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Hitachi Home & Life Solutions

Hitachi Home & Life Solutions

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Published by Angel Broking

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Published by: Angel Broking on Oct 29, 2011
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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.
% diff
Net 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 2QFY2012results. The company’s revenue declined marginally by 2.1% yoy to
 ` 
128cr in2QFY2012. 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 in2QFY2011. 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 dueto 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% in2QFY2011, 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 forexloss 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 toincreasing per capita income. Copper prices have seen a decline of ~20% in thepast six months, which will lead to increased margins going ahead. PAT isexpected 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 financials
Y/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 17.7
P/E (x) 8.2 12.9 34.0 9.3P/BV (x) 2.6 2.2 2.1 1.7RoE (%) 36.6 18.4 6.3 20.5RoCE (%) 25.2 16.9 10.1 19.8EV/Sales (x) 0.6 0.6 0.5 0.5EV/EBITDA (x) 7.1 8.3 10.3 5.9
 Source: Company, Angel Research; Note: Price as on October 20, 2011
BUY
CMP
 ` 
165Target Price
 ` 
212
Investment Period 12 Months
Stock InfoSectorBloomberg CodeShareholding Pattern (%)Promoters69.9MF / Banks / Indian Fls11.2FII / NRIs / OCBs0.6Indian Public / Others18.4 Abs.(%)3m1yr3yrSensex(8.5)(14.8)(39.6)HHLS(14.9)(46.2)134.0Nifty5,092Reuters CodeHITA.NSHTHL INFace Value (
 ` 
)10BSE Sensex16,93752 Week High / Low327 / 136 Avg. Daily Volume38,165Beta1.2Consumer goodsMarket Cap (
 ` 
cr)387
 
Shareen Batatawala
30940000 ext: 6849shareen.batatawala@angelbroking.com
Hitachi Home & Life Solutions
Performance Highlights
Company Update | Consumer goods
October 28, 2011
 
 
HHLS
 
| Company Update
October 28, 2011
 2
Exhibit 1:
 
2QFY2012 performance
Y/E March (
`
cr) 2QFY2012 2QFY2011
yoy chg (%)
1QFY2012
qoq chg (%)
1HFY2012 1H20FY11
% chg
Net Sales 128 131
(2.1)
328
(61.0)
456 436
4.5
Net 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
15.2
Operating 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 estimates
Actual (
`
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 company’s EBITDA margin witnessed a dip of705bp yoy as compared to 2QFY2011 on the back of ~30% yoy increase inemployee expenses. Further, the company reported a loss of
 ` 
7cr in 2QFY2012 ascompared to profit of
 ` 
5cr in 2QFY2011 due to higher forex losses and increasedtotal expenditure.
 
 
HHLS
 
| Company Update
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, Koreaand Taiwan. China has a 20% penetration rate, while penetration in the US standsat 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 percapita 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 increasingcalls to use energy-efficient products by the government have spurred the demandfor star-rated appliances in the country. The company launched
i-Clean
withautomatic 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 innovativeproducts.
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 homeair-conditioner segment with the launch of
Kaze
, with a two-star and three-starrating to cater to the medium-class mass-segment market. The company hasincreased its presence from 236 towns in June 2010 to ~300 towns currently andis increasing its dealer and distributer base as well.
05010015020025030035001020304050607080FY2007FY2008FY2009FY2010FY2011FY2012EFY2013E
 (  '   0  0  0  uni  t   s  )  
   (
        `
   i  n   '   0   0   0   )
Per Capita Income (LHS)AC volume (RHS)

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