sector update: consumer durables 21 jun …...sector update: consumer durables hdfc 21 jun 2018...

SECTOR UPDATE: CONSUMER DURABLES 21 JUN 2018

Cooling Products

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What transpired in summer 2018 The summer of 2018 started on a weak note, despite IMD predicting a harsh summer. Consumer offtake has thus far been weak, as evident in cooling products’ (air conditioner and air cooler) performance in 4QFY18. The room air-conditioner (RAC) industry has witnessed several headwinds during FY18, led by GST transition and the change in energy efficiency ratings. Air cooler industry saw two bad quarters (1Q and 4Q) in FY18 owing to erratic summer. Based on our channel checks and management interaction, we noted that March-April were washout (primarily South region) months owing to pre-monsoon showers and storm. However, since mid-May onwards temperatures have been rising in the North/West region on an average by +1°C YoY (last 45 days). This was driven by an extended summer. Our checks confirmed that higher temperatures have resulted in a recovery in consumer offtake primarily for air conditioners since air coolers require consistent heat (impulse purchase). We expect low single digit growth in 1QFY19 for Voltas (UCP) and Symphony (domestic) owing to a pickup in the second half of the quarter. We believe stock correction has been greater than the earnings cut since 4QFY18 for Voltas (17% vs. 7% EPS cut) and Symphony (25% vs. 12% EPS cut) implying a de-rating. Based on our checks, we confirmed that both these players continue to maintain their leadership despite stiff competition. We believe low penetration of cooling products and their leadership position, along with a solid management track record warrants a great entry opportunity to play the structural story.

What transpired in summer-18 and the way forward: AC industry outperformed air cooler industry in FY18:

In a challenging environment (demonet, GST, energy rating change and weak summer) AC industry grew by healthy 11% in FY18. Voltas/Blue Star/Lloyd posted 15/15/11% value growth during the year. Air cooler industry witnessed de-growth in FY18, while Symphony outperformed with 5% value growth.

Industry production (volume) grew in high single digits (link to volume breakup): As per Bureau of Energy Efficiency (BEE), the Air conditioner industry grew at a modest pace of 7% in volume terms during FY18 to 6.9mn units vs. 37% growth in FY17. Slower industry growth was attributed to GST disruption, rating change (change in energy efficiency norms) and the high base of last year. In order to gauge the quality of data, we compared the AC industry production numbers with revenue growth of listed players. We noticed that directionally the trend is prevalent in previous years (FY13-18). Interestingly, Inverter AC continued to gain share at a handsome pace (now 28% volume share vs. 11% in FY17).

Summer 2018 was erratic: Cooling companies reported weak 4QFY18 performance. Therefore, in order to co-relate their performance with the weather, we collected temperature data (link to data) of 110 days (1st Mar-17th June) for the top 25 cities across India. We observed that summer was only slightly weaker for pan-India (-0.09°C YoY). North (+0.22°C YoY) and West region (+0.27°C YoY) was hotter, while South (-1.08°C YoY) and East (-0.35°C YoY) region witnessed a washout summer vs. last year.

Naveen Trivedi [email protected] +91-22-6171-7324

Siddhant Chhabria [email protected] +91-22-6171-7336

mailto:[email protected]

SECTOR UPDATE : COOLING PRODUCTS

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MNCs are bullish on AC industry in India: Commentary

(link to commentary) by major MNC players (like Daikin, OGeneral and Haier) on the potential of air conditioner industry in India re-iterates our view that growing incomes will drive penetration (sustainable >10% volume growth CAGR). Daikin plans to expand its distribution reach in tier 3 and tier 4 cities in order to enjoy electricity penetration and rising rural income.

India is the second fastest RAC growing market (link to World RAC data): In the top 10 RAC market, Vietnam grew the fastest with 21% 10 year CAGR while India ranked second with 11% CAGR. In terms of annual demand (units), India ranks 4th in the world. India offers immense potential owing to low AC penetration

coupled with the 2nd highest number of HHs in the world. We believe India can sustain >10% AC volume CAGR driven by cheaper financing options, growing disposable incomes, rising temperatures and increasing number of HHs (~4.8 members/HH, which is the highest in the world).

Our thesis on cooling products: We continue to believe that the AC industry will sustain its secular long term growth driven by (1) Rising demand for cooling products driven by growing disposable incomes, cheaper financing options and increasing up-country penetration of electricity, (2) Low penetration (~5%) and (3) Improving energy efficient products.

Feedback from channel check (dealers/distributors) Air conditioner (link to full channel check detail) Air Cooler (link to full channel check detail) Industry witnessed volume contraction in Apr owing to pre-

buying (energy rating change) and erratic summer Recovery since mid-May AC offtake > Air coolers Inverter share increased to ~50% in peak season AC seasonality is declining Daikin, Voltas and OGeneral outperformed the industry Lloyd price hike (lower price discount vs. peers) led to

short-term shock in trade channel Rural demand is rising driven by consumer financing and

electricity penetration Channel inventory is high in South region Panasonic has lost market share in few pockets Bullish on long term potential owing to low penetration and

increasing energy efficient products

Industry is down 20-25% in Apr to mid-May owing to erratic summer

There has been a pick-up in offtake since 15th May but it is not significant to return to positive territory

Symphony brand leadership sustains with strong corporate governance

Offtake for premium products is sluggish as consumer upgrade to AC supported by consumer finance

Unbranded players witnessed cost inflation (~10%) owing to GST

Kenstar and Bajaj lost market share owing to less focus from management and change in distribution strategy respectively

Air cooler inventory is higher on a YoY basis particularly for South market

Shift from unorganized to organized is not yet visible Air cooler industry will sustain healthy growth owing to

high recurring cost of air conditioners

Source: HDFC sec Inst Research

MNCs are bullish on long term prospects in RAC industry in India Daikin plans to expand its distribution reach in tier 3 and tier 4 cities in order to enjoy electricity penetration and rising rural income In the top 10 RAC market, Vietnam grew the fastest with 21% 10 year CAGR while India ranked second with 11% CAGR India still has one of the highest members per households at 4.8 in the world


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Expect 1QFY19 performance to be muted for cooling products: On account of erratic summer, pre-buying in air conditioners and strong primary growth in Apr-17, we believe the performance of Voltas and Symphony in

1QFY19 would be soft. We believe mild recovery in consumer offtake (mid-May to June) and favorable base would result into 2% revenue growth for each Voltas (UCP) and Symphony (domestic) in 1QFY19.

Favorable base of 1QFY19 offers respite to cooling products: Companies Q1FY17 Q2FY17 Q3FY17 Q4FY17 Apr-17 May-17 Jun-17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Apr-18E May-18E Jun-18E 1QFY19E

Voltas (UCP) 29% 13% -5% 28% 1% 15% 32% 8%* 2%

Blue Star (UCP) 34% 17% 34% 20% 13% 12%* 28%* 19%* NR Symphony (Domestic) 33% 31% 10% 38% -18% 26% 27% -18% 2%

Source: Companies, HDFC sec Inst Research *Like-like growth RED: steep volume contraction Light Red: mild volume contraction Light Green: mild volume growth Dark Green: strong volume growth

Our thesis and recommendation for Voltas: We continue to believe that the AC industry will sustain

its secular long-term growth. We maintain our thesis on Voltas' to sustain leadership in the room AC space and improving margin trajectory for EMPS segment. Besides, foray into other consumer durable categories, providing multi-year growth visibility for the company.

We cut our EPS estimate by ~3% for FY19-20 to factor weak consumer offtake for RAC and EBIT margin pressure in UCP. We value based on SOTP valuing EMPS/EPS/UCP at Jun-20 P/E at 15 (earlier 13x)/20/35x to arrive at TP of Rs 648 (Rs 667 earlier).

Valuation Summary

Our thesis and recommendation for Symphony: Our bullishness on Symphony is based on (1) Rising

demand for cooling products driven by growing disposable incomes, cheaper financing options and increasing up-country penetration of electricity, (2) A large unorganised air cooler market, (3) Consistent product innovation, (4) Growing distribution reach (40k dealers targeted vs. 30k now) over the next 2 years and (5) Untapped opportunities in RoW.

We cut our EPS estimates by ~4% for FY19-20 to factor weak consumer offtake in the domestic business. We value Symphony at 45x Jun-20 EPS, our TP is at Rs 1,949 (earlier 1,983). We maintain BUY.

Companies MCap (Rs bn)

CMP (Rs) Reco. TP

(Rs) EPS (Rs) P/E (x) EV/EBITDA (x) Core RoCE (%) Upside

FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E (%) Havells 334 535 BUY 656 11.3 15.0 18.2 47.5 35.6 29.4 31.9 24.2 20.3 34.2 35.6 41.1 23% Voltas 173 522 BUY 648 17.4 19.4 22.3 30.0 26.9 23.4 22.1 19.4 16.9 52.4 61.1 61.3 24% Crompton 140 218 BUY 285 5.2 6.4 8.0 42.2 34.0 27.1 26.0 21.4 17.3 39.3 49.5 58.8 31% Symphony 98 1,395 BUY 1,949 27.5 33.2 41.5 50.7 42.1 33.6 42.6 32.8 25.9 89.9 94.5 104.9 40% V-Guard 89 210 BUY 253 3.8 5.3 7.2 55.8 39.8 29.1 47.4 29.0 21.6 20.7 29.9 36.3 20% TTK Prestige 67 5,824 NR 7,502 134.6 154.1 189.4 43.3 37.8 30.7 26.6 22.6 18.5 15.1 15.7 17.5 29% Note: TP is fair value for TTK Prestige since we do not have rating

Favorable base of 1QFY19 offers respite to cooling products Maintaining our structural thesis on air conditioner and air cooler industry, Voltas and Symphony would be the key beneficiary


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Table of content Insights on summer 2018 ............................................................................................................................. 5

Summer 2018 temperature deviation vs. 2017 and 30 year average ....................................................... 5 Summer 2018 YoY deviation w.r.t. cooler and hotter days ........................................................................ 5 Pan-India: Daily Change in High Temperature (YoY) .................................................................................. 5 North Region: Daily Change in High Temperature (YoY) ............................................................................ 5 West Region: Daily Change in High Temperature (YoY) ............................................................................. 6 South Region: Daily Change in High Temperature (YoY) ............................................................................ 6 East Region: Daily Change in High Temperature (YoY) ............................................................................... 6 City-wise YoY Deviation in high temperatures for 110 days ...................................................................... 7

Air Conditioner: Industry Production Volume ............................................................................................. 10 AC Market: World and India ....................................................................................................................... 12

Top 10 Countries RAC Volume Annual Demand (CY17) ........................................................................... 12 India RAC Market Breakup ........................................................................................................................ 12 MNC commentary/statements on India RAC ........................................................................................... 13

Symphony Ltd ............................................................................................................................................ 14 Key takeaways from management interaction......................................................................................... 15 Key takeaways from air cooler dealers/distributors check ...................................................................... 16 Recent Performance ................................................................................................................................. 17 Our Assumptions ....................................................................................................................................... 21 Financials .................................................................................................................................................. 25

Voltas Ltd .................................................................................................................................................. 27 Key takeaways from management interaction......................................................................................... 28 Key takeaways from air conditioners dealers/distributors check ............................................................ 29 Recent Performance ................................................................................................................................. 30 Our Assumptions ....................................................................................................................................... 34 Financials .................................................................................................................................................. 35


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Insights on summer 2018 Cooling companies reported weak 4QFY18 performance. In order, to co-relate their performance with the weather, we collected temperature data of 110 days (1st Mar-17th June) for the top 25 cities across India. Summer 2018 Temperature Deviation (March-June). Summer 2018 temperature deviation vs. 2017 and 30 year average

Region YoY Avg. Deviation (March-June)

Avg. Deviation from historical avg. (March-June)

North +0.22°C +1.39°C West +0.27°C +1.69°C South -1.08°C -0.48°C East -0.35°C +0.85°C Pan-India (25 cities) -0.09°C +1.07°C Source: Accuweather, HDFC sec Inst Research Summer 2018 YoY deviation w.r.t. cooler and hotter days YoY Deviation (No. of days)

No. of days Pan-India North West East South

Hotter (>=+1°C) 23 43 37 40 8 Normal (+/- 1°C) 41 15 40 12 27 Cooler (<=-1°C) 36 42 23 48 65 Source: Accuweather, HDFC sec Inst Research Pan India: We observed that summer 2018 was only

slightly weaker (-0.09°C YoY). North (+0.22°C YoY) and West region (+0.27°C YoY) was hotter, while South (-1.08°C YoY) and East (-0.35°C YoY) witnessed a washout summer.

