Capital Goods: Room air conditioners | At an inflection point

Capital Goods | Room air conditioners: At an inflexion point

Capital Goods

Room air conditioners

At an inflection point



Room air conditioners

At an inflection point

Capital Goods



Please click here for Video Link

20 April 2016

Industry growth at 15% CAGR over FY16-20E.

We estimate the Indian room air

conditioner market would grow from 4mn units in FY16 to 7mn in FY20, a 15%

CAGR. The growth would be driven by rising penetration of ACs (3-4% currently

vs. 30% global average), higher disposable income, growing urbanization and

year round usage of ACs. For FY17 we build in 15% industry growth and this

comes after a subdued CY15/FY16, where unseasonal rainfall adversely

impacted sales of air conditioners (ACs); we expect industry volumes to increase

10% YoY in CY15/FY16. Our recent channel checks indicate a very strong pickup

in volumes over the past 2-3 weeks post the sharp rise in temperatures across

the country. If the recent trend in summer seasons sales continues, our FY17

industry growth at 15% YoY has an upside risk to it and industry growth could be

upwards of 20%.

Competition remains high; brand, distribution, after sales service and dealer

margins key differentiators:

Our discussion with channel partners indicates

brand name, distribution reach (>50–55% of AC sales now in Tier 2 to Tier 4

cities), After sales support and Dealer support/margins are key success factors in

the AC industry. Competition has increased with players such as Daikin, LG,

Panasonic, Lloyd Electric and Blue Star eyeing a larger market share.

Shift toward higher energy-efficient models; Premiumisation trends to

continue:

There is a clear shift toward five-star and inverter ACs that comprise

20% and 10%, respectively, of overall industry volumes. Consumers are

increasingly considering the lifecycle cost of a product than just the initial capital

cost. BEE has mandated compulsory rating of inverter ACs from 2018; thus, the

rating for fixed and variable compressors will be merged—a four- or five-star

rated AC would be primarily considered an inverter, while a current five-star

rated AC would be graded as three-star. The split AC market is expected to

move toward split inverter ACs over the next few years; inverters are projected

to reach 30% of the market by FY18 and 50% by 2020.

Margins to improve with fall in commodity prices:

Star ratings, normally

revised every two years have not been changed for CY16 and CY17. The ratings

were last upgraded in January 2014. Therefore, manufacturers have not

resorted to any price hikes. In fact, a sharp contraction in raw material prices

would help improve margins for AC manufacturers.

Valuation and views:

Voltas (BUY, TP: INR350), market leader in the room AC

segment with a ~21% share, is our top pick in the sector. The company is the

best play due to its distribution reach (>12,000 touch points), strong after sales

network, focused advertising, highest dealer margins and a reputed brand

name. Blue Star (N/R) which entered the residential AC segment in FY11 has

grown its share to 11% in FY16 and targets to grow 30% in FY17 to capture a 12-

13% share. Other listed companies which are beneficiaries of a rise in AC

demand are Hitachi Home & Life (N/R) and Lloyd Electric (N/R).

Capital Goods | Room air conditioners: At an inflexion point

Room air conditioners

At an inflection point – sales to reach 7mn by 2020E (15% CAGR)



In our opinion, the Indian room AC industry is at an inflection point and poised to

sales after a subdued FY16; we forecast volumes to increase ~10% in FY16.



In India, AC penetration remains a dismal 3–4% vis-à-vis peers; nevertheless, this

bolsters demand for ACs. More importantly, ACs has now transformed into a necessity

from luxury a couple of years back. Interestingly, most people now install multiple ACs

in their homes.



India’s AC sales which stood at 4mn units in FY16 are expected to rise to 7mn

units by FY20, a 15% CAGR. Key drivers for room AC sales over the coming years

are:



Increasing penetration levels where India significantly lags behind other

countries



Improved macro-economic factors such as rising disposable income, higher

standard of living and urbanization. This has changed the perception of air

conditioners from a luxury to a necessity with most Indian households now

opting for multiple air conditioners.



Seasonality concerns being addressed by offering heating and cooling

options with the AC so that it can be used year round



Increasing range of energy efficient AC’s which address the Indian

consumer’s concerns on high electricity bills.



Positive impact of the 7 Pay Commission wage hike recommendations

which would lead to increased spending on consumer durables

Exhibit 1: India remains under penetrated vis-à-vis other countries

Country

Taiwan

Korea

China

Thailand

Indonesia

India

Penetration (%)

90%

87%

70%

53%

30%

3–4%

Source: Industry, Blue Star, MOSL

Exhibit 2: Air conditioners remain under penetrated compared to other durables

Description

Fridge

Air Cooler

Washing machine

Air Conditioner



% penetration

77%

33%

17%

10-11%

3-4%

Source: Industry, MOSL

Unseasonal rainfall during March/ April 2015 dented peak summer season sales.

