Table of Contents - Business...

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Leveraging brand across categories We initiate coverage on IFB Industries which is expected to benefit from market leadership in the front load washing machine segment, domestic manufacturing of top load washing machines from Q3FY15 and uptick in the refrigerator and air conditioner segments from Q4FY15. Fine blanking segment is also expected to grow at steady double digits. Stable Rupee, reducing share of traded imported goods, reduction in imported raw materials and domestic manufacturing of top load washing machines will aid margins along with turnaround in IFB Points. Improving return ratios, debt free status, better working capital cycle and generation of FCF augur well from a long term perspective.

� Maintains leadership in front loading washing machine segment: IFB Industries is expected to maintain its leadership (~47% market share) in the front load washing machine segment due to its strong product offerings and pricing. It plans to start domestic manufacturing of top load washing machines which is 90% of the washing machine market at its Goa facility in Q3FY15 and increase market share in this high volume category. With mere ~35% capacity utilization at the Goa facility for front load washing machines, it is in advanced stages of talks with a Japanese conglomerate for contract manufacturing which will aid margins and act as a natural hedge due to high imports by the company.

� To leverage IFB brand across multiple home appliances: We expect refrigerators and air conditioners to be a strong focus area accounting for 18% of sales in FY17E from 10.3% in FY14. In the India Today MDRA Consumer Survey 2014, IFB Refrigerators were overall ranked first despite its availability only through IFB Points as these products were introduced only in late FY13. Microwave category accounts for 14.5% of sales in FY14 and we expect the share of home appliances (ex-washing machines) to increase from 33% in FY11 to 42% in FY17E. IFB currently has more than 7000 dealers and ~275 IFB Points through which it markets all it products. IFB Points contributed more than 17% to sales in Q1FY15 compared to 9% in FY13.

� Strong Financials: We expect the company to post revenue CAGR of 17.2% over FY14-17E with the home appliances division expected to grow at CAGR of 18% and fine blanking division at 13.3%. Operating margins will expand from a low of 4.4% in FY14 to 9.7% in FY17E on the back of stable Rupee, reducing share of traded imported goods and reduction in imported raw materials. Domestic manufacturing of top load washing machines will aid margins along with turnaround in IFB Points. We expect the return ratio to improve significantly with RoE increasing to 20.7% by FY17E and RoCE to 18.6%. We believe the company will generate significant FCF from FY16E onwards.

� Valuation & Risks: We believe IFB is attractively positioned at 16.1x and 12.4x FY16E and FY17E PE respectively. Between FY10 and FY12 when the financial performance of the company was at its best, the stock was trading at PE valuations of 20x, ~15% discount to Whirlpool but at a premium to Symphony. We believe in the next 2 years the company will replicate its performance which it demonstrated in FY10-12 and hence command significant valuation premium going ahead. On the back of this, we initiate coverage on the stock with a target price of Rs465 (17x FY17E EPS of Rs27.4) giving ~15% discount to its best FY10-12 valuations. Key risks are aggressive pricing by the competition and limited success of new launches.

Target Price Rs465 Key Data

Bloomberg Code IFBI IN

CMP* Rs339 Curr Shares O/S (mn) 40.5

Diluted Shares O/S(mn) 40.5

Upside 37% Mkt Cap (Rsbn/USDmn) 13.7/223

Price Performance (%)* 52 Wk H / L (Rs) 344.4/45.1

1M 6M 1Yr 5 Year H / L (Rs) 344.4/38.4

IFBI IN 24.1 312.2 586.6 Daily Vol. (3M NSE Avg.) 299374

Nifty (1.0) 18.2 37.5

*as on 1 October 2014: Source: Bloomberg, Centrum Research

Shareholding pattern (%)*

Jun-14 Mar-14 Dec-13 Sep-13

Promoter 75.0 75.0 75.0 75.0

FIIs 0.04 0.04 0.04 0.04

DIIs 0.9 0.9 0.8 1.0

Others 24.1 24.1 24.2 24.0

Source: BSE, *as on 1 October 2014

Increasing share of home app (ex-Washing Machine)

Source: Company, Centrum Research

Improving operating margins


Ankit Kedia, [email protected]; 91 22 4215 9634

Y/E Mar (Rsmn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) EPS (Rs) RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)

FY13 9,159 14.1 502 5.5 315 (1.8) 7.8 11.3 10.5 43.7 25.5

FY14 10,215 11.5 452 4.4 216 (31.3) 5.3 6.6 6.0 63.6 29.1

FY15E 12,171 19.2 868 7.1 584 170.5 14.4 15.9 13.7 23.5 14.9

FY16E 14,264 17.2 1,233 8.6 852 45.9 21.0 19.4 17.1 16.1 10.1

FY17E 16,424 15.1 1,591 9.7 1,110 30.2 27.4 20.7 18.6 12.4 7.3

Source: Company, Centrum Research Estimates

33.135.0

34.4 39.3 41.5 41.7 42.1

30

32

34

36

38

40

42

44

FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(%)

11.2

5.9 6.55.1

6.3

8.19.3

12.6

12.0 11.09.9

11.511.8 12.0

0

4

8

12

16

FY11

FY12

FY13

FY14

FY15E

FY16E

FY17E

(%)

Home Appliances Fine Blanking

Consumer BUY

Initiating Coverage 7 October 2014

INDIA

IFB Industries

2 IFB Industries

Table of Contents

Maintains leadership in front load washing machine segment ........................................................ 3

Pricing the product right helps maintain leadership ............................................................................................... 3

Focus on domestic manufacturing of top load segment ....................................................................................... 4

To start contract manufacturing ...................................................................................................................................... 4

Leveraging IFB brand to other home appliances............................................................................... 5

Refrigerators & Air conidtioners to gain prominance .............................................................................................. 5

Focus on value added products like accessories & additives ................................................................................ 6

Expanding distribution network and IFB Points ........................................................................................................ 7

Fine blanking to grow at steady rate .................................................................................................. 8

Focus on 2 &4 wheeler industry ....................................................................................................................................... 8

Financials ............................................................................................................................................. 9

Home Appliances to grow ahead of fine blanking division................................................................................... 9

Margins to expand significantly ....................................................................................................................................... 9

PAT to grow at a CAGR of 97% over FY14-17E .......................................................................................................... 11

Significant improvement in return ratios and FCF generation .......................................................................... 11

Quarterly Financials ............................................................................................................................................................. 13

Valuations .......................................................................................................................................... 14

Key Risks ............................................................................................................................................. 15

Rupee depreciation ............................................................................................................................................................. 15

Aggressive pricing strategy by competition ............................................................................................................. 15

Limited success of new launches ................................................................................................................................... 15

Company Background ....................................................................................................................... 16

Annexure 1- Industry brief ................................................................................................................ 17

Washing Machines ............................................................................................................................................................... 17

Refrigerators ........................................................................................................................................................................... 18

Air conditioners ..................................................................................................................................................................... 19

Annexure 2- Company profile of competitors ................................................................................. 20

Whirlpool of India ................................................................................................................................................................. 20

LG and Samsung ................................................................................................................................................................... 21

Financials - Historical ......................................................................................................................... 22

Financials ........................................................................................................................................... 23

3 IFB Industries

Maintains leadership in front load washing machine segment

IFB Industries is expected to maintain its leadership in the front load washing machine segment with ~47% market share on the back of strong product offerings and attractive pricing, leaving behind global leaders LG and Samsung. We believe the front loading washing machine category contributes ~10-12% to overall washing machine market in the country (refer Annexure 1 for washing machine industry brief), which is very low compared to developed countries. This category contributes about 70% in developed countries like US and Europe and hence as the market expands, we expect IFB to maintain its leadership status. 100% of the front load washing machine is manufactured at the company’s Goa facility. Its other products are imported. We expect the company to post gross revenue CAGR of 13.3% to Rs8243mn over FY14-17E in the front load washing machine segment, ~10% volume growth and marginal price increase every year.

Exhibit 1: Healthy growth in front load washing machines for IFB


Pricing the product right helps maintain leadership

IFB has one of the most exhaustive SKUs in the front load washing machine segment across categories. The company refreshes its portfolio every 6-9 months with new features which are the first in the industry and later replicated by the competition. The company recently introduced new features in its 6.5Kg category which received positive response from customers and also plans to introduce a new model in Q3FY15. Along with a strong product profile, the pricing is lower than of the competition which helps the company maintain its leadership position. In most categories product pricing of IFB is better than that of the competition for technologically superior products. IFB is the only company which offers 4-year warranty on all SKUs with availability of spare parts & accessories for 10 years attracting more customers as the competition offers only 2-year warranties.