Pan-India: Daily Change in High Temperature (YoY)

Source: Accuweather, HDFC sec Inst Research

North Region: North witnessed an erratic summer with unseasonal showers and dust storm in Mar and Apr resulting in lower mercury levels. However, once unseasonal showers abated mercury levels started rising in late May (see chart) resulting in a hotter summer. Key cities in the North witnessed a hot summer i.e. Delhi (+0.55°C YoY), Chandigarh (+0.06°C YoY), Indore (+0.92°C YoY) and Bhopal (+0.75°C YoY).

North Region: Daily Change in High Temperature (YoY)


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An erratic summer with unseasonal showers and dust storm in Mar and Apr

Total Number of Households (HHs) by Region

Region HHs (mn no.) Mix of HHs

North 87.2 28% West 61.9 20% South 71.8 23% East 85.2 28% India 306.2 100%

Source: Census 2011, HDFC sec Inst Research Pan-India temperature was marginally weaker in summer 2018 vs. last year

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All regions witnessed a cooler April

(°C) Uptick driven by North and West

region


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West Region: West witnessed a consistent hot summer driven by harsh summer in cities like Ahmedabad (+0.37°C YoY), Rajkot (+0.75°C YoY), Jaipur (+0.90°C YoY) and Jodhpur (+0.51°C YoY)

West Region: Daily Change in High Temperature (YoY)


South Region: South on a YoY comparison witnessed a washout summer owing to unseasonal rain. South plays critical part for 4Q performance for cooling products since the summer sets in March. As evident in the chart, March on a YoY basis was cooler which impacted performance for companies in 4QFY18. Cooler summer was witnessed across cities in South region like Bengaluru (-1.36°C YoY), Chennai (-0.85°C YoY), Madurai (-1.35°C YoY), Coimbatore (-1.08°C YoY) and Kochi (-0.75°C YoY).

South Region: Daily Change in High Temperature (YoY)


East Region: East witnessed a cooler summer driven by soft summer in Kolkata (-0.34°C YoY) and Ranchi (-1.75°C YoY)

East Region: Daily Change in High Temperature (YoY)


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(°C) Consistent hot summer driven by harsh summer in cities like Ahmedabad , Rajkot, Jaipur and Jodhpur

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A washout summer owing to unseasonal rain

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(°C)A cooler summer driven by soft summer in Kolkata and Ranchi

South and East regions witnessed a washout summer owing to unseasonal rain


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City-wise YoY Deviation in high temperatures for 110 days

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1-Mar-18 (1) 2 2 (1) 2 - - - 2 - (4) (1) - (4) 1 - 2 1 - - 1 2 - - - 2-Mar-18 3 4 3 3 3 1 - 1 3 1 (1) 1 1 (1) 3 1 1 (1) (1) - 1 3 1 3 (2) 3-Mar-18 5 - 3 5 3 1 1 1 2 1 2 1 2 2 5 1 2 - 1 - 1 2 3 3 (1) 4-Mar-18 4 1 2 5 2 3 9 - - - (1) - (1) (1) 4 - 1 2 4 5 1 1 4 2 (1) 5-Mar-18 2 1 2 1 2 3 3 2 - 2 - 1 2 - 1 2 1 1 1 2 (1) (1) (2) - - 6-Mar-18 1 - - - - 2 2 - 1 - 2 1 1 2 (1) - - - 1 3 2 (2) (2) 5 3 7-Mar-18 - 2 - (1) - (3) (1) (1) 4 (1) 3 2 3 3 2 (1) 1 1 1 - - (1) (4) 1 - 8-Mar-18 5 5 - 5 - 1 (4) 2 4 2 (1) 3 1 (1) 3 2 4 (1) 7 6 1 (1) (2) - 1 9-Mar-18 4 7 - 4 - 3 1 2 3 2 1 2 (4) 1 5 2 5 2 3 6 - (1) (1) - 2

10-Mar-18 10 6 12 7 12 6 6 4 3 4 4 8 1 4 10 4 6 3 2 - (1) (2) (3) - - 11-Mar-18 9 9 6 9 6 8 7 7 7 7 9 7 1 9 9 7 7 9 6 5 - (3) (2) (1) - 12-Mar-18 11 9 8 10 8 8 10 6 5 6 5 4 4 5 9 6 9 5 6 5 (1) (2) (1) (1) 1 13-Mar-18 13 12 9 12 9 7 9 2 3 2 3 3 6 3 10 2 5 7 7 6 (2) (1) (5) (5) - 14-Mar-18 8 7 6 6 6 3 6 1 - 1 (1) 1 5 (1) 5 1 (1) 5 7 6 2 - (2) (4) (2) 15-Mar-18 4 4 4 4 4 1 1 (1) (1) (1) (4) (3) 2 (4) 2 (1) - 4 3 4 3 - 2 - - 16-Mar-18 2 5 1 1 1 (1) 1 (1) (2) (1) 1 (7) (7) 1 - (1) 1 4 (1) (1) - - 2 - - 17-Mar-18 2 4 - 3 - 2 1 1 - 1 3 (3) (3) 3 2 1 1 - (1) - (5) (4) (6) (1) 1 18-Mar-18 4 3 2 2 2 3 1 - (1) - (1) (2) (1) (1) 2 - 2 2 1 1 (4) (2) (1) - 1 19-Mar-18 5 3 2 5 2 3 4 (1) - (1) (1) 1 (1) (1) 1 (1) 5 9 (2) 1 (4) (1) (3) (3) - 20-Mar-18 5 5 3 4 3 2 4 (1) (2) (1) (1) - 3 (1) 2 (1) - 5 6 8 (1) (3) (2) - 1 21-Mar-18 - (3) 2 (1) 2 - 1 (3) (4) (3) (1) (1) 3 (1) (2) (3) (6) 6 2 3 - (1) - 3 - 22-Mar-18 (5) (4) - (5) - (4) (3) (5) (1) (5) (2) (2) - (2) (5) (5) (5) 4 4 1 - 4 3 1 (1) 23-Mar-18 (7) (2) (1) (7) (1) (4) (5) (2) (2) (2) (3) (3) (2) (3) (6) (2) (2) 4 (1) - - 2 3 - - 24-Mar-18 (1) (2) (5) (3) (5) (3) (4) (2) (1) (2) - (1) (3) - (2) (2) (1) 3 (3) (2) (3) 1 1 1 (1) 25-Mar-18 (1) - (2) (2) (2) (2) (3) - - - 6 (1) (3) 6 (2) - (1) (2) (5) (2) (3) (1) (2) (2) (1) 26-Mar-18 (2) (1) (2) (1) (2) (2) (3) (1) (1) (1) 4 (1) (2) 4 (1) (1) (2) 1 (3) (1) (2) (1) (3) (4) - 27-Mar-18 1 (1) - - - - (1) (3) (1) (3) (5) (1) - (5) (1) (3) (4) 1 (4) (1) (1) - 2 (1) - 28-Mar-18 2 (2) - 1 - (2) (1) (2) (1) (2) (2) (3) (2) (2) (2) (2) - 3 (1) 1 (2) 2 2 (1) (2) 29-Mar-18 (2) (2) (3) (2) (3) (2) (1) (1) 1 (1) (1) (1) (2) (1) (2) (1) 1 3 (2) - (2) 2 1 - - 30-Mar-18 (2) (2) (4) (2) (4) (1) (2) 1 2 1 (2) (1) (2) (2) (2) 1 2 (5) (2) - - 2 2 (2) (1) 31-Mar-18 (5) (6) (7) (5) (7) (1) (1) 1 3 1 (2) (2) (1) (2) (1) 1 2 (4) (8) (6) (3) - 1 (1) (3) 1-Apr-18 (5) (5) (8) (4) (8) (1) (1) (1) 1 (1) - - (1) - (2) (1) - (4) (8) (3) (2) (2) (1) (2) (1) 2-Apr-18 (4) (4) (6) (2) (6) 1 (1) 1 - 1 (1) 2 (5) (1) (1) 1 (1) (3) (12) (6) (2) (4) (1) (2) - 3-Apr-18 (1) (2) (4) - (4) 1 (1) 1 1 1 (2) 2 (1) (2) - 1 (1) (5) (7) (3) (3) (3) (1) (2) (1) 4-Apr-18 1 4 (2) 3 (2) 1 - 3 1 3 - 1 (2) - 2 3 1 3 (6) 1 (3) - (1) (1) (3) 5-Apr-18 4 10 1 3 1 2 1 - (2) - - 2 (3) - 1 - - (1) (3) 1 (3) (1) (1) - -


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6-Apr-18 (1) 2 - (1) - - (2) 1 2 1 - (1) (2) - 3 1 5 (1) (2) 2 (2) (2) (3) (2) (1) 7-Apr-18 - 2 (6) 1 (6) 1 1 4 4 4 1 1 (3) 1 2 4 6 (5) (5) 1 (3) (3) (2) 1 - 8-Apr-18 3 2 (4) 2 (4) 2 - 1 1 1 - (2) (8) - 2 1 4 (6) (6) (2) (4) (2) (2) (2) (1) 9-Apr-18 (2) 2 (1) 3 (1) 1 2 1 - 1 (1) (3) (3) (1) 2 1 4 (5) (4) (2) (4) (3) (3) (3) -

10-Apr-18 2 3 (1) 2 (1) 2 1 (1) (1) (1) - (3) (2) - - (1) - (4) (6) (2) (4) (3) (4) (2) - 11-Apr-18 (6) (11) (3) (5) (3) - (1) (2) (1) (2) 1 (3) (3) 1 (1) (2) (3) - (3) (2) (3) (2) (3) (1) (1) 12-Apr-18 (6) (5) (4) (5) (4) (5) (3) (3) (4) (3) (1) (2) (3) (1) (5) (3) (5) (3) (5) (2) (3) (1) (2) (2) (1) 13-Apr-18 (4) (4) (2) (5) (2) (4) (4) (4) (4) (4) (2) (2) (4) (2) (5) (4) (5) - (4) - (4) - (1) - - 14-Apr-18 (4) (4) (1) (4) (1) (3) (4) (3) (3) (3) (2) (2) (4) (2) (4) (3) (4) 2 (4) 1 (1) 2 (1) - - 15-Apr-18 (2) (3) (1) (2) (1) (3) (2) (3) (2) (3) (1) (1) (7) (1) (2) (3) (4) 6 (3) 1 (3) - (5) (3) (2) 16-Apr-18 - (4) 4 - 4 (2) (2) (3) (1) (3) (1) (2) (3) (1) (3) (3) (6) 6 2 6 (1) (5) (3) - 1 17-Apr-18 (3) (3) 2 (2) 2 (3) (2) (2) - (2) 3 - (1) 3 (3) (2) (4) 4 3 3 (1) (6) (4) 1 (1) 18-Apr-18 (4) (5) - (5) - (1) (2) (2) 1 (2) - (2) (3) - (4) (2) (2) 2 (5) (1) (1) (2) (3) 1 - 19-Apr-18 (3) (4) (2) (4) (2) (1) (1) (1) (1) (1) 1 1 (3) 1 (2) (1) (1) 2 (3) 2 (2) (1) (4) - - 20-Apr-18 (5) (6) (2) (3) (2) (1) (1) (1) (3) (1) - (2) (1) - (4) (1) (8) 8 2 1 - 2 (1) - - 21-Apr-18 (7) (6) 1 (6) 1 (2) (3) (2) (3) (2) 1 3 (2) 1 (7) (2) (5) 7 (4) - 1 (1) - 2 1 22-Apr-18 (5) (4) - (4) - - (2) - 1 - 2 3 (2) 2 (8) - (3) 7 (6) - (1) (1) (1) 2 (2) 23-Apr-18 (3) (1) 1 (3) 1 2 1 2 4 2 1 3 (1) 1 (2) 2 - 6 (1) 1 (2) (1) (1) 2 - 24-Apr-18 2 2 - 1 - 3 1 4 3 4 3 4 - 3 2 4 2 3 (4) 1 (3) (1) (1) 1 (1) 25-Apr-18 4 5 - 4 - 3 3 4 2 4 1 3 - 1 5 4 4 (1) (3) (1) (3) 1 (2) - (1) 26-Apr-18 4 3 (2) 4 (2) 4 3 3 2 3 - 1 1 - 4 3 4 (6) (4) (3) (1) (1) (1) - (1) 27-Apr-18 2 3 (3) 1 (3) 4 3 1 1 1 - 1 - - 3 1 3 (6) (5) (3) (2) (2) (3) (2) (1) 28-Apr-18 1 (2) (4) 1 (4) 2 3 2 3 2 - 2 1 - 3 2 3 (5) (6) (3) (1) (1) (2) (1) (1) 29-Apr-18 2 1 (4) 1 (4) 2 2 3 2 3 - 1 2 - 6 3 4 (7) (5) - (1) 1 (3) (1) (1) 30-Apr-18 3 5 (6) 2 (6) 5 2 2 2 2 - - 4 - 5 2 2 (5) (9) (4) (1) 1 1 (1) (1) 1-May-18 (1) (1) (5) - (5) 2 3 2 1 2 (1) 2 3 (1) 4 2 2 (2) (3) (4) (2) 2 1 (5) (2) 2-May-18 (2) (5) (4) (2) (4) 2 3 1 1 1 - (1) 2 - 2 1 2 (5) (2) (1) - 2 2 (1) (1) 3-May-18 (4) (2) (9) (5) (9) 1 - (1) - (1) 1 2 (4) 1 1 (1) - (7) (8) (3) - 2 - (1) (2) 4-May-18 (2) - (5) (2) (5) - 1 (2) 1 (2) - (1) - - 1 (2) 1 (5) (6) (3) (4) (1) (1) (4) (3) 5-May-18 - - (4) (2) (4) - 2 (1) - (1) - (1) - - 1 (1) 1 (5) (3) (1) (4) (1) - (2) (2) 6-May-18 (5) (7) (4) (6) (4) 1 - (1) - (1) - - - - (1) (1) (4) 1 (3) (1) (2) (1) (2) (4) (2) 7-May-18 (4) (4) - (4) - - (2) (2) (2) (2) - - 2 - (4) (2) (5) 2 (2) (2) (3) (1) (1) (3) (1) 8-May-18 (7) (8) 3 (8) 3 (2) (3) (3) (2) (3) (1) (1) 2 (1) (6) (3) (6) 5 (1) - - 1 (2) (2) (1) 9-May-18 (6) (2) - (7) - (1) (1) (1) (2) (1) 1 2 2 1 (5) (1) (3) 9 3 2 (1) (1) (4) (3) (3)