Most players expecting an average growth of 15–20% in the industry were

saddled with unsold inventory. Consequently, manufacturers resorted to price

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point



cuts and discounts that continued well into Q316. Though secondary sales

during the quarter was strong (+35% YoY), driven by higher festive demand and

an unusually warm winter, it has been more of clearing the inventory backlog as

companies plan to launch new models in CY2016.

For FY17, we forecast the industry growth to accelerate to 15%. As BEE’s star

ratings remain unchanged, we do not expect any price hikes across most

manufacturers. Nevertheless, this is subject to the rupee’s movement; nearly

50–60% of the parts of a split ACs are imported and a fall in the currency is

generally offset by passing on price hikes to end consumers.

CY16 off to a good start; IMD forecasts “above normal” summer temperatures



The summer season has begun earlier than normal in CY16 - typically, AC sales

start by mid to end March. This year, the industry has witnessed an early

onslaught of summers, right from the middle of February. While the entire

country witnessed a relatively warm February, March saw a lot of traction in

South India. Rising temperatures in Maharashtra, Tamil Nadu, Kerala and

Telengana pushed up sales by up to 25 per cent for major manufacturers such as

Daikin, Blue Star, Carrier-Midea and Voltas between January and mid-March.

year. Dealers expect sales to rise 18–20% YoY in CY16.



The Indian Meteorological Department (IMD) forecasts that during the 2016

summer season (April- June), temperatures’ are likely to be above normal by >1

degree across the country. There is a high probability (76%) of moderate to

severe heat wave conditions during the summer season. This is primarily in the

Central and North West India. We note that temperatures have been above

normal during the past two weeks in April with heat waves seen across North,

South and East India. Our recent channel checks indicate a very strong pickup in

AC volumes over the past 2-3 weeks. If the recent trend in summer season sales

continues, our FY17 industry growth at 15% YoY has an upside risk to it and

industry growth could be upwards of 20%.



Though industry players have majorly relied on the summer months (50-60% of

total) for boosting sales, sustained high temperatures following the monsoon

(Oct - December) have resulted in a new window for AC sales. As a result, ACs

are now being sold for almost 7–8 months in a year compared to 4–5 months

previously.

Exhibit 3: Room AC volumes (FY05–18E) and growth (% YoY)

Volumes(INR m)

22%

1.9

FY08

2.0

FY09

2.5

3.3

25%

31%

23%

2.8

FY14

3.5

FY15

3.9

4.4

FY17

5.1

10%

15%

Industry gr. (% )

15%

2.9

-14%

FY11

FY12

2.7

15%

20%

1.1

FY05

1.3

FY06

1.5

FY07

-5%

FY13

FY10

FY16

FY18

Source: MOSL, Industry

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Market share of key players in the room AC segment



Based on various media articles, company interactions and reports, we have

derived the market share of players in the room AC segment. According to GfK

Nielsen’s multi-brand outlet survey, Voltas ranked first with a share of ~21% as

of Q316 followed by LG.

Exhibit 4: Market share in the room AC market

Name of company

Voltas

Daikin

Lloyd Electric

Hitachi

Blue Star

Samsung

Others

Market share (%)

Source: Media reports, Industry, Channel checks, MOSL

Exhibit 5: Break-up of room AC market share (by player)

Others, 5

Samsung, 10

Blue Star, 11

Voltas, 21

Hitachi, 11

Lloyd Electric, 11

LG, 19

Daikin, 13

Source: Industry, MOSL, Channel checks

Exhibit 6: Brand hierarchy in the Indian room AC market

Premium

• O General, Mitsubishi Electric, Carrier, Daikin, Toshiba,

Hitachi

Popular

• Voltas, Blue Star, LG, Whirlpool, Panasonic, Lloyd Electric,

Samsung

• Videocon, Electrolux, GREE, Midea

Economy

Source: Dealer feedback, Industry, MOSL

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Industry sales shifting towards Inverters



By ratings, the three-star range accounts for 60% of the ACs sold in the country

followed by five-star. BEE has mandated the rating of inverter ACs, with the

same set of fixed-speed norms, from 2018. This implies the rating for fixed and

variable compressors would converge into one—four or five-star rated ACs

would be primarily inverters, while a current five-star rated AC would be a

three-star. The split AC market would gradually transition to split inverter ACs

over the next few years, accounting for a market share of 30% by FY18 and 50%

by 2020 (Source: Blue Star).

