hitachi home & life solutions

8/3/2019 Hitachi Home & Life Solutions

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Please refer to important disclosures at the end of this report 1

Y/E March (` cr) 2QFY12 2QFY11 % chg (yoy) Angel est. % diffNet sales 128 131 (2.1) 139 (8.3)EBITDA 2 11 (81.9) 9 (76.7)

EBITDA margin (%) 1.6 8.7 (705)bp 6.3 (472)bp

Reported PAT (7) 5 (255.0) 3 (338.9)Source: Company, Angel Research

Hitachi Home & Life Science Solutions (HHLS) reported disappointing 2QFY2012

results. The companys revenue declined marginally by 2.1% yoy to `128cr in

2QFY2012. On the profitability front, the company reported a loss of `7cr(includes forex loss of `7.8cr) in 2QFY2012 as compared to a profit of `5cr in

2QFY2011. We maintain our FY2013E earnings estimates at `41cr while EBITDA

margins are expected to improve from 7.4% in FY2011 to 7.8% in FY2013E due

to better operating leverage. We maintain our Buy recommendation on the stock.Below-expectation performance: Net sales declined by 2.1% yoy to `128cr.EBITDA margin came in at 1.6% in 2QFY2012, down 705bp yoy from 8.7% in

2QFY2011, on the back of higher other expenses and employee expenses.

On the bottom-line front, the company reported a loss of `7cr mainly due to forex

loss of `7.8cr on ECB.

Outlook and valuation: We expect HHLS to post a 15% CAGR growth overFY2011-13E, aided by a 14.7% CAGR volume growth for the same period due to

increasing per capita income. Copper prices have seen a decline of ~20% in the

past six months, which will lead to increased margins going ahead. PAT is

expected to grow at a CAGR of 17.6% over FY2011-13E to `41cr in FY2013E. At

`165, HHLS is trading at 9.3x FY2013E earnings and P/B of 1.7x for FY2013E.

We maintain our Buy recommendation on the stock with a target price of `212,

based on a target PE of 12x for FY2013E.

Key financialsY/E March (` cr) FY2010 FY2011 FY2012E FY2013ENet sales 640 763 851 1010% chg 36.1 19.3 11.5 18.7

Net profit 46 29 11 41% chg 113.3 (36.2) (62.1) 264.6

EBITDA margin (%) 9.1 7.4 5.3 7.8

EPS (`) 20.0 12.8 4.8 17.7P/E (x) 8.2 12.9 34.0 9.3

P/BV (x) 2.6 2.2 2.1 1.7

RoE (%) 36.6 18.4 6.3 20.5

RoCE (%) 25.2 16.9 10.1 19.8

EV/Sales (x) 0.6 0.6 0.5 0.5

EV/EBITDA (x) 7.1 8.3 10.3 5.9

Source: Company, Angel Research; Note: Price as on October 20, 2011

BUYCMP `165

Target Price `212

Investment Period 12 Months

Stock Info

Sector

Bloomberg Code

Shareholding Pattern (%)

Promoters 69.9

MF / Banks / Indian Fls 11.2

FII / NRIs / OCBs 0.6

Indian Public / Others 18.4

Abs.(%) 3m 1yr 3yr

Sensex (8.5) (14.8) (39.6)

HHLS (14.9) (46.2) 134.0

Nifty 5,092Reuters Code HITA.NS

HTHL IN

Face Value (`) 10

BSE Sensex 16,937

52 Week High / Low 327 / 136

Avg. Daily Volume 38,165

Beta 1.2

Consumer goods

Market Cap (`cr) 387

Shareen Batatawala30940000 ext: 6849

[email protected]

Hitachi Home & Life SolutionsPerformance Highlights

Company Update | Consumer goods

October 28, 2011


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HHLS| Company Update

October 28, 2011 2

Exhibit 1:2QFY2012 performanceY/E March (` cr) 2QFY2012 2QFY2011 yoy chg (%) 1QFY2012 qoq chg (%) 1HFY2012 1H20FY11 % chgNet Sales 128 131 (2.1) 328 (61.0) 456 436 4.5Net raw material 80 81 (1.3) 224 (64.3) 305 274 11.2(% of Sales) 62.7 62.2 68.4 66.8 62.8

