Whirlpool of India: Long term play on Superior product portfolio and Brand moat

Whirlpool entered the Indian market back in late 1980s, but was thwarted by the duo of LG and Samsung who stormed the Indian electronics and home appliances market. Whirlpool lost its dominant position in washing machine and despite acquiring Kelvinator India in 1995, could not take the top slot in refrigerators.

The company slipped into losses and in 2005 it roped in Arvind Uppal from Nestle to turnaround the Indian operation. It shifted focus to mass to mid-range products which caters to an overwhelming 80% of the Indian market, adopting what LG did in its early days in India.

 

A great turn around…..

In the next seven years, under the able leadership of Arvind Uppal, Whirlpool's current president for Asia-Pacific and managing director India, it started it’s turn around journey.

From -125 Cr of net loss in FY05 to +166 Cr of profit after tax in FY11, the turnaround for the company has been quite robust. From D/E as high as 5.15 times in FY05 to becoming completely debt free in by FY10.

The Company had issued 15.23 Cr 10% Redeemable Non-Convertible Cumulative Preference Shares of Rs.10 each to Whirlpool Canada Holding Company in the year 2005 redeemable at the end of twenty years with call and put options.

In FY11 the company redeemed 9.84 Cr shares using the put option and further the balance 5.48 Cr shares were fully redeemed with dividend paid in FY12.

With this the board served dual purpose

a) Reduce holding to 75% as per SEBI norms. The parent Whirlpool of US holds 75% through Whirlpool Mauritius.

b) Clears the overhang of preferential dividend payments and pave the way for payment of regular dividends for shareholders in future (no interest payment, no pref. dividend)

Result >> In Q1FY13, while the topline grew by 10% Net Profit grew by 26% due to EBITDA margin expansion, higher other income and lower finance costs.

 

...but the journey ahead is not a smooth one.

"Leadership would not just mean bagging market share, but also to build Whirlpool as a best-in-class technology brand," says Uppal on growth ahead.

Recently the company launched 160 models across various product categories, plans to spend Rs. 100Cr each in Capex and Marketing. The company targets market leadership in refrigerators and washing machines within a year. It also wants to be a top brand in air-conditioners and microwaves by then.

That’s all fine but where is the company standing via-à-vis competition. Let’s have a look.

In the year ended March 31^st, 2012:

Refrigerator: 3^rd position with 13.8% share behind LG (36.6%) and Samsung (19.8%) 

Washing Machine:  3^rd position again after LG and Samsung

Microwave: 4^th largest brand

Air-conditioners:  5^th largest brand.

Whirlpool plans to invest more than Rs 750 Cr in India over the next three years, invest in product innovation and development, capacity augmentation and marketing at a time when the white goods industry is down to single digit growth rate in a slowing economy.

Some of its recent launches such as direct-cool refrigerators got great customer response across markets in India. The management clearly states that they will not sacrifice profits for growth.

"We believe in profitable growth. My principle is simple: volume is vanity, profit is sanity and cash is the reality," Uppal said.

 

New product innovations and brand launches

Whirlpool recently rolled out a top-loading washing machine, which washes clothes like a front-loading machine, giving superior cleaning. Other examples of innovations include a split basket to wash delicate clothes and a new line of refrigerators with a separate bottle chiller.

Plans are also in place to launch brands from Whirlpool's global portfolio, like KitchenAid, which would operate in the super-premium appliances segment. Whirlpool brand stretches from the mass to premium segments.

 

Road ahead looks promising

As per recent estimates (Q1FY13) company is expected to do revenue of 3,390 Cr in FY13 (YoY 12%) and 4,051 Cr in FY14. (yoy 20%).

Expected earnings are 167 Cr in FY13 and 220 Cr in FY14 translating to an EPS of 13.2 (FY13 yoy rise of 36%) and 17.2(FY14 yoy rise of 31%).

The debt free balance sheet, very strong cash flows, durable brand moat (high debtor turnover of 25.6 times), rich parentage are the levers which can led the market to pay a slight premium.

Till now due to debt and preference share burden the company didn't paid any dividend, so dividends seem to be a distinct possibility going forward.

Also management is positive on the exports front which clocked a turnover of ~188 Cr in FY12 with 11% growth.

The company is at an interesting juncture, if things do turn out as per plans can turn out to be a very rewarding journey for the shareholders. 

India, after all is the 5^th largest market for America’s largest home appliances maker and they sure want to make their mark this time round giving their Korean competitors a hard time.