganic growth. Whirlpool has a strong cash balance of Rs19.5bn as of H1FY21. Considering the company has maintained dividend at Rs5 per share for FY20, return ratios will start declining in the absence of inorganic growth.

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