Exhibit 2: Attractive price points helps in maintaining leadership

(Rs/unit) 5.5Kg 6Kg 6.5Kg 7Kg 8Kg

IFB 23,260 24,690 29,130 30,540 36,650

Siemens 29,940 30,500 NA 41,000 51,500

Bosch 28,499 33,490 35.490 37,990 50,990

LG 24,490 26,990 36,590 36,990 43,490

Samsung 21,500 24,240 27,990 35,900 47,500

Source: Industry, Centrum Research

In the recent India Today Group – MDRA consumer survey, IFB washing machines were ranked on top across all categories in terms of quality, value for money, durability, serviceability, confidence, user friendliness etc. We believe these attributes lead to higher brand recall and help maintain dominance in the front load washing machine category. The company has a strong 55 member R&D team with members from Italy and South Korea helping product development.

3,413 4,203 5,181 5,664 6,480 7,342 8,243

23.2 23.3

9.3

14.413.3

12.3

0

5

10

15

20

25

30

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


(%)

(Rs mn)

Front load gross sales % growth

100% of the front load washing machine is manufactured in-house

4 years warranty along with attractive pricing help in maintaining leadership

4 IFB Industries

Exhibit 3: Superior quality & value for money make IFB washing machine market leaders

Co Name Overall Rating

Quality Value for Money

Need fulfillment

Durability Pride User-Friendly Serviceability Confidence

IFB 8.12 8.16 7.96 8.19 8.05 8.02 8.14 8.28 8.26

Whirlpool 7.94 8.03 7.86 7.91 7.88 7.85 7.90 7.87 8.03

Sharp 7.94 8.03 7.77 7.77 7.84 8.00 7.71 8.10 8.10

Videocon 7.92 8.08 7.83 7.81 7.8 7.82 7.88 7.74 7.92

Panasonic 7.89 8.00 7.68 8.00 7.95 7.68 8.09 7.86 7.82

LG 7.82 7.92 7.77 7.73 7.67 7.77 7.83 7.76 7.88

Onida 7.8 7.86 7.73 7.79 7.76 7.65 7.74 7.89 7.91

Samsung 7.76 7.84 7.67 7.69 7.64 7.62 7.75 7.74 7.97

Godrej 7.73 7.75 7.71 7.81 7.72 7.66 7.73 7.71 7.77

Haier 7.66 7.92 7.27 7.46 7.65 7.69 7.69 7.50 7.54

Source:India Today Group – MDRA Consumer Survey May 2014

Focus on domestic manufacturing of top load segment

Following the success of front load washing machines, the company plans to start domestic manufacturing of top load washing machines which is ~90% of the washing machine market (Refer Annexure 1). The company will be present only in the automatic category which has 40% of the volume market. Till now the company was importing top load washing machines, but from end Q3FY15 it will manufacture it at the Goa facility. Currently, the company has minuscule market share in the top load washing machine category but plans to introduce more SKUs, new products and features to focus on the higher volume category. Hence, we expect the company to post 3x revenue jump in the top load washing machine segment over FY14-17E to Rs1800mn translating into 2-3% overall market share in a category where the company is a leader in the front load machines. However we also believe this category would be highly competitive given the large number of domestic and international players along with being a price sensitive category.

Exhibit 4: Focus now on topload washing machine


To start contract manufacturing

Currently, the company has ~35% capacity utilization at the Goa facility for front load washing machines. To increase utilization the company is at an advanced stage of talks with a Japanese conglomerate for contract manufacturing which it expects to start in FY15. We believe it will benefit from higher utilization rate deriving healthy operating leverage leading to margin expansion and also acting as a natural hedge given the high imports of the company. We have not incorporated this in our estimates though it would be an earnings upside.

Currently exports account for less than 1% of sales of the home appliances division and IFB is trying to increase its presence in other continents. The company has deployed sales representatives in South Africa and Nigeria. It has certification for environment, energy, wash quality and other safety related issues.

781 865 891 654 886 1,380 1,800

10.8

3.0

(26.6)

35.5

55.7

30.4

(40)

(30)

(20)

(10)

0

10

20

30

40

50

60

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000


(%)

(Rs mn)

Top load gross sales % growth

Expect the company to garner 2-3% market share over next 3 years from top lad segment

Contract manufacturing to offer operating leverage and act as natural hedge against imports

5 IFB Industries

Leveraging IFB brand to other home appliances

While the brand IFB is synonymous with front load washing machines, the company is using this brand for other home appliances as well. We expect the share of other home appliances to increase from 33% in FY11 to 42% in FY17E. Apart from washing machines, the company has a strong presence in the microwave category which accounts for 14.5% of sales in FY14. Sale of dishwashers has been flat for three years at ~Rs420mn. This was below expectations of the management. However, it is optimistic of boosting sales given its strong product quality, difficulty in finding house helps, growth of nuclear families and superior hygiene needs.

Exhibit 5: Revenue mix across home appliance categories

FY11 FY14 FY17E


Exhibit 6: Increasing share of home appliances – ex washing machine


Refrigerators & Air conidtioners to gain prominance

We expect refrigerators and air conditioners to be the strong focus area for the company going ahead and expect sales of 18% in FY17E from 10.3% in FY14. The company introduced these products in late FY13 in the domestic market through IFB Points only. ACs launched earlier did not meet quality specifications and consumer expectations and hence they were launched again in Q1FY15 and have shown strong demand which resulted in more than Rs500mn gross revenues in Q1FY15. The AC is priced at a premium to Voltas and Blue Star and is present across categories 1 Ton, 1.5 Ton and 2 Ton. Energy rating plays a crucial role in selling ACs and most of the SKUs are 2/3 Star for IFB (Recently there was a change in the energy rating system). We expect the AC sales to grow at a CAGR of 27% over FY14-17E to R1916mn (Refer Annexure 1 for industry brief on ACs).

In the refrigerator category, the company has a presence in the high capacity and premium segment. Plans to introduce new products by end of Q3FY15 in the low capacity categories will boost sales

54.5%

12.5%

18.2%

0.0%

6.7%

5.2% 0.0%1.4% 1.5%

54.5%

6.3%

14.5%

1.3%

6.5%

4.0%

9.1%1.9% 1.9%

47.5%

10.4%

10.8%

7.2%

6.4%

3.0%

11.0%1.9% 1.7%

Washing Machine - Front Load Washing Machine - Top Load Microwave ovens Refrigerator Accessories and additives

Dishwashers Air conditioners Others Spares

33.1 35.0 34.4 39.3 41.5 41.7 42.1

31.4

16.9

28.2 27.8

19.3

17.3

10

15

20

25

30

35

30

32

34

36

38

40

42

44


(%)

(%)

Gross HA Sales ex- Washing machine % growth (RHS)

New products expected to be launched from Q3FY15 end

6 IFB Industries

going forward. The management gained confidence from the India Today MDRA Consumer Survey 2014 where IFB Refrigerators were overall ranked first despite having a presence only at IFB Points and limited sales. Though this could be a one off survey, we believe directionally the company is taking the right path in getting the products quality right. Hence, the company is expected to up its ante in the category which we expect will boost sales to Rs1241mn by FY17E. While these categories are not high margin, we believe they complete a bouquet of products for the company to be offered to customers and help in building brand from a long term perspective.

Exhibit 7: Growth in refrigerator sales Exhibit 8: Growth in air conditioner sales

Source: Company, Centrum Research Estimates Source: Company, Centrum Research Estimates

Exhibit 9: User friendly IFB refrigerators are most popular among consumers

Co Name Overall Rating

Quality Value for Money

Need fulfillment

Durability Pride User-Friendly Serviceability Confidence

IFB 8.14 8.21 8.32 8.07 7.96 8.11 8.25 7.79 8.00

Panasonic 8.06 8.15 7.94 7.97 8.15 7.88 7.94 7.94 8.21

Samsung 7.99 8.08 7.95 7.96 7.90 7.87 7.95 7.85 8.07

Whirlpool 7.91 8.04 7.83 7.87 7.77 7.73 7.86 7.83 7.95

Videocon 7.89 7.99 7.79 7.87 7.83 7.86 7.8 7.85 7.88

Sharp 7.88 7.88 7.8 7.8 8.08 8.04 8.00 7.68 7.76

Toshiba 7.88 7.96 7.79 7.83 7.83 7.54 7.67 8.00 8.17

LG 7.82 7.94 7.77 7.72 7.70 7.73 7.79 7.74 7.85

Electrolux 7.75 7.98 7.76 7.61 7.72 7.48 7.41 7.72 7.54

Godrej 7.75 7.88 7.74 7.67 7.64 7.62 7.67 7.57 7.75

Source: India Today Group – MDRA Consumer Survey May 2014

Focus on value added products like accessories & additives

Sales of additives and accessories (for running and maintenance of products) have become a focus area for the company which is expected to contribute well both to topline and profitability. Additives and accessories for washing machines, dishwashers and microwaves account for the bulk of sales. We expect this to grow at a CAGR of 18% over FY14-17E against 17% in FY11-17E and contribute 6-7% to sales.

