Whirlpool of India Limited

Initiating Coverage Report

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Initiating Coverage Report

WHIRLPOOL OF INDIA LIMITED Exchange: NSE/BSE Ticker Symbol: BSE: 500238, Bloomberg: WHIRL IN Sector: Consumer Electronics Industry: Household Appliances CMP (17/10/15) INR 682.75 Target Price INR 826.5 BUY Upside 21.05% This report is published for educational purposes only by students competing in the CFA Institute Research Challenge WIL: A swirling growth story

Key Stock Data Whirlpool of India Limited (WIL) is well placed to tap the underpenetrated consumer durables space in India with strength of the brand, strong support from 2015 2016 E 2017 E parent and its sound financial health. Its presence across various product segments and its strong focus on consumer satisfaction through innovation Revenue 33,317.8 40,749.5 47,192.4 drives its growth. With estimated revenue and EPS CAGR of 14% and 17% respectively over FY2015-18E along with high free cash flows on account of PAT (INR mn.) 2,105.1 2,639.5 3,172.5 strong pick up in the pent-up demand, we recommend a BUY with a price target of INR 826.5. EPS 16.5 21.9 24.8 Highlights P/E(x) 38.4 x 37.7 x 35.7 x . Improving Economic Outlook A positivity in the macro economic environment is felt with India being the EV/EBITDA 23.9 19.3 16.7 fastest growing economy with GDP at 7.5 percent YoY in Q1 2015, inflation ROE (%) 25.4 26.6 28.5 under control (4.41% in Q2 FY2016) and interest rates gradually falling (reduced to 6.75% in September 2015). IIP has also shown positivity and Market Cap INR 86.6 bn consumer sentiment is also improving which is good sign for the consumer durables industry which is highly dependent on these factors. 52-Week range INR 406.60-Rs.847.05 . Underpenetrated Indian consumer durables market Free Float 8.6% The current penetration stands at 26% for refrigerators, 12% for washing machines, 8% for air conditioners and 5% for microwaves. This offers a big Major Shareholders: 75% headroom for growth for companies in this segment. WIL, backed by its brand Whirlpool Mauritius Limited image, parent support, technical expertise and strong financials is strongly placed leverage the situation.

Table of Contents . A strong financial performance Business Description 2 The revenue CAGR is expected to be 14% over FY 2015-18E period with the Corporate Governance 3 profit margins growing at 17% CAGR on account of improving outlook of the Industry overview and Competitive Positioning 3 industry, management’s intent to increase presence across market segments Investment Summary 5 and aggressive push in the new market segments will lead to increased revenues. Apart from that a net cash balance sheet, no leverage and no capital Valuation 7 expenditure in the near future will allow the company to outgrow the industry. Financial Analysis 9 Investment Risks 10 Key Risks: Slow economic growth, rise in commodity prices, currency Appendix 11 fluctuations and competition

Exhibit 1: WIL stock performance with SENSEX & BSE Consumer Durables Index

900 826.5 800 Upside: 700 21.05% 600 682.75 500 400 300 200 100

Jul-12 Jul-11 Jul-13 Jul-14 Jul-15

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Oct-10 Oct-11 Oct-12 Oct-13 Oct-14

Apr-11 Apr-12 Apr-13 Apr-14 Apr-15

Whirlpool SENSEX BSE Consumer Durables Index CMP Target Price

Source: Bloomberg 1

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Business Description

Exhibit 2: Segment wise Revenue break-up (INR million) Whirlpool of India Ltd. entered into India in late 1980`s under a joint venture with TVS group. It is a 75% owned subsidiary of Whirlpool Corporation, the global leader in the home-appliance industry and it established its first manufacturing facility for washing

7346 machines in Pondicherry. The company in 1996 acquired Kelvinator India Limited and also 6121 transferred the TVS share to form Whirlpool of India Ltd. expanding its business line to 9344 refrigerators, microwave ovens and air conditioners, and it is the 4th largest consumer 8456 4227 4332 durable company in India. 5839 5984 The company has annual manufacturing capacities of 1.8 million (mn) direct cool refrigerators, 0.81 mn frost-free refrigerators, and 0.65 mn washing machines at its 3 25871 28588 17865 18309 manufacturing facilities in Faridabad, Puducherry and Pune (Appendix 4 )

Business Model FY 2013 FY 2014 FY 2015 FY 2016E WIL has a Trading + Manufacturing based Model in which Refrigerators and Washing Refrigerators Washing Machine Others machines are manufactured completely in India, while A/Cs, Microwaves, and other kitchen appliances are traded. Refrigerators and Washing machines contributed around 83% of the Source: Company Reports, Student Estimates total revenues of FY 2015. WIL has recently entered into new segments –built in kitchen appliance and water purifiers- Exhibit 3: Market share % & volume growth % which the company expects will contribute to 10-15% of the future revenues against the 5% at the present. 30 10 27 25 Company Strategies 8 20 . Focus on Urban Penetration: 6 With its current sales concentrated in the top 50 cities of the country, WIL expects to tap 15 13 14 the urban and semi-urban markets only as penetration levels even in the urban segment 4 10 9 are low. (40% in refrigerators and ~20% in air conditioners and washing Machines). For 7 2 6 5 tapping this market, WIL has expanded its distribution network (Appendix 23) and also 4 entered the modern trade channel. 1 0 0 . Diversifying product portfolio through Innovation 2007 2008 2009 2010 2011 2012 2013 2014 The company has entered into new segments like built in kitchen appliances, water Market Share Volume growth purifiers. The A/C segment is also relatively small. These are high growth segments and Source: Euromonitor based on technological prowess and superior brand portfolio of its parent Whirlpool Corp., WIL expects to increase the contribution of this segment from the current INR 300 Exhibit 4: Imports a % of total costs million to INR 1 billion by 2018. The company also plans to open new flagship stores of 20000 40% inbuilt kitchen appliance store range. . Focus on premium products: 15000 30% WIL taking lineage from its parent has been strong in providing premium products with latest technologies (Appendix 24). This helps the company to enjoy price differentials 10000 20% and higher profitability than its peers booking a revenue CAGR of 11% even during lean

INR million INR period of FY2009-FY2014. (Appendix 3) 5000 10% . Improving market share: The company is targeting to improve its market share to 15% by FY2021 and it is 0 0% planning reach there by introducing newer and improved versions of its products more 2012 2013 2014 2015 frequently than before. Also improvements and efficiencies in dealer networks are on the Total Input costs Imported radar. (Appendix 28) Import % Shareholding Structure Source: Student Research Whirlpool Mauritius Ltd (holding company) holds majority stake in Whirlpool of India Ltd Exhibit 5: Shareholding Pattern on behalf of Whirlpool Corporation Inc., USA (Ultimate Holding Company). They hold 75% Corporate Public Bodies 9% (95,153,872) of the total share value of the company. Of the 25% public shareholding FIIs 2% 13.52% of the shares are held my institutional investors and 11.48% by non-institutional 6% investors. Copt hall Mauritius Investment Ltd and HDFC Large Cap Fund (Stock Account) Mutual are amongst the public shareholders holding more than 1% of the share. (Appendix 8) Funds 8% Corporate Management The Company is ably led by the management with a clear strategy in place to ensure Promoter s continued and sustainable growth in the future for the company. Mr. Arvind Uppal the 75% current chairman and Managing Director has been re-appointed by the shareholders for a

Source: Company Reports period of five years commencing from June 22nd 2015 showing faith in the management. (Appendix 37) 2

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Exhibit 6: WIL Awards & Recognitions Corporate GovernanceCorporate Governance Year Award & Recognitions WIL’s Protton World Series Whirlpool of India Ltd. has a strong corporate governance structure. The board structure of Refrigerator was selected for WIL is clearly defined in the report on Corporate Governance in the Annual Report. With 4 2015 the Good Design Awards 2015, (four) Non-Executive Independent directors, the board complies with clause 49 of listing Japan agreement regarding 50% of the board to comprise of Non-Executive Directors (Appendix ICWAI National Award for 37). The strengths of WIL is seen in the following areas: Excellence in Cost Management . Committees: Established Audit, Nomination and Remuneration, Stakeholders’ 2012 Trophy for Export Excellence in Relationship and Corporate Social Responsibility Committees (Appendix 38). EPO Service for outstanding . Whirlpool Code of Ethics: Whirlpool Corporation has a set code of ethics which is export performance' applicable to all its subsidiaries which strengthens the overall governance of WIL. Whirlpool Pondicherry Washer . Whistle Blower Policy: WIL has a robust Whistle Blower Policy that provides a formal Facility Gold Award 2011 Sullivan Manufacturing mechanism for all employees of the Company to approach their Supervisor. Excellence Award . Risk Management Policy: The Company has set up a core group of leadership team, Received the ENERGY STAR which identifies, assesses the risks and the trends, exposure and potential impact Sustained Excellence award analysis to give management a better grasp of possible risks the business may face. Named one of the 100 Best Corporate Citizens by Chief Social Responsibility 2009 Responsibility Officer The company actively finds opportunities to leave a lasting impact on the society. Through (formerly Business Ethics) “Integrated Child Development Program” WIL has sponsored to educate 300 children in The 'Best Innovative Product' three villages adjacent to the Pune plant. This programme aims to provide all-round in the popular refrigerators category development to needy students through their Classes VII– X. Source: Company Data Also, under its “Skill Development” program, imparted vocational training to almost 1,900 youths across India through training partners recognized by National Skill Development Corporation (NSDC). Exhibit 7: Indian Market Size (INR bn) 2500 Beneish M Score Model 1305 2000 Beneish M Score is a mathematical model which takes financial ratios as eight variables to decide if there are any manipulations in the accounts and earnings. WIL has M-score of-2.74 1500 735 (Appendix 9). According to this model, a company having M-score below -2.22 is not 1000 514 618 manipulating its earnings. 435 257 500 231 Industry Overview and Competitive Positioning 223 86 96 108 68 7477 81 87 93 262 0 4137 87 101 122 140 Current State & Future Drivers: 2009 2013 2014 2015 2016 2020 E E E From FY2009-14 the consumer durables industry grew at a muted CAGR of ~10% due to Washing Machine Refrigerators weak demand as a result of unfavourable macroeconomic conditions (Appendix 27). Going Air Conditioners Television forward there is a good headroom for expansion in India given the current low penetration Source: EY and FICCI Industry Report levels of 12% & 26% against the global average of 70% & 60% for Washing Machines and Exhibit 8: Consumer Durables Industry Refrigerators respectively. By 2020 India is slated to become the 5th largest Consumer Refrigerators Durables Market and market of White Goods is expected to increase to INR 600 billion by 2020 with a CAGR of 17%. (Appendix 27) Washing White Goods Machines Urban markets account for the major share (65 per cent) of total revenues in the consumer durables sector in the country. On the other hand, rural markets are also likely to witness ACs Consumer growing demand in the coming years as the government plans to invest significantly in rural Durables TVs electrification. (Appendix 17)

Microwaves Macroeconomic Conditions Brown Goods Other India's GDP grew 7.5 percent YoY in Q1 2015, up from a growth of 6.6 percent in the Domestic previous period assisted by a strong expansion in manufacturing and services sectors. With Source: Student Research Appliances India remaining the world`s fastest growing economy for 2nd straight quarter and the Exhibit 9: Market Penetration India vs forecasted GDP for the next 5 years being around 8%; these events have an encouraging Global Average implications for the Consumer Durables Industry. (Appendix 27) 100.0% 85.0% Initiatives taken by RBI and lower global crude and commodity to control inflation has 70.0% 80.0% 60.0% resulted in CPI gradually coming down from a high of 11% in Q3 FY2014 to 4.41% in Q2 60.0% FY2016 (Appendix 19). Furthermore, RBI has set the target of bringing down CPI to 4%, so 40.0% 21.0% this would induce people to buy more discretionary products like the consumer durables 8.8% 20.0% 3.0% as IIP for the month of August 2015 came at 6.4% higher as compared to the level in the 0.0% Refrigerators Washing Air Conditioner month of August 2014, with consumer durables index recording a 17% growth. A series of Machine rate cuts by RBI with the benchmark repo rate coming down to 6.75% in Sep`15 from 8% in Dec` 15, therefore we believe that availability of cheaper credit will help in spurring India Global Average Source: Euromonitor purchases through financing. 3

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Exhibit 10: Global Penetration Comparison Improving Demographics Volumes Volumes (mn, CY (mn, CY As per the census 2011, more than 50% of the total population falls in the working age 2000) 2014) CAGR group of 15-54 years, hence the growing incomes and aspirations of this group is expected to drive the demand for White goods. (Appendix 21) US 55.9 55.7 -0.0 The growing number of Middle class families, with their increasing disposable incomes, will UK 12.8 14.5 0.9 lead to the change in their spending patterns towards consumer durables, Urbanisation is

Germany 17.9 18.0 0.1 increasing in India and will continue to do so in the years to come due to direct and indirect exposure to Western lifestyles. (Appendix 21) France 11.9 14.4 1.4

Mexico 6.2 8.4 2.2 Government Initiatives

Russia 5.4 21.5 10.4 . Launch of Make in India promises to ease indigenous production and is expected to strengthen the case for Domestic Manufacturing of the Consumer Durables thereby Brazil 10.4 31.3 8.2 reducing the input costs in the long term by lessening the dependency on the imports.