Staff Costs 13 10 29.9 12 6.1 24 19 25.6

(% of Sales) 9.8 7.4 3.6 5.3 4.4

Other Expenses 33 28 16.4 66 (49.9) 99 78 26.8

(% of Sales) 25.9 21.8 20.1 21.7 17.9

Total Expenditure 126 119 5.4 302 (58.4) 428 371 15.2Operating Profit 2 11 (81.9) 26 (92.1) 28 65 (56.9)OPM 1.6 8.7 7.9 6.1 14.9

Interest (incl. forex losses) 8 3 189.9 3 224.9 11 11 (2.8)

Depreciation 4 4 17.7 5 (5.4) 9 7 21.5

Other Income 0 1 (94.1) 0 (77.8) 0 1 (61.5)

PBT (11) 7 (256.0) 19 (156.2) 18 47 12.6(% of Sales) (8.3) 5.2 5.8 3.9 10.8

Tax (3) 2 (258.2) 6 (158.1) 2 6 (61.7)

(% of PBT) 31.7 31.2 30.7 13.7 13.5

Reported PAT (7) 5 (255.0) 13 (155.4) 15 41 (66.8)PATM (5.7) 3.6 4.0 3.3 9.3

Equity capital (cr) 23 23 23 23 23

EPS (`) (3.2) 2.0 (255.0) 5.7 (155.4) 6.6 17.7 (66.8)Source: Company, Angel Research

Exhibit 2:2QFY2012 Actual vs. Angel estimatesActual (` cr) Estimate (` cr) Variation (%)

Net Sales 128 139 (8.3)

EBITDA 2 9 (76.7)

EBIDTA margin 1.6 6.3 (472bp)

Adjusted PAT (7) 3(338.9)

Source: Company, Angel Research

For 2QFY2012, HHLS reported a 2.1% yoy decline in its revenue to `128cr (8.3%

below our estimate of `139cr). The companys EBITDA margin witnessed a dip of

705bp yoy as compared to 2QFY2011 on the back of ~30% yoy increase in

employee expenses. Further, the company reported a loss of `7cr in 2QFY2012 as

compared to profit of `5cr in 2QFY2011 due to higher forex losses and increased

total expenditure.


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October 28, 2011 3

Investment rationale

Penetration opportunity in the RAC market in India

Penetration levels for the room air conditioner (RAC) market in India is currently at3%, which is very low compared to other countries such as China, Malaysia, Korea

and Taiwan. China has a 20% penetration rate, while penetration in the US stands

at 90%. Per capita income in India grew at a CAGR of 15% over FY2006-11 from

`27,123 in FY2006 to `54,835 in FY2011. On a conservative basis, we expect per

capita income to grow at a CAGR of 13% over FY2011-13E.

Exhibit 3:Per capita income vs. RAC sales volume for HHLS

Source: RBI, Angel Research

Innovation and energy-efficient products to drive growth

Growing concerns about global warming, surging electricity prices and increasing

calls to use energy-efficient products by the government have spurred the demand

for star-rated appliances in the country. The company launched i-Clean with

automatic filter clean technology with high energy efficiency with a five-star rating.

The company has been continuously spending on R&D to come up with innovative

products.

Entry into tier-II and tier-III cities with low-price split AC Kaze

HHLS, which caters to the premium segment, has entered the low-price home

air-conditioner segment with the launch of Kaze, with a two-star and three-star

rating to cater to the medium-class mass-segment market. The company has

increased its presence from 236 towns in June 2010 to ~300 towns currently and

is increasing its dealer and distributer base as well.

0

50

100

150

200

250

300

350

0

10

20

30

40

5060

70

80

FY2007 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

('000units)(

`

in'000)

Per Capita Income (LHS) AC volume (RHS)


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October 28, 2011 4

Assumptions

Growth in air conditioner offtake is dependent on the per capita income of families

in India. Due to the slowdown in the economy, we have assumed a CAGR of 13%

for FY2011-13E as compared to 15% over FY2006-11 due to which AC sales

volume is expected to grow by 9.7% in FY2012E and 20.1% in FY2013E.

