Whirlpool: Buy

Investors with a one-two year perspective can buy the stock of Whirlpool of India. Though the first nine months of FY12 were bad for the company with sales and profit dropping due to lower air-conditioner and refrigerator sales and higher input costs, we believe that the coming months should be better.

This year's summer sales of air-conditioners have begun in parts of the country and it appears that it could be better than last year. Also, with inflation easing and interest rates likely to soften, demand should receive a boost.

The rupee, whose sharp depreciation eroded the company's profit margins, has also winched up from its low of 54 per dollar last December to around 49 now. Besides, the price hike in air-conditioners and refrigerators in January should also improve profit margins, going ahead.

The stock price has corrected from Rs 295 last April to Rs 187 now. At the current market price, the stock trades at around 14 times its likely FY13 per share earnings. Historically, the stock has been trading at around 24 times.

Whirlpool's sales mix is skewed towards refrigerators and air-conditioners. These two products make up over 60 per cent of the company's sales.

Demand to revive

With summer starting late in 2011 and being milder than the previous year, the demand for air-conditioners and refrigerators dropped and Whirlpool faced difficulty in growing sales.

For the nine months ending December-2011, the company's sales dropped 4 per cent.

The year 2012, however, may be a better one. Summer has begun at the right time in the southern parts of the country and the western region is experiencing warm temperatures. This should boost the company's air-conditioner and refrigerator sales.

Another key factor that is expected to buttress demand in the coming months is the falling inflation and the expected drop in interest rates. The Wholesale Price Index, which was hovering over 9 per cent for most part of 2011, fell to a two-year low of 6.55 per cent in January.

Expected softening of interest rates as a fall out of the drop in inflation may see more dealers willing to finance customer purchases and more consumers considering the use of credit to make purchases.

Last year's good monsoon is also expected to improve demand for home appliances from rural households. Home appliance makers have already cited an increasing trend of people in Tier II/III towns upgrading their products.

Whirlpool of India has a dealer network that is spread across the country with presence also in Tier II/III cities. The initial signs of demand recovery should see the company using its strengths to good effect to capture growing demand.

Profit margins to improve

For the nine months ending December 2011, Whirlpool reported a 27 per cent drop in net profits over the previous year. The pressure on profits followed higher input cost and a less than proportionate increase in end-product prices.

Whirlpool imports around 20-25 per cent of its raw material requirement. With the rupee's sharp depreciation against the dollar (from around 45 in April 2011 to 54 by December), the cost of raw materials — mainly steel and copper —increased steeply. Raw materials consumed, as a percentage of sales, was 55 per cent for the nine months of FY12, up from 49 per cent in the same period the previous year.

The company could not pass on the entire increase in costs as demand was already weak. Operating profit margins dropped to around 6.5 per cent for the nine months of FY12 from 9 per cent last year. Net profit margins were at 4.4 per cent versus 5.9 per cent in the same period last year.

However, with the advent of the New Year, the company has taken another price increase, which, according to dealer reports, is around 2-4 per cent across product categories.

Profit margins will get a breather from this. The rupee has also strengthened to levels of 49-50 now. This should see the company's input costs moderating.

Debt-free

Whirlpool had repaid all its debt. The company can leverage on its debt-free status to improve net profit margins in the coming year.

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