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Johnson Controls-Hitachi Air Conditioning RESULT REPORT Q3 FY24 | Sector: Consumer Durables January 30, 2024 1

Market share loss continues; reiterate SELL

Result Synopsis

JCHAC continues with its disappointing performance with revenue declining 42%. Decline was on the favorable base as Q3FY24 saw revenue decline of 10%. Gross margin has seen significant improvement of 972bps on yoy basis. We feel that this gross margin expansion is on account of change in strategy of moving towards the premium end as against the earlier focus of mass premium segment. Our channel checks suggest JCHAC continues to see market share erosion. JCHAC continues to underperform players like Lloyd, LG, and Bluestar. As per media articles JCHAC had lost significant market share in 1HFY24, and our channel checks suggest that it has further lost market share in Q3 and now has become fringe player vs earlier where company was one of the top 5 player in RAC market with strong brand presence. We change in strategy will take time to give the desired result and company will have to continuously monitor it to be successful. Although we may only see the tangible benefits of the new strategy from 2HFY26. We believe the change in strategy will arguer well for the company as it will be playing to its strength where it can provide quality and give more value to its consumers at the premium end. We continue to remain Sell on the stock, we will become constructive once we see some signs of improvement.

JCHAC has seen significant erosion of its market share. As per some media articles its market share has halved in 1HFY24 and is further losing market share and has become fringe player vs one of the top 5 player in the RAC industry. JCHAC has been failing to protect its margin and simultaneously it is losing market share on consistent basis. Implementation in the strategy will have to be watched out closely. FY24 is expected to be washout year for JCHAC. Gross margins if maintained at the current levels can lead to significant improvement in profitability. we continue to remain Sell the stock with a revised PT of Rs919 valuing the company at 1x price to sales on FY26 estimates.

Result Highlights

* Quarter summary – JCHAC has once again disappointed with revenue significantly below our estimates with revenue declining 42% yoy. This decline is on back of decline it registered in the base quarter. In base quarter of Q3FY23 revenue decline by 10%.

* Margins – Gross margin has significantly improved in Q3. The company has registered gross margins of 35.2% expansion of 972bps. The company continues to register EBITDA loss on negative operating leverage

* Market share – Company after losing significant market share in 1H, has lost market share further in Q3 as well. JCHAC is now no longer featuring in top 5 company in RAC which earlier it used to be.

* Market Buzz – As per our channel checks, JCHAC is again focusing on the premium end. We believe it’s the right strategy as they would be playing to its strength, and it can create niche for itself.

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