10-May-18 (2) 2 3 - 3 1 1 (1) - (1) - 1 3 - (2) (1) (1) 8 (4) (1) - 2 (1) (2) (2) 11-May-18 1 1 1 2 1 1 1 2 - 2 1 (1) 3 1 2 2 1 1 (4) - (1) 4 (2) (1) 1 12-May-18 1 - (2) - (2) - - - - - 1 (4) 2 1 2 - (2) (1) (3) (4) (1) 2 - (3) (1) 13-May-18 (3) (2) (3) (1) (3) (1) (1) (1) - (1) 1 (1) (2) 1 (1) (1) (3) (2) (4) (3) (2) 2 (1) (2) (2)


Page | 9

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14-May-18 (7) (9) (11) (6) (11) (3) (2) (2) - (2) (1) (1) (1) (1) (3) (2) - (4) (10) (6) (4) (3) (4) (4) (2) 15-May-18 (5) (5) (7) (6) (7) (1) (2) - 1 - (1) 2 (4) (1) - - - (2) (3) (2) (2) (5) (2) (1) - 16-May-18 (1) - (3) (1) (3) - - - 2 - - 3 (1) - 1 - 2 - 2 (3) (5) (5) (5) (4) (4) 17-May-18 4 3 1 5 1 3 2 1 2 1 1 3 - 1 2 1 6 (2) (3) (2) (3) (5) (4) (4) (1) 18-May-18 - (1) (1) 1 (1) 1 1 2 1 2 1 - 1 1 1 2 3 (2) 1 (2) (5) (6) (4) (2) (2) 19-May-18 - - - - - - - (2) 1 (2) 1 - - 1 (2) (2) 1 (3) (2) (3) (1) (3) (1) (1) (2) 20-May-18 3 - (2) 2 (2) 1 2 1 1 1 1 - - 1 1 1 4 (6) (4) (4) (3) (5) - (1) - 21-May-18 3 6 - 2 - 3 2 3 4 3 1 2 (1) 1 1 3 6 (5) (5) (3) (1) (2) (2) (1) - 22-May-18 15 8 2 15 2 3 3 2 2 2 1 (2) (1) 1 7 2 8 (3) (2) (4) - (2) (1) (1) 2 23-May-18 4 4 2 5 (1) 2 2 4 3 4 (1) (2) (2) (1) 5 4 5 (4) (4) (6) (2) (4) 1 - (1) 24-May-18 2 2 (1) 2 (1) 1 2 1 4 1 1 (3) - 1 2 1 1 (3) 1 (3) (2) (5) - (4) (1) 25-May-18 2 2 - 2 - (1) 1 (1) 1 (1) - - - - 1 (1) 1 (1) - (3) (3) (1) (4) (6) (4) 26-May-18 - 1 4 1 4 1 - 1 - 1 - 2 (1) - - 1 1 4 3 (2) (2) (5) (4) (1) (1) 27-May-18 4 4 6 3 6 1 - 2 1 2 1 4 (7) 1 - 2 2 5 6 1 2 (3) (1) - (2) 28-May-18 4 6 4 8 4 3 3 3 2 3 (1) 2 (1) (1) 1 3 4 4 2 (1) 2 (3) (2) - - 29-May-18 12 10 2 10 2 4 5 3 3 3 1 (1) 5 1 9 3 5 (1) (1) - 1 (1) (2) (2) 1 30-May-18 5 (1) - 5 - 4 4 1 - 1 1 3 5 1 3 1 - 2 - 1 (1) (1) (2) (2) 1 31-May-18 9 6 - 7 - 1 3 1 1 1 1 2 3 1 5 1 2 2 - 2 - (2) (2) (1) -

1-Jun-18 6 - (4) 5 (4) 2 4 1 - 1 1 1 - 1 13 1 3 (6) - (3) (1) (3) (2) (2) 2 2-Jun-18 (3) (7) (7) (2) (7) 1 1 (1) 2 (1) 1 - (2) 1 5 (1) (1) (3) (6) (1) (2) 1 (2) 1 (2) 3-Jun-18 (5) (6) (6) (3) (6) (3) (1) (2) 2 (2) - (2) (1) (4) 1 (2) (2) (7) (3) (1) (2) (2) - - (3) 4-Jun-18 (4) (6) (6) (3) (6) 1 (2) 2 3 2 - 1 (1) (5) - 2 - (3) (6) (2) (3) (1) (3) (2) (2) 5-Jun-18 (3) (5) (3) (3) (3) 2 4 1 3 1 - (2) - (4) - 1 2 5 (2) (1) (2) (2) (2) (1) - 6-Jun-18 (5) (9) 5 (6) 5 4 7 1 2 1 (1) (1) - (1) (2) 1 2 6 1 (1) (1) (1) (1) 2 - 7-Jun-18 3 6 6 4 6 4 9 2 4 2 (3) (3) (3) (3) 6 2 2 11 3 - 1 3 1 1 (1) 8-Jun-18 6 7 (6) 6 (6) 6 4 2 3 2 1 3 (4) (4) 4 2 1 2 (1) (1) (4) 2 - (1) (1) 9-Jun-18 1 (4) (2) 3 (2) 3 - 1 2 1 (1) (3) (5) (3) 1 1 2 3 (1) - (3) 1 (3) (2) -

10-Jun-18 (3) (2) (3) (1) (3) 2 (5) 4 4 4 2 (2) (6) (3) (2) 4 - 4 1 - (2) 1 (1) 2 2 11-Jun-18 1 4 (1) 3 (1) 4 3 2 1 2 3 (2) 1 (1) 1 2 - - (3) 1 (1) (1) (1) - (2) 12-Jun-18 - 3 1 2 1 - - 1 - 1 2 (1) - - 2 1 (2) 4 (1) 2 3 (1) (1) (3) (1) 13-Jun-18 (1) 5 (1) (1) (1) 2 - 1 - 1 2 4 1 3 3 1 (2) (2) (4) (1) (1) - (3) - (4) 14-Jun-18 (1) (1) (5) (1) (5) 2 - 1 (1) 1 - 1 1 3 (1) 1 (2) (1) (2) 1 (3) - (4) (8) (3) 15-Jun-18 (1) (4) (1) 1 (1) - - 1 (1) 1 1 2 - 1 1 1 (3) 7 4 5 1 2 (1) (5) (3) 16-Jun-18 7 (4) 4 5 4 1 - - (1) - (2) (2) 5 3 2 - (2) 6 5 5 2 1 1 (1) - 17-Jun-18 4 (7) 4 2 4 1 (1) 1 - 1 (2) (5) (2) (11) 1 1 - 4 3 (3) 3 1 (1) (5) (1) City Avg. 0.5 0.1 (0.6) 0.6 (0.7) 0.9 0.7 0.4 0.7 0.4 0.2 0.0 (0.6) (0.2) 0.9 0.4 0.5 0.7 (1.5) (0.2) (1.4) (0.8) (1.3) (1.1) (0.8)



Page | 10

Air Conditioner: Industry Production Volume RAC industry production volume Volume FY12 FY13 FY14 FY15 FY16 FY17 FY18 Star 1 107,525 260,019 223,016 88,326 39,782 1,505 415,913 Star 2 1,064,021 1,286,143 1,131,687 927,755 561,870 429,452 538,926 Star 3 894,352 1,017,074 1,342,260 2,486,797 2,785,931 3,629,764 2,846,892 Star 4 147,176 245,353 207,138 130,471 47,836 37,009 99,109 Star 5 541,648 458,976 578,454 1,006,012 1,240,603 1,641,909 1,038,727 Inverter - - - - 25,006 702,652 1,964,640 Total 2,754,722 3,267,565 3,482,555 4,639,361 4,701,028 6,442,291 6,904,207

Growth YoY (%) FY12 FY13 FY14 FY15 FY16 FY17 FY18 Star 1 142% -14% -60% -55% -96% 27535% Star 2 21% -12% -18% -39% -24% 25% Star 3 14% 32% 85% 12% 30% -22% Star 4 67% -16% -37% -63% -23% 168% Star 5 -15% 26% 74% 23% 32% -37% Inverter 2710% 180% Total 19% 7% 33% 1% 37% 7%

Mix (%) FY12 FY13 FY14 FY15 FY16 FY17 FY18 Star 1 4 8 6 2 1 0 6 Star 2 39 39 32 20 12 7 8 Star 3 32 31 39 54 59 56 41 Star 4 5 8 6 3 1 1 1 Star 5 20 14 17 22 26 25 15 Inverter - - - - 1 11 28 Total 100 100 100 100 100 100 100 Source: BEE, HDFC sec Inst Research

FY18 was a year marked by disruptions like 1) GST pre-buying (1QFY18), 2) Modest festive season due to GST pre-buying, 3) Rating change pre-buying (3QFY18), 4) IMD forecast for harsh summer in 2018 and 5) Pre-monsoon showers pan-India has resulted in a weak summer Air conditioner production volumes grew by only 7% in FY18 1 Star AC’s showed an unusual pick-up in growth in FY18. It could be a result of rating change norm (effective Jan’18)


Page | 11

Inverter Air Conditioners Gaining Share Inverter (Volumes) FY16 FY17 FY18 Star 3 15,072 560,866 1,634,398 Star 4 4,990 70,018 85,676 Star 5 4,944 71,768 244,566 Total 25,006 702,652 1,964,640

Mix (%) FY16 FY17 FY18 Star 3 60 80 83 Star 4 20 10 4 Star 5 20 10 12 Total 100 100 100 Source: BEE, HDFC sec Inst Research Industry Production Volume vs. Revenue Growth of Players

FY13 FY14 FY15 FY16 FY17 Industry Production Volume 19% 7% 33% 1% 37% Voltas UCP Segment Growth 19% 12% 22% 2% 18% Johnson (Hitachi) Revenue Growth 17% 18% 43% 6% 20% Blue Star UCP Segment Growth 3% 12% 24% 18% 27% Source: Companies, HDFC sec Inst Research FY18 Industry growth FY18 Industry AC Production Volume Growth 7% Industry AC Market Value Growth 11% Voltas UCP Segment Growth 15% Blue Star UCP Segment Growth 17% Lloyd Consumer 11%

Source: Companies, HDFC sec Inst Research

Inverter AC’s continued to gain share at an impressive pace (28% in FY18 vs. 11% in FY17) Volume production data is directionally in-line with value growth for most of the players during FY13-18


Page | 12

AC Market: World and India India is the second fastest RAC (Room Air Conditioners) growing market in the top 10 RAC market in the world after Vietnam. India has the lowest AC penetration coupled with the 2nd highest number of HHs in the world. We believe India can sustain >10% AC volume

CAGR driven by cheaper financing options, growing disposable incomes, rising temperatures and increasing number of HHs (~4.8 members/HH, which is the highest in the world).