Exhibit 4:Key assumptionsFY2012E FY2013E

Air conditioner volume growth (%) 9.7 20.1

Change in MRP of air conditioners (%) 3.0 1.0

Change in copper price (%) (10.0) 8.0

Change in price of CRCA sheets (%) (7) 4

Source: Angel Research

Exhibit 5:Change in estimatesY/E March Earlier estimates Revised estimates % chg

FY2012E FY2013E FY2012E FY2013E FY2012E FY2013ENet sales (` cr) 871 1040 851 1010 (2.3) (2.9)OPM (%) 6.0 7.1 5.3 7.8 (71bps )71bps

EPS (`) 12.0 17.7 4.8 17.7 (59.6) (0.2)Source: Angel Research


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October 28, 2011 5

Financial performance

We expect the company to post revenue CAGR of 15% over FY2011-13E, from

`763cr in FY2011 to `1,010cr in FY2013E, on the back of volume growth of

14.7% (CAGR) over FY2011-13E for air conditioners. EBITDA margin is expected

to improve in FY2013E due to stable raw-material prices to 7.8% of sales in

FY2013E from 7.4% of sales in FY2011. The companys earnings are expected to

bounce back to `41cr in FY2013E from `29cr and `11cr in FY2011 and FY2012E,

respectively.

Exhibit 6:Revenue and Revenue growth


Exhibit 7:EBITDA and EBITDA margin


Exhibit 8:PAT and PAT growth


0

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20

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0

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600

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1200


(%)

(`

cr)

Revenue (LHS) Revenue growth (RHS)

0

2

4

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8

10

12

0

10

20

30

40

50

60

70

80

90


(%)

(`cr)

EBITDA ( LHS ) EBITDA margin (RHS)

-100

-50

0

50

100

150

200

250

300

0

10

20

30

40

50


(%)

(`cr)

PAT (LHS) PAT growth (RHS)


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October 28, 2011 6

Outlook and valuation

We have revised our revenue estimates downwards; however, we maintain our

earnings estimates, considering easing raw-material prices (i.e., copper and CRCA

sheets). We expect revenue to post a CAGR of 15% over FY2011-13E and EBITDA

margin to increase by 43bp over FY2011-13E from 7.4% in FY2011 to 7.8% in

FY2013E. Profit is expected to bounce back in FY2013E to `41cr from `29cr in

FY2011. At current levels, the stock is trading at PE of 9.3x FY2013E and P/B of

1.7x for FY2013E. We maintain our Buy recommendation on the stock with a

target price of `212, based on a target PE of 12x for FY2013E.

Exhibit 9:One-year forward PE


Channel check

We interacted with 5-6 dealers of HHLS. The channel check revealed that the air

conditioner sales volume has been flat to slightly positive compared to last year.

There has been a slight increase in prices of Hitachi Air Conditioners by

2-3% in the past month. HHLS caters mainly to the premium segment, wherein

Diakin is the companys main competitor with the highest sales volume. Other

players in the premium segment are Mitsubishi and OGeneral. The companys

mass premium brand Kaze is doing well in the market.

0

50

100

150

200

250

300

350

400

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

(`)

Price 4x 8x 12x 16x


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October 28, 2011 7

Risks

Unstable raw-material prices

Steel and copper are the major raw materials used to manufacture airconditioners. Copper prices declined by ~20% from April 2011 to September

2011. However, CRCA prices witnessed an uptrend from July 2011 to September

2011. Such instability in raw-material prices will affect the companys profitability

in the long run.

Exhibit 10:Copper price trend

Source: Bloomberg

Foreign exchange risk

The company has ECBs of JPY930mn from Japan due to which the interest rate

was very low at 2.3% for FY2011. Depreciation in the currency has led to forex

losses of `9.4cr for 1HFY2012. Any further depreciation would lead to dented

profits going ahead.

