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Industry slowdown and margin headwinds continue; downgrade to Neutral

Result Synopsis

Whirlpool’s standalone revenue was in line with estimates with,revenue growing 48% yoy on a low base. Entry level products have been witnessing demand slowdown. Our channel checks suggest WHIRL has lost some market share in FY22. On the margin front, WHIRL continues to see gross margin erosion of 450bps yoy and 311bps on sequential basis as inventory losses and inability 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 it in 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 downgrade the stock to NEUTRAL. We will become constructive on the stock once we see rural demand returning.  

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 maintained our revenue estimates and EPS increase is on account of higher other income and lower interest expense. We continue to value company at 45x as it will be difficulttask to improve margins and gain market share fromhereon.We now have Neutral stance on the stock with PT of Rs1,836 valuing it at 45x FY24 EPS.  The key risk which can lead to upgrade would be quick turnaround of rural markets and improvement in margins owing to lower commodity prices.

Result Highlights

* Quarter summary – WHIRL delivered in line revenue while missing estimates on margin front as company has not being able to pass on increased commodity prices. Gross margin contracted 450bps yoy to 28.5% a decade low.

* Margins – EBITDA margin expanded 178bps yoy despite sharp contraction in gross margins as it has been able to control its costs and higher operating leverage has also helped.

* 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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