Whirlpool: Don't buy into the dips

Near-term prospects not encouraging, given rising cost pressures and subdued demand

Whirlpool of India management sounded off a cautious note in its annual general meeting held on September 1. Impacted by weakening consumer demand, the management halved its volume growth guidance for this financial year from 10 per cent (given in November 2014) to give per cent.

A weak summer affected the sales of refrigerators (62 per cent of FY15 revenues) as well as air conditioners (seven per cent of revenues), which led to a fall in revenue growth to a multi-quarter low of 4.6 per cent for the three months ending June.

After the company's cautious outlook, analysts, too, have trimmed their revenue and net profit estimates for FY16 as well as FY17 by 10-20 per cent. Clearly, in the near-term, challenges will continue to weigh on Whirlpool's financial performance as well as stock price.

How much of the bad news is captured in the current valuations? Although the stock has slipped from its all-time intra-day high of Rs 847 seen in mid-July to Rs 615, it still trades at 32 times FY16 estimated earnings and 26 times FY17 estimated earnings. This is at a premium to its historical average one-year forward price/earnings ratio of 23 times.

Going forward, the company could also incur additional costs in order to comply with new energy standards which are expected by January 2016. A weakening rupee could further increase its costs given that Whirlpool imports 38 per cent of its raw materials.

But given the weak demand environment, Whirlpool might not be able to pass on this cost increases to end consumers, which could impact its profitability going forward. The company’s management believes trade discounts and promotions are likely to remain elevated in the foreseeable future as well (up from 6.9 per cent in the first quarter of FY15 to 15.9 per cent in the same period this financial year).

Even though there are some silver linings, they will bear fruit only in the medium-term. For instance, increase in the salaries of government employees, after the implementation of the seventh pay commission recommendations, will increase the demand for white goods in FY18, say analysts. Whirlpool also plans to step up new launches, which could act as key growth drivers.

While the replacement demand for refrigerators is also seen improving, the company is adding capacity at its Ranjangaon plant that should aid the growth of this business going forward. A healthy balance sheet and strong cash kitty are other positives, and should come handy. In the air conditioners segment, though, while the company plans to focus on ramping up business, high competitive intensity will be a key monitorable.

For now, the lack of near-term catalysts will keep the stock price in check for some time, unless the festive season surprises positively.