0

50

100

150

200

250

300

350

400

450

500

Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11

(`

perkg)


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October 28, 2011 8

Competition

HHLS has a market share of 7% in terms of sales volume and 9% in value terms,

while LG is the market leader with a 29% market share in the air conditioner

segment. Other players in the same segment are Blue Star, Voltas and Samsung.

HHLS is trading at a PE of 34.0x and 9.3x its FY2012E and FY2013E earnings,

which is attractive for an MNC.

Exhibit 11:Relative valuationCompany Sales(` cr) OPM(%) PAT(` cr) EPS(`) ROE(%) P/E(x) P/BV(x)

EV/EBITDA(x)EV/Sales(x)

FY2012EHHLS 851 5.3 11 4.8 6.3 34.0 2.1 0.5 10.3

Blue Star 3406 5.9 130 14.5 24.2 14.9 3.4 0.7 9.6 Voltas 5405 8.0 349 10.5 20.6 9.2 1.9 0.5 6.4

FY2013EHHLS 1010 7.8 41 17.7 20.5 9.3 1.7 0.5 5.9

Blue Star 3972 7.4 199 22.1 31.5 9.8 2.8 0.6 6.6

Voltas 5954 8.3 364 12.0 19.7 8.8 1.7 0.5 5.6

Source: Angel Research, Bloomberg


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October 28, 2011 9

Industry outlook

As per industry data, the Indian consumer durable industry stands at `35,000cr, as

of March 2011. The consumer durable industry can be classified into consumer

electronics and consumer appliances. Consumer appliances are further divided

into brown goods and white goods. The Consumer Electronics and Appliance

Manufacturers Association (CEAMA) has put its growth estimates for the home

appliances industry at 20% for FY2012.

Exhibit 12:Consumer durable industry classification

Source: Industry

Air conditioning industry

The air conditioning industry in India is estimated at `13,100cr, as of March 2011,

of which `7,000cr is contributed by room air conditioners (RAC) and the remaining

`6,000cr by ductable/central air conditioning systems (CAS).

Exhibit 13:Total air conditioner market in India

Source: Industry

Consumer DurableConsumer Appliance

Brown goods

Kitchenappliances likemicrowaveove ns, mixers,etc.

White goods

Air conditioner

Refrigerator

Wash ing machine

Others

Consum er Electronics

Mobile Phones

Television

MP 3

Others

0

2

4

6

8

10

12

2005 2006 2007 2008 2009 2010 2011

`

cr('000)

Ductable/ Central AC system (CAS) Room Air Conditioner


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October 28, 2011 10

The RAC market experienced ~31% growth in FY2011 in comparison to ~25%

growth in FY2010. The RAC market grew at a CAGR of 20%, while the

ductable/CAS market grew at a CAGR of 17% over FY2006-11.

Exhibit 14:Trend in RAC industry

Source: Industry

However, penetration of room air conditioners in India is still low at ~3% only and

is expected to grow to 5% by FY2015E. Air conditioners are now affordable both in

terms of initial investment and running cost and are now treated as a necessity

rather than a luxury item. This promises a strong market for the air conditioner

business.

Exhibit 15:Market share in Air conditioner Industry (India)

Source: Industry

0

5

10

15

20

25

30

35

40

0

1

2

3

4

5

6

7

2006 2007 2008 2009 2010 2011

(%)

`

cr('000)

Room Air Conditioner YoY growth

Bluestar4%

Hitachi7%

LG29%

Samsung19%

Voltas

19%

Whirlpool4%

Panasonic6%

Others12%


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October 28, 2011 11

The company

HHLS is a subsidiary of Japan's Hitachi Appliances, which holds a 68% stake in the

company. HHLS manufactures and sells air conditioners and is engaged in the

trading of refrigerators, washing machines and chillers.

The companys air conditioners segment includes home AC, commercial or

ductable AC and telecom AC categories. The company operates in the mass

premium segment. HHLS currently holds a 7% market share in the RAC segment

and is No. 1 in the premium segment. In ductable commercial air-conditioner,

HHLS has a 17% market share. In the telecom tower air-conditioners category,

HHLS is a leader with a 42% market share.

