Whirlpool of India: BOOK PROFIT :: Business Line

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With high retail inflation clouding the company’s prospects, investors can lock into current gains.

Investors can consider booking profits on their holdings in the Whirlpool of India stock. The stock has outperformed the broader market in the last one year. However, we see limited upside for the stock from here.

At the current market price of Rs 227, the stock trades at a price-earning multiple of 21 times the trailing earnings (jumping from a multiple of 14 times last year) and does not appear to have factored in the challenges in terms of slowing demand, increasing competition and rising raw material costs.

With this year’s festival season turning a damp squib, the company has missed out on chunk of volumes for the year. Also, high retail inflation clouds the prospects for Whirlpool of India. It is advisable that investors lock into current gains.

SLOWING DOWN

Whirlpool is in the big-ticket segment of the home appliances market where demand is influenced by inflation and interest rates. The Consumer Price Index accelerated to 10.79 per cent in January this year, rising for the fourth consecutive month.

This curtailed discretionary spending of consumers, taking a toll on growth for many players in the retail market, including Whirlpool of India. The consumer durables index of IIP contracted 8 per cent in December 2012 and Whirlpool recorded a growth of just 1.7 per cent (year-on-year) in net sales for the December-12 quarter.

Sales growth was around 10 per cent in the first six months of FY-13.

Over the next two quarters also, we do not see a significant jump in sales for the company.

For one, inflation may take time to moderate. Retail prices may have to moderate from the current levels for a sustainable recovery in demand. Two, interest rate cuts, if any, from the RBI reflect only with a lag on sales for consumer players.

Risks to our assumption of lower growth would be any surprise in sales in the summer months (March-May) on demand for air-conditioners and refrigerators.

The company’s new launches of last year in the air-conditioner and refrigerator segment, however, have had good response in the market.

For this year’s summer season, the company is planning to launch new model refrigerators in lower price range hoping to garner increased share of the mass market.

PROFIT MARGIN UNDER PRESSURE

In the December-12 quarter, Whirlpool saw a drop in profit margins following higher input costs and increase in employee expenses. Higher input costs are due to rupee’s depreciation against the dollar.

From around 52.3 levels in the beginning of October-12, the rupee fell to 55 against the dollar by end-December-2012.

This brings rupee’s average value to 53.6, down from 50.8 in the same period last year. With Whirlpool importing almost 25 per cent of its input requirements, the rupee’s weakening was a clear negative for the company.

Raw material expenses as a percentage of sales rose to 42.5 per cent in the December-12 quarter, from 40 per cent in the same quarter last year. Employee expenses were also higher by 19 per cent in the quarter.

Operating profit margin shrunk over two percentage points to 4 per cent in this period (8.9 per cent for FY-12).

Though Whirlpool does enjoy some pricing power in the market, it has not been able to pass on the entire input price inflation to the end consumer.

However, with consumers turning resistant to higher prices, hikes may now not happen as easily as in the past. One, the consumer sentiment is weak and, two, there is increased competition for the company across product segments.

DROP IN PROFIT

The company’s net profits dropped by over 50 per cent, year-on-year, in the December-12 quarter.

The net profit margin is down to 1.7 per cent from around 3 per cent a year earlier.

For the nine months ended December-12, net profit, however, posted a 19 per cent increase, thanks to the higher sales in air-conditioners in the summer months and the strong rupee in the initial part of the year.

The company continues to be debt-free and is making savings on interest cost.