Hitachi Home & Life Solutions (India)

Investors with an appetite for risk can consider investing in the stock of Hitachi Home & Life Solutions (India) at the current price of Rs 337. The stock, though at a high now, offers scope for gains in the medium term given the pace at which the demand for air-conditioners is growing and the company's foothold in the premium air-conditioning market.



Of the few listed AC manufacturers, Hitachi has relatively low exposure to markets outside India and higher focus on the retail end of the business. At the current market price, the stock discounts its FY10 earnings by 17 times.

A recent CII survey notes that air-conditioners (residential use) reported a 50 per cent growth in output in April-June 2010. Hitachi's earnings have grown at an average rate of 33 per cent annually over the last five years and it currently holds a 7 per cent share in the fragmented room air-conditioner space. With the company's new launch ‘Kaze' making inroads in the Tier 2 and Tier 3 centres, Hitachi's sales and market share are expected to hold up.

Hitachi is a small-cap stock with a market capitalisation of Rs 760 crore; its peers — Blue Star and Voltas — are players in the mid-cap segment.

Entering new market

Hitachi Home & Life Solutions (India) is a subsidiary of Hitachi Appliance Inc, Japan. Apart from selling room air-conditioners and refrigerators, the company also specialises in commercial air-conditioners, including telecom air-conditioners. However, room air-conditioners are the major revenue generators (around three-fourths of the total revenue) for the company.

In 2009-10 all the players in the commercial air-conditioner space saw reduced order inflows, especially in the telecom space (air-conditioning for towers). However, Hitachi, with a 27 per cent market share in this segment, managed a 35 per cent growth in total sales by ramping up distribution and new product launches in premium room-air-conditioners. Hitachi's ‘ACE Follow Me' model, which comes with movement sensor to detect human movement and divert air-flow accordingly, has got a good response from the market.

Hitachi, has recently rolled out a product for the mid-market — buyers in the Tier II and Tier III cities — and has priced it lower than its existing models. The product, ‘Kaze', comes in four variants with price points starting from Rs 25,490 for a 0.9 tonner to Rs 30,740 for a 1.5 tonner. Since its launch in February this year, the brand has been doing well in tier II/III towns. The company expects to sell at least 50,000 units of this new model in the current year and increase its market share to over 10 per cent in the room air-conditioning segment. Hitachi is also working on widening its distribution network.

Growth and margins

In terms of five-year performance on sales, Hitachi stands at par with bigger players such as Blue Star and Voltas. From an annual sales of about Rs 250 crore in 2005-06, the company's net sales grew to Rs 636 crore in 2009-10, a 25 per cent compounded annual growth. Net profits also grew at a healthy 33 per cent over the five-year period. Copper and aluminium are the two main inputs; close to 50 per cent of the raw materials consumed are imported by the company.

A scenario of rising metal prices will hurt the margins of the company. However, on this score, the recent worries about the Chinese economy cooling off and the European crisis have led to commodity price outlook moderating. This would be a positive for Hitachi's margins.

Margins at the operating level improved by 3 percentage points to 11 per cent in 2009-10 (Blue Star's OPM is at 12 per cent). At the net level, margin was 7 per cent. Margins seem to have improved mainly due to higher sales clocked by the company. Raw material costs as a percentage of sales stood at 65 per cent for the company in 2009-10, higher than the 59 per cent in 2008-09.

New capacity

The company's total capacity for production of ACs has risen to 4 lakh units a year with the setting up of the new unit in Kadi, Gujarat, last year. This facility was built with a capex of Rs 50 crore and is equipped to manufacture commercial air-conditioners.

The increase in production due to the capacity addition is expected to contribute a minimum of 10 per cent to overall turnover. Demand in the commercial AC space is expected to see a revival from the second-third quarter of the year. The company is comfortably placed on debt with the debt-equity ratio standing at 0.5 in end-March 2009.