Exhibit 10: Focus on accessories & additives


132662

993 1,2410

200

400

600

800

1,000

1,200

1,400

FY14 FY15E FY16E FY17E

(Rs mn)

123 943 1,226 1,533 1,9160

400

800

1,200

1,600

2,000

FY13 FY14 FY15E FY16E FY17E(Rs mn)

422 501 575 675 797 940 1,109

6.7

6.4

6.2

6.5

6.36.3

6.4

6.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

0

200

400

600

800

1,000

1,200


(%)

(Rs mn)

Accessories & Additives Gross sales % of Home Appliances Sales

7 IFB Industries

Expanding distribution network and IFB Points

IFB currently has more than 7000 dealers across India against 30K+ for Samsung & LG. The company plans to add ~175 dealers every quarter and focus more on North and West regions which are lagging behind South India. New 183 dealers added in Q1FY15 accounted for Rs165mn of sales in Q1FY15 itself. The company also currently has 550 service franchises and plans to increase this to 575 by the year end due to its pan India presence. Historically, the pain point of the company was stagnant distribution reach and service network which it improved in the last 2/3 years. This is expected to show results in coming years. The company also has 23 service training centers and plans to add 4 more by FY15. It also has its own call center in Goa operational since Nov 2012 and outsourced call centers in Munnar and Hyderabad. The service center in Goa focuses on outbound calls to gauge customer satisfaction and reduce customer issues through data analytics.

Exhibit 11: Increase in dealer addition / service franchisee Exhibit 12: Distribution of dealers/IFB Points

Source: Company, Centrum Research Source: Company, Centrum Research

IFB Points are exclusive franchise-run retail stores and company owned outlets which the company has started to ramp up in the last couple of years. Through these points company markets all its products and caters to demand in Tier-I, II and III cities. Some of these products are exclusively marketed through IFB Points. The addition of high potential categories such as refrigerators and air conditioners makes IFB Points highly viable for franchise. IFB Points contributed more than 17% to sales in Q1FY15 compared to 9% in FY13. The company reimburses franchise for the initial operating cost such as rentals etc and charges the same to P&L account. We believe this cost is more than offset by entry into other new product categories. Currently it has ~275 IFB Points of which ~30% are profitable. It has also closed 58 IFB Points till Q1FY15 owning to bad selection of locations and profitability issues.

The company is also focussing on sales through its own website which has more than 1.6lac visitors/month. Sale from this channel was Rs89mn in FY14 and Rs39mn in Q1FY15.

Exhibit 13: Increasing contribution from IFB Points Exhibit 14: Home appliances sales across geographies


450

306

389

240

183

431461 481

535 550

0

100

200

300

400

500

600

Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15

(Nos)

Dealer Addition Service Franchaisee

0%

10%

20%

30%

40%

50%

South North West East

Dealers IFB Points

9.0% 15.0% 17.0%5%

7%

9%

11%

13%

15%

17%

19%

FY13 FY14 Q1FY15

(%)

23%

53%

6%

18%

North South East West

IFB Points account for 17% of sales in FY14 against 9% in FY13

8 IFB Industries

Fine blanking to grow at steady rate

Focus on 2 &4 wheeler industry

The fine blanking division caters to the 2W & 4W industry with more than 85% of the revenues coming from these. It manufactures components such as cushion plates for seat recliners, K12 tongue for seat belt assembly, door latches, gate assembly for gear transmission, gear shift selectors, interlocks and transmission, rotor segments for aircrafts, plate valves for compressors and face comp drives, gears, cam plate assemblies, and sprockets for two wheelers. Clients for its engineering products include Maruti Suzuki, Ford India, Fiat India, Toyota Kirloskar Motors, Lucas TVS, Brakes India, Rane TRW, Bosch Chasis, TVS Motor, Yamaha Motorcycles, Honda Motorcycles & Scooters India, Royal Enfield, Hero, L&T, SKF, etc. Growth of this segment has always been higher than that of the industry or in-line. Hence going forward we believe revenues will grow at a CAGR of 13.3% over FY14-17E in-line with the industry. Margins in this segment will be around 11-12% on the back of small operating leverage with topline growth. The company has also invested in automation and is focused on improving internal efficiencies to increase profitability.

In November 2013 the company entered the after-market business of 2 wheeler motorcycle chains and sprocket kits under the brand name Ultramiles. Being a customer facing business and in brand building phase, this business posted marginal operating loss of Rs3mn in Q1FY15.

Exhibit 15: Fine Blanking to grow in-line with industry Exhibit 16: Margins to improve

Source: SIAM, Company, Centrum Research Estimates Source: Company, Centrum Research Estimates

Exhibit 17: Sales mix – FY13 Exhibit 18: Sales mix – FY14


(10)

(5)

0

5

10

15

20

25

30

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15E

FY16E

FY17E

(%)

2W Industry 4W Industry IFB - Fine Blanking Division

819

814

1,030

1,280

1,466

1,560

1,775

2,021

2,283

2,579

18.3

13.0

17.1

12.612.0

11.09.9

11.5 11.8 12.0

5

7

9

11

13

15

17

19

0

500

1,000

1,500

2,000

2,500

3,000

FY08 FY09 FY10 FY11 FY12 FY13 FY14FY15EFY16EFY17E

(%)

(Rs mn)

Revenue Operating Margins

52%

32%

6%

4%

6%

40%

49%

3%3%

5%

4 Wheeler 2 Wheeler Others Heavy Vehicle Electrical

9 IFB Industries

Financials

Home Appliances to grow ahead of fine blanking division

We expect the company to post revenue CAGR of 17.2% over FY14-17E to Rs16424mn with home appliances division expected to grow at CAGR of 18% and fine blanking division at 13.3%. We believe recovery in consumer demand, focus on new categories such as refrigerators and air conditioners and in house manufacturing of top load washing machines will help the home appliances division grow faster. Fine blanking division will grow on the back of increasing volumes in 2 and 4-wheeler segments. Hence we believe the share of home appliances division will increase to 84% in FY17E against 81% in FY11.

Exhibit 19: Healthy sales growth expected Exhibit 20: Home app to grow ahead of fine blanking


Margins to expand significantly

We expect margins of the company to expand from a low of 4.4% in FY14 to 9.7% in FY17E on the back of significant margin improvement in the home appliances division. We have modeled margin expansion at 9.3% from 5.1% for the home appliances division while the fine blanking division’s margins will expand on the back of strong operating leverage, focus on automation and internal efficiencies.

Gross margins for the company were impacted significantly from FY11 onwards as the rupee and gross margins fell from highs of 48.5% in FY10 to 41.7% in FY14. Going forward we expect gross margins to improve marginally to 42.1% on the back of stable Rupee, smaller share of traded imported goods and reduction in imported raw materials.

Operating margins of the company was further impacted on the back of forex losses due to high proportion of imports. Adjusting for forex loss margins would have been 5.8% in FY14. Hence the company has now started to do 100% currency hedging which will reduce losses.

Domestic manufacturing of top load washing machines will aid margins. Turnaround of IFB Points will also reduce costs and higher sales from these outlets will increase margins as the company earns better margins from IFB Points.

Exhibit 21: Margins to expand significantly Exhibit 22: Home appliances to show margin expansion


2,886

3,826

4,509

5,434

6,784

8,030

9,159

10,215

12,171

14,264

16,424

0.0

32.6

17.820.5

24.9

18.4

14.111.5

19.217.2

15.1

0

5

10

15

20

25

30

35

0

4,000

8,000

12,000

16,000

20,000

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

(%)

(Rs mn)

Net Sales Growth (RHS)3,543

3,736

4,472

5,517

6,563

7,600

8,440

10,150

11,981

13,845819

814 1,030

1,280

1,466

1,560

1,775 2,021 2,283 2,579

35

2035

4035

6035

8035

10035

12035

14035

16035

18035

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15E

FY16E

FY17E

(Rs mn)

-29

161

398

530

604

412

502

452

868

1,233

1,591

4.2

8.89.8

8.9

5.1 5.5

4.4

7.1

8.6

9.7

0

2

4

6

8

10

12

(400)

0

400

800

1,200

1,600

2,000

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15E

FY16E

FY17E

(%)

(Rs mn)

Operating profit Operating Margins (RHS)

4.1

10.5 10.7 11.2

5.9 6.55.1

6.38.1

9.3

18.3

13.0

17.1

12.6 12.011.0

9.911.5 11.8 12.0

0

4

8

12

16

20

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15E

FY16E

FY17E

(%)


10 IFB Industries

Exhibit 23: Gross margins to expand marginally


Exhibit 24: Share of traded goods to reduce Exhibit 25: Imported RM component to reduce further…

Source: Company, Centrum Research Estimates Source: Company, Centrum Research

Exhibit 26: ..reducing forex losses seen over years Exhibit 27: Adj. Operating margins for forex losses


A&P spends of the company is the highest among listed peers at ~5.5% of sales. It still refrains itself from expensive advertisement as it is not in a position to compete with global competitors. We believe with strong topline growth, A&P expenditure will not grow in the same proportion aiding margin expansion which is the case for other listed peers.

