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IFB Industries 10 September 2014

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IFB Industries 10 September 2014 Institutional Equities IFB Industries 10 September 2014 Reuters: IFBI.BO; Bloomberg: IFBI IN We hosted the conference-call of IFB Industries (IFB) on 9 September 2014 to NOT RATED know more about its business operations and future prospects. IFB is confident of maintaining its over 20% revenue CAGR and improving its margins from the Sector: White Goods current level over the next three-five years. Following are the key takeaways: CMP: Rs280 IFB operates in two segments - home appliances (82.6% of FY14 net revenue) and fine blanking (17.4% of FY14 net revenue). The fine blanking segment has two Jignesh Kamani, CFA manufacturing units, one each in Kolkata and Bangalore. The appliances segment has [email protected] its manufacturing facility in Goa for front-loading washing machines (capacity of ~1.2- +91-22-3926 8239 mn units per year). IFB imports all the products from the US, China, Turkey etc except front-loading washing machines. Ruchita Maheshwari The home appliances segment has products such as washing machines - both [email protected] domestic and industrial (accounting for 60.0% of the division’s revenue), microwave +91-22-3926 8023 ovens (14.4%), kitchen appliances (10.2%), clothes dryers (1.3%), dish-washers - both domestic and industrial (2.5%), air-conditioners and refrigerators (3.4%) and others Key Data (8.2%). Fine blanking is in a niche segment - manufacturing engine parts for two- wheelers and four-wheelers. Current Shares O/S (mn) 40.5 The front-load washing machine manufacturing facility currently runs at ~35% of its Mkt Cap (Rsbn/US$mn) 11.2/185.6 call Update - capacity. IFB is in negotiations (at an advanced stage) with leading Japanese 52 Wk H / L (Rs) 292/45 conglomerates for contract manufacturing. This will increase capacity utilisation to 50% Daily Vol. (3M NSE Avg.) 266,162 in FY15E and to ~70% in FY16E. As all overheads are covered, it would add to profitability and also act as a natural hedge in respect of imports undertaken by the One-Year Indexed Stock Performance company. 590 IFB introduced air-conditioners (ACs) in 3QFY14, but couldn’t meet quality 530 470 specifications and consumer expectations until 4QFY14. IFB launched ACs afresh in 410 1QFY15 after meeting all quality specifications and consumer expectations. AC sales 350 290 stood at Rs500mn in 1QFY15. 230 Conference 170 IFB had a technical tie-up with Germany-based Bosch for making ACs in 1992-93, but 110 it was discontinued as Bosch wanted equity stake in the company which was not 50 acceptable to IFB. Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 IFB Industries NSE CNX NIFTY INDEX The geographical revenue break-up is 50%-55% (southern region), 25% (northern region) with the western and eastern regions accounting for the rest, of which the Price Performance (%) eastern region is the lowest contributor. IFB is increasing its focus on the northern, western and eastern regions. 1 M 6 M 1 Yr The company is aggressively promoting IFB points (exclusive franchisee-run retail IFB Industries 43.3 267.1 435.8 stores). IFB points cater to Tier I, Tier II and Tier III cities. It is important to note that 20 Nifty Index 7.7 24.7 38.3 months ago, the contribution of IFB points was 5% to total sales, which has risen to 16% of total sales. As of 30 June 2014, IFB had 550 service franchisees across India, Source: Bloomberg which will be increased to 575 by 30 September 2014. IFB has ~7,000 dealers and is planning to add 150-175 dealers every quarter, on its terms. Dealers are more enthusiastic currently because of the launch of new products. In 1QFY15, IFB added 183 dealers who generated sales amounting to Rs165mn. The management has given guidance of revenue growth run-rate (26%) and operating margin (7.8%) - which was registered in 1QFY15 - for the next two-three years, despite the performance in 1QFY15 being mainly driven by the AC segment. IFB intends to hike product prices from October 2014 onwards. IFB imports nearly all its products (except front-loading washing machines). Steep depreciation of the Indian rupee (INR) against the US dollar (USD) over the past two years impacted gross margin in the absence of a hedging policy. Effective FY14, IFB has adopted a 100% hedging policy. IFB has a miniscule market share in top-loading washing machines. The company plans to start manufacturing activity from 4QFY15 (capacity ~1mn units at a cost of Rs500mn) so as to garner a meaningful market share. Please refer to the disclaimer towards the end of the document. Institutional Equities IFB, which was positioned as a single-product company (washing machines), is filling the gap by introducing various product segments. IFB accepts the fact that the dish-washer