China 36.0 135.5 9.9 . Goods and Services tax (GST) is slated to come into force from April 1, 2016, and once it is rolled out the consumer durables are likely to benefit greatly from it because of an Indonesia 1.9 10.7 13.0 expected ~20% reduction in their logistics cost on account of subsuming of CST and other Thailand 1.9 4.5 6.2 taxes. (Appendix 26)

Malaysia 1.2 1.9 3.6 Rise in organized retail India 4.4 16.6 9.9 Organized retailing will not only streamline the supply chain, but also facilitate increased

Source: Euromonitor demand, especially for high-end and branded products. Organized retail industry is Exhibit 11: Brand comaprison expected to cover a market share of 15%–18%, from around 3% currently by 2020. 7 6 Impending Bureau of Energy Efficiency (BEE) Norms 5 According to the Government norms, all the consumer durable manufacturers need to 4 adopt new BEE norms from April 2016. This will increase the pricing pressures on the

Rank 3 overall industry. In the short term margins can get hurt due to rise in costs, but historically 2 industry has passed on the cost to the consumers so a gradual volume-mix shift towards 1 higher rate products is bound to an improvement in the margins in the long term. (Appendix 0 25) Price Variants Technology Brand In Store Recall Presence Realizations to improve based on premium product offerings Whirlpool Hitachi IFB LG Samsung Videocon Average realizations for the home appliance industry have grown at a CAGR of 2.8% in Source: Student Research CY2004-14 period. Although volumes are currently skewed towards lower priced models, Exhibit 12: Customer Target going forward the volume mix is expected to shift to higher value products. In the refrigerator segment, the price difference between direct cool models and frost free models is ~50% & in the washing machine segment, price difference between top load and front load is ~60%. The AC market has already started shifting towards split ACs from window

Premium ACs. (Appendix 15)

Competitive Positioning (Refer Appendix 24)

Middle Despite being in a highly competitive market WIL has been able to keep its market share and margins high (NP Margin 6.3%). It has strong capabilities in the Washing Machine and Refrigerators segment and follows LG and Samsung as the third largest player. WIL has

WhirlpoolLower Hitachi IFB LG Samsung Videocon always aptly recognised the opportunities in the market and has been a leader in the technological and innovation domain, helping it maintain its margins. Support from parent

Source: Student Research has also led to Whirlpool to be recognised as a global leading brand and helps WIL draw Exhibit 13: Porter's Five Forces Analysis customers. The following points summarise its positioning: . The company has a strong distribution network and enjoys great loyalty and trust in the market. From our primary research, we understand that although distributors earn a Threat of new margin of ~15% which is less than those offered by peers (~20%), the timely entrants disbursements, other incentives like holiday packages etc. make the dealers stay with 6 WIL and push its products in the market. (Appendix 38) 4 Bargaining Bargaining . WIL has kept its ad spend (Appendix) limited but has pushed its products aggressively power of 2 power of suppliers customers through the distributors and modern trade. The new launches with premium pricing are 0 pushed through stores like Croma, Vijay Sales etc. as they attract the SEC 1 segment who Rivalry pay for the technology. among Threat of With no debt, efficient working capital management, good cash balances and sound existing substitutes profitability, WIL has fared better than its Indian peers as summarised in Exhibit 14. competitors

Source: Student Research

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Exhibit 14: Indian Peer Comparison on key factors and financial strength Company Major Portfolio OPM Trend Net Profit margin Number of Working Financials trend Capital Days Whirlpool of Refrigerators, 59 Mtk cap: INR 88.13 bn India Ltd. Washing Machines, Microwave P/E: 38.0 x Oven, AC, Water purifiers EBITDA Margin: 10.05% EV/Sales: 2.7x Hitachi AC, Refrigerators Mtk cap: INR 38.96 bn 24 P/E: 48.7 x EBITDA Margin: 8.77% EV/Sales: 2.6x

Symphony Air Coolers Mtk cap: INR 65.74 bn 70 P/E: 58.9 x EBITDA Margin: 27% EV/Sales: 12.6x

Voltas AC Mtk cap: INR 90.05 bn 77 P/E: 22.13 x EBITDA Margin: 5.89% EV/Sales: 1.7x

Blue Star AC, Refrigerators Mtk cap: INR 30.97 bn -7 P/E: 20.2 x EBITDA Margin: 5.63% EV/Sales: 1.4x

IFB Washing Machine, Mtk cap: INR 20.35 bn Microwave, 32 P/E: 49.8 x Kitchen Appliances EBITDA Margin: 6.86% EV/Sales: 2.1x

Source: Bloomberg, Student Research Investment Summary Exhibit 15: Revenue Growth 35000 35.0% We initiate coverage of Whirlpool of India Ltd. with a BUY recommendation and a target 30000 30.3% 30.0% price of INR 826.5 using Discounted Free Cash Flow to equity and Relative Valuation 26.3% 25000 25.0% methodologies, offering a 21.05% upside from current stock price of 682.7 on October 20.0% 20000 16.4% 17, 2015. WIL is one of the leading Indian players in the consumer durables segment 15.0% 15000 holding over 12% market share with strong capabilities and foothold in the refrigerator 9.6% 10.0% INR million INR 10000 and washing machines segments. WIL with its sound financials and strong parent 4.6% 2.5% 5.0% 5000 -2.1% 0.0% support is expected to benefit from the growing demand in the industry and positive 0 -5.0% macro-economic factors. FY FY FY FY FY FY FY 2009201020112012201320142015 The company is well placed with strong financials Revenues Growth YoY WIL recorded a sales and revenue growth of 11% and 12% CAGR even during the slump Source: Company Data period of FY2009-FY2014. With an increase in consumer demand post FY2014, the company has shown a robust turnaround with 16% YoY growth in revenues, margin Exhibit 16: EPS Growth expansion by 2.6% and EPS growth of 71% YoY in FY2015. Although part of these 18.00 140.0% realisations were supported by a fall in commodity prices in the last fiscal with ~40% 16.00 119.9% 120.0% 14.00 100.0% reliance on imports, it was able to log in premium pricing as well. Post FY2009, WIL has 12.00 80.0% 71.3% turned into a net cash company with no long term liabilities. With its three state-of-the- 10.00 60.0% art manufacturing facilities running at an overall average utilization of 50%, the 8.00 40.0% 6.00 20.0% company has enough headroom for expansion without incurring large capital 4.00 3.2% -3.8% 0.0% expenditure in the foreseeable future (Appendix 2) 2.00 -25.5% -20.0% 0.00 -40.0% FY FY FY FY FY And the growth is expected to continue 2011 2012 2013 2014 2015 WIL had set in ambitious targets of increasing its revenues 2.5X in the next three years EPS Growth YoY with a CAGR of 35% over the FY14-17E period. Although we saw a weak summer Source: Company Data impacting Q1 15 growth leading to management lowering its volume guidance from 10% to 5%, we believe that positivity showed by encouraging IIP numbers of 4.1% in April- Exhibit 17: Details of project Akraman August period (Consumer durables contributes more than 5.5% to IIP) combined with Phase Focus pickup in demand pre festive season will help the company report an overall 22% YoY growth in revenues for FY16. Highest number of product Akraman1.0 With its focus on premiumization, we believe that this strategy will pay more in the launches future and the company will be able to focus on the premium end of each sub-segment Akraman2.0 Restructuring Distribution in future thereby competing on the technology front rather than on the price front and Improving shop floor Akraman3.0 retaining its focus on profitability. For taking on competition, the company introduced conversion project Akraman. The details are provided in Exhibit 17 Source: Company Data, Student Research The company has also diversified its product portfolio, focussing on maintaining markets in the refrigerator and washing machine segment and making the market in the high growth segments of built in kitchen appliances, air conditioners and microwaves by

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putting greater focus on these. The company has entered into special tie-ups with real Exhibit 18: Market Penetration India vs estate firms like DLF to fit kitchen appliances in their projects apart from opening Global Average exclusive built-in showrooms called 'Whirlpool Haute Kitchen'. With this WIL expects to 85.0% 90.0% increase the contribution of this segment from the current INR 300 million to INR 1 80.0% 70.0% billion by 2018. The company is also building a strong franchise of split A/Cs with its 70.0% 60.0% new “Climate Control” technology. Sensing the opportunity, WIL has also tied up with 60.0% 50.0% modern trade outlets like Flipkart for sale of its products. 40.0% 30.0% 21.0% With strong support from parent (Appendix 5) 20.0% 8.8% 10.0% 3.0% Whirlpool Corporation, the parent of WIL, is the world’s largest home appliance maker 0.0% by revenue (US$20 bn in CY2014) with market leadership in the developed world. The Refrigerators Washing Air Conditioner Machine company under its product innovation for local markets’ strategy expects to drive growth in the Indian markets. India is an important territory for Whirlpool Corp to drive India Global Average its presence in Asia. WIL imports A/Cs and built in range of kitchen appliances from Source: Euromonitor Whirlpool’s subsidiaries abroad. Whirlpool Corp has also acquired 51% stake in Hefei Exhibit 19: Interest Rate movement Rongshida Sanyo Electric Company based in China. Once the synergies start building in, (%) WIL’s ability in product development and product sourcing from China will improve 9 significantly. Whirlpool Corp charges a royalty payment of ~1.6% for all this. 8 7 Supported by growth in the industry 6 5 The consumer durables industry has a good headroom for expansion in India given the 4 current low penetration levels in the various segments specially related to the white goods industry (Appendix 20). The growth is mainly derived from urban areas with ~65% of total revenues supporting the target market for WIL (Appendix 28). We expect the penetration levels to rise going forward on account of improvements in affordability Source: RBI Data of households indicated by the growing per capita income and availability of finance. Exhibit 20: Segment Wise revenue It may be noted that more than 50% of the total Indian population falls in the working (INR Mn.) and sales growth age group of 15 to 54 years and with growing incomes and aspirations the demand for 150000 white goods is expected to be driven by this age group. There has also been a shift in the consumer preference towards more premium products like the automatic washing segment, split A/Cs, frost-free refrigerators etc. which are the strength areas for WIL. 100000 On the other hand, there is intense competition in the industry with other Asian players like LG, Samsung taking over a good share of the market (~40%) leading to price wars. Adding to this, the new BEE norms effective April 2016 might also put pressure on 50000 margins in the short term, but historically industry has passed on the cost to the consumers so a gradual volume-mix shift towards higher rate products is bound to bring an improvement in the margins in the long term. (Appendix 25) 0 FY FY FY FY FY And other macro-economic factors 2013 2014 2015 2016 2023 The country’s GDP is expected to grow at 7% levels till 2020 (Appendix 27). With this Other appliances Spares for finished goods growth, a huge increase in discretionary spending is also expected. This increased Microwave AC demand is further fuelled by lowering inflation and interest rates in the economy. Washing Machine Refrigerators Another major impetus for increased demand will be the 7th pay commission which is Source: Company Data, Student Estimates likely to improve demand for white goods segment. The weakening of rupee may put pressures as ~40% of its products are imported but we that the growth factors offset this pressure. Exhibit 21: WIL price movement over 5 years and key happenings 900.00 Sensex and NSE crashes on chinese yuan 800.00 devaluation