Top 10 Countries RAC Volume Annual Demand (CY17)

Rank (RAC

Demand) Country RAC (mn

unit) 10 Year

CAGR 5 Year CAGR

3 Year CAGR

Mix of total market

Cooling Degree

Days

GDP per capita 2016

(Current USD)

Number of HHs

(mn)

Annual AC

sales/HHs 1 China 43.5 7% 3% 3% 45% 1,046 8,123 456 10% 2 Japan 8.9 2% 1% 2% 9% 397 38,972 49 18% 3 USA 8.0 0% 1% -1% 8% 1,555 57,638 134 6% 4 India 4.9 11% 8% 10% 5% 3,120 1,709 248 2% 5 Brazil 2.8 9% -3% -12% 3% 2,015 8,649 57 5% 6 Indonesia 2.3 10% 3% 1% 2% 3,545 3,570 61 4% 7 Vietnam 1.9 21% 16% 16% 2% 3,016 2,170 22 8% 8 Saudi Arabia 1.7 4% 2% -7% 2% na 20,028 5 35% 9 Thailand 1.3 7% 5% 3% 1% 3,567 5,910 18 7%

10 Argentina 1.1 1% -4% -5% 1% na 12,440 12 9%

World 96.0 5% 2% 2% 100% na 10,163 1,650 6% Source: The Japan Refrigeration and Air Conditioning Industry Association, Davis and Gertler, PNAS 2015, World Bank, HDFC sec Inst

India RAC Market Breakup

2012 2013 2014 2015 2016 2017 5 Year CAGR 3 Year CAGR Units (000) Window 806 747 703 705 620 718 -2% 1% Split 2,527 2,699 2,971 3,142 3,662 4,081 10% 11% Split-Type (Multi) - - - - - 91 na na Total 3,333 3,446 3,674 3,847 4,282 4,890 8% 10% Mix (%) Window 24% 22% 19% 18% 14% 15% Split 76% 78% 81% 82% 86% 83% Split-Type (Multi) 0% 0% 0% 0% 0% 2% Total 100% 100% 100% 100% 100% 100% Source: The Japan Refrigeration and Air Conditioning Industry Association, HDFC sec Inst Research

World RAC market (96mn units)

India RAC market (~5mn units)

Source: The Japan Refrigeration and Air Conditioning Industry Association

India RAC market is shifting towards the split AC. Window AC share has gone down to 15% in 2017 vs. 24% in 2012

Window14% Split

82%

Multi Split4%

Window15% Split

83%

Multi Split2%


Page | 13

MNC commentary/statements on India RAC Company Period Comments/Statements

Daikin 2017

“The air conditioning market in India in particular has rapidly expanded (10% annual growth toward 2020) due to expansion of middle income households against the backdrop of high economic growth. Because growth is at a pace that exceeded our original plan, I would like us to invest with even greater concentration. In addition to investigation of a second factory, we will work to increase revenues by expanding the sales network to Tier 3 and Tier 4 cities, increasing RA sales by fortifying the mass retailer routes, enlarging the inverter AC lineup to further promote inverter use, and expanding the commercial-use VRT market to regional cities and strengthening after sales service. We will strive to become the overwhelming No. 1.”

“In India, Daikin captured demand of the expanding middle class, and sales significantly increased through dealer development, improved productivity, and launch of new products.”

“India market registered growth of 18% in the local currency term in 2017-18”

OGeneral 2018

“Fujitsu General will add five models of inverter air conditioner conforming to the new energy saving standards for the air conditioner market in India from late February to strengthen our product lineup to a total of 25 models. It is estimated that the room air conditioner market in India is at 4.28 million units (FY2016; source: The Japan Refrigeration and Air Conditioning Industry Association). India’s population is also expected to increase and its economy is expected to grow in the future. Therefore, it is predicted that India will grow into the third largest market in the world in the near future. Meanwhile, energy saving standards and an energy labeling program were revised and have been enforced since January 2018. As a result, it is expected that the demand for inverter air conditioners will expand even further in the future.”

2016 “Reestablishment sales strategy for India: doubling sales versus FY2016 (1) Allocating personnel and

resources, reviewing of JV operations, (2) Strengthening product strategy, considering local production”

Haier

2017

“The South Asian region continued to grow rapidly in 2017, of which the Indian market achieved an increase of 40% in revenue, four times higher than the growth in the industry

By the end of 2017, Haier Industrial Park in India was put into production. The production capability of refrigerators, washing machines, air-conditioners, water heaters increased by 3.8 million units, which will efficiently improve speed and cater to the needs of the local market.”

2016

“Revenue from the Indian market increased by 26%, with a market share of 5%. During the reporting period, the Company have stepped up its efforts in capability building in terms of products, channels and supply chains, etc., and launched glass-door refrigerators, cleaning-free washing machines, rapid cooling air-conditioners and other differentiated products; simplified channel structure and enhanced the network quality by 10%; promoted the expansion project of industrial park to lay a solid foundation of supply chain to increase the speed of response to local needs.”

Source: Companies, HDFC sec Inst Research

Daikin is focusing on expanding the sales network to Tier 3 and Tier 4 cities to accelerate revenue and gain market share Daikin has registered 18% growth (local currency term) in India in 2017-18 Fujitsu General (OGeneral) predicated that India will grow into the third largest market in the world in the near future Haier clocked 40% growth in revenue in India, 4x of the market growth

COMPANY UPDATE 21 JUN 2018

Symphony BUY


Structural story intactSymphony reported a washout quarter with revenue contracting by 14/18% for standalone/domestic business on account of erratic summer. While domestic business grew by 5% in FY18 owing to strong off-season primary sales. Typically 4Q is the balancing quarter for Symphony, whose performance is driven by consumer offtake. Pre-monsoon showers in South region (larger piece in 4Q) impacted offtake resulting in weak inventory replenishment. We interacted with the mgt and have reached out to

several dealers/distributors to confirm (1) Our thesis on air cooler, (2) Symphony’s market share change, (3) Any structural shift towards AC market (since AC market grew by 11% vs. Air cooler contraction in FY18), (4) Consumer off-take during April-June and (5) GST related impact on unorganised market.

We observed that FY18 was a one-off year (2 seasonally weak quarters, 1QFY18 & 4QFY18) for air cooler business. Although summer for pan-India was hotter YoY, lack of consistent heat impacted air cooler business. However, we are encouraged by the response we got from dealers/distributors w.r.t. Symphony’s strong brand recall, improving after sales service, consistent product launches and respected corporate governance.

We noticed that with version 3.0 Symphony attempts to be more aggressive in industrial cooling and exports. They desire to compete with product

differentiation (launch tech-rich coolers) and don’t wish to resort to a price discounting strategy.

Our bullishness on Symphony is based on (1) Rising demand for cooling products driven by growing disposable incomes, cheaper financing options and increasing up-country penetration of electricity, (2) A large unorganised air cooler market, (3) Consistent product innovation, (4) Growing distribution reach (40k dealers targeted vs. 30k now) over the next 2 years and (5) Untapped opportunities in RoW.

We cut our EPS estimates by ~4% for FY19-20 to factor weak consumer offtake in the domestic business. We value Symphony at 45x Jun-20 EPS, our TP is at Rs 1,949 (earlier 1,983). We maintain BUY.

Near-term outlook: We advise investors to look at the stock from the long term perspective and be cognizant of seasonal risks for cooling products

Financial Summary (Rsmn) FY17 FY18 FY19E FY20E FY21E

Net Revenue 7,680 7,983 9,362 11,248 13,128 EBITDA 2,009 2,193 2,805 3,485 4,047 APAT 1,691 1,926 2,322 2,907 3,409 EPS (Rs) 24.2 27.5 33.2 41.5 48.7 P/E (x) 57.8 50.7 42.1 33.6 28.6 EV/EBITDA (x) 47.1 42.6 32.8 25.9 21.8 Core RoCE (%) 106.9 89.9 94.5 104.9 108.1 Source: Company, HDFC sec Inst Research

INDUSTRY APPLIANCES

CMP (as on 20 Jun 2018) Rs 1,397

Target Price Rs 1,949

Nifty 10,772

Sensex 35,547

KEY STOCK DATA Bloomberg SYML IN

No. of Shares (mn) 70

MCap (Rsbn)/(US$ mn) 98/1,435

6m avg traded value (Rs mn) 82

STOCK PERFORMANCE (%)

52 Week high / low Rs 2,213 /1,152

3M 6M 12M

Absolute (%) (19.7) (22.7) 4.2

Relative (%) (27.4) (28.0) (9.4)

SHAREHOLDING PATTERN (%)

Promoters 75.00

FIs & Local MFs 7.51

FPIs 7.15

Public & Others 10.34 Source : BSE

Naveen Trivedi [email protected] +91-22-6171-7324

Siddhant Chhabria [email protected] +91-22-6171-7336

SYMPHONY : COMPANY UPDATE

Page | 15

Key takeaways from management interaction 4QFY18 Performance and 1QFY19 outlook

Air cooler offtake has a higher dependence on season: Although AC market growth was at 11% in FY18 as compared to air cooler market contracted but Symphony management does not see it as a structural change in the air cooler market. Air cooler market is more sensitive towards the consistent heat during the peak summer (May). Consumer offtakes are ~80-85% during the summer, hence, the dependence on summer is high for air cooler vs. AC.

South region impacted primary sales in 4QFY18: Distributors buy from Symphony during July to Jan (non-season period) and then these distributors sell it to dealers during Feb-March. Depending on the initial sign of season/demand, distributors replenish the inventory during March. As per the mgt, this year due to weak summer in south region, distributors did not replenish the inventory.

Voltas enjoying low base and distribution expansion: Voltas air cooler posted strong 18% volume growth in air cooler in FY18 and reached to ~2lac units. Voltas’ healthy growth is coming on the backdrop of distribution expansion. Voltas is a new player with strong distribution reach, which the company is leveraging and it converting into healthy volume growth. As per Symphony, most branded players have witnessed volume contraction in FY18 at retail level.

1QFY19 outlook is weak: As per Symphony’s estimate, air cooler market has contracted while Symphony reported growth in FY18. Therefore, company expects that volume market share would have been expanded vs. last year. However, the real season impact would be known in July. Air cooler demand at the retail level starts during 1st week of May (North and West region), however, since the summer was erratic the pickup could not happen at

the retail level. However, summer in North India and parts of West India has picked since 15th May and is extended this year until June end. Despite this, primary sales will continue to remain weak in 1QFY19 owing to high channel inventory.

Version 3.0

Rising aggression for industrial cooling and exports: As competition continues to intensify, Symphony goes back to the drawing board to re-write their strategy (developed version 3.0). They desire to compete with product differentiation (launch tech-rich coolers) and not with price discounting strategy. The company has appointed executives pan-India to drive industrial cooling business and sounds confident on accelerating growth. Symphony’s continued focus on expanding their geographical presence is evident with a recent non-binding offer to acquire a ‘profitable’ company outside India.

International Biz Outlook

Mgt. is bullish on exports: Export revenue growth has been very volatile and growth rate is slower than expectation. However, there are a lot of opportunities in the market where the company has presence. Middle East, Asia and Europe are the big markets for Symphony. Mgt expects double digit revenue growth in the coming years.

