Add Johnson Controls‐Hitachi Air Conditioning India Ltd For Target Rs.2,227 - Yes Securities
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In‐line revenue but earnings disappoint due to margin fall; 2HFY22 needs to be closely monitored; maintain ADD
Our view
JCHAC delivered in‐line revenue growth but a sharper than expected contraction in gross margins. Gross margin contracted by 746bps, highest by any company to have reported so far. We feel that this gross margin contraction is on account of conscious strategy of company moving towards mass premium segment as it wants to aim for volume growth and re‐coup its lost market share at all costs. Our channel checks also suggest JCHAC is getting aggressive on mass premium segment which consist 70% of the RAC industry volumes. Next couple of quarters need to be watched out for where company goes aggressive on volumes. We continue to maintain our ADD rating and will become more bullish on the stock once we see visible uptick in RAC volumes.
Result Highlights
* Quarter summary – JCHAC delivered in‐line revenue growth of 28% on base of 18% decline. Favorable base along with entry into mass premium segment has resulted in growth. Gross margin contracted 746bps to 30.4% (lowest in past many years) which can be attributable to competitively pricing its products aggressively in quest to gain market share.
* RAC segment grows at cost of margins – Cooling products segments which largely consist of RAC has grown at 32%; however, it has reported higher than estimated EBIT loss of Rs120mn.
* Commodity inflation impact –Gross margins contracted by 746bps yoy and 58bps sequentially on back of steep increase in commodity prices. Company is aggressively pushing for volumes rather than looking for profitability.
* Market Buzz – As per our channel checks, JCHAC is now aggressively focusing on mass premium segment and has been aggressively launching new SKU’s at competitive pricing to recoup lost market share.
Valuation
JCHAC is ramping up its distribution network to cater to tier 2,3,4 cities which are touted to be new growth areas. Recently company has changed its strategy and looking for higher volumes rather than profitability. 2HFY22 needs to watched closely as company becomes aggressive in mass premium segment. We expect FY21‐24E Revenue/EBITDA/PAT CAGR of 19%/33%/59% on favorable base. We continue to maintain ADD on the stock with PT of Rs2,227 valuing it at 45x FY24 EPS.
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