700.00 Whirlpool Q215 results rises 2 Folds to 40.7 600.00 Whirlpool Q414 net profit rises 44% to Rs 35.5 cr September AGM, Volume 500.00 Guidance reduced Whirlpool of India Q413 400.00 Make In India net profit declines by 33% Launch 300.00 Make In India 200.00 Whirlpool of India Q211 net down nearly 53% at Rs Announcement 100.00 14.36 cr Announcement of Fed tapering -

Source: Bloomberg, Student Research

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Exhibit 22: Computation of Beta Beta Computation Valuation Beta(industry) 1.46 The price of Whirlpool of India Ltd. has been rising from 2014 due to a boom period in the D/E (industry) 0.18 overall consumer durables industry. At the CMP, WIL is trading at 38.0x P/E, 2.7x EV/Sales Beta unlevered 1.31 and 23.9x EV/EBITDA. Considering company’s healthy financials, growing consumer Whirlpool D/E 0 durables industry, favourable government policies and strong parent support, we issue Beta levered 1.31 BUY recommendation with a price target of INR 803.0. We have considered two standard approaches to value WIL: Discounted Cash Flow (DCF) Source: Bloomberg, Student Estimates Method and Relative Multiples Valuation. Giving 60% weightage to DCF and 40% to Exhibit 23: Computation of Weighted Average Cost of Relative multiples we get a target price of INR 826.5 (Exhibit 23). Capital

Cost of Equity Discounted Cash Flow Method Beta 1.31 Looking at the historical trends, it has been found that there is high correlation between Risk free rate (10- year 7.53% per capita income growth of India and the growth of consumer durables sector. The Government bond yield) industry grows with a multiplier of 2.3x of per capita income growth (Appendix 27). And Equity Risk Premium 5.71% then based on the market share which is expected to increase every year, we have computed the revenues for WIL (Appendix 30). Cost of Equity 14.98% WIL currently derives majority of its revenues (83%) from its refrigerator and washing D/E 0 machine which is expected to continue even in future. However, due to management’s WACC 14.98% aggressive marketing and focus on newer segments, revenues from air conditioners, microwaves and newly introduced kitchen appliances is expected to grow at a faster pace Source: Bloomberg, Student Estimates and thus, we expect a higher YoY growth in these segments (Appendix 28). We have forecasted the earnings of the company in two phases. The first phase includes a Exhibit 24: Computation Target Price detailed year-to-year forecast up to 2023 and a constant growth rate of 5% is assumed for the terminal phase. The target price so achieved using this approach is INR 803. Method Price Weight Value The DCF Model involves following assumptions: DCF 803.0 60% 481.8 . Cost of Goods Sold: With the acquisition of Hefei Rongshida Sanyo Electric Company P/E 880.2 50% based in China, Whirlpool Corporation will gain manufacturing scale and a EV/ Sales 819.2 25% competitive cost structure. Leveraging these synergies, WIL’s ability in product EV/EBITDA 867.3 25% development and product sourcing from China will improve significantly which would Relative 861.7 40% Price 344.7 reduce COGS as a percentage of Sales (Appendix 2) Target 826.5 . Capital Expenditure: Historically, the capex has been close to 3% of the revenues and CMP 682.7 over the next 5-10 years, there is not going to be a huge capex requirement. If at all Upside 21.05% any capex requirement arises, it would be met by the existing manufacturing plants whose capacities are not fully utilized. Source: Student Estimates . Weighted Average Cost of Capital: Since the company has zero debt and has no plans for expansion and hence taking debt, the cost of equity will be its WACC. The Cost of Exhibit 25: Sensitivity Analysis Equity is calculated using CAPM (Appendix 32). The risk-free rate of 7.5% is arrived WACC using 10-year government bond yield and beta was computed using bottom up 803.0 14.3% 14.5% 15.0% 15.3% 15.5% approach (Appendix 32).

3.0% 788.6 772.0 741.9 726.4 712.4 . Terminal Growth: The cash flows, being very uncertain in this industry, have been projected till 2023 post which a terminal growth rate of 5% is assumed. This 4.0% 834.4 815.2 780.8 763.0 747.2 assumption is in line with the cyclicality of the industry which might hamper the 4.5% 860.8 840.1 803.0 783.9 766.9 growth. Terminal Growth 5.0% 890.0 867.6 827.4 806.8 788.5 . Short-term Investments: Since WIL is sitting on huge cash and has no plans for

5.5% 922.6 898.1 854.4 832.1 812.3 expansion or raising debt in future, we have assumed that it would invest 5% of its

revenues in short-term investments. Growth of Refrigerator & Washing Machine 803.0 8% 10% 12% 14% 16% Sensitivity Analysis 10% 675.3 725.2 784.6 815.3 885.3 We performed sensitivity analysis on factors which directly impact out valuation 14% 690.2 749.3 792.6 822.2 901.3 assumptions. From sensitivity analysis we found that our valuation is mainly sensitive to 18% 701.2 763.2 803.0 832.3 919.5 Terminal growth, rate of growth of revenues from refrigerators and washing machines 20% 712.4 789.2 820.2 854.6 936.5 and WACC.

Growth of new segments and new A/cGrowthsegments of 22% 723.2 805.0 836.5 871.2 950.1 Monte Carlo Simulation Source: Student Estimates A Monte Carlo Simulation using @RiskAMP tool was utilized in analysing the potential outcomes of Whirlpool`s growth prospects. This methodology simulates a range of possible outcomes for the multiple variables determining the intrinsic value of WIL’s stock price. Key factors for this model include WIL’s growth opportunities, WACC and Input costs.

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10,000 simulations were run which accounted for each possibility of a feasible change in Exhibit 26: Monte Carlo Simulation important company specific, industry macroeconomic factors. These inputs leads to a Price target range of INR 720 and INR 970 with a 90% confidence level.

Relative Valuation Method (Appendix 33) Apart from the DCF method, we also analysed trailing price relatives of comparable firms, after selecting the appropriate peer group, we identified the most appropriate local peer

Frequency of Whirlpool India ltd. as IFB (NSE:IFBN) since its major business lines are Washing Machines and Refrigerators which constituted around 98% of the sales of WIL in FY15. For multiples price valuation we chose EV/Sales, EV/ EBITDA and P/E multiples, all based on one-year forward medians. EV/Sales was chosen specifically due to the cyclical nature of White Goods industry, and capital intensive nature requires valuation through EV/EBITDA.

Source: @RiskAMP, Student Research Analysis using P/E Method: We constructed P/E bands based on 2 year forward median values and we observed an Exhibit 27: WIL vs IFB Comaparison historical discount of 30% for WIL over its peers’ group median values. We value WIL at INR 880 using 35.7x median P/E for FY`17. Historically, WIL has traded below its median 2 year Forward P/E multiple, Recently all 700 639.6 the stocks in this sector have been trading at higher P/E valuations, WIL has also followed 600 the same trend. This change is completely justified by change in the political scenario and 500 440.8 439.9 improving macroeconomic environment resulting in a positive sentiment. 400 330.4

300 200 Exhibit 30: P/E Bands Chart 100 1000 0 01-Jan-14 01-Jan-15 900

WHIRLPOOL IFB 800 Source: Student Research 700

Exhibit 28: Relative Multiples comparison with peers 600 500 Company EV/EBITDA P/E EV/Sales 400 WIL 23.9 x 38.0 x 2.7 x 300 SYMPHONY 40.2 x 58.9 x 12.6 x 200 Hitachi: HLS 22.2 x 48.7 x 2.6 x 100 Blue Star 19.6 x 20.2 x 0.9 x 0 IFB 22.1 x 49.8 x 1.8 x

VOLTAS Ltd 18 x 22 x 2 x

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15

Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15

Apr-11 Apr-12 Apr-13 Apr-14 Apr-15

Feb-13 Feb-11 Feb-12 Feb-14 Feb-15

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 MEDIAN 22.07x 42x 2.22x Adj Close 11x 16x 24x 32x 42x Source: Bloomberg, Student Research Source: Bloomberg, Student Research

Exhibit 29: 1 Year Fwd P/E Analysis using EV/Sales Method We observed that median EV/Sales of the peer set to be 2.32x and the subsequent analysis 45.00 40.00 leads to an intrinsic value per share of INR 819.27 for WIL , a ~20% discount to the current 35.00 trading price, which further re-affirms our Buy recommendation 30.00 Median: 25.00 22.86x 20.00 Analysis using EV/EBITDA Method 15.00 The observed median EV/EBITDA for FY17 was found at 16.7x from the peer set and the 10.00 5.00 workings with 2-year forward EBITDA (FY16E) leads to an intrinsic value of INR 867.36 - for WIL, a ~25% discount to the current trading price. So there is a huge upside for the stock.

1 yr Fwd P/E multiple Median Due to the discount at which WIL`s CMP is trading we remain confident that this valuation using the multiples strongly reaffirms our Buy recommendation and validates our target Source: Bloomberg, Student Research price of INR 826.5 with an upside potential of ~21.05% (See Appendix for complete valuation).

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Financial Analysis

Exhibit 31: Key Financial Ratios Key Ratios FY 2013 FY 2014 FY 2015 FY 2016 E FY 2017 E FY 2018 E Shareholder Ratios EPS 10.1 9.7 16.6 21.9 24.8 26.4

Profitability Gross Profit Margin 17.4 17.6 20.5 23.8 23.8 23.8 (%) EBIT (%) 6.5 6.1 9.0 10.6 12.3 12.2 Net Profit (%) 4.6 4.3 6.3 7.0 7.8 8.2

Exhibit 32: Segment wise Revenue Performance Break up and growth RoE (%) 20.1 18.1 25.4 26.6 28.5 27.5 70000 45.0% RoA (%) 9.2 7.8 11.4 11.1 11.3 10.1 40.0% 60000 35.0% 50000 Efficiency 30.0% Asset Turnover (X) 2.2 1.9 1.9 1.9 1.8 1.7 40000 25.0% Receivable Days 20.1 21.7 17.8 16.1 17.2 17.2 30000 20.0%

INR million INR Inventory Days 100.4 111.9 114.4 112.8 114.7 114.7 15.0% 20000 Working Capital 29.2 42.5 56.8 48.7 57.2 67.6 10.0% Days 10000 5.0% 0 0.0% Liquidity FY FY FY FY FY FY 2013 2014 2015 2016 2017 2018 Current ratio 1.3 1.5 1.6 1.6 1.8 1.9 Quick Ratio 0.5 0.6 0.8 1.0 1.1 1.2 Refrigerators Washing Machine AC Microwave Others Growth Overview Source: Company Data, Student Research Exhibit 30 depicts the financial condition of WIL for the next three years based on our Exhibit 33: PAT, PAT margin, EBIT Margin underlying assumptions. The company is fundamentally sound and has the strong backing of its parent Whirlpool Corp. which is a global leading consumer durables company. WIL 4000 16.0 is a net cash company with zero long term debt. (Appendix 3) 3500 14.0 3000 12.0 Growth driven by macro-economic variables 2500 10.0 WIL was able to record a revenue CAGR of 11% even during the slump period of FY2009-

2000 8.0 % 2014. Post that as the demand has picked up, WIL reported 16% YoY growth in revenues. 1500 6.0 INR million INR Going forward as well, the company is going to benefit from macro-economic factors like 1000 4.0 500 2.0 increasing per capita incomes and stabilising interest and inflation environments. 0 - Also, given the strong headroom for market penetration from current levels, it is expected FY FY FY FY FY FY that WIL over the next 5 years will be able to report healthy growth of 17% CAGR in 2013 2014 2015 2016 2017 2018 revenues.

