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RAC turnaround key for margin revival

IFB Industries (IFBI) reported consolidated sales of Rs9bn, up 9% YoY but 14% below our estimate. Home Appliances sales grew 9% YoY to Rs7bn while Engineering sales grew only 3% YoY to Rs1.7bn. Gross margin declined 720bps YoY and 220bps QoQ to 36.5% due to rise in raw material costs, unfavorable revenue mix (higher share of RAC) and delay in passing on cost increase due to competition. Higher sales promotion, product mix and higher employee expenses led to EBITDA loss of Rs103mn, thus leading to net loss of Rs283mn vs. our estimate of Rs69mn profit. In FY21/22, IFBI’s profitability was impacted due to loss of RAC sales amid lockdown in peak summer season leading to RAC division loss of Rs600mn/Rs970mn at PBT level. With a strong start to FY23 led by harsh summer, IFBI aims to improve margins driven by healthy volumes, cost reduction measures and lowering import content. We cut our earnings estimates by 6% each for FY23E/24E and maintain ADD rating on the stock with a revised SOTP based target price of Rs910 (Rs935 earlier). We assign 28x/10x P/E to Home appliances/Engineering division on FY24E EPS.

Room Air Conditioners business update

COVID led sales disruption led to lower than expected FY22 RAC volume/value sales at 153,000 units/Rs4bn, respectively with PBT loss of Rs970mn. IFBI’s internal aim is to turn profitable in FY23 with ~8% EBIT margin. IFBI has monthly RAC capacity of 45,000 units and is nearly fully booked for the ongoing summer season. In Apr/May’22, it achieved sales volume of 50,000/36,000 units. For FY23, it aims to sell 225,000 units under brand IFB and 125,000 units as OEM sales. It could not meet targeted volumes in May’22 due to compressors shortage amid shipping issues from China. Under OEM sales, IFBI currently supplies to 3 clients and has order book visibility for July-Sept’22 based on new BEE energy norms. Key margin improvement levers are volume growth, material cost reduction and reducing imports. IFBI has localized electronics in Feb’22 and will substitute import of cross flow fan (through local vendor in 3-4 months), compressor (through domestic plant of Hailey/GMCC) and aluminum sheet for condenser (once Hindalco supplies start in 3-4 years).

Home Appliances segment update

IFBI took 12-13% price hike from Jan’21 to Mar’22 and further 2-3% price hike in AprMay’22. However, entire cost inflation couldn’t be passed on due to competition, with 3-4% lag still prevailing in washing machines. In front loaders, premiumization trend is underway with 8kg and 9kg range selling more in metro cities. IFBI will be launching 9kg plus category in Q2FY23, where current industry volumes are 60,000 units. Dishwashers’ overall demand has moderated, but can be enhanced through widening reach. IFBI aims to grow volumes to 75,000 units per annum vs. current levels of 45,000.

Maintain ADD rating with a revised target price of Rs910

We expect IFBI to report revenue CAGR of 17% over FY22-FY24E. While scale-up in AC and top-load washing machine would offer healthy growth prospects, but margin recovery will be challenged by input costs pressures amid high competitive intensity.

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