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Please refer to important disclosures at the end of this report 1
376 328 14.8 236 59.5
EBITDA 26 26 (0.0) 16 64.8
EBITDA margin (%) 6.8 7.8 (101)bp 6.6 22bp
14 13 3.7 7 85.1
Source: Company, Angel Research
Hitachi Home & Life Science Solutions (HHLS) reported a better-than-expected
top-line at `376cr in its 1QFY2013 results, which is 14.6% higher on a y-o-y
basis from `328cr in 1QFY2012. The company disappointed on the EBITDA
margin front which contracted by 101bp yoy to 6.8% from 7.8% in 1QFY2012 onaccount of higher other expenses. The net profit grew marginally by 3.7% yoy to
`14cr owing to a lower interest cost during the quarter.
A sluggish economic scenario has led to a fall in the demand for air
conditioners (ACs) in the domestic market by 14% in FY2012. However, HHLS was
able to grow at 1% in FY2012. We expect the companys revenue to grow at 8.7%
in FY2013E. However, the EBITDA margin is expected to remain under pressure in
FY2013E to 3.9% due to forex losses arising from foreign currency expenses and its
plans to source (ACs) from the parent company. HHLS is expected to see some relief
on the interest front due to its continued efforts to reduce foreign currency loans. InFY2014E, we expect a revival in the domestic economy leading to a recovery in the
companys performance, resulting in an EBITDA margin of 6.6% and subsequently
a net profit of `25cr for FY2014E.
We expect HHLS to post a 10.7% CAGR over
FY2012-14E while the EBITDA margin is expected to expand by 293bp over
FY2012-14E. PAT is expected to post a CAGR of 177% over FY2012-14E to `25cr in
FY2014E on a lower base of `3cr in FY2012. At the current market price, HHLS is
trading at a PE of 10.5x its FY2014E earnings.
Key financials
% chg 19.3 4.6 8.7 12.6
% chg (59.6) (80.7) 93.1 295.9
EBITDA margin (%) 5.9 3.7 3.9 6.6
P/E (x) 15.5 80.0 41.4 10.5
P/BV (x) 1.5 1.5 1.5 1.3
RoE (%) 10.6 1.9 3.7 13.6
RoCE (%) 12.9 4.4 5.5 15.0
EV/Sales (x) 0.4 0.4 0.4 0.3
EV/EBITDA (x) 7.2 11.3 9.6 4.9
Source: Company, Angel Research
CMP `114
Target Price `130
Investment Period 12 Months
Stock Info
Sector
Net Debt 68
Bloomberg Code
Shareholding Pattern (%)
Promoters 69.9
MF / Banks / Indian Fls 2.8
FII / NRIs / OCBs 8.1
Indian Public / Others 19.2
Abs. (%) 3m 1yr 3yr
Sensex 9.3 6.0 15.0
HHLS (6.5) (30.5) 46.5
Beta 1.0
Cons. Durable
Market Cap (`cr) 387
52 Week High / Low 188 / 93
Avg. Daily Volume 29,726
Face Value (`) 10
BSE Sensex 17,728
Nifty 5,380
Reuters Code HITA.NS
HTHL IN
+91- 22- 3935 7800 Ext: 6849
Performance Highlights
1QFY2013 Result Update | Cons. Durables
August 14, 2012
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Exhibit 1:1QFY2013 performance
Net raw material 251 224 11.9 151 66.4 522 504 3.4(% of Sales) 66.7 68.4 63.9 65.4 66.1
Staff Costs 13 12 9.6 15 (12.9) 53 44 19.8
(% of Sales) 3.4 3.6 6.3 6.6 5.8
Other Expenses 87 66 31.3 55 58.3 194 169 14.8
(% of Sales) 23.1 20.2 23.2 24.4 22.2
OPM 6.8 7.8 (101)bp 6.6 22bp 3.7 5.9 (228)bp
Interest (incl. forex losses) 2 2 (29.3) 3 (36.2) 9 7 20.9
Depreciation 5 5 3.7 5 1.7 18 16 14.1
Other Income 0 0 50.0 0 80.0 1 6 (84.6)
130.7
(% of Sales) 5.2 5.8 3.6 0.3 3.6
Tax 6 6 2.1 1 433.3 (0) 11 (104.4)
(% of PBT) 30.3 30.6 13.1 (16.8) 38.6
PATM 3.6 4.0 3.1 0.4 2.2
Equity capital (cr) 23 23 23 23 23
Source: Company, Angel Research
Exhibit 2:1QFY2013 Actual vs Angel estimates
EBITDA 26 30 (15.6)
EBIDTA margin 6.8 9.3 (251)bp
Source: Company, Angel Research
Top-line above expectation, EBITDA margin disappointsFor 1QFY2013, HHLS reported a top-line of `376cr, 15.5% better than our
expectation of `326cr and 14.4% higher on a y-o-y basis. The EBITDA margin
came in at 6.8%, 251bp lower than our expectation of 9.3% and 101bp lower on
a y-o-y basis, mainly on account of higher other expenses. Thus, a lower than
expected margin led to a net profit of `14cr, 21.4% lower than our expectation of
`17cr.
