Whirlpool of India

Investors with a medium-term horizon can consider buying the Whirlpool of India stock. Though the stock trades at 23 times its trailing earnings, which appears expensive, the potential for improvement in earnings is significant on account of the company's product launches, expanding dealer network and better pricing power.

The company's sales for FY-10, at Rs 2,137 crore, recorded a 30 per cent growth against 9 per cent in FY-09. Whirlpool's efforts to expand distribution reach through road shows and dealer-contact programmes in the Tier-II and Tier-III cities have evoked good response (added around 2,000 dealers in the network last year); in a year's time, this geographical expansion too may buoy-up sales.

With strong demand translating into good pricing power, the company has passed on part of the increase in raw material cost to buyers by way of price increases (of around 4 per cent in two rounds between December and now).

If commodity prices rise further, Whirlpool plans to pass it on to the consumers again, shielding its margins from erosion.

Whirlpool's net profit margins too are set to improve in FY-11, as it has repaid its entire debt recently.

The stock is up 115 per cent from our initial buy in November 2009. At the current market price of Rs 258, the stock still promises upside.

Sales strength

Whirlpool reports a five-year compounded growth of 19 per cent in sales.

This average is skewed by the muted 7 per cent growth in 2008-09 when Whirlpool saw a blip in demand following the sudden withdrawal of consumer credit for durable-goods purchases by finance institutions. With revival in the economy many NBFCs however kick started financing consumer goods purchases during diwali last year.

Whirlpool's already strong market position in refrigerators has been fortified through product innovations over the years.

In 2007 summer, the company launched Delight (frost-free) and Fusion (direct cool) range of refrigerators and in 2008 the ‘Mastermind' series (fully automated refrigerator).

In 2009, features such as e-light, stabiliser-free option, and l-shaped handles were added.

In 2010, the company unveiled the ‘Protton' model with freshness booster system .

For the current year, the company is working on the plan of launching UPS systems for home and office applications. The product has been tested in UP and Bihar and will be launched across markets soon.

The product upgrades clubbed with its marketing initiatives and a good after-sale service have helped Whirlpool grow sales.

Washing machines sales (in volume terms) have grown at a CAGR of 15 per cent in the years between 2005 and 2009; growth in FY10 picked up to 39 per cent. Refrigerator volumes have risen by close to 10 per cent annually between 2005 and 2009; in 2009-10, the volumes rose by 28 per cent.

The company is now set to venture into the non-metro cities and has conducted road shows in West Bengal (Asansol and Durgapur), Bihar, Uttar Pradesh, Maharashtra and all the four States in the South.

Over the long term, these new markets will help the company expand sales and gain a larger share of the market.

The company's marketing budget will be funded without much trouble as the company has cut down its debt burden, freeing up operating cash flows for promotional and distribution spends.

Healthy cash flows

At the end of FY10, after repaying almost Rs 110 crore of debt, the company had Rs 62 crore of cash balance (cash generated from operations was Rs 258 crore against Rs 184 crore in the previous year).

Cash generation was helped by a doubling of profits (to Rs 145 crore). Whirlpool turned profitable at the net level only in 2007-08. And in the last three years the company's earnings (net) have grown at over 100 per cent annually.

The company looks quite comfortable to handle future cash requirements internally. With all borrowed funds paid back now, net margins too will improve.

Margins expand

Conscious efforts to cut cost (raw material expense as a percentage of sales was down to 50 per cent in FY-10 from 52 per cent in the previous year), a profitable product mix and better realisations saw margins expand both at the operating and net levels in the March quarter and in full year FY-10.

For FY-10, the OPM was up three percentage points (to about 10 per cent) and net profit margin stood two percentage points higher at six per cent.

via BL