Hold Whirlpool of India Ltd For Target Rs.1,970 - Emkay Global
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Not out of the woods yet
Whirlpool reported another weak quarter with standalone revenue/EBITDA missing our estimates by 6%36%, on muted expectations. GMs fell to all-time low levels of 30.6%, while continued opex control helped limit the contraction in EBITDA margins at 155bps.
Our channel checks have revealed that Whirlpool has lost ~80bps of market share in both washing machines and refrigerators (YTD FY22). However, in Q3FY22, it has recovered some lost share in both the categories. Its premium product portfolio has been doing well.
With the improvement in economic activity, management expressed confidence in revenue recovery in the upcoming quarters. The focus on new product launches will be specifically directed toward regaining share in semi-automatic WMs and DC refrigerators.
Due to weak Q3 print and heightened competitive intensity, we have further cut our FY22- 24 EPS by 8-30% as we bake in a slower revenues and margins recovery in the near term. Retain Hold with a revised TP of Rs1,970 (40x Mar’24 EPS vs. 45x on Dec’23 EPS earlier).
Another disappointing quarter: Standalone revenues declined 4%/11% yoy/ qoq. The fall in volumes due to weak demand, market share pressures and insufficient price increases impacted the revenues print. GM contracted by 604bps yoy and 262bps qoq to a historically low 30.6%. The plunge in GM was due to inflationary pressures and the one-time amortization of inventory step-up gain from acquisition. EBITDA margin narrowed to 5.2% from 6.7% in Q3FY21, though this contraction was limited as a result of opex control. Employee expense/other opex declined 14%/21%. RPAT fell by 36% yoy, missing estimates by 43%
Outlook: Management interaction (after a more than two-year gap) provided insights on strategies regarding: 1) product launches; 2) reversing market share loss in entry-level product categories; 3) distribution expansion; and 4) cost management. Product innovation and new launches in semi-automatic WMs and DC refrigerators will be directed toward regaining the lost market share. Although the company has started to regain market share in Q3 in both WMs and Refs, our channel checks revealed that it has still lost about 80bps share on YTD FY22 basis. But it is worth noting that the share gain has come even after keeping the prices higher than its peers, as the primary focus is on profitable growth. The sustenance of share gains will be a key monitorable. Amid commodity inflation, margin recovery will be gradual. We are factoring in a 300bps GM expansion in the next two years, supported by revenue recovery and market share gains in entry level products. Our channel checks continue to indicate that competitive intensity remains high, and it is unlikely to moderate in the near future. And, this could weigh on WHIRL’s performance and recovery timelines. Before becoming constructive on the name, we await a reversal in the earnings cut trend. Downside/upside risks: macro-slowdown; sustained commodity inflation and INR volatility; inability to reverse the margin contraction; and faster-than-expected market share recovery.
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