PAT EBIT Margin (%) Profitability to remain strong PAT Margin (%) WIL has kept its focus on premium products resulting in sound profitability. Based on the shift in consumer preferences towards premium products and WIL’s own technological Source: Company Data, Student Research capabilities it is expected that it will be able to grow at profits of 16% CAGR over the next 5 years. Exhibit34: RoE Trend

60% Net cash company with high liquidity Post FY2009, WIL has done away with long term debt and maintains high liquidity with a 40% cash balance of INR 5.3 billion in FY 2015. Because of good internal capital formation and 20% no requirements for capacity expansion in the near future (Plants are operating at ~50% capacity currently), no pressure of financing charges would be there for the company and 0% FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 the liquidity position will remain strong. The current ratio has improved as WIL has better working capital management than it peers with average working capital days of 56.8 Median Whirlpool despite it being in an industry which has to carry high inventory. Source: Company Data, Student Research

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Exhibit 35: DuPont Analysis ROE Decomposition In the analysed historical period WIL has given good return on equity mainly driven by good profitability. The profitability is further due to its sound operating model which has allowed it to have strong operating margins even during slump periods. (EBIT Margin: 6.5% in FY 2009). The financial leverage is high, but WIL has no long term debt. The short liabilities are well covered by current assets (Current ratio is 1.64 for FY 2015). WIL is operating at only about half of its total capacity which leads to great scope for increasing revenues without incurring further capex in the near term.

Investment Risks

Economic Risk |Revival of growth (ER1) Source: Company Data, Student Research Revival of growth is the single largest concern for the industry. It is therefore imperative that GDP growth returns to the 8%+ level, creates surplus income in the hands of consumers, which is a critical factor for discretionary businesses such as Whirlpool`s to Exhibit 36: Steel as a % of total Cost thrive. 12.0% 11.3% Economic Risk |Higher commodity Prices (ER2): 11.5% 11.4% 11.0% 10.7% The major inputs for WHIRLPOOL are Compressors, Steel and other components which 10.5% 10.7% majorly includes Plastics and PCB Boards. Recently, it has benefitted from falling steel 10.0% 10.2% 9.5% 9.7% 9.4% prices seen in the expansion of the profitability margins. Steel costs have come down from 9.0% 10.2% in FY`14 to 7.8% in FY`15. So, there is a downside risk of bottoming up of steel 8.5% 8.0% prices in the future which can impact the margins adversely. 7.8% 7.5% 7.0% FY FY FY FY FY FY FY FY Economic Risk |Currency Risk (ER3) 2008 2009 2010 2011 2012 2013 2014 2015 Whirlpool imports around 30% of its raw materials primarily from US and European countries, hence there is a major risk of any untoward currency depreciation impacting the Cost of Goods Sold and subsequently the margins. Source: Company Data, Student Research Industry specific risk |Intense competition (IR1) Exhibit 37: Imports as a % of Total costs India`s high growth potential has drawn several foreign players into the market, and as 20000 40% Industry grows we expect aggressive expansion by the current and new players, which 35% 35% might upset the growth prospects of WIL, as Historically WIL hasn`t compromised on 33% 15000 30% margins, thus intense competition is a key risk for the margins of WIL. 27% 26%25% 10000 20% Company Specific Risk |Less focus of the Parent (CR1) 15% INR million INR The home appliance industry requires frequent product launches with contemporary 5000 10% design and features, requiring continuous investments in product development and 5% product innovation in accordance with the tastes of the local market. Low focus on the 0 0% 2011 2012 2013 2014 Indian Market by the Parent may cause Whirlpool to lose its marketing standing in the long run. Total Input costs Imported Source: Company Data, Student Research Company specific risk |Increased Royalty payments (CR2) Over the years, WIL`s royalty payments have ranged from 1.2-1.3% of the total revenue. Exhibit 38: Investment Risk Sensitivity

If there is any increase in these payments then it is bound to have a negative impact on

ER1 the profit margin of WIL. High IR1 CR2 Regulatory Risk | Impending BEE Norms (RR1) ER2 Energy efficiency for Direct Cool (or single door) refrigerators, which was voluntary until

December 2014, has become mandatory from January 2015. Energy norms for Air Severity Severity

ER3 Conditioners and Frost Free refrigerators will get tougher in January 2016. E-Waste Rules, RR2 RR1 which came into effect in May 2012, is being revised to make producers more accountable.

CR1 Finally, CSR is now mandatory for companies such as Whirlpool. All these have added to

Low costs, both direct and indirect.

Regulatory Risk |More FTA`s on the anvil (RR2) Low Probability High More FTA’s are on the anvil, e.g. with Australia, Japan and EU. India is actively participating Source Student Estimates in the Regional Comprehensive Economic Partnership (RCEP) agreement, a formation of 16-member countries comprising of 10 ASEAN members and its six FTA partners namely India, China, Japan, Korea, Australia and New Zealand. This may alter the contours of trade for our industry and company.

Equity Research Report ends here 10

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Appendix 1: Profit & Loss Statement

In Millions of INR except Per Share FY 2013 FY 2014 FY 2015 FY 2016E FY 2017E

Revenues

Refrigerators 17,865.35 18,309.34 25,871.16 28,587.63 32,018.15

Washing Machine 5,839.33 5,984.45 8,456.05 9,343.94 10,465.21

Refrigerators +Washing Machine 23,704.69 24,293.80 34,327.21 37,931.57 42,483.36

AC 1,977.75 2,026.90 2,864.02 3,379.54 3,987.86

Microwave 430.70 441.40 623.71 735.97 868.45

Spares for finished goods 1,103.06 1,130.47 1,597.36 1,884.88 2,224.16

Other appliances 715.62 733.40 1,036.30 1,222.83 1,442.94

Gross Sales 30,364.99 31,059.60 35,777.67 42,400.36 47,895.35

Less: Excise Taxes 2,637.73 2,713.18 2,839.84 3,160.84 3,570.47

Add: Sundry/Other Operating Income 204.55 279.55 380.00 406.39 459.06

Total Revenue 27,931.81 28,625.97 33,317.83 40,639.32 45,906.09

COGS 17,355.34 17,924.25 19,712.64 23,164.41 26,166.47

Operating Expenses 5,724.07 5,675.79 6,759.62 7,823.07 8,836.92

Operating Profit 4,852.41 5,025.94 6,845.56 9,651.84 10,902.70

Salaries Wages and Employee Benefits 2,427.54 2,631.32 3,152.64 3,251.15 3,672.49

Depreciation Expense 603.19 638.34 681.26 688.13 738.53

Total Operating Expenses 26,140.14 26,883.92 30,312.60 34,980.08 39,490.13

EBIT 1,821.69 1,756.28 3,011.66 4,324.85 6,625.25

Total Financial Costs 30.01 14.22 6.44 53.32 75.72

PBT 1,791.68 1,742.06 3,005.22 4,271.53 6,549.53

Tax Expense 514.19 512.94 900.13 1,478.37 2,266.79

Tax % 28.70% 29.44% 29.95% 34.61% 34.61%

PAT 1,277.49 1,229.11 2,105.10 2,639.52 3,172.50

Source: Company Reports and Student Estimates

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Appendix 2: Balance Sheet

In Millions of INR except Per Share FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Assets Cash & Near Cash Items 1,549.8 2,915.7 5,356.0 6,273.5 8,908.5 Short-Term Investments - 0.6 0.9 2,032.0 2,032.0 Accounts & Notes Receivable 1,709.1 1,698.7 1,550.7 2,032.0 2,295.3 Inventories 5,222.8 5,766.7 6,590.1 7,721.5 8,722.2 Other Current Assets 486.1 476.1 522.0 508.0 573.8 Total Current Assets 8,967.7 10,857.9 14,019.6 18,566.9 22,531.8 LT Investments & LT Receivables - - - - - Net Fixed Assets 4,133.6 4,236.1 3,956.6 4,168.5 4,329.9 Gross Fixed Assets 9,861.2 10,493.9 11,388.0 12,288.0 13,188.0 Accumulated Depreciation 5,727.7 6,257.8 7,431.4 8,119.5 8,858.0 Other Long-Term Assets 743.5 596.6 513.1 1,016.0 1,147.7 Total Long-Term Assets 4,877.0 4,832.7 4,469.7 5,184.5 5,477.6 Total Assets 13,844.8 15,690.6 18,489.3 23,751.4 28,009.4

Liabilities & Shareholders' Equity Accounts Payable 5,808.6 6,342.4 7,194.1 9,005.7 10,172.8 Short-Term Borrowings - - - - - Other Short-Term Liabilities 974.3 1,112.1 1,344.3 2,308.3 2,607.5 Total Current Liabilities 6,782.9 7,454.5 8,538.4 11,314.0 12,780.3 Long-Term Borrowings - - - - - Other Long-Term Liabilities 886.4 835.6 793.2 1,174.5 1,326.7 Total Long-Term Liabilities 886.4 835.6 793.2 1,174.5 1,326.7 Total Liabilities 7,669.4 8,290.1 9,331.5 12,488.5 14,106.9 Total Preferred Equity - - - - - Minority Interest - - - - - Share Capital & APIC 1,395.6 1,395.6 1,395.6 1,395.6 1,395.6 Retained Earnings & Other Equity 4,779.8 6,005.0 7,762.2 9,867.3 12,506.8 Total Equity 6,175.4 7,400.6 9,157.8 11,262.9 13,902.4 Total Liabilities & Equity 13,844.8 15,690.6 18,489.3 23,751.4 28,009.4

Source: Company Reports and Student Estimates

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Appendix 3: Historical Ratios

Ratios FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Median Whirlpool Median Whirlpool Median Whirlpool Median Whirlpool Median Whirlpool

Liquidity

Current ratio 1.1 1.1 1.0 1.2 1.0 1.3 1.1 1.5 1.3 1.6

Quick ratio 1.1 0.2 1.1 0.4 1.0 0.5 1.0 0.6 0.6 0.8

Shareholder Ratios

Earnings per share 12.8 12.3 4.6 9.6 6.7 10.1 8.4 9.7 22.6 16.6

Book Value 74.9 27.9 74.6 37.5 55.0 47.6 58.9 57.3 92.3 71.2

Investment Valuation

ratios Operating profit per 24.5 20.8 12.7 17.6 18.2 17.3 17.5 16.7 34.9 26.1 share Net Operating Profit 155.2 213.0 156.2 209.5 168.2 218.6 155.7 223.4 342.6 259.6 Per Share (INR)

Debt Coverage Ratios

Interest cover 3.9 43.4 2.6 42.4 3.9 60.7 2.5 123.5 13.2 467.9 Total Debt to owners 0.7 0.2 0.4 NA 0.8 NA 0.6 NA 0.5 NA fund

Profitability Ratios

EBITDA Margin (%) 8.8 10.3 5.8 8.9 5.0 8.4 4.3 7.9 8.8 10.4 Cash Profit Margin 6.5 7.7 5.8 6.5 3.8 6.7 3.9 6.5 6.3 8.4 (%) Net Profit Margin (%) 5.4 6.1 2.9 4.7 3.2 4.6 3.5 4.3 5.0 6.4 Return On Net Worth 27.0 53.0 7.1 22.2 10.5 23.1 12.0 18.1 24.4 25.4 (%)

Management

Efficiency Ratios Inventory Turnover 5.6 4.1 6.2 6.2 5.5 5.3 4.8 4.9 6.7 5.4 Ratio Debtors Turnover 5.6 21.2 5.2 21.1 6.0 18.0 5.1 16.6 4.7 20.3 Ratio Investments Turnover 5.6 4.1 6.2 6.2 5.5 5.3 4.8 4.9 6.7 5.4 Ratio Fixed Assets Turnover 6.1 3.4 6.8 3.1 6.7 2.9 6.5 2.9 6.8 2.9 Ratio Number of Days In 59.5 14.5 44.0 17.3 34.2 29.2 43.7 42.5 24.9 56.8 Working Capital

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Appendix 4: Current Plant capacity

Plant Production capability Production Capacity Current Utilization

Faridabad, Haryana Direct Cool Refrigerators 2mn units (6,000 units/day) 80% with Double shift

Ranjangaon, Pune Frost Free Refrigerators 0.8 mn units (2,500 units/day) 60% with single shift

Puducherry Washing Machines 1 mn units (3000 units/day) 60% with single shift

Overall Capacity Utilisation ~50%

Source: Student Research

Appendix 5: Whirlpool Corporation The Whirlpool Corporation is an American multinational manufacturer and marketer of home appliances, headquartered in Benton Charter Township, Michigan, United States. It is the number one major appliance manufacturer in the world, with approximately $20 billion in annual sales, 100,000 employees and 70 manufacturing and technology research centres throughout the world in 2014. The company markets Whirlpool, KitchenAid, Consul, Maytag, Brastemp, Amana, Bauknecht, Jenn-Air, Indesit and other major brand names in more than 170 countries.

