Update On Johnson Controls-Hitachi Air Conditioning India Ltd By HDFC Securities
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Our Take
JCHAC is a joint venture between two global parents US-based Johnson Controls and Japan-based Hitachi Appliances.
The company enjoys a strong brand recall. It has an established market positioning in the air-conditioning segment and has consistently expanded its product portfolio to include other appliances, viz., refrigerators and air purifiers. It has total installed capacity of 9,00,000 Room Air Conditioners (RACs) per annum (in a single shift). In addition to this, it also has the capacity to manufacture 1,20,000 tons of Ductable units, 9,000 variable refrigerator flow (VRFs) and 300 Chiller Units per annum.
The appliance industry has a huge dependence on China for components and parts. Any supply disturbance from China, therefore, may increase cost pressures. JCHAC sources ~31% of its total purchase value from its group companies, which has reduced its reliance on China. We believe it is well-positioned for a strong bounce-back with continuation of healthy demand and re-stocking in the trade channel for the coming summer season.
We believe changing customer preferences and up-trading by existing customers would drive growth of JCHAC’s premium products. The company has made US$ 20 million (nearly Rs.140 cr) investment in manufacturing and R&D facilities. Its inauguration of the Global Development Center (GDC) in FY20 is one of the biggest steps towards globalizing its product development process. JCHAC now has a distribution network spread over 10,000 sales points, and includes 290+ exclusive sales and service dealers, 70+ Hitachi exclusive showrooms, and more than 1,500 service points.
In the near term, we expect its growth to take a pause, given the current situation, slow economic activity, liquidity challenges, and sluggish demand for Commercial Air Conditioning Systems from sectors such as offices, marriage halls, auditoriums, hotels and restaurants. We believe that due to the COVID-led lockdown and economic slowdown, FY21E would post degrowth.
Valuations & Recommendation:
We believe the company would benefit from premium brand recall, pan-India presence, and product launches. However, COVID-induced lockdown has impacted inventories, worsened working capital cycle and disturbed the supply chain. Going forward, we expect a 8% CAGR in top-line and 25% CAGR in PAT over FY20-23E. Bottom line growth should be led by the corporate tax rate cut (the company has paid ~35% taxes in the previous years, which will now come down to 25-26%). JCHAC has a competitive edge due to its focus on backward integrated manufacturing plants along with India-specific R&D, technology and product development capabilities. We believe the base case fair value of the stock is Rs.3047 (50.1x FY23E EPS) and the bull case fair value is Rs.3290 (54.1x FY23E EPS). Investors willing to take some risk can look to buy at LTP and add more at Rs.2252 (37.0x FY23E EPS).
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