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Buy Whirlpool of India Ltd For Target Rs.2,650

Revenue in line; commodity prices dent gross margin

Two-year revenue CAGR stood much better than RAC peers

* WHIRL’s revenue grew 31% YoY in 1QFY22 (in line with our estimate), with a two-year CAGR at -18%, which is better than Room AC players like VOLT (est. -30%), BLSTR (-25%), Hitachi (-28%). It is the only White Goods company in our coverage universe to meet our revenue expectations in 1QFY22.

* Gross margin was impacted (-300bp YoY) due to commodity cost inflation and adverse revenue mix. EBITDA stood 34% below our estimate, with margin at 4.1% (est. 6.5%). The decline in gross margin could be partly attributed to WHIRL’s focus on gaining market share in the mass market categories of Refrigerators and Washing Machines.

* WHIRL’s revenue growth doesn’t suggest any market share loss, providing us confidence in the strong White Goods franchise. On a relative basis, demand for Washing Machines and Refrigerators can potentially surprise over the next six months v/s a seasonal category like ACs, provided consumer demand holds good as the economy opens up. We cut our FY22E/23E EPS by 10% each to factor in higher than expected input cost pressures. Our TP stands at INR2,650/share (earlier: INR2,900/share) as we roll forward our valuation to Sep’23E EPS, but cut our target P/E to 50x from 55x earlier. We maintain our Buy rating.

Topline in line; gross margin pressure led to an earnings miss

* 1QFY22 snapshot: Revenue rose 31% YoY to INR13.4b and was in line with our estimate. Gross margin contracted by 300bp YoY to 33%. EBITDA margin stood at 4.1% v/s our estimate of 6.5%. Other income was weak at INR140m, despite a higher cash balance. As a result, adjusted PAT stood at INR233m (+42% YoY) and was 58% lower than our estimate of INR552m.

Valuation and view

* While demand has quickly normalized for Consumer Electrical categories, offtake for Durables remained under pressure in 1QFY22. WHIRL’s 1QFY22 two-year revenue CAGR of -18% is better than Room AC players in our coverage universe (barring Lloyd’s) and provides us confidence that the company continues to see market share gains rather than general apprehensions of a risk to market share.

* Unlike peers, WHIRL hasn’t resorted to aggressive cost cutting measures during COVID-19. As the economy recovers from the lockdowns, operating leverage should aid margin normalization by FY24E to 11.3%. The impact of commodity price inflation has been higher than our expectation, leading us to cut our FY22E/FY23E EPS by 10% each. Our TP stands at INR2,650/share (earlier: INR2,900/share) as we roll forward our valuation to Sep’23E EPS, but cut our target P/E to 50x. We maintain our Buy rating.

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