48.0 48.1

45.9

48.5

44.7

40.840.1

41.7 41.9 42.0 42.1

35

37

39

41

43

45

47

49

51

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15E

FY16E

FY17E

(%)

61.2

66.7

58.1

57.1

58.8

56.3

54.4

55.5

56.1

38.8

33.3

41.9

42.9

41.2

43.7

45.6

44.5

43.9

0%

20%

40%

60%

80%

100%

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Manufactured Traded

31.7

32.5

34.4

22.4

28.8

27.6

22.3

68.3

67.5

65.6

77.6

71.2

72.4

77.7

0%

20%

40%

60%

80%

100%

FY08 FY09 FY10 FY11 FY12 FY13 FY14Imported Domestic

100 0

66.9

2.9

143.9

0

20

40

60

80

100

120

140

160

FY09 FY10 FY11 FY12 FY13 FY14

(Rs mn)

8.89.8

8.9

5.1 5.54.4

9.1 9.8 8.9 6.0 5.5 5.80.0

2.0

4.0

6.0

8.0

10.0

12.0


(%)

Operating Margin Operating Margin - ex Fx Loss

11 IFB Industries

Exhibit 28: A&P spends highest among listed peers Exhibit 29: A&P Spends to remain ~5% of sales

Source: Companies, Centrum Research Source: Company, Centrum Research Estimates

PAT to grow at a CAGR of 97% over FY14-17E

We expect profitability to grow at a CAGR of 71% over FY14-17E to Rs1110mn on the back of healthy operating performance. Change in depreciation policy from Q1FY15 to straight line method against written down value method along with re-assessing the useful life of the asset will decrease the depreciation of the company from R226mn in FY14 to Rs137mn further aiding profitability growth.

Exhibit 30: PAT to grow at A CAGR of 72% over FY14-17E


Significant improvement in return ratios and FCF generation

We expect the return ratio to improve significantly with RoE to 20.7% by FY17E and RoCE to 18.6% by FY17E. Fine blanking business will need continuous capex and hence we expect the RoCE of this division to improve marginally to 14.2% by FY17E while the home appliances’ RoCE will improve to historic levels of 52% by FY17E.

We expect the capex of the company to be Rs500mn in FY15E for a new manufacturing facility in Goa for top load washing machine along with small investments in the fine blanking business. In FY16E and FY17E we have modelled Rs350mn capex each year for the fine blanking business and maintenance capex in the home appliance business. Given this backdrop, we believe the company will generate significant FCF from FY16E onwards.

Debtor days on a blended basis are ~25 days, with home appliance debtor days in single digits. The company does not offer credit facility and hence is not present in modern retail outlets for all products. Hence net working capital for the company is 23 days as it maintains around 2 months of inventory for raw material and finished goods.

4.8

4.6 4.7 4.9

5.5

3.4

2.6

2.0

1.8

1.7

3.2

3.9

3.8 4.1

4.9

4.4

3.6

5.3

4.4 4.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

FY10 FY11 FY12 FY13 FY14

(xxx)

IFB Whirlpool Symphony Hitachi

172 245 200 261 315 378 444 566 634 745 860

6.0

6.4

4.44.8 4.6 4.7 4.9

5.55.2 5.2 5.2

3

4

5

6

7

0

200

400

600

800

1,000

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15E

FY16E

FY17E

(%)

(Rs mn)

A&P Spends % of sales

140 370 538 503 320 315 216 584 852 1,110

(231.7)

164.9

45.3

(6.4)(36.3)

(1.8)(31.3)

170.5

45.9 30.2

(300)

(250)

(200)

(150)

(100)

(50)

0

50

100

150

200

0

200

400

600

800

1,000

1,200

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(%)

(Rs mn)

Adj Net Profit % Growth

Debtor days in home appliances division is in single digits

12 IFB Industries

Exhibit 31: Improvement in return ratios Exhibit 32: Home appliances RoCE to improve significantly


Exhibit 33: DuPont Analysis

FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

PAT/Sales (x) 0.10 0.07 0.04 0.03 0.02 0.05 0.06 0.07

Sales/Assets (x) 4.03 3.58 3.35 3.04 2.71 2.78 2.80 2.70

Assets/Equity (x) 1.08 1.04 1.06 1.08 1.15 1.19 1.16 1.13

RoE (%) 43.0 27.6 13.5 11.3 6.6 15.9 19.4 20.7


Exhibit 34: Expected to generate FCF Exhibit 35: Working capital under check

Source: Company, Centrum Research Estimates Source: Company, Centrum Research

40.0

26.7

13.410.5

6.0

13.717.1 18.6

43.0

27.6

14.111.3

6.6

15.919.4 20.7

0

8

16

24

32

40

48

FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(%)

RoCE RoE

54.8

48.9

50.9

20.0 24.8

17.7

28.1

41.2 52.2

25.1

36.8

27.6

21.8

12.6

8.6

13.3

13.6

14.2

0

10

20

30

40

50

60

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(%)


221 269 229 177

237

(134)(196)

(375)

163

414

675

(600)

(400)

(200)

0

200

400

600

800

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15E

FY16E

FY17E

(Rs mn)

5060

5157

48 50 53 56

21 23 16 19 21 21 1926

107 108

75 74 7769

6572

0

20

40

60

80

100

120

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

(Days)

Inventory Days Debtor Days Creditors Days

13 IFB Industries

Quarterly Financials

Exhibit 36: Quarterly Financials

Y/E Mar (Rs mn) Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15

Total Income 2,333 2,681 2,154 2,307 2,363 2,781 2,764 2,906

COGS 1,400 1,706 1,278 1,321 1,343 1,656 1,638 1,695

Staff cost 208 205 244 239 257 249 235 285

Admin & other expenses 582 587 575 682 706 709 729 711

Total Expenditure 2,191 2,498 2,097 2,242 2,305 2,614 2,602 2,690

EBITDA 142 183 57 65 58 167 163 216

Depreciation 43 48 51 51 54 60 61 5

EBIT 99 136 6 14 4 107 102 211

Interest 1 1 0 1 4 5 5 5

Other Income 30 29 44 18 21 13 31 12

Exceptional Item 0 0 0 0 0 0 0 0

PBT 129 164 49 30 21 115 128 218

Total tax 38 44 8 8 5 26 37 44

Reported PAT 91 120 41 21 15 88 91 174

Adj PAT 91 120 41 21 15 88 91 174

Growth %

Revenue 15.2 14.4 3.5 15.8 1.3 3.7 28.4 26.0

EBIDTA 20.1 51.6 40.6 (46.1) (59.5) (8.9) 186.1 233.4

Adj PAT 16.1 11.4 (5.5) (66.2) (83.1) (26.3) 122.5 714.6

Margins %

Gross Margin 40.0 36.4 40.7 42.7 43.2 40.5 40.7 41.7

EBIDTA 6.1 6.8 2.6 2.8 2.4 6.0 5.9 7.4

EBIT 4.2 5.1 0.3 0.6 0.2 3.8 3.7 7.3

Adj PAT 3.9 4.5 1.9 0.9 0.6 3.2 3.3 6.0

Segmental Breakup

Home Appliances - Sales 1,971 2,299 1,746 1,953 1,840 2,310 2,237 2,391

YoY Growth (%) 17.0 15.4 5.7 23.3 (6.6) 0.5 28.1 22.4

Engineering - Sales 362 382 408 354 423 471 528 515

YoY Growth (%) 6.5 8.5 (5.1) (13.2) 16.8 23.2 29.4 45.7

Home Appliances - EBIT 122 158 28 41 23 114 118 190

EBIT Margin (%) 6.2 6.9 1.6 2.1 1.2 4.9 5.3 7.9

Engineering - EBIT 19.3 26.2 23.6 9.3 24.5 29.7 33.7 56.5

EBIT Margin (%) 5.3 6.9 5.8 2.6 5.8 6.3 6.4 11.0


14 IFB Industries

Valuations

IFB Industries is expected to benefit from market leadership in the front load washing machine segment, domestic manufacturing of the top load washing machine from Q3FY15 and expected uptick in refrigerators and air conditioners from Q4FY15. This will not only aid revenue growth but expand margins of the company coupled with steady growth in the fine blanking segment. Improving return ratios, virtually debt free status, improving working capital cycle coupled with generation of FCF augur well from a long a term perspective. Hence we have modelled 17.2% revenue and 72% PAT CAGR over FY14-17E on the back of steady margin expansion with RoE improving to 20.7% in FY17E.

