Sell Johnson Controls Hitachi Air Conditioning Ltd For The Target Rs.684 - Yes Securities
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Disappointing performance with continued market share loss; reiterate SELL
Result Synopsis
JCHAC continues with its disappointing performance with revenue declining 9.1%. Decline was on the lower base as Q2FY23 saw revenue decline of 22.4%. Gross margin although has improved on yoy basis, while it is still significantly lower than its historical levels of ~35%. We feel that this gross margin contraction is on account of intense competition in RAC space where other companies have become super aggressive. Our channel checks suggest JCHAC is losing its focus and its strategy on mass premium segment is backfiring. JCHAC continues to underperform players like Lloyd, LG, and Bluestar. As per media articles JCHAC had lost significant market share in Q1, and our channel checks suggest that it has further lost market share in Q2 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 feel it would be extremely difficult to gain market share and margin improvement looks to be tall ask. Considering lower margin profile and continued loss in market share we remain negative on the stock and reiterate our sell rating. JCHAC will have to make significant changes in its overall strategy to turnaround losing market share trend. We believe it is a long-drawn process and will have to wait and watch for management strategy and its implementation before we become constructive on the stock
JCHAC has seen significant erosion of its market share. As per some media articles its market share has halved in Q1 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. Market share gains and improvement in profitability will need to be watched out for before we become constructive on the stock. We have cut our revenue estimates by 15% and 8% in FY24 and FY25 respectively, while our earnings estimate for FY25 is lower by 8% Given the headwinds company is facing, we continue to remain Sell the stock with a revised PT of Rs684.
Result Highlights
* Quarter summary – JCHAC has once again disappointed with revenue significantly below our estimates with revenue declining 9.1% yoy. This decline is on back of significant decline it registered in the base quarter. In base quarter of Q2FY23 revenue decline by 22%.
* Margins – Gross margin although has improved on yoy basis, it is nowhere close to the gross margins it used to do few years back. On EBITDA margin front negative operating leverage is resulting in EBITDA loss for the company.
* Market share – Company after losing significant market share in Q1, has lost market share further in Q2 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 losing its focus and market share, while its concentration on mass premium segment is not yielding any result and company is now losing favors with large MBO’s.
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