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 (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 manufacturing facility currently runs at ~35% of its Mkt Cap (Rsbn/US$mn) 11.2/185.6 callUpdate

- 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 , 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 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, 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 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 3,160 3,806 20.4 % of sales 39.9 34.9 34.3 - - 34.5 37.3 - Operating profit 65 163 216 233.4 32.7 502 452 (10.1) OPM (%) 2.8 5.9 7.4 - - 5.5 4.4 - Interest costs 1 5 5 257.1 8.7 2 14 615.0 Depreciation 51 61 5 (90.6) (92.1) 183 226 23.3 Other income 18 31 12 (32.0) (61.5) 117 82 (30.1) PBT 30 128 218 633.3 70.0 434 293 (32.5) Tax 8 37 44 427.4 19.4 120 77 (35.4) Effective tax rate (%) 28.3 29.0 20.3 - - 27.5 26.4 - Adjusted PAT 21 91 174 714.6 90.7 315 216 (31.3) NPM (%) 0.9 3.3 6.0 - - 3.4 2.1 - EPS (Rs) 0.5 2.2 4.2 714.6 90.7 7.6 5.2 (31.3) Equity 412.8 412.8 412.8 - - 412.8 412.8 - Source: Company, Nirmal Bang Institutional Equities Research Company background IFB has two divisions - fine blanking and home appliances. The company is part of the IFB Group, which includes IFB Agro Industries and IFB Automotive. The fine blanking division, earlier known as Indian Fine Blanks, started operations in India in 1974 in collaboration with Heinrich Schmid AG of Switzerland. Its initial products ranged from fine-blanked components and tools to related machines like straighteners, decoilers, strip loaders etc. Its engineering divisions are located in Kolkata and Bangalore. The home appliances division was started in 1991. The division has products such as washing machines, clothes dryers, dish-washers, microwave ovens, air-conditioners, refrigerators, cooker hoods and modular kitchens. The company has a service network comprising 250 franchisees and 2,200 service engineers.