We believe the stock is attractively positioned against peers and is currently trading at 16.1x and 12.4x FY16E and FY17E respectively.

Exhibit 37: Comparative Valuations – Home appliance division

Company Mkt Cap (Rs mn)

CAGR FY14-FY16E (%) EBITDA Margin (%) PE (x) EV/EBITDA (x) RoE (%) Div Yield (%)

Rev. EBITDA PAT FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E

IFB Industries* 13,744 18.2 65.2 98.6 4.4 7.1 8.6 63.6 23.5 16.1 29.1 14.9 10.1 6.6 15.9 19.4 0.0 0.0 0.0

Whirlpool of India 55,050 18.0 31.2 42.2 8.0 9.1 9.9 44.8 29.3 22.2 11.7 17.1 13.4 18.1 21.7 23.1 0.0 0.1 0.1

Hitachi Home 17,656 21.3 50.5 199.3 5.6 8.0 8.5 218.6 33.0 24.5 9.8 17.4 13.7 3.4 20.4 22.6 0.9 0.3 0.4

Symphony 47,552 25.2 21.6 25.4 26.3 24.1 24.8 45.0 36.4 28.5 24.4 29.3 22.7 42.5 41.5 42.8 0.2 1.2 1.3

Global peers USD mn

Toshiba Corp 19,410 2.7 15.0 89.5 7.3 8.3 9.2 42.0 15.0 11.7 7.4 6.8 5.8 4.5 10.7 13.1 1.8 1.7 1.9

Panasonic Corp 28,950 1.2 4.5 31.3 8.2 8.4 8.8 24.9 18.5 14.6 4.4 4.8 4.2 8.6 9.8 11.5 1.1 1.2 1.4

Sony Corp 19,451 0.7 31.5 NA 5.2 5.0 8.9 (15.7) (14.1) 16.4 5.2 6.4 3.3 (5.8) (6.8) 5.7 1.3 0.7 1.1

Sharp Corp/Japan 4,783 (0.4) (2.7) 88.2 7.9 7.3 7.6 38.2 18.7 13.8 5.5 5.8 5.2 7.2 15.3 19.0 0.0 0.2 0.3

Whirlpool Corp 11,360 7.6 15.3 19.5 9.5 10.3 10.9 14.0 12.5 10.5 7.4 6.7 5.6 18.0 18.3 19.4 1.5 2.0 2.2

LG Electronics Inc 9,649 4.6 13.6 165.6 5.5 6.4 6.5 64.3 11.1 8.5 5.8 4.4 4.0 1.4 7.9 9.3 0.3 0.3 0.3

Electrolux AB 8,039 4.8 15.6 148.2 6.8 6.8 8.3 79.9 17.9 13.3 7.6 8.8 7.1 4.5 16.8 24.6 3.9 3.4 3.6

Samsung Elect. 159,872 (3.7) (6.5) (13.4) 23.3 21.7 21.9 5.8 7.9 8.2 2.7 2.7 2.3 19.8 14.9 12.7 1.0 1.4 1.6

Canon Inc 43,332 1.0 3.2 6.9 16.4 17.0 17.1 17.8 16.1 15.1 5.1 6.3 6.0 8.4 8.4 8.7 3.9 3.7 3.7

Source: Bloomberg consensus, Companies; *Centrum Research Estimates

Exhibit 38: Rolling forward EV/EBITDA chart Exhibit 39: Rolling forward P/E chart

Source: Bloomberg, Company, Centrum Research Estimates Source: Bloomberg, Company, Centrum Research Estimates

Valuation Method 1

Stock has historically traded at ~30% discount to Whirlpool and marginal premium to Symphony which has turned to discount in the past two years. Between FY10 and FY12 when the financial performance of the company was at its best, the stock was trading at PE valuations of 20x, ~15% discount to Whirlpool but at a premium to Symphony. We believe in the next 2 years the company will replicate its performance which it demonstrated in FY10-12 and hence command significant valuation premium going ahead.

On the back of this, we initiate coverage on the stock with a target price of Rs465 (17x FY17E EPS of Rs27.4) giving ~15% discount to its best FY10-12 valuations.

0

2

4

6

8

10

12

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

Jan-13

May-13

Sep-13

Jan-14

May-14

Sep-14

EV/EBITDA Mean

Mean + Std Dev Mean - Std Dev

0

5

10

15

20

25

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Mar-12

Sep-12

Mar-13

Sep-13

Mar-14

Sep-14

P/E Mean

Mean + Std Dev Mean - Std Dev

15 IFB Industries

Exhibit 40: IFB premium /(discount) to Whirlpool Exhibit 41: IFB premium /(discount) to Symphony

Source: Bloomberg, Company, Centrum Research Estimates Source: Bloomberg, Company, Centrum Research Estimates

Valuation method 2: SoTP Valuation

Company has two varied business lines, an engineering division and home appliance division. Hence we consider SoTP valuation methodology valuing both the divisions separately. In this method, we arrive at a valuation of Rs457/share assigning 18x multiple to the home appliance division and 10x multiple to the engineering division. For the calculation of EPS of individual businesses, we have taken our EBIT estimates and according to the share of revenues, divided the other income to both the businesses. Tax rate has been taken similar for both divisions in arriving at the individual profitability. We have also undertaken this exercise to ascribe value to individual businesses in case the company plans to demerge one of the businesses later.

Exhibit 42: SoTP valuations

FY17E EPS (Rs) PE (x) Value/Share (Rs)

Home Appliances 22.8 18 411

Engineering 4.6 10 46

Total 27.4

457

Source: Centrum Research Estimates

Exhibit 43: Peer Valuations – Engineering division

Company Mkt Cap (Rs mn)

CAGR FY14-FY16E (%) EBITDA Margin (%) PE (x) EV/EBITDA (x) RoE (%) Div Yield (%)

Rev. EBITDA PAT FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E

MM Forgings 5,570 20.2 26.4 40.1 19.7 22.1 21.8 19.0 12.0 9.7 3.5 NA NA 15.9 20.1 20.5 3.4 0.6 0.6

Ramkrishna Forg. 6,428 52.3 74.9 135.5 13.2 15.4 17.4 70.1 54.4 14.6 13.1 12.4 6.3 2.9 3.6 12.1 0.9 0.4 0.4

LG Balakrishnan 10,837 13.8 17.3 21.0 11.6 11.9 12.3 17.5 14.6 11.9 3.5 8.2 6.9 21.8 21.6 22.2 NA 1.1 1.4

Source: Bloomberg consensus

We are using valuation method 1 for our final target price while valuation method 2 is used only to reconfirm valuation thesis.

Key Risks

Rupee depreciation

As seen in FY12/FY13, depreciation of Rupee can significantly impact gross margins of the company and profitability given that ~22% of raw materials and more than 40% of the goods sold are imported.

Aggressive pricing strategy by competition

IFB operates in highly competitive categories with competition not only from domestic players but also from global players with deep pockets. It will be difficult for the company to increase pricing in new categories including refrigerators and air conditioners due to its small market share.

Limited success of new launches

Company has entered new categories such as refrigerators and air conditioners. It will need to constantly innovate and regularly update its product offerings to meet customer expectations. Limited success in new categories could impact margins.

-80%

-60%

-40%

-20%

0%

20%

Sep-06

Mar-0

7

Sep-07

Mar-0

8

Sep-08

Mar-0

9

Sep-09

Mar-1

0

Sep-10

Mar-1

1

Sep-11

Mar-1

2

Sep-12

Mar-1

3

Sep-13

Mar-1

4

Sep-14

-90.0%

-50.0%

-10.0%

30.0%

70.0%

110.0%

150.0%

Mar-11

Sep-11

Mar-12

Sep-12

Mar-13

Sep-13

Mar-14

Sep-14

16 IFB Industries

Exhibit 44: Shareholding pattern (%)

Q1FY15 Q4FY14 Q3FY14 Q2FY14

Promoter 75.0 75.0 75.0 75.0

FIIs 0.04 0.04 0.04 0.04

DIIs 0.9 0.9 0.8 1.0

Others 24.1 24.1 24.2 24.0

Source: BSE

Company Background

IFB Industries Limited originally known as Indian Fine Blanks Limited started its operations in India during 1974 in collaboration with Hienrich Schmid AG of Switzerland. The product range includes Fine Blanked components, tools and related machine tools like Straighteners, Decoilers, Strip loaders and others. The Engineering divisions are located at Kolkata & Bangalore. The Bangalore unit, apart from Fine Blanked components, manufactures motors for White goods as well as Automotive applications.