Exhibit 7: Break-up of ACs by star ratings

Exhibit 8: Region-wise sales of ACs

5 Star

10%

Inverter

3 Star

Others

60%

North India

South India

West India

East India

20%

Source: Industry, MOSL

Exhibit 9: Inverter sales for key AC manufacturers vs. the industry

Description

Industry

Daikin

Blue Star

Hitachi

Voltas

% of total sales

10%

32–35%

13–14%

40%

5–7%

Source: MOSL, Media reports, Company



Japanese (Daikin, Mitsubishi, Sharp and Hitachi) players currently dominate the

Indian inverter AC market. Our channel checks indicate Voltas’s share would be

<10% in the inverter category that has not been its focus area until date. On the

other hand, Blue Star has one of the widest portfolios for inverter ACs in the

country and aims to gain a stronger foothold in the sector. The company derives

~13–14% of revenues from this category.

We highlight that Voltas’ 2016 AC advertising campaign of “All Star ACs”

emphasizes the benefits of using Inverters and therefore shows Voltas’ focus on

growing its share in the Inverter market where it has lagged behind peers.

North India remains the largest market for ACs; dominated by Window ACs



By region, North India (38–40% of total) continues to remain the largest market,

followed by South India (30%). A key trait of the North Indian market is the

preference for window ACs, while split ACs are largely in demand elsewhere in

the country. However, since the Northern region is the largest market,

companies tend to continue manufacturing window ACs and cater to the

demand.

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 10: Voltas – Region-wise sales break-up (% of total)

Exhibit 11: Daikin – Region-wise sales break-up (% of total)

North

South

East

West

North

South

East

West

Source: Company, MOSL



Source: Company, MOSL

We observed that Samsung and LG exited the window AC market in 2012 as the

share of split ACs rose to ~75% of total sales and the price gap between split and

window ACs reduced considerably; this indicates customers were opting for split

ACs. However, LG has re-introduced select window AC models. For Voltas,

window ACs comprise 24–25% of sales compared to the industry level of 15–

16% as the former is a leader in the Northern market. Also, the window AC

market size has been relatively stable, with many buyers shifting from air

coolers to ACs for the first time (especially in Tier 2 and 3 cities).

Exhibit 12: India room ACs – split ACs continue to gain share

Split

Window

78%

82%

84%

86%

87%

88%

22%

FY13

18%

FY14

16%

FY15

14%

FY16

13%

FY17

12%

FY18

Source: Industry, MOSL

Key differentiators in the Room AC industry



A key differentiator in the Indian AC market is the distribution reach of a

manufacturer; this has become all the more important since ~50–55% of the

overall industry’s volumes are now outside metros/Tier 1 cities. In our

understanding, one of the main advantages for Voltas is more than 12,000 touch

points all over India which stood at 6,500 as of FY14.

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 13: Dealer touch points across AC brands in India

Company Name

Voltas

Blue Star

Daikin

Videocon

Hitachi

Lloyd Electric

Touch points

>12000

3,800

4,000

7,000

4,000

7,000

Source: Industry, Media reports, MOSL



Dealer margins.

Voltas, LG are very dealer oriented and give high margins while

Samsung and Blue Star are not equally so. Voltas gives 35% margins to some of

the bigger dealers and 28% to smaller dealers while LG gives 28-30% margins to

dealers. Blue Star gives lesser margins (25-26% margin) and is a relative new

comer to the industry as it entered the retail market only in CY11. At the other

end of the spectrum are O General and Mitsubishi Electric which offer the

lowest margins in the 18-20% range to its dealers.

Exhibit 14: Dealer margins offered by various air conditioner manufacturer

Name of company

Voltas

Blue Star/Samsung/Lloyd Electric

Daikin/Hitachi

Mitsubishi

O General

Margin offered

+++++++

++++++

+++++

++++

+++

Source: Industry, MOSL, **higher denotes better margins



Branding and advertising spends:

Brand name and trust are other key

differentiators in the AC industry. For example, Voltas, through the highly

successful ‘Murthy campaign (launched in 2012)’, has strengthened its

connection with Indian customers over the past four years. The advertisement

was also used to highlight the company’s ‘All weather air conditioners’, which

can be used for both heating and cooling throughout the year. Blue Star has also

used the “Nobody cools better”, “Get office like cooling at home” and “Daddy

Cool” advertising campaigns to build a strong connect with the Indian

customers. Typically, with the onset of the summer season, AC manufacturers

step up their advertising spends to gain mindshare with the customer. For

details of marketing campaigns being run by various manufacturers in the 2016

summer season, please refer to the section “Marketing campaign being run for

the 2016 summer” at the end of the report. Companies typically spend 1-2% of

their sales on advertising.