3 IFB Industries

Institutional Equities

Financials (standalone) Exhibit 3: Income statement Exhibit 4: Cash flow Y/E March (Rsmn) FY10 FY11 FY12 FY13 FY14 Y/E March (Rsmn) FY10 FY11 FY12 FY13 FY14 Net sales 5,340 6,797 8,029 9,159 10,215 EBIT 349 513 263 319 226 Growth (%) 20.5 27.3 18.1 14.1 11.5 (Inc.)/dec. in working capital (307) 186 (239) (154) (138) Raw-material 3,070 3,752 4,707 5,372 5,866 Cash flow from operations 42 699 24 165 88 Other income 229 178 115 117 82 Staff costs 507 630 699 849 979 Depreciation 87 104 149 183 226 Other expenses 1,326 1,799 2,212 2,436 2,918 Deferred liabilities 37 63 54 42 37 Total expenditure 4,904 6,181 7,618 8,657 9,763 Interest paid (-) (3) (3) (3) (2) (14) EBITDA 436 617 412 502 452 Tax paid (-) (37) (185) (54) (120) (77) Growth (%) 35.7 41.5 (33.3) 22.0 (10.1) Dividend paid (-) (5) - (3) (15) (241) EBITDA margin (%) 8.2 9.1 5.1 5.5 4.4 Extraordinary items - - (15) - - Other income 229 178 115 117 82 Net cash from operations 350 856 265 370 100 Capital expenditure (-) (190) (669) (367) (527) (679) Interest costs 3 3 3 2 14 Net cash after capex 159 188 (101) (158) (579) Gross profit 662 792 523 617 519 Inc./(dec.) in short term borrowings - - - 99 379 Growth (%) 44.6 19.7 (34.0) 18.0 (15.9) Inc./(dec.) in long term borrowings - - - - - Depreciation 87 104 149 183 226 (Inc.)/dec. in investments (106) (355) 362 (468) 195 Profit before tax 575 688 374 434 293 Others (175) 64 8 385 241 Growth (%) 50.5 19.6 (45.6) 16.0 (32.4) Equity issue/(buyback) 59 7 1 50 - Tax 37 185 54 120 77 Cash from financial activities (223) (284) 370 66 815 Opening cash 429 365 269 538 446 Effective tax rate (%) 6.5 26.9 14.4 27.6 26.4 Closing cash 365 269 538 446 682 Net profit 538 503 320 315 216 Change in cash (64) (96) 269 (92) 236 Growth (%) 45.3 (6.4) (36.4) (1.8) (31.3) Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Exhibit 6: Key ratios Exhibit 5: Balance sheet Y/E March FY10 FY11 FY12 FY13 FY14 Y/E March (Rsmn) FY10 FY11 FY12 FY13 FY14 Per share (Rs) Equity 355 362 363 413 413 EPS 14.6 14.2 8.6 7.8 5.3 Reserves 1,183 1,750 2,059 2,744 2,960 Book value 44 60 68 78 83 Net worth 1,538 2,112 2,422 3,156 3,372 Valuation (x) P/E 19.1 19.6 32.4 35.8 52.2 Short term loans - - - 99 478 P/sales 1.8 1.5 1.2 1.2 1.1 Long term loans - - - - - P/BV 6.3 4.7 4.1 3.6 3.3 Total loans - - - 99 478 EV/EBITDA 21.1 14.8 22.4 20.6 23.7 Deferred tax liability 37 100 154 196 233 EV/sales 1.7 1.3 1.2 1.1 1.0 Liabilities 1,575 2,212 2,576 3,451 4,083 Return ratios (%) Gross block 3,960 4,323 4,117 3,795 4,328 RoIC 30.6 24.5 11.3 9.3 5.5 Depreciation 3,205 3,081 2,556 1,927 2,071 RoCE 40.6 27.7 14.2 11.1 6.4 RoE 40.4 27.6 13.5 11.3 6.6 Net block 755 1,243 1,561 1,868 2,258 Margins (%) Capital work-in-progress 69 146 45 83 146 EBITDA margin 8.2 9.1 5.1 5.5 4.4 Long-term Investments 106 462 100 568 373 PBIT margin 6.5 7.5 3.3 3.5 2.2 Inventories 853 888 1,093 1,320 1,555 PBT margin 10.8 10.1 4.7 4.7 2.9 Debtors 280 391 466 479 723 PAT margin 10.1 7.4 3.8 3.4 2.1 Cash 365 269 538 446 682 Turnover ratio Other current assets 475 493 609 621 676 Asset turnover ratio (x) 3.4 3.1 3.1 2.7 2.5 Avg. inventory period (days) 63 52 52 55 57 Total current assets 1,973 2,041 2,705 2,865 3,636 Avg. collection period (days) 19 21 21 19 25 Creditors 1,097 855 1,091 1,199 1,420 Avg. payment period (days) 81 50 52 50 52 Other current liabilities 232 824 745 734 909 Solvency ratios (x) Total current liabilities 1,329 1,679 1,835 1,933 2,329 Debt-equity - - - 0.0 0.1 Net current assets 645 362 870 933 1,307 Interest coverage 135.8 197.2 82.2 159.6 15.8 Total assets 1,575 2,212 2,576 3,451 4,083 Growth (%) Sales 20.5 27.3 18.1 14.1 11.5 Source: Company, Nirmal Bang Institutional Equities Research EBITDA 35.7 41.5 (33.3) 22.0 (10.1) PAT (82.9) (6.4) (39.3) 3.0 (31.3) Source: Company, Nirmal Bang Institutional Equities Research

4 IFB Industries

Institutional Equities

Disclaimer Stock Ratings Absolute Returns

BUY > 15%

ACCUMULATE -5% to15%

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5 IFB Industries