In 1991 company started manufacturing and marketing of consumer durables (~84% of revenues). It is a market leader in front load washing machines and has a manufacturing facility in Goa. Other products, microwave ovens, refrigerators, air conditioners etc are imported.

Exhibit 45: Board of Directors

Designation Name Profile

Executive Chairman Mr. Bijon Nag

Mr. Bijon Nag is the Promoter and Executive Chairman of the Company. Mr. Nag is a mechanical engineer and a prominent industrialist having more than three decades of vast experience in machine tool and engineering industries. Mr. Bijon Nag is also Chairman of IFB Agro Industries Ltd and director of IFB Automotive Pvt. Ltd., and Maruti Insurance Broking Pvt Ltd.

Joint Executive Chairman & Managing Director

Mr. Bikram Nag

Mr. Bikram Nag is a BBA from Richmond College, U.K. He has more than seventeen years of experience in the field of business management. Mr. Nag is also Joint Executive Chairman of IFB Agro Industries Ltd and director of IFB Automotive Pvt. Ltd., Travel Systems Ltd. and Thai Automotive & Appliances Ltd.

Director & Chief Financial Officer

Mr. Prabir Chatterjee

Mr. Prabir Chatterjee is a bachelor of science from Ramakrishna Mission, Calcutta University and a Cost Accountant from ICWAI. He started his career in Dunlop India Limited and later joined IFB Industries Limited in 2000 as GM-Finance and worked in different capacities and was elevated to the post of CFO in 2011.

Director Dr. Rathindra Nath Mitra

Dr. Rathindra Nath Mitra, 67, has completed his B.SC (Hons), M.Sc, Ph.D from IIT, Kharagpur. He worked in several organizations and retired as Chief Manager (Systems) from Hindustan Copper Ltd. He works as consultant for IT (Systems & control) for his clients. Dr. Mitra is specialized in process development and IT Systems. He is a guest lecturer of prestigious educational institutions and take interest in training, publishing papers etc

Director Dr. Tridibesh Mukherjee

Dr. Tridibesh Mukherjee, 71, is a Metallurgical Engineer and has a Ph.D from University of Sheffield, U.K. He was Dy Managing Director (Steel) of Tata Steel Ltd and then after the takeover of Corus, Director (Integration and Technology) of Tata Steel Group. Dr. Mukherjee was chairman of several reputed companies like Tata Metaliks Ltd etc and was also on the Board of many Tata Group companies. He is currently on the Board of reputed public companies like TIL India, Nicco Corporation, Bharat Forge, Rane (Madras), Tata Advanced Materials.

Director Mr. Radharaman Bhattacharya

Mr. Radharaman Bhattacharya, 80, is a senior Chartered Accountant having more than 43 years of rich professional experience. Mr. Bhattacharya is a practicing chartered accountant and is specialized in the field of accountancy and taxation matters.

Director Mr. R. Muralidhar

Mr. R. Muralidhar, 70, is a MBA from IIM (Ahmedabad). Mr. Muralidhar has worked in several reputed companies like Warner Hindustan (Parke Davis), Hindustan Lever, EID Parry, Max India, Bharat Technologies and also in IFB Industries Limited. He specializes in Administration and Management and is actively associated with organizations in the field of education and training.

Director Mr. Sudip Banerjee

Mr. Sudip Banerjee, 54, has diploma in Management from AIMA. He joined Wipro Technologies as Marketing Executive and got elevated to the position of President over years. He worked as CEO at L&T Infotech Limited. He specializes in the field of HR, IT including services. He is a member of advisory Board of Head-Held –High – Foundation and of TAPMI Business School, Jaipur. Mr. Banerjee is an Independent Director in Kesoram Industries.


In 2001, the company was declared sick due to mounting debt and an inability to repay. Post BIFR and settlement with creditors in 2009, the company became debt free post preferential equity infusion by the promoters. Currently the company is virtually debt fee

17 IFB Industries

Annexure 1- Industry brief

Washing Machines

The washing machine segment was valued at Rs61.7bn in FY14 at 5mn units and grew 8.7% last year. It is expected to grow by ~9-10% in FY15 in volume terms. This category has experienced continued slowdown in the past 3 years due to rising input costs, high inflation and poor consumer sentiment. However, with prices expected to remain stable, demand will pick up in FY15. Changing environmental dynamics, urbanization, and rising income levels are driving growth of this segment. The number of middle-class households is expected to rise to 53.3 million by 2015, and 113.8 million by 2025 presenting a huge potential for washing machines.

Exhibit 46: Washing machine market size Exhibit 47: Market Share across players

Source: ADI Media Research, Centrum Research Source: ADI Media Research, Centrum Research

The semi-automatic segment continues to dominate in volume terms, at 60% but is slowly losing share to fully automatic machines which increased its share from 30% in 2009 to 40% in FY14. LG dominates the segment with a 34.1% market share in volume terms in 2013-14 and is also the leader in both automatic and semi-automatic segments. Videocon, given its low price, has ~27% market share in the semi-automatic segment while IFB has a presence only in the automatic category. Consumers are slowly beginning to prefer high capacity models with 6.5Kg+ washing machines now accounting for more than 65% of volumes.

Exhibit 48: Automatic segment market share Exhibit 49: Semi-Automatic segment market share

Source: ADI Media Research, Centrum Research Source: ADI Media Research, Centrum Research

56.3%

43.7% Fully Automatic

Semi Automatic

2013-14

Market Size 6170 Cr

34.1%

17.8%15.5%

13.1%

9.0%

5.5%

5.0%

LG

Videocon

Whirlpool

Samsung

Godrej

IFB

Others

2013-14

Market Size 5000000 units

32%

25%

12%

12%

6%

5%

9%

LG

Samsung

Whirlpool

IFB

Godrej

Videocon

Others

2013-14


36%

27%

18%

11%

5% 3%LG

Videocon

Whirlpool

Godrej

Samsung

Others

2013-14


18 IFB Industries

Exhibit 50: Market size (No of units in Million) Exhibit 51: Consumer preference towards high capacity

Source: ADI Media Research, Centrum Research Source: Industry, Centrum Research

Refrigerators

The refrigerator industry was valued at Rs140bn in FY14 (9mn units), and with expected improvement in the economic scenario, demand is likely to pick up at a relatively fast pace of ~11%. Direct cool refrigerators continue to command 75%+ market share in volume terms. The refrigerators segment has high penetration in India accounting for 31% and entry of multinational players has given a new direction with new and innovative products competing with domestic manufacturers. LG continues to dominate the segment with 24.5% market share followed by Samsung at 20.6%. Refrigerators with a capacity range of 142–340 L dominated sales, representing 70%+ of total volume sales. Those with 341–540 L capacities continued to gain momentum accounting for 20% of total refrigerator volume sales. With the new BEE (Bureau of Energy Efficiency) norms, a refrigerator previously rated at 5 stars would now be rated at 3 stars. It will also be 36% more efficient on power consumption than a 3 star refrigerator under the old rating scale.

Exhibit 52: Market Share across players Exhibit 53: Market Size

Source: ADI Media Research, Centrum Research Source: Industry, Centrum Research

Exhibit 54: Direct cool product mix Exhibit 55: Frost Free Product Mix

Source: Industry, Centrum Research Source: Industry, Centrum Research

69.5 66.1 64.6 63.0 68.0 60.0

30.5 33.9 35.4 37.0 32.0 40.0

0

20

40

60

80

100

120


(%)

Semi Automatic (%) Fully Automatic (%)

2.8 3.8 4.7 5.0 4.6 5.0

0%

10%

20%

30%

40%

50%

FY12 FY13 FY14 FY15WM <= 6 6 < WM <= 6.5 6.5 < WM <= 7 7 < WM

24.5%

20.6%

18.5%

17.0%

11.7%

7.7%LG

Samsung

Godrej

Videocon

Whirlpool

Others

2013-14

Rs 140 Bn

5

6

7

8

9

10

FY10 FY11 FY12 FY13

(Mn units)

0%

20%

40%

60%

80%

100%

FY12 FY13 FY14 FY15

184 litres or less 185-225 226 & above

0%

20%

40%

60%

80%

100%

FY12 FY13 FY14 FY15

225 or less 226-270L 271-300L 301-350L 351L & above

19 IFB Industries

Air conditioners

The room air conditioner segment is valued at Rs80bn, with volumes declining for categories on increasing product price. Consumers are shifting to smaller tonnage split units due to increasing prices as well as shrinking room sizes. The share of split unit to window unit sales is expected to be 75%+ over the next 3 years. Brand loyalty is very low in the segment given that no player has more than 20% market share.

