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% CFA Institute Research Challenge Hosted in India Symbiosis Centre for Management and Human Resource Development 0 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 0 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 CFA Institute Research Challenge 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 CFA Institute Research Challenge 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.