Restructuring subsidiaries has resulted in margin expansion: Symphony has reduced the losses by 75% in GSK (China) during the last 2 years through various re-engineering measures. The company is hopeful for breakeven the business by the end of FY20. Symphony has improved IMPCO’s operational performance. Asset-light business model would generate healthy FCF in the coming years.


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Key takeaways from air cooler dealers/ distributors check

Summer 2018: Air cooler market is down by 20-25% across regions in Apr to mid-May owing to erratic season. While, there has been a pick-up in offtake since 15th May but the pickup is not significant to return to positive territory.

Branded Competition: Symphony was the outlier with strong distribution network and brand recall. Voltas has increased its footprint but dealers don’t perceive the product as a ‘value buy’ when compared to Symphony’s premium build and pricing. Kenstar has lost market share in the recent past owing to lack of focus from the management since they are undergoing a transition (Videocon to Everstone Private Equity). Bajaj with its new distribution strategy is still struggling to hold market share, however the company has launched new models. Dealers view increasing number of brands and product launches as a positive for the industry as it continues to develop the category.

Unorganised Players: GST transition was expected to be the key driver to shift the market towards organized players. However, this trend has not yet been witnessed in the market. Although, unbranded players have seen cost inflation (10-15%) owing to tax paid on raw material, narrowing the pricing gap vs.

branded products. E-way bill is expected be the catalyst in driving the transition to formalization.

Symphony market position: Majority of the dealers continued to appreciate Symphony’s brand, corporate governance and clear-cut strategy (missing for players like Bajaj and Kenstar). Interestingly, large distributors of Kenstar and Voltas acknowledged Symphony as the leader with strong product differentiation and industry leading after sales service.

Channel inventory: Air cooler inventory is at higher levels on a YoY comparison, particularly in South region (~30% revenue mix). This may impact 1QFY19 performance as Symphony’s strategy is to normalize inventory prior to introducing new season pricing (July onwards).

Premium air cooler: Dealers/distributors weren’t bullish on the premium range (> Rs 10,000) of air coolers citing that consumers will upgrade to an entry level air conditioner supported by consumer financing.

Long term air cooler outlook: Dealer/distributors believe that there is a market for both air conditioner and air coolers. Since consumers cannot afford the recurring cost of air conditioners owing to long periods of usage during summer. Consumer finance will also benefit air coolers as witnessed for air conditioners.


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Quarterly Financials (Standalone) Particulars 4QFY18 4QFY17 YoY (%) 3QFY18 QoQ (%) FY18 FY17 YoY (%) Net Revenue 1,554 1,808 (14.0) 2,176 (28.6) 6,870 6,639 3.5 Material Expenses 714 902 (20.9) 995 (28.3) 3,203 3,103 3.2 Employee Expenses 128 124 3.1 140 (8.7) 520 462 12.6 ASP Expenses 69 100 (31.4) 5 1,331.3 304 381 (20.2) Other Operating Expenses 148 186 (20.3) 169 (12.2) 643 617 4.1 EBITDA 496 496 (0.1) 868 (42.9) 2,200 2,076 6.0 Depreciation 11 10 15.8 12 (6.8) 44 35 23.9 EBIT 485 486 (0.4) 856 (43.4) 2,156 2,040 5.7 Other Income 92 137 (33.2) 80 14.2 403 379 6.4 Interest - - na - na 7 0 na PBT 576 624 (7.6) 937 (38.5) 2,552 2,419 5.5 Tax 157 167 (6.2) 274 (42.7) 723 673 7.4 PAT 420 457 (8.1) 663 (36.7) 1,830 1,746 4.8 EPS 6.0 6.5 (8.1) 9.5 (36.7) 26.1 24.9 4.8 Source: Company, HDFC sec Inst Research Margin Analysis (Standalone) % of Net sales 4QFY18 4QFY17 YoY (%) 3QFY18 QoQ (%) FY18 FY17 YoY (%) Material Expenses 45.9 49.9 (396) 45.7 22 46.6 46.7 (11) Employee Expenses 8.2 6.9 136 6.4 179 7.6 7.0 61 ASP Expenses 4.4 5.5 (112) 0.2 420 4.4 5.7 (131) Other Operating Expenses 9.6 10.3 (74) 7.8 178 9.4 9.3 6 EBITDA Margin (%) 31.9 27.4 446 39.9 (800) 32.0 31.3 76 Tax Rate (%) 27.2 26.8 40 29.2 (199) 28.3 27.8 50 APAT Margin (%) 27.0 25.3 174 30.5 (347) 26.6 26.3 33 Source: Company, HDFC sec Inst Research

Domestic revenues declined by 18% while exports grew at 7% in 4QFY18 Symphony ‘s consolidated revenue grew by 4% in FY18 owing to two back to back weak summer Maintained value market share of 50% GM was up by 396bps to 54% owing to favorable base (impact from promo-launch of Touch series) IMPCO turned profitable while GSK (China) losses halved South India contributes ~20% of domestic business which was impacted by delayed summer


Page | 18

Segmental Quarterly (Standalone) (Rs mn) 4QFY18 4QFY17 YoY (%) 3QFY18 QoQ (%) FY18 FY17 YoY Gr. (%) Revenue Domestic 1,232 1,506 (18.2) 2,080 (40.8) 6,213 5,918 5.0 Export 322 302 6.6 96 234.0 657 721 (8.9) Total 1,554 1,808 (14.0) 2,176 (28.6) 6,870 6,639 3.5 Revenue Mix (%) Domestic 79 83 96 90 89 Export 21 17 4 10 11 Total 100 100 100 100 100 EBIT Domestic 446 521 (14.5) 895 (50.2) 2,330 2,174 7.2 Export 131 102 27.7 42 212.2 229 246 (6.8) Total 576 624 (7.6) 937 (38.5) 2,559 2,419 5.8 EBIT Margin (%) Domestic 36.2 34.6 155 43.0 (684) 37.5 36.7 78 Export 40.5 33.8 671 43.4 (283) 34.9 34.1 78 Source: Company, HDFC sec Inst Research

Weak summer impacted the domestic revenue and EBIT performance Symphony added 6 countries to its customer list during FY18


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Symphony at a glance

Particulars (Rs mn) Consolidated

Particulars (Rs mn) Standalone

FY15 FY16 (9M)* FY17 FY18 FY15 FY16

(9M)* FY17 FY18

Revenue Revenue India 4,112 3,684 5,969 6,222 India 4,086 3,679 5,951 6,213 RoW 1,143 771 1,679 1,761 Export 537 469 721 657 Total 5,255 4,455 7,648 7,983 Total 4,623 4,149 6,672 6,870 EBIT (Inc. other income) EBIT (Inc. other income) India 1,437 1,510 2,216 2,334 India 1,428 1,506 2,153 2,330 RoW 181 16 134 332 Export 195 190 246 229 Total EBIT 1,618 1,526 2,350 2,666 Total EBIT 1,623 1,696 2,399 2,559 Revenue Growth (%) Revenue Growth (%) India 18% 19% 22% 4% India 17% 20% 21% 4% RoW -17% -10% 63% 5% Export -5% 17% 15% -9% Total 9% 13% 29% 4% Total 14% 20% 21% 3% Revenue Mix (%) Revenue Mix (%) India 78% 83% 78% 78% India 88% 89% 89% 90% RoW 22% 17% 22% 22% Export 12% 11% 11% 10% Total 100% 100% 100% 100% Total 100% 100% 100% 100% EBIT Margin (%) EBIT Margin (%) India 35% 41% 37% 38% India 35% 41% 36% 38% RoW 16% 2% 8% 19% Export 36% 41% 34% 35% Total 31% 34% 31% 33% Total 35% 41% 36% 37% EBIT Growth (%) EBIT Growth (%) India 25% 40% 10% 5% India 25% 41% 7% 8% RoW -21% -89% 546% 148% Export -9% 30% -3% -7% Total 18% 26% 16% 13% Total 20% 39% 6% 7% EBIT Mix (%) EBIT Mix (%) India 89% 99% 94% 88% India 88% 89% 90% 91% RoW 11% 1% 6% 12% Export 12% 11% 10% 9% Total 100% 100% 100% 100% Total 100% 100% 100% 100% Source: Company, HDFC sec Inst Research

Symphony’s Renewed Strategy


Page | 20

Air Cooler Industry Air cooler Value Market Break-up (~Rs 35-40bn) Air cooler Volume Market Break-up (~9mn units)

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Branded Air Cooler Value Market Share Branded Air Cooler Vol. Market Share

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Symphony maintained value market share of 50% in FY18 despite increased competitive intensity from Voltas and Crompton. We believe Kenstar and Bajaj lost market share in FY18 Symphony is the pioneer in developing the premium market (>Rs 10,000). It has the maximum SKU share in the premium segment. We expect premiumisation to continue since it is only ~4% of the total air cooler market

Organised27%

Unorganised73%

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Unorganised65%

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Assumptions Standalone Segmental Particulars (Rs mn) FY13 FY14 FY15 FY16 (9M) FY17 FY18 FY19E FY20E FY21E Revenue Domestic 2,730 3,946 4,085 3,679 5,918 6,213 7,425 9,166 10,898 Export 353 566 537 469 721 657 778 893 1,010 Total 3,083 4,512 4,622 4,148 6,639 6,870 8,203 10,059 11,908 Revenue Gr. (%)

Domestic 30.6% 44.5% 3.5% 20.1% 20.6% 5.0% 19.5% 23.4% 18.9% Export -13.8% 60.3% -5.1% 16.5% 15.2% -8.9% 18.4% 14.7% 13.1% Total 23.3% 46.3% 2.4% 19.7% 20.0% 3.5% 19.4% 22.6% 18.4% Revenue Mix (%)

Domestic 89% 87% 88% 89% 89% 90% 91% 91% 92% Export 11% 13% 12% 11% 11% 10% 9% 9% 8% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% EBIT

Domestic 807 1,141 1,428 1,506 2,174 2,330 2,930 3,632 4,291 Export 119 215 195 190 246 229 309 356 403 Total 926 1,356 1,623 1,696 2,419 2,559 3,239 3,988 4,694 EBIT Margin (%)

Domestic 30% 29% 35% 41% 37% 38% 39% 40% 39% Export 34% 38% 36% 41% 34% 35% 40% 40% 40% Total 30% 30% 35% 41% 36% 37% 39% 40% 39% EBIT Change (bps)

Domestic 1,083bps -67bps 604bps 597bps -420bps 78bps 195bps 16bps -25bps Export 633bps 448bps -168bps 418bps -645bps 78bps 482bps 18bps 4bps Total 990bps 2bps 506bps 577bps -444bps 81bps 223bps 16bps -23bps EBIT Mix (%)

Domestic 87% 84% 88% 89% 90% 91% 90% 91% 91% Export 13% 16% 12% 11% 10% 9% 10% 9% 9% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% EBIT Growth (%)

Domestic 106.0% 41.3% 25.2% 40.6% 8.3% 7.2% 25.7% 23.9% 18.1% Export 6.3% 81.7% -9.3% 29.9% -3.2% -6.8% 34.8% 15.3% 13.2% Total 83.9% 46.5% 19.7% 39.3% 7.0% 5.8% 26.5% 23.1% 17.7% Source: HDFC sec Inst Research


Page | 22

Standalone Sales Volume Particulars FY13 FY14P FY15P FY16P(9m) FY17P FY18P FY19E FY20E FY21E Sales Volume India 437,061 590,416 673,432 612,873 926,219 975,682 1,131,995 1,344,125 1,559,185 ROW 79,713 116,628 110,279 95,958 143,866 135,283 155,545 176,185 197,327 Total 516,774 707,044 783,711 708,831 1,070,085 1,110,964 1,287,540 1,520,310 1,756,512 Sales Volume Gr (%)

India 22.2% 35.1% 14.1% 21.3% 13.3% 5.3% 16.0% 18.7% 16.0% Export -30.3% 46.3% -5.4% 16.0% 12.4% -6.0% 15.0% 13.3% 12.0% Total 9.5% 36.8% 10.8% 20.6% 13.2% 3.8% 15.9% 18.1% 15.5% Aircoolers - Realization