Exhibit 56: Market share

Source: Industry, Centrum Research

Exhibit 57: Product mix Exhibit 58: Market volume

Source: Industry, Centrum Research Source: Industry, Centrum Research

LG, 21%

Voltas, 20%

Samsung, 11%Others, 15%

Panasonic, 10%

Daikin, 6%

Hitachi, 6%

Bluestar, 6%

Godrej, 5%

0%

10%

20%

30%

40%

50%

60%

70%

FY12 FY13 FY14 FY15

0.75 Tonnes 1 Tonne 1.5 Tonnes 2 & above

2.0

2.5

3.0

3.5

FY10 FY11 FY12 FY13 FY14 FY15 FY16

Unit m

millions)

20 IFB Industries

Annexure 2- Company profile of competitors

Whirlpool of India

Whirlpool of India is a 75% subsidiary of US-based Whirlpool Corporation. It has a presence in segments like refrigerators, washing machines, air conditioners, microwave ovens and water purifiers. It has three manufacturing facilities at Faridabad, Pondicherry and Ranjangaon, where it produces washing machines and refrigerators, which account for 83% of its revenue. The refrigerator segment (~60%+ revenue) is the major revenue contributor followed by washing machines (~20% revenue).

Exhibit 59: Gross revenue mix trend


Exhibit 60: Market share & position across categories Exhibit 61: Gross margin trend

Source: Industry, Centrum Research Source: Company, Centrum Research

Exhibit 62: Historical financial summary

Y/E Mar (Rs mn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Revenue 13,018 15,646 17,192 22,149 27,028 26,579 27,727 28,346

YoY Growth (%) 20.2 9.9 28.8 22.0 (1.7) 4.3 2.2

Operating Profit 473 895 1,408 2,412 2,636 2,231 2,220 2,115

Operating Margin (%) 3.6 5.7 8.2 10.9 9.8 8.4 8.0 7.5

PAT (Adj.) (53) 323 705 1,450 1,660 1,237 1,277 1,229

YoY Growth (%) 0.0 (707.8) 118.2 105.7 14.5 (25.5) 3.2 (3.8)

PAT Margin (%) (0.4) 2.1 4.1 6.5 6.1 4.7 4.6 4.3

RoE (%) (21.2) 14.7 59.8 79.2 57.0 28.8 23.1 18.1

RoCE (%) 15.5 19.3 26.4 45.2 42.6 26.5 22.5 17.7

EPS (Rs) (0.4) 2.5 5.6 11.4 13.1 9.8 10.1 9.7

P/E (x) (1,031.0) 169.6 77.7 37.8 33.0 44.3 42.9 44.6

EV/EBITDA (x) 119.9 63.2 39.2 22.5 20.6 24.2 24.0 24.5


67.0 65.8 65.5 65.0 59.8 58.6 62.7 62.2

17.4 18.3 18.0 19.720.7 22.5

21.6 21.2

2.4 6.6 6.7 7.3 11.1 10.4 7.5 6.2

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Refrigerators Washing Machines Air Conditioners Microwave Ovens

Other Products Spares & Accessories Miscellaneous

13%

16%

9%

3%

0%

4%

8%

12%

16%

20%

Fifth Third Fourth Ninth

Refrigerator Washing Machine

Microwave Air Conditioner

31.7

33.8

35.8

38.6

37.236.4

37.436.8

30

32

34

36

38

40


(%)

21 IFB Industries

LG and Samsung

Exhibit 63: Market share across categories Exhibit 64: India revenue share as % of global revenues

Source: Industry, Centrum Research Source: Companies, Centrum Research

Exhibit 65: Samsung India financials Exhibit 66: Improving profitability of Samsung HA division

Source: MCA, Centrum Research Source: MCA, Centrum Research

Exhibit 67: Increasing share of mobiles revenues for Samsung India

Source:MCA, Centrum Research

0%

10%

20%

30%

40%

Refrigerator Flat Panel TV

Air Conditioner

Microwave Smart Mobile Phones

Washine Machines

Samsung LG

0%

1%

2%

3%

4%

5%

6%

2010 2013

LG Samsung

2.7%1.8%

4.9%

8.8%

0%

2%

4%

6%

8%

10%

0

50,000

100,000

150,000

200,000

250,000

300,000

2010 2011 2012 2013

(Rs mn)

Revenue EBIT

-5.8%

-3.1%

-0.4%

-1.7%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

30,000

31,000

32,000

33,000

34,000

35,000

36,000

37,000

38,000

2010 2011 2012 2013

(Rs mn)

Revenue EBIT

28.9 23.718.1 13.6

0

20

40

60

80

100

2010 2011 2012 2013

(%)

Household appliance AV IT HHP SDE

22 IFB Industries

Financials - Historical

Exhibit 68: Income Statement

Y/E March (Rs mn) FY08 FY09 FY10 FY11 FY12

Net Sales 3,826 4,509 5,434 6,784 8,030

Growth (%) 33 18 20.5 24.9 18.4

Employee Cost 316 394 507 630 699

%of Sales 8.3 8.7 9.3 9.3 8.7

Material cost 1984 2437 2798 3752 4754

%of Sales 51.9 54.1 51.5 55.3 59.2

Admin & other expenses 1,365 1,279 1,598 1,798 2,165

% of sales 35.7 28.4 29.4 26.5 27.0

EBIDTA 161 398 530 604 412

EBIDTA Margins (%) 4.2 8.8 9.8 8.9 5.1

Depreciation 84 76 87 104 149

Interest expenses - - 3 3 3

PBT for operations 77 323 441 497 260

Other income 74 59 135 191 115

Exceptional item 234 2,781 - - (15)

PBT 385 3,163 575 688 359

Provision for tax 11 12 37 185 54

Effective tax rate (%) 2.9 0.4 6.5 26.9 15.0

Net Profit 373 3,151 538 503 305

Adj Net Profit 140 370 538 503 320


Exhibit 69: Key Ratios

Y/E March FY08 FY09 FY10 FY11 FY12

Growth ratios (%)

Revenues 32.6 17.8 20.5 24.9 18.4

EBIDTA (660.5) 147.4 33.1 13.9 (31.8)

Adj Net Profit (231.7) 164.9 45.3 (6.4) (36.3)

Margin ratios (%)

EBIDTA Margins 4.2 8.8 9.8 8.9 5.1

PBIT Margins 2.0 7.2 8.2 7.4 3.3

PBT Margins 10.1 70.1 10.6 10.1 4.5

PAT Margins 3.7 8.2 9.9 7.4 4.0

Return Ratios (%)

ROCE 17.0 39.2 40.0 26.7 13.4

RoNW (4.9) (40.6) 43.0 27.6 14.1

RoIC 13.3 46.4 37.5 24.7 11.5

Turnover Ratios (Days)

Inventory period 59.9 50.6 57.3 48 50

Collection period 22.8 16.3 18.8 21 21

Payment period 107.9 74.6 73.7 77 69

Net Working Capital (14.6) (2.2) 18.8 5 15

Solvency Ratio

Debt-equity (1.3) 0.0 0.0 0.0 0.0

Net Debt-equity (1.1) (0.4) (0.3) (0.3) (0.3)

Current ratio 1.1 1.4 1.5 1.2 1.5

Interest coverage ratio NM NM 172.2 195.9 82.2

Dividend

Dividend (Rs) 0.0 0.0 0.0 0.0 0.0

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

Dividend Payout (%) 0.0 0.0 0.0 0.0 0.0

Per Share (Rs)

Basic (end pt) EPS - Rep 21.6 109.2 15.5 14.2 8.6

FDEPS (Adjusted) 3.4 9.1 13.3 12.4 7.9

Basic (end pt) EPS - Adj 8.1 12.8 15.5 14.2 1.0

FDEPS (Reported) 9.2 77.8 13.3 12.4 7.5

CEPS 11.3 79.6 15.4 15.0 11.2

Book Value (68.7) 23.7 38.0 52.1 59.8

Valuations (x)