The company is known as one of the leading innovation and Technology Company in the world. It derives maximum revenue from American and Latin American regions. Of late the company has started increasing its footprint in Asian region owing to the large opportunity present here. The major territories in Asia are India and China. The company in October 2014 completed the acquisition of Hefei Sanyo to gain stronger presence in the Asian markets.

Revenue breakup 120.0%

100.0% 4.1% 4.0% 15.1% 19.5% 80.0% 60.0% 24.6% 23.4%

40.0% 53.1% 20.0% 50.8% 0.0% 2013 2014

North America Latin America EMEA Asia

Source: Company Data

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Appendix 6: Whirlpool Corp Market positioning

Brazil UK US

Whirlpool #2 #3 #4 Whirlpool #2 #3 #4 Whirlpool #2 #3 #4

China Italy India

#1 #2 #3 Whirlpool Whirlpool #2 #3 #4 #1 #2 Whirlpool #4

Source: Student Research

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Appendix 7: WIL Business Model

WIL deals with two types of goods: Trading Goods: Goods that are semi-finished that are used to produce a Finished Product. They are traded multiple times. Manufactured/ Finished Goods: In contrast, finished goods are sold to the customers directly and there is no further trading involved.

Manufactured Goods Trading Goods (Includes spares for finished goods)

Microwaves and Kitchen Appliances Refrigerator Washing Machines Air Conditioner

Whirlpool of India – Whirlpool of India – Beijing Embraco Whirlpool Corporation Inc., Usa Faridabad Plant Puducherry Plant Snowflake Compressor

Company Ltd

Whirlpool of India – Others Whirlpool Microwave Product Ranjangaon Plant Developments Ltd (Hong Kong)

Whirlpool Europe

Source: Student Research

Appendix 8: Institutional Investor Details % Shares Owned: 12.52%

# of Holders: 32 Total Shares Held: 158,78,465

Net Change: 1,85,175

# New Positions: 2

# Closed Positions: 1

# Increased Positions: 7

# Reduced Positions: 6

# Net Buyers: 1

Source: Company Report

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Appendix 9: Beneish M-score

Beneish M Score is a mathematical model which takes financial ratios as eight variables to decide if there are any manipulations in the accounts and earnings.

Model considers following 8 variables:

1. DSRI - Days' sales in receivable index 2. GMI - Gross margin index 3. AQI - Asset quality index 4. SGI - Sales growth index 5. DEPI - Depreciation index 6. SGAI - Sales and general and administrative expenses index 7. LVGI - Leverage index 8. TATA - Total accruals to total assets

M Score is then calculated using following formula: M = -4.84 + 0.92*DSRI + 0.528*GMI + 0.404*AQI + 0.892*SGI + 0.115*DEPI – 0.172*SGAI + 4.679*TATA – 0.327*LVGI 4.679*0. If the M Score calculated is less than -2.22, the company is not manipulating its earnings.

M-Score Calculation for Whirlpool of India Ltd.

DSR 0.723 GMI 0.806 AQI 0.470 SGI 1.152 DEPI 0.937 SGAI 1.250 LVGI 0.856 TATA 0.038 M-score -2.743

As M-Score for WIL is less than -2.22, there are no manipulations in the financial statements.

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Appendix 10: Market Share Break-up

The White Goods industry is dominated majorly by foreign players, namely LG, Samsung. These 2 company has around 40% of the total market. Rest of the market is divided between Whirlpool, Videocon, Godrej and Others. Below is the market share break up for the year 2014:

Home Appliance Industry Market share(2014)

Others 16% LG Haier 26% Electrolux 4% 5%

Godrej 10% Samsung Whirlpool 19% 10% Videocon 11%

LG Samsung Videocon Whirlpool Godrej Electrolux Haier Others

Source: Euromonitor

When we see component wise market share, we observe that LG is the dominant plater across all the categories followed by Samsung. WIL is the 4the largest player over all with individual market shares of 11%, 12% and 3% in the Refrigerator, Washing Machine & AC segments, respectively.

Company Refrigerator Washing Machine Air Conditioner Microwave LG 22% 32% 18% 39% Samsung 19% 24% 12% 18% Videocon 11% 16% 7% 6% Whirlpool 11% 12% 3% 5% Electrolux 6% 4% Godrej 14% 6% Haier 4% Panasonic 7% 5% Daikin 8% Voltas 20% Blue star 5% Others 13% 10% 20% 23% Total 100% 100% 100% 100% Source: Student Research

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Appendix 11: Porter’s Five Forces Analysis of Consumer Durables Industry

Threat of new LEGEND entrants 5 0 - No threat to the business 4 1 - Insignificant threat to the business 2 - Low threat to the business 3 3 - Moderate threat to the business Bargaining power of 2 Bargaining power of 4 - Significant threat to the business suppliers customers 1 5 - High threat to the business 0

Average Score – 2.6

Rivalry among Threat of substitutes existing competitors

Threat of new entry | LOW:

Generally companies need a lot of investment to set up the manufacturing cost or import from their parent country to the local market. Though technology intensive, given the cut-throat competition bringing about product differentiation in the minds of the customers is still a challenge. As ‘Whirlpool of India’ and its peers have been in the market for a long time the crucial retail distribution network is established and loyal. New entrant would find it difficult to penetrate the markets vis- à-vis existing players. Economies of scale – In the consumer durables industry the companies play on volumes

Bargaining power of customers | MODERATE:

The customers are spoilt for choice in the white goods segment. It is also important to note that the inherent value of the goods is high which hinder customers from switching to similar products on a regular basis. Though there are no direct switching costs, customers do tend to use the durables to last their complete lifetime while taking the support of a very good after sales service. The bargaining power of the customers is limited to the sense that when the products a technologically lagging or the price of the goods is out-of- sync with the market there can be a correction forced by switching brands.

Threat of substitutes | LOW:

Threat of substitutes tends to be higher in electronic goods like mobiles and kitchen appliances. As there are is a lot of competition from cheaper and traditional substitutes in kitchen appliances. ‘Whirlpool of India’ has no mobile segment and a limited exposure to the kitchen appliances segment. Threat of substitutes is almost non-existent in the air conditioners, refrigerator segment. With women being the primary target customers, the growing percentage of women in the working class would drive this further down in the future.

Rivalry among existing competitors | SIGNIFICANT:

Presence of a large market in an emerging market like India has attracted many global players to the country, ‘Whirlpool of India’ being one of them. This, in addition with the domestic players, caused intense rivalry in the field where product differentiation is limited. The overall penetration of the market has been low and with the semi-urban and rural markets relatively unexploited the rivalry among existing competitors is expected to go higher.

Bargaining power of suppliers | LOW:

As one of the key factors to enter and succeed in the consumer durable industry is to establish the supply chain, all the players including ‘Whirlpool of India’ have longstanding relationships with their suppliers and most of the components are built in-house to reduce this dependency. Moreover, it takes a lot to modify an existing supply chain and this would directly impact sales. Though the number of suppliers who offer similar services is high, their bargaining power tends to be low

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because they need the Consumer durable companies as much as the companies need the suppliers result in a very balanced scenario.

Future Outlook as a Whole

With government initiatives like make in India and the steeply raising disposable income in the country makes India a hotspot for the next 10-15 years. After which there would still be a huge replacement demand. There will still be challenges due to lack of infrastructure, high distribution costs which will hinder the penetration process. Overall, the future for the consumer durables industry looks very promising.

Appendix 12: Impact of various factors on industry

Negative Impact Positive Impact

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Appendix 13: SWOT Analysis

SWOT Analysis

Strengths 5 4

3 2 1 Threats 0 Weakness

Opportunities

Strengths

 Offers products for all income levels with special focus on the premium segment (400+L capacity)  Well established distribution network with recent foray into the online (e-commerce) space  Good Brand Visibility and a Global operating platform  R&D and continued innovation in energy efficiency, cooling and storage techniques

Weakness

 Demand is seasonal and dependent on external factors like Monsoon  Low purchasing power of Customers in India  Lack of a clear strategy for business growth and penetrating Indian Markets

Opportunities

 In India, the penetration levels are rather low and thereby a lot of scope for expansion  Rural markets will take some time to mature after which they can be penetrated  Increasing Income levels and Rapid Urbanization  Rapidly expanding Sub-Continent (Nepal, Sri Lanka, Bangladesh etc.) and South-East Asian markets and higher focus on export.

Threats

 Cheaper imports from Asian countries  Import duties imposed on raw materials are steadily increasing  Make in India and other government initiatives might lead to the entry of more local players in the air conditioning and kitchen appliances segments

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Appendix 14: Industry Volumes

No. of Units (mn.) CAGR 2015 2030 2015-25 (%) Refrigerator 10.5 29.6 7.2 Air Conditioner 3 17.7 12.6 Washing Machine 4.9 15.6 8.1 Microwave Oven 2 18.7 16 Total Volumes 20.4 81.6 10.7

The overall industry is expected to grow at a CAGR of 11% till 2025 and individual volumes of Refrigerators, ACs, and Washing Machines are expected to grow 7.2%, 12.6% & 8.1%, respectively. This volume growth is led by a continued trend of premiumization and an expected shift in industry volumes towards higher star rated products which denotes higher energy efficiency, thus Volume growth is sustainable in the long term horizon.

Source: EY and FICCI Industry Report

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Appendix 15: Shift in Consumer Preferences

Washing Machines Shift in prefernces (%)

The pattern of Sale of Washing Machines has changed over the years 100 with Semi-Automatic machines constituting around 86% of the total 86 Washing Machines sold in 2000, and in 2014 the sale of Automatic 80 68 Machines picked up momentum by increasing to 32% and is 60 expected to grow at a CAGR of ~7% yoy. 40 32

20 14

0 2000 2014

Semi Automatic Fully Automatic

Air Conditioners:

AC sales break up has gone under a substantial change. In 2000 Shift in Air Conditioner preferences (%) Split ACs only constituted around 29% of the total ACs sold, but in 100 2014 the sale of Split ACs and has increased to 82%, and with the 82 advent of BEE norms, this trend is likely to be continued. 80 71

40 29 18 20 0 2000 2014 Window Split

Source: Euromonitor

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Appendix 16: Financing Patterns

Home appliances purchase transactions is largely done through Cash or Credit Cards in India, and television accounts for more than half of the home appliance financing in India.

Mode of Purchases Share of Financing in Consumer Durables

20 40 30

40 20

Cash Credit Cards Other Financing TV AC Others

Source: Student Research

Appendix 17: Electrification

Government has introduced a scheme for electrification drive plan for Rural India titled Deen Dayal Upadhaya Gram Jyoti Yojna(DDUGJY), under this the Government has allocated INR 700 Billion under the 12th 5-year plan, to improve the supply of electricity.