India 6,246 6,683 6,066 6,003 6,389 6,368 6,560 6,819 6,990 Export 4,432 4,855 4,870 4,892 5,011 4,857 5,002 5,067 5,118 Total 5,966 6,382 5,803 5,852 6,204 6,184 6,371 6,616 6,780 Source: Company, HDFC sec Inst Research Note: FY16 is of 9M financial, growth are adjusted

Volume growth and realisation growth are projected numbers between FY15-18


Page | 23

Consolidated Segmental Assumption

Particulars (Rs mn) Consolidated

Particulars (Rs mn) Standalone

FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E Revenue Revenue India 6,222 7,425 9,166 10,898 India 6,213 7,425 9,166 10,898 RoW 1,761 1,937 2,082 2,230 Export 657 778 893 1,010 Total 7,983 9,362 11,248 13,128 Total 6,870 8,203 10,059 11,908 EBIT (Inc. other income)

EBIT (Inc. other income)

India 2,334 2,930 3,632 4,291 India 2,330 2,930 3,632 4,291 RoW 332 345 449 497 Export 229 309 356 403 Total EBIT 2,666 3,275 4,081 4,788 Total EBIT 2,559 3,239 3,988 4,694 PAT

PAT

India 1,742 2,084 2,579 3,047 Export 1,672 2,084 2,579 3,047 RoW 184 263 354 389 Capital Employed 157 220 253 286 Total 1,926 2,347 2,933 3,435 India 1,830 2,303 2,831 3,333 Revenue Growth (%)

Revenue Growth (%)

India 4% 19% 23% 19% India 4% 20% 23% 19% RoW 5% 10% 7% 7% Export -9% 18% 15% 13% Total 4% 17% 20% 17% Total 3% 19% 23% 18% Revenue Mix (%)

Revenue Mix (%)

India 78% 79% 81% 83% India 90% 91% 91% 92% RoW 22% 21% 19% 17% Export 10% 9% 9% 8% Total 100% 100% 100% 100% Total 100% 100% 100% 100% EBIT Margin (%)

EBIT Margin (%)

India 38% 39% 40% 39% India 38% 39% 40% 39% RoW 19% 18% 22% 22% Export 35% 40% 40% 40% Total 33% 35% 36% 36% Total 37% 39% 40% 39% EBIT Growth (%)

EBIT Growth (%)

India 5% 26% 24% 18% India 8% 26% 24% 18% RoW 148% 4% 30% 11% Export -7% 35% 15% 13% Total 13% 23% 25% 17% Total 7% 27% 23% 18% EBIT Mix (%)

EBIT Mix (%)

India 88% 89% 89% 90% India 91% 90% 91% 91% RoW 12% 11% 11% 10% Export 9% 10% 9% 9% Total 100% 100% 100% 100% Total 100% 100% 100% 100% PAT Mix (%)

PAT Mix (%)

India 90% 89% 88% 89% India 91% 90% 91% 91% RoW 10% 11% 12% 11% Export 9% 10% 9% 9% Total 100% 100% 100% 100% Total 100% 100% 100% 100% Source: Company, HDFC sec Inst Research


Page | 24

Key Assumptions

FY15 FY16 (9m) FY17 FY18 FY19E FY20E FY21E Standalone Volume Growth

India 14.1 21.3 13.3 5.3 16.0 18.7 16.0 Export (5.4) 16.0 12.4 (6.0) 15.0 13.3 12.0 Total 10.8 20.6 13.2 3.8 15.9 18.1 15.5

Realisaiton Growth

India (9.2) (1.1) 6.4 (0.3) 3.0 4.0 2.5

Export 0.3 0.4 2.4 (3.1) 3.0 1.3 1.0 Total (9.1) 0.8 6.0 (0.3) 3.0 3.8 2.5

Revenue Growth 2.5 19.7 20.0 3.5 19.4 22.6 18.4 Gross Margin (%) 52.9 54.9 53.3 53.4 55.4 56.1 56.1 Employee (%) 6.6 7.2 7.0 7.6 7.5 7.2 7.2 SG&A (%) 7.7 2.0 5.7 4.4 4.6 4.4 4.4 Other Expenses (%) 9.5 9.0 9.3 9.4 10.0 11.0 11.5 EBITDA Margin 29.1 36.7 31.3 32.0 33.4 33.5 33.0 Subsidiaries 14.1 21.3 13.3 5.3 16.0 18.7 16.0 Revenue Growth (5.4) 16.0 12.4 (6.0) 15.0 13.3 12.0

IMPCO 10.8 20.6 13.2 3.8 15.9 18.1 15.5 MKE (China)

EBITDA Margin (9.2) (1.1) 6.4 (0.3) 3.0 4.0 2.5 IMPCO 0.3 0.4 2.4 (3.1) 3.0 1.3 1.0 MKE (China) (9.1) 0.8 6.0 (0.3) 3.0 3.8 2.5

Source: Company, HDFC sec Inst Research Note: FY16 is of 9M financial, growth are adjusted

Volume growth and realisation growth are projected numbers between FY15-18 We believe China business will break-even in FY20


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Income Statement (Consolidated) Year End March (Rs mn) FY17 FY18 FY19E FY20E FY21E Net Revenues 7,680 7,983 9,362 11,248 13,128 Growth (%) 29 4 17 20 17 Material Expenses 3,644 3,853 4,325 5,123 5,980 Employee Expense 687 727 808 899 1,001 ASP Expense 653 560 683 821 958 Freight and forwarding 241 231 272 326 381 Other expenses 445 418 469 593 761 EBITDA 2,009 2,193 2,805 3,485 4,047 EBITDA Growth (%) 11 9 28 24 16 EBITDA Margin (%) 26.2 27.5 30.0 31.0 30.8 Depreciation 69 68 72 75 79 EBIT 1,940 2,125 2,733 3,410 3,968 Other Income (Inc. EO Items) 432 541 542 672 820 Interest 0 18 18 18 18 PBT 2,372 2,648 3,257 4,063 4,770 Tax 681 723 935 1,156 1,361 RPAT 1,691 1,926 2,322 2,907 3,409 Adjustment - - - - - APAT 1,691 1,926 2,322 2,907 3,409 APAT Growth (%) 15.9 13.9 20.6 25.2 17.3 Adjusted EPS (Rs) 24.2 27.5 33.2 41.5 48.7 EPS Growth (%) 15.9 13.9 20.6 25.2 17.3

Source: Company, HDFC sec Inst Research

Balance Sheet (Consolidated) Year End March (Rs mn) FY17 FY18 FY19E FY20E FY21E SOURCES OF FUNDS Share Capital - Equity 140 140 140 140 140 Reserves 4,450 5,996 7,685 9,707 11,977 Total Shareholders Funds 4,590 6,136 7,825 9,847 12,116 Long Term Debt - - - - - Short Term Debt 193 256 256 256 256 Total Debt 193 256 256 256 256 Net Deferred Taxes 45 89 89 89 89 Long Term Provisions & Others 27 23 25 28 31 TOTAL SOURCES OF FUNDS 4,855 6,504 8,195 10,219 12,492 APPLICATION OF FUNDS Net Block 810 818 846 871 892 CWIP - - - - - LT Loans & Advances 43 59 59 59 59 Other Non Current Assets 1 - - - - Total Non-current Assets 854 877 905 930 951 Inventories 773 796 933 1,121 1,309 Debtors 523 615 721 867 1,012 Other Current Assets 543 855 988 1,167 1,347 Cash & Equivalents 3,294 4,443 5,905 7,626 9,601 Total Current Assets 5,134 6,709 8,547 10,781 13,268 Creditors 609 633 742 892 1,041 Other Current Liabilities & Provns 523 449 515 600 687 Total Current Liabilities 1,133 1,082 1,257 1,492 1,728 Net Current Assets 4,001 5,627 7,290 9,289 11,541 TOTAL APPLICATION OF FUNDS 4,855 6,504 8,195 10,219 12,492



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Cash Flow Statement (Consolidated) Year ending March (Rs mn) FY17 FY18 FY19E FY20E FY21E Reported PBT 2,337 2,648 3,257 4,063 4,770 Non-operating & EO Items (387) - - - - Interest Expenses 0 18 18 18 18 Depreciation 71 68 72 75 79 Working Capital Change (390) (437) (199) (276) (273) Tax Paid (682) (723) (935) (1,156) (1,361) OPERATING CASH FLOW ( a ) 949 1,574 2,212 2,724 3,232 Capex (68) (76) (100) (100) (100) Free Cash Flow (FCF) 880 1,499 2,112 2,624 3,132 Investments (788) (1,412) (1,000) (1,000) (1,000) Non-operating Income 204 - - - - INVESTING CASH FLOW ( b ) (652) (1,487) (1,100) (1,100) (1,100) Debt Issuance/(Repaid) 193 63 - - - Interest Expenses (0) (18) (18) (18) (18) FCFE 1,073 1,543 2,094 2,607 3,114 Share Capital Issuance - - - - - Dividend (240) (380) (633) (886) (1,139) Others - - - - - FINANCING CASH FLOW ( c ) (47) (335) (651) (904) (1,157) NET CASH FLOW (a+b+c) 250 (248) 462 721 975 EO Items, Others (248) 1 - - - Closing Cash & Equivalents 466 219 681 1,402 2,377


Key Ratios (Consolidated) FY17 FY18 FY19E FY20E FY21E PROFITABILITY (%) GPM 52.5 51.7 53.8 54.5 54.4 EBITDA Margin 26.2 27.5 30.0 31.0 30.8 EBIT Margin 25.3 26.6 29.2 30.3 30.2 APAT Margin 22.0 24.1 24.8 25.8 26.0 RoE 43.5 35.9 33.3 32.9 31.0 RoIC (or Core RoCE) 106.9 89.9 94.5 104.9 108.1 RoCE 42.4 34.7 32.3 32.1 30.4 EFFICIENCY Tax Rate (%) 28.7 27.3 28.7 28.5 28.5 Fixed Asset Turnover (x) 3.9 3.7 3.9 4.4 4.7 Inventory (days) 36.8 36.4 36.4 36.4 36.4 Debtors (days) 24.9 28.1 28.1 28.1 28.1 Other Current Assets (days) 25.8 39.1 38.5 37.9 37.5 Payables (days) 29.0 28.9 28.9 28.9 28.9 Other Current Liab & Provns (days) 24.9 20.5 20.1 19.5 19.1

Cash Conversion Cycle (days) 33.6 54.1 54.0 54.0 53.9 Net D/E (x) (0.7) (0.7) (0.7) (0.7) (0.8) Interest Coverage (x) 5,915 119 153 190 222 PER SHARE DATA (Rs) EPS 24.2 27.5 33.2 41.5 48.7 CEPS 25.1 28.5 34.2 42.6 49.8 Dividend 4.5 4.5 7.5 10.5 13.5 Book Value 65.6 87.7 111.8 140.7 173.1 VALUATION P/E (x) 57.8 50.7 42.1 33.6 28.6 P/BV (x) 21.3 15.9 12.5 9.9 8.1 EV/EBITDA (x) 47.1 42.6 32.8 25.9 21.8 EV/Revenues (x) 12.3 11.7 9.8 8.0 6.7 OCF/EV (%) 1.0 1.7 2.4 3.0 3.7 FCF/EV (%) 0.9 1.6 2.3 2.9 3.5 Dividend Yield (%) 0.3 0.3 0.5 0.8 1.0


COMPANY UPDATE 21 JUN 2018

Voltas BUY


Opportunity to enter secular theme Voltas’ reported a weak 4QFY18 result with EMPS margin expansion was the only positive takeaway. UCP segment (53% of rev.) grew by ~12/15% like-like revenue growth for 4Q/FY18. Despite slow RAC growth, Voltas expanded volume market share to 22.1% in FY18 vs. 21.4% YoY. Lloyd/Blue Star reported 11/15% growth in FY18. We interacted with the mgt and have reached out to several dealers/distributors to confirm (1) Consumer offtake during Mar-Jun, (2) Inverter AC offtake and strategy, (3) Outperforming brands, (4) Intensifying competition to impact margins and (5) Structural story on air conditioners.

In FY18, air conditioners have outperformed air coolers despite slow AC industry growth (11% in FY18). Two pre-buying opportunities (GST implementation in 1Q and energy rating change in 3Q) have supported the AC market during off-season. While, seasonal offtake (4QFY18) was weak owing to an erratic summer.