PER 98.4 37.1 25.5 27.3 42.9

P/BV (4.9) 14.3 8.9 6.5 5.7

EV/EBIDTA 105.1 33.4 25.0 21.5 31.8

EV/Sales 4.4 3.0 2.4 1.9 1.6

M-cap/Sales 3.6 3.0 2.5 2.0 1.7


Exhibit 70: Balance Sheet


Share Capital 180 296 355 362 363

Reserves & Surplus (2,965) 666 1,183 1,750 2,059

Total Shareholders Funds (2,624) 1,122 1,538 2,112 2,422

Loan Funds 3,445 0 0 0 0

Deferred Tax Liabilities 0 0 37 100 154

Total Capital Employed 821 1,122 1,575 2,212 2,576

Fixed Asset

Gross Block 3,790 3,865 3,960 4,323 4,117

Less:- Accumulated Depreciation 3,088 3,163 3,205 3,081 2,556

Net Block 702 702 755 1,243 1,561

Capital WIP 8 18 69 146 45

Total fixed assets 710 721 824 1,388 1,606

Investments 0 0 106 462 100

Inventory 628 625 853 888 1,093

Debtors 239 201 280 391 466

Loans & advances 194 172 475 481 605

Other Current Assets - - - 13 3

Cash & bank balances 261 429 365 269 538

Total current assets 1,322 1,428 1,973 2,041 2,705

Current liabilities and provisions 1,214 1,026 1,329 1,679 1,835

Net current assets 108 401 645 362 870

Total 821 1,122 1,575 2,212 2,576


Exhibit 71: Cash Flow


CF from operations

Profit before tax 151 382 575 688 359

Depreciation & amortisation 84 76 87 104 149

Others 104 (8) 11 (25) (30)

CF before WC changes 339 450 673 767 478

Working capital changes 6 (140) (148) 99 52

Cash inflow from operations 345 310 525 866 530

Income tax paid (17) 5 (78) (151) (76)

Cash from Operations 328 315 447 715 454

Cash from investing

Capex (59) (86) (269) (475) (588)

Investments 0 0 (104) (347) 388

Others 0 1 0 3 18

Cash from investing (59) (86) (374) (819) (182)

Cash from financing

Borrowings/ repayments (212) (248) 0 0 0

Interest paid 0 0 (3) (3) (3)

Equity/ Share Capital 0 187 (129) 11 1

Dividend & Dividend Tax 0 0 (5) 0 0

Cash from financing (212) (61) (137) 8 (2)

Net change in cash 57 168 (64) (96) 269


23 IFB Industries

Financials

Exhibit 72: Income Statement

Y/E March (Rs mn) FY13 FY14 FY15E FY16E FY17E

Net Sales 9,159 10,215 12,171 14,264 16,424

Growth (%) 14.1 11.5 19.2 17.2 15.1

Employee Cost 849 979 1,156 1,329 1,502

%of Sales 9.3 9.6 9.5 9.3 9.1

Material cost 5489 5957 7073 8271 9517

%of Sales 59.9 58.3 58.1 58.0 57.9

Admin & other expenses 2,318 2,826 3,075 3,431 3,814

% of sales 25.3 27.7 25.3 24.1 23.2

EBIDTA 502 452 868 1,233 1,591

EBIDTA Margins (%) 5.5 4.4 7.1 8.6 9.7

Depreciation 183 226 137 150 161

Interest expenses 2 14 20 25 30

PBT for operations 317 212 711 1,058 1,401

Other income 117 82 90 110 120

Exceptional item - - - - -

PBT 434 293 801 1,168 1,521

Provision for tax 120 77 216 315 411

Effective tax rate (%) 27.6 26.4 27.0 27.0 27.0

Net Profit 315 216 584 852 1,110

Adj Net Profit 315 216 584 852 1,110


Exhibit 73: Key Ratios

Y/E March FY13 FY14 FY15E FY16E FY17E

Growth ratios (%)

Revenues 14.1 11.5 19.2 17.2 15.1

EBIDTA 22.0 (10.1) 92.1 42.1 29.1

Adj Net Profit (1.8) (31.3) 170.5 45.9 30.2

Margin ratios (%)

EBIDTA Margins 5.5 4.4 7.1 8.6 9.7

PBIT Margins 3.5 2.2 6.0 7.6 8.7

PBT Margins 4.7 2.9 6.6 8.2 9.3

PAT Margins 3.4 2.1 4.8 6.0 6.8

Return Ratios (%)

ROCE 10.5 6.0 13.7 17.1 18.6

RoNW 11.3 6.6 15.9 19.4 20.7

RoIC 9.5 5.5 15.8 21.2 25.6

Turnover Ratios (Days)

Inventory period 53 56 56 56 56

Collection period 19 26 25 25 25

Payment period 65 72 70 70 70

Net Working Capital 19 22 23 23 24

Solvency Ratio

Debt-equity 0.0 0.1 0.1 0.1 0.1

Net Debt-equity (0.3) (0.2) (0.2) (0.3) (0.4)

Current ratio 1.5 1.6 1.6 1.7 1.9

Interest coverage ratio 159.6 15.8 36.5 43.3 47.7

Dividend

Dividend (Rs) 0.0 0.0 0.0 0.0 0.0

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

Dividend Payout (%) 0.0 0.0 0.0 0.0 0.0

Per Share (Rs)

Basic (end pt) EPS - Rep 7.8 5.3 14.4 21.0 27.4

FDEPS (Adjusted) 7.8 5.3 14.4 21.0 27.4

Basic (end pt) EPS - Adj 7.8 5.3 14.4 21.0 27.4

FDEPS (Reported) 7.8 5.3 14.4 21.0 27.4

CEPS 12.3 10.9 17.8 24.7 31.4

Book Value 77.9 83.2 97.7 118.7 146.1

Valuations (x)

PER 43.7 63.6 23.5 16.1 12.4

P/BV 4.4 4.1 3.5 2.9 2.3

EV/EBIDTA 25.5 29.1 14.9 10.1 7.3

EV/Sales 1.4 1.3 1.1 0.9 0.7

M-cap/Sales 1.5 1.3 1.1 1.0 0.8


Exhibit 74: Balance Sheet


Share Capital 413 413 413 413 413

Reserves & Surplus 2,744 2,960 3,544 4,396 5,507

Total Shareholders Funds 3,156 3,372 3,957 4,809 5,919

Loan Funds 99 478 478 478 478

Deferred Tax Liabilities 196 233 233 233 233

Total Capital Employed 3,451 4,083 4,668 5,520 6,630

Fixed Asset

Gross Block 3,795 4,328 4,828 5,178 5,528

Less:- Accumulated Depreciation 1,927 2,071 2,208 2,358 2,519

Net Block 1,868 2,258 2,620 2,820 3,010

Capital WIP 83 146 5 5 5

Total fixed assets 1,950 2,404 2,625 2,825 3,015

Investments 568 373 373 373 373

Inventory 1,320 1,555 1,867 2,188 2,520

Debtors 479 723 834 977 1,125

Loans & advances 613 668 730 856 985

Other Current Assets 8 8 8 8 8

Cash & bank balances 446 682 914 1,413 2,178

Total current assets 2,865 3,636 4,354 5,443 6,816

Current liabilities and provisions 1,933 2,329 2,684 3,121 3,574

Net current assets 933 1,307 1,669 2,322 3,243

Total 3,451 4,083 4,668 5,520 6,630


Exhibit 75: Cash Flow


CF from operations

Profit before tax 434 293 801 1,168 1,521

Depreciation & amortisation 183 226 137 150 161

Others (71) (16) (70) (85) (90)

CF before WC changes 546 504 868 1,233 1,591

Working capital changes (131) (242) (131) (154) (156)

Cash inflow from operations 415 262 738 1,079 1,435

Income tax paid (93) (56) (216) (315) (411)

Cash from Operations 322 206 522 764 1,025

Cash from investing

Capex (505) (578) (359) (350) (350)

Investments (437) 225 0 0 0

Others 11 15 90 110 120

Cash from investing (931) (338) (269) (240) (230)

Cash from financing

Borrowings/ repayments 100 381 0 0 0

Interest paid (2) (14) (20) (25) (30)

Equity/ Share Capital 420 0 0 0 0

Dividend & Dividend Tax 0 0 0 0 0

Cash from financing 518 367 (20) (25) (30)

Net change in cash (92) 235 233 499 765


24 IFB Industries

Appendix A

Disclaimer

Centrum Broking Limited (“Centrum”) is a full-service, Stock Broking Company and a member of The Stock Exchange, Mumbai (BSE) and National Stock Exchange of India Ltd. (NSE). Our holding company, Centrum Capital Ltd, is an investment banker and an underwriter of securities. As a group Centrum has Investment Banking, Advisory and other business relationships with a significant percentage of the companies covered by our Research Group. Our research professionals provide important inputs into the Group's Investment Banking and other business selection processes.

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25 IFB Industries

The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection.

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Buy Upside > 25% Upside > 20% Upside > 15%

Hold Upside between -25% to +25% Upside between -20% to +20% Upside between -15% to +15%

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Registration Nos.

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Bombay Mutual Building ,

2nd Floor,

Dr. D. N. Road, Fort, Mumbai - 400 001

Correspondence Address

Centrum House

6th Floor, CST Road, Near Vidya Nagari Marg, Kalina,

Santacruz (E), Mumbai 400 098.

Tel: (022) 4215 9000

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