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Industry slowdown and margin headwinds continue; maintain BUY on reasonable valuations

Result Synopsis

Whirlpool’s standalone revenue declined 9.5% yoy as the industry has been facing significant demand headwinds leading to a volume decline. WHIRL revenue has declined despite price increases of 10‐12% indicating even higher decline in volumes. Entry level products saw higher impact as volumes in that segment have declined significantly more than the premium products in refrigerators; similar case with washing machines with semi‐automatic volumes declining more than fully automatic. Our channel checks suggest WHIRL has lost some market share in FY22. On the margin front, WHIRL continues to see gross margin erosion of 442bps in FY22 as it is not able to pass on increased commodity prices in the current environment. Although it has devised strategy of regaining its lost market share and further building on itin ensuing quarters, we feel market share gains will be a difficult and long drawn process. WHIRL is now planning to become more aggressive in mid to premium segment by setting up front load washing machine capacity where it hardly has any presence (0.6% share),refurbishing its product portfolio to give more value to entry level customers and providing best after sales service to improve customer satisfaction. We now remain cautious as rural economy which is a strong market for Whirlpool is in stress due to inflationary pressure, moreover, establishing itself in mid to premium range will take time. Considering inability to pass on increased costs and increased competition, we feel margin recovery will take time; we however maintain BUY as valuations and earnings expectations are quite reasonable.  

Despite near term headwinds, we continue to believe WHIRL’s strong parentage, brand presence and a well penetrated distribution network is capable of driving market share gains. Buyout of ELICA will give them added play in the fast‐growing kitchen category. We have moderated our gross margin assumptions as company has not been able to pass on increased commodity prices resulting in earnings cut of 14.5% and 12% in FY23 and FY24 respectively. We have reduced its target multiple to 45x from 50x earlier as it will be difficulttask to improve margins and gain market share from hereon. Valuation comfort leads us to maintain BUY with PT of Rs1,743 valuing it at 45x FY24 EPS.  The key risk which can lead to a further downgrade in multiples would be failure to drive share gains and improve margins in the ongoing season.

Result Highlights

* Quarter summary – WHIRL once again missed estimates on revenue and operating margin as industry saw volume decline, with entry level products seeing a much sharper decline than premium products. Gross margin contracted 397bps yoy on high commodity inflation.

* Margins – EBITDA margin contracted just 22bps yoy despite sharp contraction in gross margins as it has been able to control its costs better than peers.   

* Market share – Our channel checks suggest company has lost market share in FY22; however, we expect the company to arrest market share decline given its strategy of focusing on mid and premium end of the market.

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