Our channel checks confirmed the weak offtake (volume contraction) during March to mid-May. However, from mid-May onwards, there has been a recovery in demand courtesy to an extended summer. Dealer/distributors stated that consumer offtake for air conditioners are occurring throughout the year (seasonality is declining). Daikin, Voltas and OGeneral have outperformed the industry in FY18. Inverter share has catapulted to 40-50% in peak season driven by players like LG (16-17% vol. market share) retailing only inverters and Voltas ramping up its mix to 30%.

As per the management, competition is intensifying (driven by MNCs) and hence Voltas may witness

margin pressure to retain leadership. In the backdrop of intensifying competition, limited price hike (~3% on few SKUs) on rising input inflation and weak offtake, UCP margins will be under pressure. We build in 100bps decline in UCP EBIT margin in FY18-20E.

EMPS margin trajectory has increased on the back of improving execution and focus on quality order book. EBIT margin has expanded by 330bps to 6.5% in FY18 (5 year high margin). We increase EBIT margin by 100bps over FY18-20E to 7-8%. We believe this piece of the business is set for a re-rating.

We continue to believe that the AC industry will sustain its secular long-term growth. We maintain our thesis on Voltas' to sustain leadership in the room AC space and improving margin trajectory for EMPS segment. Besides, foray into other consumer durable categories, providing multi-year growth visibility for the company.

We cut our EPS estimate by ~3% for FY19-20, factoring the EBIT margin pressure in UCP. We value based on SOTP valuing EMPS/EPS/UCP at Jun-20 P/E at 15 (earlier 13x)/20/35x to arrive at TP of Rs 648 (Rs 667 earlier).

Financial Summary: Consolidated (Rs mn) FY17 FY18 FY19E FY20E FY21E Net Sales 60,328 64,044 70,857 81,061 93,102 EBITDA 5,791 6,653 7,444 8,439 9,713 APAT 5,082 5,751 6,424 7,387 8,422 Diluted EPS (Rs) 15.4 17.4 19.4 22.3 25.5 P/E (x) 34.0 30.0 26.9 23.4 20.5 EV / EBITDA (x) 26.5 22.1 19.4 16.9 14.5 Core RoCE (%) 39.7 52.4 61.1 61.3 64.4 Source: Company, HDFC sec Inst Research

INDUSTRY APPLIANCES

CMP (as on 20 Jun 2018) Rs 522

Target Price Rs 648 Nifty 10,772

Sensex 35,547

KEY STOCK DATA

Bloomberg VOLT IN

No. of Shares (mn) 331

MCap (Rs bn) / ($ mn) 173 / 2,537

6m avg traded value (Rs mn) 1,002

STOCK PERFORMANCE (%)

52 Week high / low Rs 675 / 440

3M 6M 12M

Absolute (%) (15.9) (18.1) 10.9

Relative (%) (23.6) (23.3) (2.7)

SHAREHOLDING PATTERN (%)

Promoters 30.30

FIs & Local MFs 28.73

FPIs 19.99

Public & Others 20.98 Source : BSE

Naveen Trivedi [email protected] +91-22-6171-7324 Siddhant Chhabria [email protected] +91-22-6171-7336

VOLTAS : COMPANY UPDATE

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Key takeaways from management interaction 4QFY18 Performance and 1QFY19 outlook 1QFY19 performance to be muted: April has

witnessed degrowth in the RAC (Room Air Conditioner) industry while Voltas decline was slower than the industry owing to better channel inventory management. During Mar-May 2018 Voltas UCP (Unitary Cooling Products) grew in single digits owing to pickup in May (summer picked up). June has a favorable base (primary sales) owing to GST transition. During June, RAC offtake is concentrated in the North region (summer ends in end of June) since summer ends in early June on a pan-India basis. Management stated that the next 15 days of June are crucial. South region (2nd largest region) has a higher inventory level owing to pre-monsoon showers which impacted offtake.

Distribution is Voltas’ key competitive advantage: Daikin in the recent past has laid down its strategy to expand its distribution to tier 3 and tier 4 cities. Currently, Voltas has the highest presence in tier 3 vs. the industry. However in terms of revenue contribution tier 3 and 4 is yet to be significant (top 30 cities contribute 60-70% of UCP sales). Voltas believes that to enjoy electricity penetration they will further expand their distribution to up-country markets.

E-commerce will play a passive role in RAC: Voltas believes that air conditioners are a ‘family purchase’ product and believe that ‘touch and feel’ play a big role in consumer offtake. E-commerce contributes only ~5% of revenues, with the strategy of pushing underperforming SKUs online.

Market share expanded despite an erratic season: Voltas ramped up its inverter products from ~5% of revenues in FY17 to 20% in FY18 (industry at ~30%). The timely acceleration in inverter launches (45

SKUs vs. 8 SKUs in FY17) and stronger distribution management (erratic season) led them to number two position in the inverter market (LG is the leader with 16-17% volume market share). Voltas’ overall volume market share expanded to 22.1% in 4QFY18 vs. 21.4% YoY (retail audit data).

UCP margins may be impacted with intense competition: Comparable UCP EBIT margins for FY18 are at 13.5% (14.7% reported) which has declined by ~100bps YoY driven by delay in price hike (weak offtake), higher ASP spend and slower volume growth. Management believes UCP margin can decline with intensifying competition; however, they assured that they maintain threshold margin guidance at 11%.

Arcelik JV is on track: Voltas is set to launch Voltas-Beko products during 2HFY19 via imports. They will retail products like washing machine, refrigerator, microwave and dish washer. Manufacturing will begin during the end of FY20. Arcelik’s strength is manufacturing while Votlas’ is distribution. Manufacturing in-house is crucial for refrigerator and washing machine to customize the products to meet the needs of various types of consumers located in different pockets in the country

EMPS order book driven by government capex: Government projects (urban infra) is driving the segment while private capex continues to be muted (weak order inquiries). FY18 performance (8% YoY growth) was impacted owing to GST transition. However they delivered a 5 year high EBIT margin (6.5%) owing to better execution and focus on quality order book. Management expects margin to be in the range of 7-8% with enough levers. We believe this piece of the business is set for a re-rating.


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Key takeaways from AC dealers/distributors check Seasonal weakness persist for air conditioners: As

per our channel check, air conditioners demand was also soft during summer 2018. Erratic summer, rating change (pre-buying in 3Q), high base of last year (buying before GST implementation) and extended impact of demonet had impacted air conditioners demand during the peak summer. Retailers witnessed volume contraction during March to mid-May. However, from mid-May onwards, there has been a recovery in demand courtesy to an extended summer. As per our check, air conditioners demand is slow but better than to the air coolers.

Inverter share catapulted in FY18: Majority of the dealers we have interacted with stated that the inverter share has reached to ~40-50% mix now. They stated that inverters are easier to market since consumers are conscious about recurring cost of air conditioners.

Seasonality is declining: Most dealers stated that seasonality in air conditioners have been declining over the last few years on account of longer running time (number of days in the year) and installation during renovation of home/offices/shops.

Outperforming brands: As per our channel checks, Daikin, Voltas and OGeneral have outperformed the industry during the summer. Retailers stated that Daikin’s aggression is visible in terms of price cuts and distribution, while Voltas continues to enjoy strong brand loyalty. Lloyd was impacted owing to price hikes (now at lower price discount to peers) which created a short term shock in the trade channel. Panasonic has lost share in certain pockets.

Long term air conditioners outlook: Most dealer/distributors acknowledge that air conditioners have strong long term growth potential. As per them, market has become very competitive therefore holding market share will be a difficult task for leading brands. Consumer finance is supporting the category growth and with improving power availability incremental growth is coming from the rural belt.


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Quarterly Financials Snapshot: Consolidated (Rs mn) 4QFY18 4QFY17 YoY (%) 3QFY18 QoQ (%) FY18 FY17 YoY (%) Net Sales 20,484 20,351 0.7 13,747 49.0 64,044 60,328 6.2 Material Expenses 15,011 14,852 1.1 9,675 55.2 45,675 42,359 7.8 Employee Expenses 1,434 1,485 (3.4) 1,503 (4.6) 5,867 6,184 (5.1) Other Operating Expenses 1,507 1,803 (16.4) 1,427 5.6 5,875 6,116 (3.9) EBITDA 2,532 2,212 14.5 1,142 121.7 6,626 5,669 16.9 Interest Cost 43 58 (24.8) 19 129.6 119 160 (25.7) Depreciation 61 56 8.0 61 0.0 244 245 (0.4) Other Income (incl E/o items) 424 386 9.8 170 148.8 1,747 2,131 (18.0) PBT 2,842 2,491 14.1 1,261 125.3 8,011 7,395 8.3 Tax 900 496 81.5 301 198.7 2,270 2,004 13.3 PAT 1,942 1,996 (2.7) 960 102.2 5,779 5,199 11.2 Minority Interest 15 14 10.0 10 60.4 (38) 193 (119.7) PAT after MI 1,927 1,982 (2.8) 951 102.7 5,779 5,199 11.2 APAT 1,927 1,719 12.1 951 102.7 5,779 5,199 11.2 EPS (adjusted) 5.8 5.2 12.2 2.9 102.7 17.5 15.7 11.2 Source: Company, HDFC sec Inst Research Margin Analysis: Consolidated

4QFY18 4QFY17 YoY (bps) 3QFY18 QoQ (bps) FY18 FY17 YoY (bps) Material Expenses as % of Net Sales 73.3 73.0 31 70.4 290 71.3 70.2 110 Employee Expenses as % of Net Sales 7.0 7.3 -29 10.9 -393 9.2 10.3 -109 Other operating expenses as % of Net Sales 7.4 8.9 -150 10.4 -303 9.2 10.1 -96

EBITDA Margin (%) 12.4 10.9 149 8.3 405 10.3 9.4 95 Tax Rate (%) 31.7 19.9 1177 23.9 778 28.3 27.1 124 Net Profit Margin (%) 9.4 9.7 -33 6.9 249 9.0 8.6 41 Source: Company, HDFC sec Inst Research

Consolidated net revenue was up by ~9% like-like (exp. was 18%) UCP segment (53% of rev.) grew by ~12/15% like-like revenue growth for 4Q/FY18 (derived from comparable FY18 revenue of Rs 35bn) EBITDA was 11% ahead of our expectation due to higher margin for UCP and EMPS Management noted that commodity prices are rising but margin pressure would be limited on account of price hike APAT (at normalised tax) was up by 12% to Rs 1.9bn vs. expectation of Rs 2.2bn


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Segmental Quarterly Performance: Consolidated (Rs mn) 4QFY18 4QFY17 YoY (%) 3QFY18 QoQ (%) FY18 FY17 YoY (%) Segmental Revenues EMPS 8,735 8,290 5 7,534 16 28,452 26,550 7 Engineering Products & Services 834 1,068 (22) 695 20 3,099 3,318 (7) Unitary Cooling Products 10,645 10,860 (2) 5,422 96 32,261 30,469 6 Total 20,215 20,218 (0) 13,651 48 63,812 60,337 6 EBIT EMPS 665 477 40 534 25 1,854 849 118 Engineering Products & Services 249 259 (4) 211 18 992 956 4 Unitary Cooling Products 1,830 1,781 3 705 160 4,749 4,403 8 Total 2,744 2,516 9 1,449 89 7,595 6,208 22 Revenue Mix (%) 4QFY18 4QFY17 YoY (bps) 3QFY18 QoQ (bps) FY18 FY17 YoY (bps) EMPS 43.2 41.0 221 55.2 -1198 44.6 44.0 58 Engineering Products & Services 4.1 5.3 (116) 5.1 -97 4.9 5.5 (64) Unitary Cooling Products 52.7 53.7 (105) 39.7 1294 50.6 50.5 6 Total 100.0 100.0 100.0 100.0 100.0 EBIT Mix (%) 4QFY18 4QFY17 YoY (bps) 3QFY18 QoQ (bps) FY18 FY17 YoY (bps) EMPS 24.2 18.9 529 36.8 -1262 24.4 13.7 1,073 Engineering Products & Services 9.1 10.3 (121) 14.5 -547 13.1 15.4 (233) Unitary Cooling Products 66.7 70.8 (408) 48.6 1809 62.5 70.9 (840) Total 100.0 100.0 100.0 100.0 100.0 Segmental Margins (EBIT)(%) 4QFY18 4QFY17 YoY (bps) 3QFY18 QoQ (bps) FY18 FY17 YoY (bps) EMPS 7.6 5.7 186 7.1 52 6.5 3.2 332 Engineering Products & Services 29.8 24.2 562 30.3 -48 32.0 28.8 321 Unitary Cooling Products 17.2 16.4 79 13.0 420 14.7 14.5 27 Source: Company, HDFC sec Inst Research

EMPS EBIT margin was >7% in 4QFY18 due to execution of high margin projects.


