Whirlpool stock to benefit from attractive valuations, demand recovery

Long term growth prospects and valuations are key positives

Whirlpool of India was the worst performing consumer durable stock in 2021 shedding 33 per cent as opposed to a 47 per cent gain in the BSE Consumer Durables index and a 22 per cent rise in the Sensex.

The sharp underperformance to the benchmark and peer stocks is on the back of market share loss, tepid sales growth and rising competitive pressures. The Street is, however, positive on the stock which gained over 3 per cent in trade on Friday given an attractive valuation, lower penetration of refrigerators and washing machines, and demand recovery. 

One of the key concerns for the Street has been weak demand. Even as demand has returned to normal levels for consumer electrical goods, the pick-up for white goods has been slow.

Analysts, led by Nilesh Bhaiya of Motilal Oswal Financial Services, believe that volume growth has been subdued due to the high base of last year, continued price hikes impacting demand and slower channel filling on concerns of the third Covid wave. While wedding demand has been able to stabilise sales, it has been limited to the urban areas with rural areas still going slow on consumption. 

The other concern is the loss of market share over the last six months. Mayank Bhandari of Nirmal Bang Research says the company has lost market share after announcing two consecutive price hikes in the last 12 months as opposed to market leaders LG and Samsung, which did not increase prices. 

However, the share loss is expected to be arrested as the competition has also started raising prices, which coupled with stable raw material prices could bring parity for the company vis-a-vis the competition. 

The acquisition of kitchen appliances maker Elica could also drive incremental growth for the company. Whirlpool increased its stake in the company to 87 per cent in September last year.

With the real estate sector witnessing strong growth and kitchen chimney segment expanding at 15-20 per cent, Whirlpool is expected to gain, given that it has a fifth of the market in this segment.

Further, the penetration levels of refrigerators and washing machines at 35 per cent and 15 per cent, respectively, also offer a long-term growth opportunity. 

Analysts at ICICI Securities remain positive on the company’s business model owing to established competitive advantages and growth opportunities. They expect the company to bounce back after weak performance over the last summer seasons. Analysts at the brokerage estimate annual net profit growth for FY21-24 to be 28 per cent, with return on capital employed at over 16 per cent in the next two years.

Its low valuation is seen as another positive for the company as the price has corrected. At 31 times its FY24 earnings estimates, it is among the cheapest stocks in the consumer durable segment.

While there are multiple triggers, there are near-term headwinds such as the pace of Covid infections and demand recovery. Investors should wait for the reversal of market share loss and improvement in Q3 performance before considering buying the stock.