segment couldn’t perform as expected. However, it is optimistic that a few years down the line, home-maids will be rare, especially in metro cities, which will drive the dish- washer (domestic) segment. As per an India Today survey, IFB was ranked number one in washing machine and refrigerator segments. This made IFB to plan a small-capacity refrigerator. The company plans to roll out the product by the end of 3QFY15, or at the start of 4QFY15. IFB faces tough competition from LG, Samsung etc as these companies have high advertisement budgets which IFB cannot afford. However, IFB takes competition from Videocon Industries, Mirc Electronics etc in its stride. Despite the competition, IFB prices its products at a premium compared to competitors. To cite an instance, in 1QFY15, ACs were priced at a premium of Rs1,000-Rs1,500 per unit compared to Voltas and Blue Star. IFB does not believe in advertisements to promote sales as the company is not in a position to compete with the advertisement budgets of rivals like LG and Samsung. For IFB, what counts is better technology and customers’ word-of-mouth publicity for selling its products. IFB enjoys the benefit of having 3mn customers. As per the management, if a customer buys one product from IFB, 80%-90% of the time they end up buying another product from the company. IFB sells ~300,000 washing machines with an average price realisation of Rs16,000-Rs18,000, registering revenue of Rs5,060mn - the top contributor in the home appliances segment. Currently, front-loading washing machines have a market size of ~700,000-750,000 units, while top-loading washing machines have a market size of nearly 3x that of front-loading washing machines. While IFB enjoys a market share of 47%-48%, LG and Samsung are at second and third slots in front-load washing machines. After washing machines, microwave ovens (Rs1,220mn) is the second biggest contributor to revenue of the home appliances segment, while the balance is accounted for by ACs, kitchen appliances, dish-washers (domestic and industrial), etc. As per the management, the contribution of the washing machines segment will reduce as new products are introduced in the market. FY15 capex of Rs500mn-Rs550mn will be mainly for manufacturing top-loading washing machines and meeting the requirements of fine blanking segment. For FY16, the capex is expected to be lower compared to FY15. However, the capex may inch up, depending on the performance of ACs and refrigerators, as IFB plans to set up a manufacturing facility in India. Healthy cash generation is expected to take care of IFB’s capex for the next three-five years. As regards the fine blanking segment, IFB reported revenue of Rs1,775mn in FY14. With increased focus on two-wheelers and improvement in four-wheeler sales, the fine blanking segment expects to post a 25%- 30% revenue growth in FY15E and continue the momentum in FY16 as well. Constant capital infusion is required in the fine blanking segment. At any given point, capex is not likely to exceed the free cash flow generation of the segment. Two-wheelers account for 53%-54% of total revenue of the fine blanking segment and the balance is contributed by four-wheelers. IFB is not present in modern trade as it does not offer credit facility. Even debtor days are at 13, including for transit from Goa to other parts of India. IFB wants to keep a tight check on its working capital cycle and therefore it is not offering credit facility. As of now, ACs and refrigerators will be main focus segments for IFB. As per the management, ACs will deliver a good sales performance in FY15, but satisfactory in terms of pricing and quality. Refrigerators will also be in focus as they will be introduced by the end of 3QFY15, or at the beginning of 4QFY15. Revenue growth in 1QFY16 is likely to be driven by refrigerators. 2 IFB Industries Institutional Equities Exhibit 1: Financials Y/E March (Rsmn) cons. FY10 FY11 FY12 FY13 FY14 Revenue 5,340 6,797 8,029 9,159 10,215 YoY (%) 20.5 27.3 18.1 14.1 11.5 EBITDA 436 617 412 502 452 EBITDA (%) 8.2 9.1 5.1 5.5 4.4 Reported PAT 538 503 320 315 216 Adj. PAT 538 503 305 315 216 FDEPS (Rs) 14.6 14.2 8.6 7.8 5.3 YoY (%) (86.7) (2.5) (39.4) (9.7) (31.3) RoCE (%) 40.6 27.7 14.2 11.1 6.4 RoIC (%) 30.6 24.5 11.3 9.3 5.5 RoE (%) 40.4 27.6 13.5 11.3 6.6 P/E (x) 19.1 19.6 32.4 35.8 52.2 P/B (x) 6.3 4.7 4.1 3.6 3.3 EV/EBITDA (x) 21.1 14.8 22.4 20.6 23.7 Source: Company, Nirmal Bang Institutional Equities Research Exhibit 2: Result analysis Y/E March - consolidated (Rsmn) 1QFY14 4QFY14 1QFY15 YoY (%) QoQ (%) FY13 FY14 YoY (%) Net sales 2,307 2,764 2,906 26.0 5.1 9,159 10,215 11.5 Net raw material costs and finished goods purchases 1,321 1,638 1,695 28.3 3.5 5,497 5,957 8.4 % of sales 57.3 59.3 58.3 - - 60.0 58.3 - Other expenses 921 964 995 8.1 3.3
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