Hitachi 1QFY2013RU

7/31/2019 Hitachi 1QFY2013RU

1/13

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


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

[email protected]

Performance Highlights

1QFY2013 Result Update | Cons. Durables

August 14, 2012


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HHLS | 1QFY2013 Result update

August 14, 201 2

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


Exhibit 2:1QFY2013 Actual vs Angel estimates

EBITDA 26 30 (15.6)

EBIDTA margin 6.8 9.3 (251)bp


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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August 14, 201 3

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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August 14, 201 4

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


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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August 14, 201 5

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


Exhibit 8:Net profit margin to recover to historical level


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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August 14, 201 6

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


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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August 14, 201 7

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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August 14, 201 8

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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August 14, 201 9

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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August 14, 201 10

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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August 14, 201 11

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


12/13


August 14, 201 12

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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A t 14 201 13

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

Documents

Hitachi 1QFY2013RU