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Revenue growth healthy; Margin expansion awaited

IFB Industries (IFBI) posted consolidated sales of Rs10.7bn (Q1FY20-23 CAGR at 15.2%), above our estimate of Rs8.4bn. Home Appliances sales was at Rs8.6bn (Q1FY20-23 CAGR at 15%) led by healthy volume growth in AC and washing machines. Engineering sales was at Rs1.7bn (Q1FY20-23 CAGR at 14%) while Motor/Steel segment posted sales of Rs187mn/Rs369mn. Gross margin was substantially impacted by commodity costs increase as it fell 450bps YoY to 36.9%, but it was up 40bps QoQ. Operating expenses were elevated due to higher travel costs and sales promotion. Competitive intensity remained high in washing machines as top two players were aggressive, thus impacting IFBI’s ability to take timely price hikes. The losses in AC continued with PBT loss of Rs208mn in Q1FY23. Thus, EBITDA margin at 3.3% was below our estimate of 4.8% and PAT at Rs19mn was below our estimate of Rs54mn. We cut our EPS by 9% for FY23E to factor lower margin. However, better scale-up in AC division with higher volumes for brand IFB and OEM manufacturing, along with expected break even by end-FY23, leads to 2% rise in FY24E EPS and an increase in PE multiple to 30x (from 28x earlier). We value IFBI at a revised SOTP target of Rs1,010 (Rs910 earlier). Post the recent run-up in the stock price, our rating stands downgraded to REDUCE (from ADD).

Room Air Conditioner business update

AC sales in Q1FY23 was robust at Rs2.6bn, with its share in appliances sales rising to 30%. Volume sales were 68,000 units under IFB brand and 34,000 units to OEMs. FY23 volume target is 220,000 units under brand IFB and 180,000 units to OEM. It expects average realization at Rs30,000/unit (Q1 was Rs25,500) and has signed 3 brands as OEM supplier. IFB took 3-5% price hike in AC in Q1FY23. It has invested Rs1.7bn in the AC plant, which was commissioned two years ago, and has posted PBT loss of Rs1.8bn till-date. However, with higher volumes, price hikes and softening of commodities, it aims to achieve break even at end-FY23. With implementation of cost reduction program, break even volumes would be 16,000 units per month (~2 lacs per annum).

Washing Machine business update

Front Load sales was Rs2.8bn while Top Load sales was Rs1.1bn as volume growth was healthy. While demand started moderating post mid-May, IFBI expects better sales from festive demand beginning with Onam. It aims to increase market share through new product portfolio of larger size (10 kg FL & 12 kg TL to be launched in Q3) and improving channel extraction. Input costs rose by 13-16%, which IFBI passed on with a lag of one to two quarters, but the pricing by top two players (especially Samsung) was aggressive as they did not take adequate price hikes. In Q1, IFBI took 3-5% price hike.

Other business updates: (1) Dishwashers demand has reduced. IFBI aims to sell 6,000 units per month by expanding reach to 4,500 outlets vs. 3,000 now. (2) Ad-spends target is 5.5% of sales in FY23 vs. 7.2% YoY. (3) Import content: FL (18%), TL (31%), AC (45%).

Downgrade to REDUCE with a revised target price of Rs1,010

We expect IFBI to report revenue CAGR of 20% over FY22-FY24E led by scale-up in AC, however, attaining high single digit margin will be a key challenge amid high competition.

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