Electrification trend

67.3 2011 92.7

55.9 2001 87.6

42.4 1991 64.8

0 10 20 30 40 50 60 70 80 90 100

Total Urban Rural

Source: Student Research

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Appendix 18: Replacement Cycles

Replacement cycles - years 2009 2010 2011 2012 2013 2014

Dishwashers 8.0 8.0 8.0 8.0 8.0 8.0

Automatic washer dryers 6.0 6.0 6.0 6.0 6.0 7.0

Automatic washing machines 9.0 8.0 7.0 6.0 6.0 7.0

Semi-Automatic Washing Machines 7.0 6.0 5.0 5.0 5.0 6.0

Built-In Hobs 12.0 12.0 12.0 12.0 12.0 12.0

Ovens 8.0 8.0 8.0 8.0 8.0 8.0

Cooker hoods 12.0 12.0 12.0 12.0 12.0 12.0

Cookers 12.0 12.0 12.0 12.0 12.0 12.0

Microwaves 6.0 6.0 6.0 6.0 7.0 7.0

Fridge freezers 9.0 8.0 7.0 7.0 7.0 7.0

Fridges 8.0 8.0 8.0 8.0 8.0 8.0

Split air conditioners 9.0 9.0 9.0 9.0 9.0 10.0

Window Air Conditioners 6.0 6.0 6.0 6.0 6.0 6.0

Cooling fans 9.0 9.0 9.0 9.0 9.0 9.0

Food preparation appliances 6.0 5.0 5.0 4.0 4.0 4.0

Heating appliances 5.0 5.0 5.0 3.0 3.0 3.0

Irons 6.0 6.0 6.0 6.0 6.0 6.0

Body shavers 5.0 4.0 4.0 4.0 4.0 4.0

Hair care appliances 5.0 4.0 4.0 4.0 4.0 4.0

Coffee machines 4.0 4.0 4.0 4.0 4.0 4.0

Freestanding Hobs 8.0 8.0 8.0 8.0 8.0 8.0

Mini-Ovens 5.0 5.0 5.0 4.0 4.0 5.0

Cylinder vacuum cleaners 6.0 6.0 6.0 6.0 6.0 6.0

Handheld vacuum cleaners 4.0 4.0 4.0 4.0 4.0 5.0

Source: Euromonitor

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Appendix 19: Global Comparison

Current GDP Levels (in USD billion)

Indonesia

Mexico Spain Russia

Australia Korea Canada Brazil Italy India France United Kingdom Germany Japan

China United States

0.00 5,000.00 10,000.00 15,000.00 20,000.00

Source: World Bank data

Global Inflation

20 18 8.56 16 9.62 14 10.33 9.7 9.74 10.07 12 6.02 6.06 India Inflation % 10 7.17 9 Global Inflation % 8 6 5 5 4 4.4 3.5 3.7 2.9 2.6 2 2.5

0 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: World Bank data

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Indian Inflation

9 8.5 8 8 7.5 7.5

7 6.75 6.75

0 2010 2011 2012 2013 2014 2015

Source: World Bank data

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Appendix 20: Indian v/s Global Penetration

Market Penetration India vs Global Average 85.0% 70.0% 60.0%

21.0% 8.8% 3.0%

Refrigerators Washing Machine Air Conditioner

India Global Average

Source: Euromonitor India`s white goods market is grossly under-penetrated as compared to Global average. In refrigerators, Washing Machines, and ACs the current Indian penetration levels are 21%,8.8% & 3%, and in some categories it lags behind global average by 60%.

Penetration as compared to other Emerging economies

Household Penetration (%)

Refrigerator Washing Machine India 26 12 India (CY2030) 57 29 China 89 61 Brazil 98 95 Mexico 72 76 Malaysia 75 84

Industry volume growth rates:

Industry Volumes CAGR(2000-14) 14.0 13.0 12.0 10.4 9.9 9.9 10.0 8.2

8.0 6.2 6.0 3.6 4.0 2.2 0.9 1.4 2.0 0.1 -

-2.0 -0.0

Source: Euromonitor

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Appendix 21: Changing Consumption Patterns

Changing pattern of Private consumption expenditure Share of Discretionary spending

FY 20E 4.26.5 55.8 8 23.1 22.3 25.1 increasing

FY 15 3.75.64.86.7 9.7 21.6 27.2 20.7 36.4 41.1 45.8 59.7 72 FY 10 3.24.84.67.7 11.6 19.8 32.6 15.7

FY 05 3 53.46.6 13.8 19.3 40 8.9 63.5 59.2 54.2 40.3 28 0 20 40 60 80 100 120 Recreation , Education and Cultural Services Health care services Furnishing services Clothing and Fottwear FY 81 FY 92 FY00 FY 10 FY 20 E Gross rent and Fuel Transport & Communication Basic Discretionary Food & bevergaes Misc. Goods & Services

The share of spending in basic goods (food, beverages & tobacco and clothing & foot wear) in private final consumption expenditure is expected to decline substantially to 28.0% in FY20, versus 40.3% in FY10. On the other hand, share of discretionary spending (rent, fuel & power, furniture, medical care, transport & communication, recreation & education) is projected to increase considerably. Changing Demographics:

Growing Urbanisation 425

388 351 314 286

2001 2005 2010 2015 2020

Source: Student Research

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Appendix 22: WIL’s Price Movement Analysis

Whirlpool of India Q2 net down nearly 53% at INR 14.36 shares tank nearly 7% WIL had reported a downside of 52.99% in its bottom line for the quarter ending on September 30, 2011 at 143.6 million. The company had reported net profit of INR 305.5 million in the July-September quarter in 2010. Adding to the grievances, the company’s net sales also declined by 1.72% to INR 5.51 billion in Q2 2011-2012 as against INR 561.07 in Q2, 2010-2011. Due to these, the company’s shares closed at INR 199.75, down 6.66% from previous close on BSE.

Tapering effects of Quantitative easing Indian Equities corrected more than 10 % from the peak in May. The most likely reason for the sudden and steep correction is the likelihood of the US fed likely beginning tapering of the $ 85 billion per month for quantitative easing which has been going on since September 2012. This has been the 3rd series of the ongoing QE programme and such measures are initiated by the fed to counter the effects of the financial meltdown of 2008 with the intention of preventing the US economy from sinking into a depression. Pumping liquidity into the economy by sustained buying of treasury and mortgage-backed securities from banks results in cash injection into banks and lowers interest rates which in turn should lead to larger lending and a boost to economic activity.

Whirlpool of India Q4 net profit declines by 33% Whirlpool of India Ltd, reported a decline of 33.40% in its net profit to INR 247.5 million for the quarter ended on March 31, 2013, compared to the net profit of 371.6 million for the last quarter in the previous year (2011-12). The net income of WIL declined to 6.27 billion, resulting in decline of 3.47% as compared to 6.49 billion for the quarter ended last fiscal year(2011- 12).The net profit of the company increased by 3.25% to INR 1.28 billion for the current fiscal year(2012-13) as compared to 1.24 billion for the last year(2011-12), whereas the Net income rose by 4.32 % to INR 27.73 billion for the current financial year(2012-13) as compared to INR 26.58 billion in the previous financial year(2011-12). These declines were due to the home appliances industry seeing an unprecedented slowdown in demand for the previous several quarters. Whirlpool has bucked the trend and grown net revenue by about 5% and gained market share.

Whirlpool Q4 net profit rises 44% to INR 355 million The company had posted a profit of 247.5 million during the same period in the last fiscal year. Profit rise of 43.6% was recorded in the net profit being 355 million on account of higher income. Net sales went up by 5.6% during the period. Other income rose to 83.1 million compared to 39.2 million. This profit was reported due to the strong focus on operational excellence and product innovation which started delivering results and being all the business levers in the right direction.

Make In India Announcement The Make in India initiative will give an impetus on the growth of the country by the Growing investment in infrastructure, ease of doing business in India, lenient government policies and tax incentives providing a healthy business conditions to setting up manufacturing units, in India. Streamlining import and export policies in the globalised world to cater the needs of the consumers.

Make In India Launch India has a robust demand for electronics and leads to a major chunk of the demand being fulfilled by imports. Make in India launch provided a boost to such segments and a sentimental push in share prices of the industries involved in the segment as these industries would boost their manufacturing units. The key reason for the major imports in electronics is lack of enterprise, under investment in research and development and a large skill gap. Due to the make in India initiative, the FDI limits have been revised and an impetus for having an all-round growth is projected by making in India a manufacturing hub.

Whirlpool Q2 results rises 2 Folds to 40.7 Whirlpool of India surged to life-time high as the management forecasted a strong growth for next three years in its analysts meet. The management’s ambitious targets predicted a growing revenue 2.5 times in next three years, a 35 per cent CAGR over FY14-FY17E, having a strong focus on profitability. WIL expected to achieve it by gaining market share, focus on volume, aggressive product launches in refrigerator/washing machine, strong innovations, new products for AC/Water purifier etc.

WIL reported volume growth of 10 per cent in 1HFY15 and is confident of continuation of healthy growth. The company reported a net profit of INR 407.2 million during July-September quarter as compared to a net profit of INR 165.4 million in year ago. Net sales increased to INR 7.09 billion in quarter ended September from INR 5.68 billion in the corresponding quarter last fiscal. The stock traded at life-time high and hit 20 per cent upper circuit at INR 640.80.

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Sensex and NSE crashes on Chinese yuan devaluation affecting stocks Huge sell off was observed across the globe dampening the stock markets worldwide. BSE and NSE as well were not spared, hitting hard by plunging 1625 points and 491 points respectively in six days. Investors wealth worth INR 7000 billion was wiped off. Consumer durable Index observed a loss of 7.23 percent on Chinese global cues. Leading to this sharp fall in the CDI was China being a major manufacturing entity for consumer durables.

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Appendix 23: WIL Dealership Model

Certified Field Zones Dealers Associates

North

East

WIL West

Alternative Route South

Central

Modern Trade

Source: Student Research

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Appendix 24: Product Comparison of WIL with peers

We conducted secondary research on the basis of data collected from the Primary research, and we found the average prices in the Budget, Middle and Premium section in the table given below: 1. Refrigerators:

Budget Middle Premium Whirlpool 28,000.00 55,000.00 150,000.00 Hitachi 35,000.00 75,000.00 250,000.00 IFB 45,000.00 LG 22,000.00 60,000.00 180,000.00 Samsung 27,000.00 52,000.00 140,000.00 Videocon 26,000.00 62,000.00 125,000.00

Our research showed that Hitachi has the highest pricing across all categories and it targets a niche segment. Also, it shows that in every segment Whirlpool has 2nd highest or 3rd highest prices. This justifies the fact that Whirlpool follows a strategy of mass targeting with High pricing supplemented by superior technology. Comparison on the Basis of no of Products: Below table shows the no of products across all the product lines which was compiled by the Team during the secondary research:

Whirlpool Hitachi LG Samsung IFB Videocon Refrigerators 37 28 154 74 12 49 Washing Machines 25 4 79 49 26 83 Air-Conditioners 20 14 83 74 21 65 Microwaves 18 NA 22 28 17 NA Water Purifiers 5 NA 7 NA 1 NA Built in Appliances 75 NA NA NA 42 NA

Furthermore, we bifurcated the refrigerators of these brands into French door, Multi Door, Double door and Single Door:

Refrigerators Whirlpool Hitachi LG Samsung IFB Videocon French Door 1 2 16 1 0 0 multi door 4 4 0 8 0 2 double door 11 5 61 37 12 9 Single Door 21 17 77 28 0 38 Total Products 37 28 154 74 12 49

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We devised a methodology in which we divided the products into Budget Segment and premium segment:

Whirlpool Hitachi LG Samsung IFB Videocon

Premium Products (as %ge of 21.43 10.39 12.16 - 4.08 total products) 13.51

Budget Products (as %ge of 86.49 78.57 89.61 87.84 100.00 95.92 total products)

On the basis of the average % of the premium products present in the portfolio, we gave a ranking to the Brands according to the Premium portfolio. Thus according to our estimates Whirlpool has a 2nd Rank in the premium segment followed by Samsung and Videocon. IFB was not ranked on account of its minimal presence in Budget and Premium segment. Rankings Premium Segment Hitachi 1 Whirlpool 2 Samsung 3 Videocon 4 IFB Only targeting Mid-Income segment

2. Washing Machines: Similarly we bifurcated Washing machine on the basis of Fully Automatic, Semi-Automatic, Top Load and Dryers.

Washing Machines Whirlpool Hitachi LG Samsung IFB Videocon

Fully Automatic - 360 washing machine 3.00 4.00 24.00 15.00 13.00 3.00 (Front Load)

Fully Automatic - top 14.00 - 34.00 18.00 11.00 7.00 load Semi-Automatic 12.00 - 15.00 13.00 21.00 Dryer - - 7.00 2.00 Total Products 29.00 4.00 80.00 46.00 26.00 31.00

Using the same methodology used in the case of refrigerators we divided them into mass and premium segment:

Whirlpool Hitachi LG Samsung IFB Videocon

Premium Products (as %ge of 31.34 100.00 30.00 32.61 50.00 9.68 total products)

Budget Products (as %ge of total 69.66 - 70.00 67.39 50.00 90.32 products)

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Rankings Premium Segment Hitachi 1

IFB 2

Samsung 4 LG 5 Whirlpool 3 Videocon 6

Our analysis shows that Whirlpool has the Rank 3 in the case of premium Washing Machines. It goes concurrent with our Buy recommendation that it is targeting the premium segment. It was followed by Samsung, LG and Videocon.