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Investment rationale
Penetration opportunity in the RAC market in India
The penetration level for the room air conditioner (RAC) market in India is currentlyat 3%, 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%. The per capita income in India grew at a 14.3% CAGR over
FY2007-12 from `31,198 in FY2007 to `60,972 in FY2012 while HHLSs AC
sales volume posted a 20.3% CAGR over the same period. On a conservative
basis, we expect the per capita income to grow at a CAGR of 12.3% and HHLSs
AC volumes to post an 11.8% CAGR over FY2012-14E.
Exhibit 3:RAC sales volume for HHLS vs per capita income
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 demand for
star-rated appliances in the country. The company launched i-Clean with an
automatic filter clean technology with high energy efficiency and having a five-star
rating. With the launch of window ACs with efficiency equivalent to split ACs and
increasing five-star rated ACs in its product portfolio, we expect the company to
increase its market share in the premium segment. The company has been
continuously spending on R&D to come up with innovative products. HHLS
currently has 38 split AC models with capacities ranging from 1.0Tr to 3.5Tr and
17 RAC models within 1.0Tr to 2.0Tr capacities.
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
AC segment with the launch of Kaze, with a two-star and three-star rating to cater
to the middle level income group. The company has increased its presence from
236 towns in June 2010 to 317 towns in FY2012 and is increasing its dealer and
distributer base as well. Since tier-II and tier-III cities are expected to be the majorcontributors to the consumer durable segment going forward, revenue contribution
from these segments would add to the top-line growth.
135
133
190
243
246
263
289
36
41
46
55
61
68
77
20
30
40
50
60
70
80
0
50
100
150
200
250
300
350
FY2008 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E
(`
in'000's)('
000units)
AC volume (LHS) Per capita income (RHS)
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Financials
Exhibit 4:Key assumptionsAir conditioner volume growth (%) 6.8 10.1
Realization growth of ACs (%) 2.0 3.0
Change in copper price (%) 3.0 5.0
Source: Angel Research
Exhibit 5:Change in estimates
OPM (%) 6.9 8.4 3.9 6.6 (294)bp (184)bp
Source: Angel Research
Sluggish economic scenario to impact short term revenue growth
We expect HHLS to post a lower revenue growth of 8.7% in FY2013E to `868cr
owing to sluggish economic scenario. However, the growth rate is expected to
increase to 12.6% in FY2014E to `977cr assuming revival in the economic
conditions.
Exhibit 6:Lower revenue growth due to economic slowdown
Source: Company, Angel Research
470 640 763 798 868 9775.3
36.1
19.3
4.6
8.712.6
0
5
10
15
20
25
30
35
40
0
200
400
600
800
1,000
1,200
FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E
(%)
(`
cr)
Revenue (LHS) Revenue growth (RHS)
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EBITDA margins to be under pressure in FY2013E
The EBITDA margin contracted in FY2012 to 3.7% from 8.4% and 5.9% in FY2010
and FY2011 respectively mainly on account of higher other expenses resulting
from foreign exchange fluctuations. In FY2013E, we expect the company to face
pressure on the raw material front post the fire at Kadis AC manufacturing unit in
July 2012. The company plans to substitute the AC production at Kadi unit by
increasing production at the Jammu plant and sourcing ACs from Hitachi
Appliances Inc, which would lead to an increase in the cost of purchase
considering the recent depreciation of the INR against JPY. In addition, other forex
expenses would continue to put pressure on margins. In FY2014E, we expect the
EBITDA margin to recover to 6.6%, an expansion of 293bp over FY2012-14E.
HHLS also faces the impact of INR depreciation on interest cost as it has loans in
foreign currency. Reduction in foreign currency loan from JPY930mn in FY2011 to
JPY465mn in FY2012 would result in reduced interest cost. Consequently, the netprofit is expected to post a CAGR of 177% over FY2012-14E on a lower base of
`3cr in FY2012 to `25cr in FY2014E.
