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Hope continues on margin improvement

* Q1 print was weak, with a revenue/EBITDA miss of 8%/57%. On a 2-year CAGR basis, the revenue decline was 18%. Commodity inflation and negative operating leverage impacted profitability.

* EBITDA margin deteriorated yoy and stood at 4.1%. Other opex was down 18% qoq vs. a 25% revenue decline. Gross margins fell to 33%, the lowest since Q3FY09. Whirlpool’s gross margins have been contracting (yoy) for five consecutive quarters.

* Sustenance of market share in Refrigerators & Washing Machines reassures on revenue growth once the demand fully recovers. However, operating profit being suppressed by continued commodity inflation and freight-cost headwinds remains the key concern.

* We have further cut FY22-24E EPS by 7-12%, factoring in lower revenues and a moderation in margin assumptions. Maintain Hold with a revised TP of Rs2,310 (45x Sep’23E EPS). Revenue recovery and sustained margin delivery are key for a re-rating.

Adverse cost movements continue to hurt:

The company reported 30.5% standalone revenue growth yoy, 8% lower than our estimate. The growth was driven by strong volume gains on a low base, and sustained market share in the refrigerator and washing machine segments. Gross margins continued to worsen and stood at 33% - the lowest since Q3FY09 - indicating a lag in passing on commodity inflation to consumers.

EBITDA increased 18.9% yoy, while margins contracted by 40bps yoy/652bps qoq, adversely affected by negative operating leverage. PAT increased 41.7% yoy, supported by a reduction in interest expenses (down 50% yoy) and lower ETR (28.6% vs. 34.4% in Q1FY21).

Outlook:

Whirlpool has been delivering well on revenue growth post first wave of covid, while margin delivery has been very weak. This has resulted in continued downward revisions in estimates quarter after quarter and significant stock price underperformance vs. peers over the last 9-12 months. The absence of management communication on key strategic initiatives related to product launches and revenue growth and a failure to address concerns about its weak margin delivery may keep investors at bay.

Although we believe that gross margins have largely bottomed out, consistent improvement in the ensuing quarters will be closely watched out for. Our channel checks suggest that Whirlpool’s market share in Refrigerators and Washing Machines has been stable, which provides visibility on revenue recovery once demand normalizes.

We bake in revenue/EBITDA/PAT CAGRs of 10%/9%/10% over FY20- 24E. We believe valuations at 46x FY23E EPS reflect margin recovery, while earnings upgrades could provide upsides. Key risks: prolonged macro-slowdown; sustained commodity inflation and INR volatility; market share loss; and continued margin erosion.

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