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Appendix 25: BEE Norms

The Bureau of Energy Efficiency (BEE) Set up in March 2002 under the Ministry of Power and is an agency of the Government of India. It comes under the Provisions of Energy Conservation Act. The function of BEE is to develop programs which will lead to the increase in the conservation and efficient use of energy in the nation. The Government has put a proposal that it will be mandatory in India for all appliances to have BEE ratings, starting from January 2010.The BEE has a mission to institutionalize energy efficiency services, enable delivery mechanisms in the country and provide leadership to energy efficiency in all the sectors of the country. To reduce energy intensity in the economy is the primary objective.

The BEE has a Star Labelling Program for Frost Free Refrigerators, Air Conditioners, Tubular Fluorescent Lights and Distribution transformers which began in a voluntary phase, in May 2006. In the voluntary phase, 70% of organized players of the Air Conditioner segment adopted the program, which led BEE to make it mandatory from January 7, 2010. BEE entered into partnership with International Copper Promotion Council (India) and Emerson Climate Technologies in order to educate the market segment on star labelling, as it was a new concept for end users and even retailers and distributors. Training Sessions were conducted for salesman pan India. Post training sessions, a survey was conducted, that led to the conclusion that consumers are concerned for efficiency, low cost and brand. The survey even pointed out that salesman are not well aware of the product and not able to explain the end user about the features and the concept of payback period.

How Star labelling Model works

Illustration:

With regards to Air Conditioners, the star ratings are categorized over a band of Coefficient of Performance (COP).COP denotes the cooling capacity in watts the AC renders for every watt of Electricity consumed by it.

In the Current Scenario, the COP has to be minimum 2.7 to qualify for 1 Star rating, and remains 1 star rating uptil 2.89 COP. The 2 star rating qualifies at a minimum COP of 2.9 and maximums of 3.09. The highest is the 5 star rating which qualifies at a minimum of 3.5. The 5 star rating ACs consumes less energy as compared to others. BEE moves up energy efficiency levels continuously every two years. The table given below gives a simplistic understanding for the ratings.

Jan 2012- Dec 2013 Jan 2014- Dec 2015

Star Min Max Star Min Max

1 2.5 2.69 1 2.7 2.89 2 2.7 2.89 2 2.9 3.09 3 2.9 3.09 3 3.1 3.29

4 3.1 3.29 4 3.3 3.49 5 3.3 5 3.5

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Appendix 26: Goods and Services Tax

The Goods and Service tax is proposed to be introduced from April 1, 2016.it will be a transformational change from the present taxation system to the advanced one. GST is expected to be one of the single largest indirect tax reform that would bring about a boost to India’s GDP, but whereas the impact on the consumers is very less talked about.

Under the new GST regime, all major indirect taxes- central sales tax, value added tax, service tax and additional duties of customs at the central level, entertainment tax, octroi and lottery tax at the state level, luxury tax- will be replaced by a Dual GST. Dual GST will comprise of Central GST (CGST) that would be administered by the Centre, whereas State GST (SGST) will be administered by the State.

GST is expected to be having a far reaching impact over trade and industry as it will lead to abolition of multiple taxes, removal of cascading effect of taxation and fostering a common market across the company

The mechanism of GST is such that it will be charged at each stage of value addition and the supplier would be able to offset the levy through tax credit mechanism. As GST is an indirect tax, the ultimate burden has to be shared by the consumer as there is no cascading effect at the end. GST will most probably comprise of two nominal tax rates that would be apart from specified goods that would be exempted.

From a recent Research assignment, the consumer durable sector would be the biggest beneficiary of GST, whereby the reason being that it would lead to a saving of 30% in logistics in comparison to the current levels of 7-8% of sales. Consumer durables having a high brand recall value and shelf life, and they cannot be easily substituted, which leads to persuading the manufacturers to consolidate loads in larger warehouses.

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Appendix 27: Relation of per capita income and consumer durables industry

Per capital Per Blue Industry (current capita Year Star Hitachi Voltas Whirlpool Industry growth in$) Growth Multiplier 2001 502.62 286.25 764.56 991.84 2545.27 1735.71 2002 504.17 199.18 866.06 1101.83 2671.24 4.95% 1784.79 2.83% 1.75 2003 584.18 250.5 1165.46 1246.26 3246.4 21.53% 1879.89 5.33% 4.04 2004 695.71 279.63 1273.2 1411.96 3660.5 12.76% 2005.64 6.69% 1.91 2005 916.88 239.59 1386.66 997.28 3540.41 3.28% 2156.31 7.51% 0.44 2006 1171.5 263.13 1853.14 1255.61 4543.38 28.33% 2323.38 7.75% 3.66 2007 1594.58 328.06 2400.55 1480.15 5803.34 27.73% 2519.53 8.44% 3.28 2008 2221.59 449.93 3044.53 1800.64 7516.69 29.52% 2637.68 4.69% 4.10 2009 2552.29 473.74 4033.29 1943.33 9002.65 19.77% 2739.14 3.85% 5.14 2010 2524.97 641.75 4541.8 2541.04 10249.56 13.85% 3004.43 9.69% 1.43 2011 2858.92 764.01 5148.4 2702.8 11474.13 11.95% 3196.92 6.41% 1.86 2012 2700.29 798.09 5169.76 2657.94 11326.08 1.29% 3310.91 3.57% 0.36 2013 2767.06 929.99 5565.43 2772.73 12035.21 6.26% 3416.45 3.19% 1.96 2014 2770.39 1099.73 5151.36 2834.64 11856.12 1.49% 3541.23 3.65% 0.41 2015 3080.79 1572.84 5168.95 3293.79 13116.37 10.63% 3705.23 4.63% 2.30 Average: 2.32 Source: OECD

In order to find out relation between Industry growth and Per capita growth, a basket of companies was created comprising of whirlpool and its close peers and the log of the industry so formed was regressed against log of per capita income. The regression gave an R Square of 97% implying 97% of the variation in the industry growth is explained by variation in per capita growth.

Regression Summary Per Capita vs Consumer Durable Industry Regression Statistics Multiple R 0.986332 10.00 R Square 0.972851 9.00 Adjusted R Square 0.970763 8.00 Standard Error 0.105383 Observations 15 7.00 Standard

Coefficients Error t Stat P-value

2011 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2001 Intercept -9.59214 0.851763 -11.2615 4.46E-08 Ln PerCapita Ln Industry Ln PerCapita 2.338723 0.108358 21.58333 1.45E-11

In order to find the multiplier for industry growth, the ratio of Industry growth to per capita growth was computed for each of the years from 2001 till 2015 and the average which turned out to be 2.3 was taken as the multiplier for the forecasted growth.

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Appendix 28: Revenue forecast

Year 2016 2017 2018 2019 2020 2021 2022 2023 Per capital PPP(USD) 3885.71 4072.01 4265.80 4469.08 4683.34 4909.64 5148.72 5401.13 Per capita growth 4.87% 4.79% 4.76% 4.77% 4.79% 4.83% 4.87% 4.90% Industry growth 11.20% 11.03% 10.95% 10.96% 11.03% 11.11% 11.20% 11.28% Industry(mn INR) 339,169.73 376,571.09 417,790.08 463,581.08 514,699.40 571,901.28 635,954.73 707,661.69 Market Share 12.0% 12.5% 13.1% 13.7% 14.3% 14.9% 15.5% 16.2% Revenues 40,749.50 47,192.48 54,668.02 63,344.22 73,417.05 85,115.05 98,704.83 11,4497.59

The projected per capita income is taken from Organization for Economic Co-operation and Development (OECD). Multiplying the growth of per capita and 2.3(multiplier), industry growth was computed and the Industry value was arrived at. Due to focus on new segments and premiumization of products, we expect WIL’s market share to increase every year and it is being accounted for in the model.

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Appendix 29: Segment-wise Revenue Break up

Segment wise Revenue Break up

Other appliances

Spares for finished goods Microwave AC

Washing Machines

Refrigerators 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00%

FY 2023 FY 2015

Source: Company Reports

Segments FY 15 FY 16E FY 17E FY 18E FY 19E FY 20E FY 21E FY 22E FY 23E Refrigerators 63.96% 63.14% 62.70% 62.24% 61.77% 61.29% 60.80% 60.29% 59.77% Washing Machines 20.91% 20.64% 20.49% 20.34% 20.19% 20.03% 19.87% 19.71% 19.54% AC 7.08% 7.59% 7.87% 8.15% 8.44% 8.74% 9.04% 9.36% 9.68% Microwave 1.54% 1.65% 1.71% 1.77% 1.84% 1.90% 1.97% 2.04% 2.11% Spares for finished 3.95% 4.23% 4.39% 4.54% 4.71% 4.87% 5.04% 5.22% 5.40% goods Other appliances 2.56% 2.75% 2.85% 2.95% 3.05% 3.16% 3.27% 3.39% 3.50% Total 100% 100% 100% 100% 100% 100% 100% 100% 100%

Source: Student Research

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Appendix 30: Free Cash Flow Projections

In Millions of INR except share price FY 16E FY 17E FY 18E FY 19E FY 20E FY 21E FY 22E FY 23E

EBIT(1-t) 2,828.0 4,332.3 5,114.3 6,470.4 7,939.8 9,489.4 11,470.9 12,755.3

Add: Depreciation 688.1 738.5 788.9 844.9 900.9 962.5 1,024.1 1,085.7

Less: Changes in Working Capital 854.1 -136.4 -154.6 -175.3 -198.9 -225.7 -256.3 -291.2

Cash Flow from Ops 2,662.0 5,207.2 6,057.9 7,490.7 9,039.5 10,677.7 12,751.3 14,132.3

Less: Changes in Capex 900.0 900.0 900.0 1,000.0 1,000.0 1,100.0 1,100.0 1,100.0

FCFF 1,762.0 4,307.2 5,157.9 6,490.7 8,039.5 9,577.7 11,651.3 13,032.3

Terminal Value 129,918.0

Total 1,762.0 4,307.2 5,157.9 6,490.7 8,039.5 9,577.7 11,651.3 142,950.2

Discounted Cash Flows 4,307.2 4,485.8 4,909.4 5,288.5 5,479.4 5,797.2 61,857.6

FCF 92,125.0

Add: Cash 9,751.5

FCFE 101,876.6

No. of shares 126.9

Share Price 802.8

Source: Student Research

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Appendix 31: Depreciation Schedule

In Millions of INR FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023

Opening Gross Block 11,388.0 12,288.0 13,188.0 14,088.0 15,088.0 16,088.0 17,188.0 18,288.0

Add: Capex 900.0 900.0 900.0 1,000.0 1,000.0 1,100.0 1,100.0 1,100.0

Closing Gross Block 12,288.0 13,188.0 14,088.0 15,088.0 16,088.0 17,188.0 18,288.0 19,388.0

Gross Block 12,288.0 13,188.0 14,088.0 15,088.0 16,088.0 17,188.0 18,288.0 19,388.0 Less: Accumulated 8,119.5 8,858.0 9,647.0 10,491.9 11,392.8 12,355.4 13,379.5 14,465.2 Depreciation Net Block 4,168.5 4,329.9 4,441.0 4,596.1 4,695.2 4,832.6 4,908.5 4,922.8

Accounting Depreciation 688.1 738.5 788.9 844.9 900.9 962.5 1,024.1 1,085.7

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Appendix 32: Computation of Beta

Company D/E Beta Beta Computation

Beta(industry) 1.46 Voltas 0.03 1.45 Hitachi 0.36 1.87 D/E (industry) 0.18 Symphony 0 0.92 Beta unlevered 1.31 Blue Star 0.47 1.4 IFB 0.07 1.67 Whirlpool D/E 0 Average 0.18 1.46 Beta levered 1.31

WACC Cost of Equity Cost of Equity 14.98% Beta 1.31 Risk free rate (10 year Govt. bond Cost of Debt 0% yield) 7.53% Weight of Equity 1

Equity Risk Premium 5.71% Weight of Debt 0

Cost of Equity 14.98% WACC 14.98%

Beta: The beta of WIL was computed using bottom up approach. Taking the average beta WIL’s of its close peers, the levered beta (1.416) for the industry was computed. Using the average Debt/Equity of the peers, unlevered beta (1.31) for the industry was computed. Since WIL has no debt, the levered beta for WIL will be equal to the unlevered beta for the industry.