Page | 32

Arcelik JV with Voltas: Deal details

Source: Arcelik

Arcelik-Voltas JV will leverage both parties strengths: Arcelik’s technologyand brand image; Voltas’ local expertise and sales Network The plant, which is expected to be operational in 2019 in India, is planned to manufacture refrigerators (Direct Cool and No-Frost) Other appliances will be largely outsourced from Arcelik and trade operations will commence in 2018 Purchase of the land for the refrigerator plant has been completed. Trade operations of JV is to start by mid-year, with sales of around USD 25-30 million


Page | 33

UCP Segment: Revenue And EBIT Margin Room AC Market Share


EMPS Segment: Revenue And EBIT Margin Order Book to bill


Order book of Rs 50bn comprises of Rs 32bn domestic orders and Rs 18bn international orders Voltas’ market share in the Room AC market improved from 21.4% (Mar-17 end) to 22.1% (Mar-18 end)

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

0

2,500

5,000

7,500

10,000

12,500

4QFY

151Q

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2QFY

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4QFY

161Q

FY17

2QFY

173Q

FY17

4QFY

171Q

FY18

2QFY

183Q

FY18

4QFY

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Revenue EBIT Margin (RHS)Rs mn

20.8

21.8

20.0

21.8

21.0

22.022.021.7

21.4

22.2

23.0

23.7

22.1

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-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

01,0002,0003,0004,0005,0006,0007,0008,0009,000

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4QFY

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FY17

2QFY

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4QFY

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Revenue EBIT Margin (RHS)Rs mn

0.0x0.2x0.4x0.6x0.8x1.0x1.2x1.4x1.6x1.8x2.0x

-

10

20

30

40

50

60

4QFY

15

1QFY

16

2QFY

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3QFY

16

4QFY

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4QFY

17

1QFY

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2QFY

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3QFY

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4QFY

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Order book OB/TTM Revenue (RHS)Rs bn


Page | 34

Key Assumptions: Consolidated Rs mn FY17 FY18 FY19E FY20E FY21E Segment Revenues Electro-Mechanical Projects 26,277 28,452 31,602 35,457 39,782 Growth YoY -6.7% 8.3% 11.1% 12.2% 12.2% Engineering Products & Services 3,284 3,099 3,431 3,789 4,185 Growth YoY -11.0% -5.6% 10.7% 10.4% 10.4% Unitary Cooling Products 30,154 32,261 35,311 41,251 48,514 Growth YoY 20.2% 15.0% 9.5% 16.8% 17.6% Segment Margins Electro-Mechanical Projects 3.2% 6.5% 7.3% 7.9% 8.0% Engineering Products & Services 29.1% 32.0% 32.6% 33.1% 33.6% Unitary Cooling Products 14.6% 14.7% 14.3% 13.8% 13.3% Source: Company, HDFC sec Inst Research SOTP Valuation Segments Method Jun-20E APAT Multiple (x) Valuation VPS Electro-Mechanical Projects (EMPS) P/E multiple 2,141 15 32,115 97 Engineering Products & Services P/E multiple 976 20 19,517 59 Unitary Cooling Products (UCP) P/E multiple 4,648 35 162,681 492 SOTP 648 Source: Company, HDFC sec Inst Research

We slightly reduce (~3%) our EPS estimates for FY19-20 to factor EBIT margin pressure in UCP and built higher margin of EMPS segment


Page | 35

Income Statement: Consolidated (Rs mn) FY17 FY18 FY19E FY20E FY21E Net Revenues 60,328 64,044 70,857 81,061 93,102 Growth (%) 5.5 6.2 10.6 14.4 14.9 Material Expenses 42,359 45,675 50,715 57,691 65,803 Employee Expenses 6,184 5,867 6,454 7,099 7,809 SG&A Expenses 5,994 5,848 6,244 7,832 9,777 Total Expenses 54,537 57,391 63,413 72,622 83,389 EBIDTA 5,791 6,653 7,444 8,439 9,713 EBIDTA % 9.6 10.4 10.5 10.4 10.4 EBIDTA Growth % 33.7 14.9 11.9 13.4 15.1 Depreciation 245 244 280 315 350 EBIT 5,546.09 6,410 7,164 8,124 9,362 Other Income (Inc. EO Items) 2,009 1,767 1,955 2,286 2,411 Interest 160 119 94 70 62 PBT 7,395 8,058 9,025 10,340 11,711 Tax (Incl Deferred) 2,088 2,270 2,527 2,895 3,279 Minority Interest 217 17 74 58 10 RPAT 5,090 5,771 6,424 7,387 8,422 EO (Loss) / Profit (Net Of Tax) 8 20 - - - APAT 5,082 5,751 6,424 7,387 8,422 APAT Growth (%) 38.5 13.2 11.7 15.0 14.0 Adjusted EPS (Rs) 15.4 17.4 19.4 22.3 25.5 EPS Growth (%) 38.5 13.2 11.7 15.0 14.0


Balance Sheet: Consolidated (Rs mn) FY17 FY18 FY19E FY20E FY21E SOURCES OF FUNDS Share Capital 331 331 331 331 331 Reserves 32,735 37,112 41,942 47,336 53,367 Total Shareholder’s Funds 33,066 37,442 42,273 47,667 53,698 Minority Interest 285 317 378 444 518 Long Term Debt - - - - - Short Term Debt 1,709 1,423 923 823 723 Total Debt 1,709 1,423 923 823 723 Net Deferred Taxes (198) (46) (46) (46) (46) Other Non-current Liabilities & Provns 916 883 1,254 1,435 1,647

TOTAL SOURCES OF FUNDS 35,779 40,019 44,781 50,323 56,539 APPLICATION OF FUNDS Net Block 2,276 2,120 2,540 2,925 3,274 CWIP 66 41 41 41 41 Goodwill 723 723 723 723 723 Investments 5,099 4,876 6,376 9,626 12,876 Other Non-current Assets 7 11 12 14 16 Total Non-current Assets 8,171 7,771 9,692 13,329 16,931 Cash & equivalents 20,894 27,346 29,309 30,707 32,718 Inventories 9,070 8,129 9,448 10,748 12,259 Debtors 14,541 15,703 17,116 19,358 21,979 Other Current Assets 11,814 12,456 13,617 15,578 17,892 Total Current Assets 35,426 36,288 40,181 45,685 52,130 Creditors 26,941 29,433 32,528 37,252 42,776 Other Current Liabilities & Provns 1,770 1,952 1,873 2,145 2,463 Total Current Liabilities 28,711 31,385 34,401 39,397 45,239 Net Current Assets 6,714 4,903 5,780 6,287 6,891 TOTAL APPLICATION OF FUNDS 35,779 40,019 44,781 50,323 56,539



Page | 36

Cash Flow: Consolidated (Rs mn) FY17 FY18 FY19E FY20E FY21E Reported PBT 7,395 8,058 9,025 10,340 11,711 Non-operating & EO items (2,009) (1,767) (1,955) (2,286) (2,411) Interest Expenses 160 119 94 70 62 Depreciation 245 244 280 315 350 Working capital change 573 1,774 (508) (327) (394) Tax Paid (2,088) (2,270) (2,527) (2,895) (3,279) Other operating items 1,121 - - - - OPERATING CASH FLOW (a) 5,396 6,158 4,409 5,216 6,040 Capex 20 (63) (700) (700) (700) Free Cash Flow 5,416 6,095 3,709 4,516 5,340 Investments (690) 223 (1,500) (3,250) (3,250) Non-operating Income 2,009 1,767 1,955 2,286 2,411 INVESTING CASH FLOW (b) 1,340 1,928 (245) (1,664) (1,539) Debt Issuance/(Repaid) (998) (287) (500) (100) (100) Interest (160) (119) (94) (70) (62) FCFE 4,258 5,689 3,115 4,347 5,178 Share Capital Issuance - - - - - Minority Interest (193) 38 (13) 8 63 Dividend (1,395) (1,395) (1,594) (1,992) (2,391) FINANCING CASH FLOW (c) (2,746) (1,762) (2,201) (2,154) (2,489) NET CASH FLOW (a+b+c) 3,990 6,323 1,963 1,398 2,011 Closing Cash & Equivalents 20,893 27,217 29,309 30,707 32,718


Key Ratios: Consolidated

FY17 FY18 FY19E FY20E FY21E PROFITABILITY % GPM 29.8 28.7 28.4 28.8 29.3 EBITDA margin 9.6 10.4 10.5 10.4 10.4 APAT margin 8.4 9.0 9.1 9.1 9.0 RoE 16.6 16.3 16.1 16.4 16.6 Core RoCE (RoIC) 39.7 52.4 61.1 61.3 64.4 RoCE 15.4 15.4 15.3 15.6 15.8 EFFICIENCY Tax Rate (%) 28.2 28.2 28.0 28.0 28.0 Fixed Asset Turnover (x) 25.8 29.6 27.5 27.3 28.1 Inventory (days) 54.9 46.3 48.7 48.4 48.1 Debtors (days) 88.0 89.5 88.2 87.2 86.2 Other Current Assets (days) 71.5 71.0 70.1 70.1 70.1 Payables (days) 163.0 167.7 167.6 167.7 167.7 Other Current Liab & Provns (days) 10.7 11.1 9.6 9.7 9.7

Cash Conversion Cycle (days) 40.6 27.9 29.8 28.3 27.0 Debt/EBITDA (x) 0.3 0.2 0.1 0.1 0.1 Net D/E (x) (0.6) (0.7) (0.7) (0.6) (0.6) Interest Coverage (x) 34.6 53.8 76.3 116.3 151.4 PER SHARE DATA (Rs) EPS 15.4 17.4 19.4 22.3 25.5 CEPS 16.1 18.1 20.3 23.3 26.5 Dividend 3.5 4.0 5.0 6.0 7.0 Book Value 100.0 113.2 127.8 144.1 162.3 VALUATION P/E (x) 34.0 30.0 26.9 23.4 20.5 P/BV (x) 5.2 4.6 4.1 3.6 3.2 EV/EBITDA (x) 26.5 22.1 19.4 16.9 14.5 EV/Revenues (x) 2.5 2.3 2.0 1.8 1.5 OCF/EV (%) 3.5 4.2 3.1 3.7 4.3 FCF/EV (%) 3.5 4.2 2.6 3.2 3.8 FCFE/Mkt Cap (%) 2.5 3.3 1.8 2.5 3.0 Dividend Yield (%) 0.7 0.8 1.0 1.1 1.3 Source: Company, HDFC sec Inst Research


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RECOMMENDATION HISTORY

Rating Definitions BUY: Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 4-Apr-18 1,796 BUY 2,141

12-Apr-18 1,789 BUY 2,150 23-May-18 1,460 BUY 1,983 21-May-18 1,397 BUY 1,949

1,000

1,200

1,400

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1,800

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2,200

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17

Jul-1

7

Aug-

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-17

Nov-

17

Dec-

17

Jan-

18

Feb-

18

Mar

-18

Apr-

18

May

-18

Jun-

18

Symphony TP

Date CMP Reco Target 4-Aug-17 542 BUY 601 15-Sep-17 545 BUY 619 10-Oct-17 529 BUY 619 11-Nov-17 572 BUY 622 13-Nov-17 571 BUY 611 12-Jan-18 626 BUY 687 10-Feb-18 593 BUY 687 11-Apr-18 633 BUY 710 18-May-18 583 BUY 667 21-Jun-18 522 BUY 648

300

400

500

600

700

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov-

17

Dec-

17

Jan-

18

Feb-

18

Mar

-18

Apr-

18

May

-18

Jun-

18

Voltas TP


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Disclosure: We, Naveen Trivedi, MBA & Siddhant Chhabria, PGDBM authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. 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sector update: consumer durables 21 jun …...sector update: consumer durables hdfc 21 jun 2018...

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