The company recently introduced i-clean to cater to the mass premium category

with a self-cleaning technology. The company also launched Kaze in the low-price

product range.

Exhibit 16:Price comparison of split AC

Source: Company

The company has air conditioner manufacturing facilities in Kadi (north Gujarat)

and Jammu with a total capacity of 2,30,000 units per annum.

The company re-entered the washing machine segment in FY2011 with higher

price range products.

0 5 10 15 20 25 30 35 40 45 50 55

Kaze Split AC

ACE Cutout Split AC

ACE Follow Me SplitAC

i-Clean Split AC

Star Split AC*

Atom Square Spli t AC

i-TEC Spli t AC MRP

` (in '000) for 1.5 tonne


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October 28, 2011 12

Profit & Loss Statement

Y/E March (` cr) FY2008 FY2009 FY2010 FY2011 FY2012E FY2013EGross sales 506 519 686 829 924 1097Less: Excise duty 59 49 46 66 73 87Net Sales 447 470 640 763 851 1010

Total operating income 447 470 640 763 851 1010% chg 37.4 5.3 36.1 19.3 11.5 18.7

et Raw Materials 292 303 413 497 581 661

Other Mfg costs 21 29 9 11 12 14

Personnel 20 22 31 44 49 57

Other 65 72 126 151 161 199

Total Expenditure 400 428 582 707 806 931EBITDA 46 42 58 56 45 79% chg 94.6 (8.7) 37.3 (3.0) (20.2) 75.3

(% of Net Sales) 10.4 9.0 9.1 7.4 5.3 7.8

Depreciation & Amortisation 8 8 12 16 17 19

EBIT 39 34 46 40 28 60% chg 100.6 (11.3) 35.0 (12.9) (31.3) 116.1

(% of Net Sales) 10.4 9.0 9.1 7.4 5.3 7.8

Interest & other Charges 3 2 3 2 2 3

Other Income 10 7 12 6 1 1

(% of Net sales) 2.3 1.5 1.8 0.7 0.1 0.2

PBT 47 27 57 40 16 58% change 111.1 (42.0) 108.0 (29.4) (60.2) 264.6

Tax 5 6 11 11 5 17

(% of PBT) 9.9 20.8 19.2 26.6 30.0 30.0

PAT (reported) 42 22 46 29 11 41ADJ. PAT 42 22 46 29 11 41% chg 117.5 (49.0) 113.3 (36.2) (62.1) 264.6

(% of Net Sales) 9.5 4.6 7.2 3.8 1.3 4.0

Basic EPS (`) 18.4 9.4 20.0 12.8 4.8 17.7Adjusted EPS (`) 18.4 9.4 20.0 12.8 4.8 17.7% chg 117.5 (49.0) 113.3 (36.2) (62.1) 264.6


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October 28, 2011 13

Balance Sheet

Y/E March (` cr) FY2008 FY2009 FY2010 FY2011 FY2012E FY2013ESOURCES OF FUNDSEquity Share Capital 23 23 23 23 23 23Reserves & Surplus 60 82 124 149 157 194

Shareholders Funds 83 105 147 172 180 217Total Loans 12 51 60 90 99 99

Deferred Tax Liability 2 2 3 4 4 4

Total Liabilities 97 157 210 266 283 320APPLICATION OF FUNDSGross Block 73 110 159 199 209 229

Less: Acc. Depreciation 42 45 54 68 85 104

Net Block 31 65 105 131 124 125Capital Work-in-Progress 10 18 15 7 6 6

Goodwill - - - - - -

Investments - - - - - -

Current Assets 245 254 330 485 493 583Cash 6 23 28 2 14 12

Loans & Advances 28 33 25 31 35 42

Inventory 120 116 180 327 324 384

Debtors 90 82 96 125 121 145

Current liabilities 190 181 243 360 343 397

Net Current Assets 55 74 88 125 150 187Mis. Exp. not written off - - - - - -

Total Assets 97 157 210 266 283 320


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October 28, 2011 14

Cash Flow Statement

Y/E March (` cr) FY2008 FY2009 FY2010 FY2011 FY2012E FY2013EProfit before tax 47 27 57 40 16 58