Risk free Rate: 10 Year Government bond yield was taken as the risk free rate for India.

Equity Risk Premium: ERP for India was used from Prof. Ashwath Damodaran’s data.

Cost of Equity: The Cost of Equity was computed Using Capital Asset Pricing Model. [Risk-free rate +Beta*ERP].

WACC: Since WIL has no debt component, WACC for WIL would be equal to its Cost of Equity.

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Appendix 33: Relative Valuation

Snapshot of all the Multiples:

EV/EBITDA EV/EBITDA Company P/E EV/Sales Price/Sales (ttm) (Fwd) WHIRLPOOL of India Ltd. 23.9 x 38.0 x 2.7 x 2.67 20.2 x Symphony 40.2 x 58.9 x 12.6 x 9.50 32.2 x Hitachi: Home & Life Solution 22.2 x 48.7 x 2.6 x 2.54 19.7 x Blue star 19.6 x 20.2 x 1.4 x 1.00 17.7 x IFB 22.1 x 49.8 x 2.1 x 1.60 14.8 x Voltas Ltd 18 x 22 x 2 x 1.75 21.1 x

Peers for Whirlpool India limited has been selected on the basis of the same business lines of the respective companies. Out of these Symphony has its primary business in Coolers, IFB`s major revenue streams are Washing machines, Blue Star and Voltas are active in air conditioners while Hitachi is also present in almost every segment of White Goods Industry. Statistics of all the Multiples

Company EV/EBITDA P/E EV/Sales Price/Sales EV/EBITDA(Fwd) AVERAGE 23.20 38.76 2.55 2.85 18.70 Median 19.63 41.15 2.59 2.14 19.95 MAX 40.20 58.86 12.61 9.50 32.20 MIN 16.90 20.20 1.40 1.00 14.80

Valuation on EV/Sales Valuation on EV/EBITDA (2 year fwd) Multiple

Median EV from Sales Multiple 103,942.71 Median EV from EBITDA Multiple 110,044.00

Less: Debt - Less: Debt 0

Less: Minority Interest - Less: Minority Interest 0

Equity Value 103,942.71 Equity Value 110,044.00

Shares Outstanding 126.87 Shares Outstanding 126.87183

Intrinsic value per share 819.27 Intrinsic value per share 867.36

CMP (09/10/15) INR 682.75 Current Trading Price(09/10/15) Rs.682.75

Discount to Valuation 19.8% Discount to valuation 27.5%

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Appendix 34: Du Pont Analysis

Du Pont Analysis FY 2013 FY 2014 FY 2015 FY 2016E FY 2017E FY 2018E Tax Burden 71.3% 70.6% 70.0% 70.15% 71.56% 72.05% Interest Burden 98.4% 99.2% 99.8% 98.8% 98.9% 98.7% EBIT Margin 6.5% 6.1% 9.0% 10.6% 12.3% 12.2% Asset Turnover 2.17 1.94 1.95 1.92 1.77 1.70 Leverage Ratio 2.32 2.18 2.06 2.07 2.06 1.97 ROE 23.1% 18.1% 25.4% 26.6% 28.5% 27.5%

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Appendix 35: Foreign Currency Exposure

2011 2012 2013 2014

Earnings in Foreign Currency 2325 2512 2422 1941

Expenditure in foreign currency

Less: Input Costs 6074 4971 6228 4995

Less: Royalty 368 358 355 354

Less: Other expenses 149 158 129 201

Total Expenditure in foreign currency 6591 5487 6712 5550

Net exposure in foreign currency -4266 -2975 -4290 -3609

Net exposer in foreign currency as a % of revenues -15% -10% -15% -13%

Source: Euromonitor Since Whirlpool of India is a net importer, hence its exposure in foreign currency has been a negative item, but it has decreased in the past year courtesy of relative appreciation of Rupee. But the Chinese crisis and impending Fed rate hike are the major Currency risks.

Segment wise traded revenues as a proportion of total revenues:

2011 2012 2013 2014

Refrigerator 0 0 0 3

Washing Machine 17 14 12 16

Air conditioner 91 99 100 100

Microwave 100 100 100 100

Others 99 96 92 72

Total traded revenues 22 22 18 20

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Appendix 36: Royalty Payments

ROYALTY AS A % OF THE REVENUE

1.4 1.4

1.3 1.3 1.3

1.2 1

2008 2009 2010 2011 2012 2013 2014

Appendix 36: Advertising Spend

Advertisng Spend(% of revenues) 6

0 Voltas Whirlpool IFB BlueStar Hitachi HLS

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Appendix 37 (a): Key Personnel

Name Position Member of Brief Introduction Committees in Wil Chairman & Nomination & -Chairman & Executive Director Mr. Arvind Executive Remuneration -B.Tech from IIT Delhi, Post Graduate in Management from Uppal Director Committee the Faculty of Management Studies, Delhi. -Over 25 years of experience in Business Development, International Marketing and General Management. -Whole time Director, Executive Director – Finance & Chief Mr. Anil Berera Executive Audit Committee Financial Officer. Director & Stakeholders’ -Bachelor in commerce and Chartered Accountant CFO Relationship -Over 30 years of working experience in finance, accounts, Committee treasury, taxation and general management. He has Corporate Social extensive experience in the development and Responsibility (CSR) implementation of Strategic Business plans. Committee Mr. Sunil A. Managing - -Managing Director D’Souza Director -B.E Electronics and Communication from Pondicherry Engineering College and an MBA from Indian Institute of Management, Kolkata. -Over 25 years of experience working in various leadership positions. - Rich and diverse experience in General Management, Strategy, Sales, Marketing and Innovation in consumer driven industries with Indian, international and multicultural experience Mr. Vikas Whole Time - - Whole Time Director Singhal Director - Age 45 years - B.Tech degree in Industrial Engineering from IIT Roorkee, PGDBM from XLRI Jamshedpur. - 23 years of rich and diverse experience ranging from Manufacturing Operations to Supply Chain, Project Management, New Business Development and has dealt with a broad continuum of business facets. Mr. Sanjiv Non- Audit Committee, - Non-Executive & Independent Director Verma Executive & Corporate Social - Bachelor’s degree in Chemical Engineering from IIT Independent Responsibility Kharagpur, India Director Committee and - 23 years of experience working in various leadership Nomination and positions Remuneration - Strengths are strategic thinking and tactical skills for Committee. business growth and profitability.Leadership skills include analytical abilities and people management in multinational and multicultural environment.

Simon J. Scarff Non- Audit Committee and - Non-Executive & Independent Director Executive & Nomination and - Over 23 years with Smithkline in various capacities and Independent Remuneration had last served as Non Executive Director & Chairman of Director Committee. GlaxoSmithkline Consumer Healthcare Limited - Awarded the prestigious honour of the officer of the Order of the British Empire by Her Majesty, The Queen of England.

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Anand Bhatia Non- Chairman of the Audit - Non-Executive & Independent Director Executive & Committee, Nomination - Economics graduate from Cambridge University (U.K) Independent and Remuneration - 30 years of experience at senior level with Unilever Plc Director Committee and worldwide. At present he is a director in EID Parry (India) Stakeholders Limited, HGS Private Limited and Sowar Private Limited. Relationship Committee.

Ms. Sonu Non- Audit Committee - Non-Executive & Independent Director Bhasin Executive & - B.Sc (Hons.) degree in Mathematics from St. Stephen’s Independent Nomination And college, Delhi University and an MBA from Faculty of Director Remuneration Management Sciences, Delhi University. Committee

Source: Company Report

Appendix 37 (b): Committees at WIL

Committee Description Audit Committee The audit committee comprises of 4 (four) independent directors headed by Mr. Anand Bhatia who is an independent non-executive director since 2001. The role of the committee is well-defined. Also, the Company Secretary acts as the Secretary of the Committee.

Nomination and remuneration committee The committee comprises of 5 members, 4 (four) of whom are Independent Directors with Mr. Anand Bhatia, Non-Executive Independent Director as its Chairman. The committee controls the remuneration policy including remuneration of the managing director. It also administers the ESOP Schemes. Committee also designs the framework from directors and management nomination and actively participates in appointments

Stakeholders’ Relationship Committee This committee inter alia, takes care of the share transfers and grievances of the shareholders with Mr. Anand Bhatia, Independent non-executive director is the Chairman of the Committee. The Company Secretary, Ravi Sabharwal, is the Compliance Officer.

Corporate Social Responsibility Committee: This committees was formed to focus on CSR activities to be undertaken as per applicable provisions of the Companies Act, 2013. Mr. Arvind Uppal is the chairman of the Committee.

Source: Company Report

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Appendix 38: Primary Research

1. Name:______

2. Age Group a) 20-30 years b) 31-40 years c) 41-50 years d) 50 and above

3. Region

4. How many times have you purchased the following white goods

Refrigerators o 0 o 1 o 2 o 3 o 4 o >4

Washing Machines o 0 o 1 o 2 o 3 o 4 o >4

Air Conditioners o 0 o 1 o 2 o 3 o 4 o >4

5. According to you what is the average life of the following white goods.

Refrigerators o 3-4 years o 5-7 years o >7 years Washing Machines o 3-4 years o 5-7 years o >7 years Air Conditioners o 3-4 years o 5-7 years o >7 years

6. Which brand of the following you currently have in your house

Refrigerator ______Washing Machine ______Air Conditioner ______

7. On a scale of 1-5, would you repeat your brand in the next purchase? ______(Yes/No)

8. What type of product you currently own (Tick more than 1 if applicable)

Refrigerators o Single Door o Double Door o Multi Door o French Door Washing Machines o Semi-Automatic o Fully Automatic o Top Load o Front Load Air Conditioners o Window o Split

9. What type of product would be your next purchase (Tick more than 1 if applicable)

Refrigerators o Single Door o Double Door o Multi Door o French Door

Washing Machines o Semi-Automatic o Fully Automatic o Top Load o Front Load Air Conditioners o Window o Split

10. Give rating to following aspects as per the importance you attach to these while buying white goods.

Factors Highly Important Moderately Important Not important Image of the company / Branding Dealer’s / Retailer image Technology

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Price Variants offered

11. Rate the effect of retailers’/ dealers’ suggestions and recommendations on our buying decisions. o High o Moderate o Low

12. Rate the effect of salesman’s / demonstrator’s attitude and knowledge about the product on our buying decisions. o High o Moderate o Low

13. How often do you change your decision regarding brand of white goods after visiting the retailer / dealer? o Most of the times o Sometimes o Rarely

14. Rate the following white goods companies on the basis of visibility of retail stores / dealers in your area or nearby

Company High Visibility Moderate Visibility Low Visibility LG Samsung Whirlpool Videocon Hitachi IFB 15. Rank the following brands on your perception of these on a scale of 1-5 (1: best)

Company Brand Visibility Technology Store Presence LG Samsung Whirlpool Videocon Hitachi IFB

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Consumer Survey + Stores visit Key Insights

1. The average replacement cycle varies product wise o Refrigerators: 5-6 years o Washing Machines: 7 or more years o Air conditioners: 3-4 years 2. Consumers are not brand loyal across segments 3. Consumers have aspirational and intend to buy a higher model for their next purchase 4. Purchase decision is shaped and influenced by the dealer/ shopkeeper to a good extent 5. Consumers look for the best technology per price range and not brand 6. Whirlpool lies in the middle of the matrix with an average score of 2.8 for all three factors combined o Brand Visibility Average: 3.15 o Technology: 2.72 o Store Visibility: 3.04

Dealer visit Insights:

1. Whirlpool`s score very well on the trust factor in terms of payments to the distributers. 2. Due to this high trust, most of the dealers have a long standing relationship with Whirlpool, despite lower margins provided by WIL as compared to other brands. 3. Whirlpool`s products have a loyal customer base, i.e., replacement demand is high amongst the already existing customers. 4. In terms of no of product offerings, Whirlpool lags behind LG, Samsung, etc.

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Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with IAIP, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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