Exhibit 7:EBITDA margin to face short term pressure
Source: Company, Angel Research
Exhibit 8:Net profit margin to recover to historical level
Source: Company, Angel Research
28 54 45 29 34 64
6.0
8.4
5.9
3.7 3.9
6.6
2
3
4
5
6
7
8
9
0
10
20
30
40
50
60
70
FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E
(%)
(`cr)
EBITDA (LHS) EBITDA margin (RHS)
8 42 173
6 25
1.6
6.5
2.2
0.40.7
2.6
0
1
2
3
4
5
6
7
0
9
18
27
36
45
FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E
(%)
(`cr)
PAT (LHS) PAT margin (RHS)
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Outlook and valuation
We have revised our earnings estimates downwards considering impact of foreign
currency fluctuation in FY2013E. We expect revenue to post a 10.7% CAGR over
FY2012-14E and EBITDA margin to expand by 293bp over FY2012-14E from
3.7% in FY2012 to 6.6% in FY2013E. Net profit is expected to bounce back in
FY2014E to `25cr from `3cr in FY2012. At the current levels, the stock is trading at
a PE of 10.5x its FY2014E earnings and P/BV of 1.3x for FY2014E.
Exhibit 9:One-year forward PE band
Source: Company, Angel Research
Exhibit 10:Relative valuation
Blue Star FY2014E 3,328 6.9 146 16.2 28.2 11.9 3.0 0.5 7.5
Voltas FY2014E 6,057 6.3 323 8.8 17.4 11.4 1.9 0.5 8.5
Source: Angel Research, Bloomberg
0
50
100
150
200
250
300
350
400
Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12
(`)
Price 5x 10x 15x 20x
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Risks
Volatile raw-material prices
Steel and copper are the major raw materials used to manufacture ACs. Copperprices have been volatile since the past one year. Such volatility in raw-material
prices will affect the companys profitability in the long run.
Exhibit 11:Copper price trend
Source: Bloomberg
Foreign exchange risk
The company has ECBs of JPY465mn from Japan due to which the interest ratewas at 3.1% (excluding forex loss) for FY2012. The company also pays royalty,
technical know-how fees and consultancy fees denominated in JPY. The
depreciation of INR against the JPY has led to a dented profit of `3cr during
FY2012. Thus, volatility in foreign currency poses a risk to the companys earnings.
300
330
360
390
420
450
480
Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12
(`
perkg)
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Company Background
HHLS is a subsidiary of Japan's Hitachi Appliances, which holds a 68% stake in the
company. HHLS manufactures and sells ACs and is engaged in the trading of
refrigerators, washing machines and chillers.
The companys air conditioners segment includes home ACs, commercial/
ductable ACs and telecom ACs. The company operates in the mass premium
segment. HHLS currently holds 8% market share in the RAC segment and is No. 1
in the premium segment. In ductable commercial ACs, HHLS has a 17% market
share. In the telecom tower AC category, HHLS is a leader with a 56% market
share.
Exhibit 12:Market share in Air conditioner Industry (India)
Source: Industry
The company has AC manufacturing facilities in Kadi (north Gujarat) and Jammu
with a total capacity of 2,30,000 units per annum. The AC manufacturing unit in
Kadi caught fire in July 2012. However, this is not expected to impact the company
since the unit was completely insured and the company made arrangements to
fulfill the market demand by increasing production at the Jammu unit and by
sourcing certain finished goods from other manufacturing facilities of Hitachi
Appliances Inc. The company is increasing its focus on refrigerators with the launch
of the 2012 range ie side-by-side refrigerator with inverter technology andwashing machine.
Bluestar
4% Hitachi8%
LG18%
Samsung10%
Voltas18%
Whirlpool
4%
Panasonic10%
Others28%
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Profit & Loss Statement