Depreciation 8 8 12 16 17 19Change in Working Capital (9) (2) (8) (64) (13) (39)

Less: Other income (4) 3 (12) 9 13 3

Direct taxes paid (5) (6) (11) (11) (5) (17)

Cash Flow from Operations 38 30 37 (9) 28 24(Inc.)/Dec. in Fixed Assets (10) (37) (49) (40) (10) (21)

(Inc.)/Dec. in Investments - - - - - -

Interest received 1 2 2 2 - -

Others (5) (13) 0 6 - -

Cash Flow from Investing (14) (47) (47) (31) (10) (21)Issue of Equity - - - - - -

Inc./(Dec.) in loans 21 29 31 59 40 59

Dividend Paid (Incl. Tax) - - (3) (3) (3) (3)

Interest paid (2) (14) (2) (6) (13) (3)

Others (40) 17 (15) (31) (29) (58)

Cash Flow from Financing (21) 32 11 19 (6) (5)Inc./(Dec.) in Cash 3 17 6 (26) 12 (2)

Opening Cash balances 4 6 23 28 2 14Closing Cash balances 6 23 28 2 14 12


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October 28, 2011 15

Key RatiosY/E March FY2008 FY2009 FY2010 FY2011 FY2012E FY2013EValuation Ratio (x)P/E (on FDEPS) 9.0 17.6 8.2 12.9 34.0 9.3P/CEPS 7.6 12.8 6.6 8.3 13.3 6.4

P/BV 4.5 3.6 2.6 2.2 2.1 1.7

Dividend yield (%) 0.0 0.0 0.9 0.9 0.3 0.3

EV/Sales 0.9 0.9 0.6 0.6 0.5 0.5

EV/EBITDA 8.3 9.6 7.1 8.3 10.3 5.9

EV / Total Assets 4.0 2.6 2.0 1.8 1.6 1.5

Per Share Data (`)EPS (Basic) 18.4 9.4 20.0 12.8 4.8 17.7

EPS (fully diluted) 18.4 9.4 20.0 12.8 4.8 17.7

Cash EPS 21.7 12.9 25.2 19.8 12.4 26.0

DPS 0.0 0.0 1.5 1.5 1.5 1.5

Book Value 36.3 45.5 63.9 74.9 78.2 94.4

Dupont AnalysisEBIT margin 8.7 7.3 7.2 5.3 3.3 5.9

Tax retention ratio 0.9 0.8 0.8 0.7 0.7 0.7

Asset turnover (x) 5.5 4.0 3.8 3.0 3.2 3.3

ROIC (Post-tax) 43.0 23.2 22.4 11.5 7.4 13.9

Cost of Debt (Post Tax) 16.7 22.4 2.0 4.9 8.9 2.2

Leverage (x) 0.1 0.3 0.2 0.5 0.5 0.4

Operating ROE 44.7 23.5 26.8 14.9 6.7 18.5

Returns (%)ROCE (Pre-tax) 44.4 27.0 25.2 16.9 10.1 19.8

Angel ROIC (Pre-tax) 51.5 34.7 32.7 19.0 10.6 21.2

ROE 67.8 22.9 36.6 18.4 6.3 20.5

Turnover ratios (x)Asset Turnover 6.1 4.3 4.0 3.8 4.1 4.4

Inventory / Sales (days) 86 92 85 121 140 128

Receivables (days) 61 67 51 53 52 52

Payables (days) 146 158 133 156 156 156

WC (ex-cash) (days) 36 39 31 44 55 56

Solvency ratios (x)Net debt to equity 0.1 0.3 0.2 0.5 0.5 0.4

Net debt to EBITDA 0.1 0.7 0.5 1.6 1.9 1.1

Interest Coverage 17.7 2.4 30.6 6.7 2.2 18.8


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Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement Hitachi Home & Life Solutions

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to 15%) Sell (< -15%)

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

hitachi home & life solutions

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