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Whirlpool: Steadfast improvement - Views on News from Equitymaster
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  • Jun 26, 2002

    Whirlpool: Steadfast improvement

    Consumer durable majors have had a poor run ever since the Cricket World Cup in 1999. A series of events starting from the earthquake in Gujarat, uneven distribution of rainfall, general weakness in agriculture and industrial sector have made life miserable for durable manufacturers. While most of the durable majors are having a tough time, Whirlpool of India has managed to better its performance during these times. But volatility in earnings continues to remain a cause of concern.

    (Rs m) 1QFY02 1QFY03 Change FY01 FY02 Change
    Net sales 2,026 2,163 6.8% 9,184 9,868 7.4%
    Other Income 47 21 -55.5% 277 188 -32.1%
    Expenditure 1,855 1,979 6.7% 8,476 9,045 6.7%
    Operating Profit (EBDIT) 171 184 7.4% 708 822 16.2%
    Operating Profit Margin (%) 8.4% 8.5%   7.7% 8.3%  
    Interest 120 99 -17.6% 444 477 7.5%
    Depreciation 97 95 -2.0% 342 391 14.3%
    Profit before Tax 1 11 - 199 142 -28.6%
    Tax - 4 - (6) 51 -
    Profit after Tax/(Loss) 1 6 600.0% 205 91 -55.4%
    Net profit margin (%) 0.0% 0.3%   2.2% 0.9%  
    No. of Shares (m) 126.9 126.9   126.9 126.9  
    Diluted Earnings per share 0.0 0.2   1.6 0.7  
    P/E Ratio (x)   36.5     40.4  

    Turnover during the first quarter ended March 2002 stood at Rs 2,163 m, a growth of 7%. This is a commendable performance by the MNC major considering the fact that there has been severe undercutting of prices by peers, which has led to a drastic fall in realisations. Besides, one has also keep in mind the existing discount offers in the market that has a negative impact on value growth. The company has presence in segments like refrigerators, laundering machines, air conditioners and microwave ovens, which contributed 93% to total revenues in FY02. One of the key growth drivers for the company is its thrust on exports that has shown marked improvement over the years. Exports contributed to 5% of sales in FY02 as compared to 3% in FY01.

    What is more encouraging is the fact that Whirlpool has managed to diversify its revenue stream in the last two years. The table below highlights the change in revenue mix. Going forward, while refrigerators and washing machines would still contribute to a larger chuck in the medium-term, the company has made significant progress in other two focus areas as well. The company had framed a three-fold growth strategy to achieve turnover target of Rs 30 bn by 2004. One, launching new products in the premium segment that caters to niche groups. Second, to beef up its export revenue for which it has targeted Rs 450 m by 2000. Third, venturing into new business avenues such as services and selling accessories. While it has delivered on all other fronts, turnover target of Rs 30 bn seems stiff keeping the current macro-economic environment in mind.

    Diversifying revenue mix…
    (Rs m) FY01 % of sales FY02 % of sales
    Refrigerators 7,735 74.2% 7,758 70.7%
    Washing machines 1,998 19.2% 2,128 19.4%
    A/Cs 17 0.2% 115 1.0%
    Ovens 48 0.5% 153 1.4%
    Total sales 10,428 93.9% 10,971 92.6%

    Despite a competitive environment, Whirlpool has managed to improve its operating margins, which is due to retirement of staff and other cost reduction exercises initiated by the company in early 2000 (i.e. during the rights issue). The company had incurred Rs 126 m towards voluntary retirement scheme. Interest costs have fallen significantly in the first quarter. Higher interest cost has been suppressing profit growth at the net level despite increasing market share in the durable segment. But we expect interest outflow to decline in the coming quarters as well and consequently improve profitability ratios.

    The scrip currently trades at Rs 29 implying a P/E multiple of 40x FY02 earnings. One of the key cause of concern is its volatility in earnings. While the macro-economic environment has to be taken into consideration, consistency is important if the company has to restore some confidence amongst investors'.



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