Less: Excise duty 49 46 66 69 80 90Net Sales 470 640 763 798 868 977
% chg 5.3 36.1 19.3 4.6 8.7 12.6
Net Raw Materials 305 417 504 522 568 618
Other Mfg costs 22 31 44 53 55 63
Personnel 115 137 169 194 211 233
Other 442 586 718 769 834 913
(37.2) 90.6 (15.9) (35.6) 17.1 88.6
% chg 6.0 8.4 5.9 3.7 3.9 6.6
(% of Net Sales) 8 12 16 18 20 23
Depreciation
(45.8) 107.7 (30.5) (62.9) 29.8 192.8
% chg 4.3 6.6 3.8 1.4 1.6 4.2
(% of Net Sales) 14 2 7 9 6 7
Interest (incl. forex loss on ECB) 7 12 6 1 1 1
Other Income 1.5 1.8 0.7 0.1 0.1 0.1
(% of Net sales)
(71.2) 297.6 (47.5) (89.8) 222.4 295.9
% change 6 11 11 (0) 3 11
Tax 43.0 20.8 38.6 (16.8) 30.0 30.0
(% of PBT)
- (0) - - - -
% chg (81.8) 455.8 (59.6) (80.7) 93.1 295.9
(% of Net Sales) 1.6 6.5 2.2 0.4 0.7 2.6
% chg (81.8) 455.8 (59.6) (80.7) 93.1 295.9
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Balance Sheet
Equity Share Capital 23 23 23 23 23 23Reserves & Surplus 82 124 149 148 151 171
Total Loans 51 60 65 70 77 85
Deferred Tax Liability 1 1 0 (-3) (-3) (-3)
Other Long Term Liabilities 0 0 0 0 0 0
Long Term Provisions 0 0 9 10 11 13
Gross Block 110 159 199 214 246 282
Less: Acc. Depreciation 45 54 68 84 104 127
Capital Work-in-Progress 18 15 6 13 15 15
Goodwill 0 0 0 0 0 0
Investments 0 0 0 0 0 0
Long term Loans & adv 0 0 14 17 18 20
Other non current assets 0 0 0 0 0 0
Cash 23 28 2 3 10 32
Loans & Advances 33 25 17 14 17 20
Inventory 116 180 327 268 258 264
Debtors 82 96 125 148 149 167
Other current assets 0 0 1 0 0 0
Current liabilities 181 243 376 343 350 383
Mis. Exp. not written off 0 0 0 0 0 0
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Cash Flow Statement
Profit before tax 13 52 27 3 9 36
Depreciation 8 12 16 18 20 23Change in Working Capital (2) (8) (34) 6 13 7
Other income 17 (8) (7) (1) (1) (1)
Direct taxes paid (6) (11) (11) 0 (3) (11)
(Inc.)/Dec. in Fixed Assets (45) (46) (30) (22) (34) (37)
(Inc.)/Dec. in Investments - - - - - -
(Incr)/Decr In L.T loans & adv - - (14) (3) (1) (2)
Balances in current/ credit/ FD 1 4 (5) (0) - -
Interest received 7 12 6 1 1 1
Others (10) (12) 8 3 - -
Issue of Equity - - - - - -
Inc./(Dec.) in loans 39 10 5 5 7 8
(Decr)/Incr in long term provision - - 9 1 1 1
Dividend Paid (Incl. Tax) - (3) (3) (3) (4) (4)
Others (7) 5 8 (8) - -
Inc./(Dec.) in Cash 17 6 (26) 1 8 21
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Key Ratios
P/E (on FDEPS) 34.7 6.2 15.5 80.0 41.4 10.5P/CEPS 16.8 4.9 7.9 12.1 9.9 5.4
P/BV 2.5 1.8 1.5 1.5 1.5 1.3
Dividend yield (%) 0.0 1.3 1.3 1.3 0.4 0.4
EV/Sales 0.6 0.5 0.4 0.4 0.4 0.3
EV/EBITDA 10.2 5.4 7.2 11.3 9.6 4.9
EV / Total Assets 1.8 1.4 1.3 1.3 1.3 1.1
EPS (Basic) 3.3 18.2 7.3 1.4 2.7 10.9
EPS (fully diluted) 3.3 18.2 7.3 1.4 2.7 10.9
Cash EPS 6.8 23.3 14.3 9.4 11.5 21.0
DPS 0.0 1.5 1.5 1.5 1.5 1.5
Book Value 45.5 63.9 74.9 74.6 75.6 84.7
EBIT margin 4.3 6.6 3.8 1.4 1.6 4.2
Tax retention ratio 0.6 0.8 0.6 1.2 0.7 0.7
Asset turnover (x) 4.1 3.9 3.2 3.4 3.7 4.0
ROIC (Post-tax) 10.0 20.3 7.5 5.4 4.2 11.9
Cost of Debt (Post Tax) 16.1 2.0 7.0 14.8 5.6 5.6
Leverage (x) 0.3 0.2 0.4 0.4 0.4 0.3
Operating ROE 8.3 24.3 7.7 1.7 3.7 13.6
ROCE (Pre-tax) 16.0 23.1 12.9 4.4 5.5 15.0
Angel ROIC (Pre-tax) 20.7 30.1 14.5 4.6 5.9 17.2
ROE 8.0 33.2 10.6 1.9 3.7 13.6
Asset Turnover 4.3 4.0 3.8 3.7 3.5 3.5
Inventory / Sales (days) 92 85 121 136 111 97
Receivables (days) 67 51 53 63 63 63
Payables (days) 153 132 157 171 153 153
WC (ex-cash) (days) 39 31 37 41 35 27
Net debt to equity 0.3 0.2 0.4 0.4 0.4 0.3
Net debt to EBITDA 1.0 0.6 1.4 2.3 2.0 0.8
Interest Coverage 1.4 27.8 4.0 1.2 2.3 6.0
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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 Yes
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
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