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 15: Advertising spends by player (FY16)

Name of company

Hitachi Home

Blue Star

Samsung

Voltas

Whirlpool

Lloyd Electric

INR mn

500

1,092

350

300

500

704

345

% of

sales

1.8%

1.9%

2.0%

1.9%

Source: Company, Media articles, *Hitachi, Lloyd Electric and Whirlpool spend for FY15, **** Blue Star

spend is INR400m in FY17



After sales service.

Another key differentiator in the room AC industry is the

after sales services provided by the manufacturer which in turn is dependent on

the quantum of service centers and their presence across the country. ACs are

typically used for a period of 10-12 years and therefore, it is critical that a

customer is offered a good after sales experience. All companies offer an Annual

Maintenance Contract (AMC) which is priced in the region of INR2000-2500 and

ensures regular servicing and maintenance of the AC. Most companies follow

the franchisee route for service centers – while the customer lodges the

complaint with the manufacturers’ call center, this is passed on to the service

center where the customer resides and the issue is addressed by the same. We

highlight that Voltas has the highest number of service centers followed closely

by LG and Carrier. With an increasing proportion of inverter AC sales, there

would be a higher need for service centers since these cannot be serviced by the

local unauthorized service centers.

Exhibit 16: Service centers across manufacturers in India

Name of company

Voltas

Blue Star

Hitachi Home and Life

Daikin

Lloyd electric

Carrier

Panasonic

No. of Service centers

200

194

275

175

100

Source: Industry, MOSL

‘Outsource and Assembly’ business model in vogue in room ACs



R&D spending.

Most AC manufacturers in India follow the ‘Outsource and

Assembly’ model with low spending on R&D. The compressors are mostly

sourced from China or Thailand while the condensers are sourced from local

vendors with the complete AC being assembled in the AC manufacturers’

factory. Typical R&D spends are in the range of 0.2%-2% of sales. Daikin has

been amongst the front runners in terms of R&D spending and is also building

its first R&D facility at an investment of INR0.6b in Rajasthan. The center is

expected to become fully operational in July, 2016 and would enable

customization of the AC for Indian climatic conditions and other SAARC

countries.

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 17: R&D spending as a % of sales (FY15)

Name of company

Blue Star

Voltas

Daikin

Hitachi Home and Life

Whirlpool

% of total

2.0%

0.2%

2.0%

1.0%

Source: Company, MOSL



Product Portfolio.

A comparison of the company wise models across star

ratings indicates that the market leader, Voltas has the maximum number of

models on offer with ~50% being 3 star rated ACs and only 15% inverter

models. Similarly, LG has 39 models on offer with ~50% of the model of the 3

star category and 15% as inverter models. This is in sharp contrast to the

Japanese players - Daikin India, Hitachi and Mitsubishi Electric who have 60%,

40% and 40% respectively, of their models from the inverter range. This clearly

highlights the focus of these brands on the inverter range of ACs.

Exhibit 18: Star Rating wise product portfolio across key players

Name of company

Voltas

Hitachi Home and Life

LG India

Samsung India

Mitsubishi Electric

Daikin India

2 Star

3 Star

4 Star

5 Star

Inverter

Total

Source: Company, MOSL, **we have taken only the models listed on the company’s website

‘2016 Summer season’ AC models and new features launched



Typically, February-March of each year sees the launch of new model ranges by

AC manufacturers for the upcoming summer season and this year has been no

different. Key features being highlighted this year by AC manufacturers are:



‘Wifi’ enabled ACs which enables the user to control the machine from

anywhere using a smart phone. Additionally, smart phones can also be used

to monitor power usage and consumption.



Air purifiers as a result of increasing concerns of polluted air within cities. As

per our discussion with AC manufacturers, air purifiers would become an

integral part of ACs in the next five years.



R410A refrigerant gas being used in ACs as an alternative to the ozone

damaging R22 gas being currently used by most manufacturers. The R22 gas

has to be phased out by 2030 but the industry intends to completely switch

to R410 by FY20 itself.



Increased focus on power savings and therefore, increased range/models of

inverter ACs with each brand trying to highlight the energy savings.



Dehumidifiers for controlling the humidity, especially during monsoons so as

to offer better comfort.

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 19: Comparison of AC features across companies

Name of company

Key features

Voltas has launched its "All Star" airconditoners with the theme of "Run

2 ACs at the cost of 1" which has a “2 stage inverter technology” for

significant power savings, environment friendly, super silent

"All Star" ACs"

operations, advanced air purifier and ambient cooling at high

“All Weather Smart A/C's"

temperature. It has introduced its advanced "All Weather Smart ACs"

which can be operated by a phone using Wifi /GPRS, senses outside

temperature and adapts to the weather and keeps a tab on power

usage and consumption

With the tagline " The AC that saves every day", LG ACs offer 30% faster

"Smart Inverter" ACs with

cooling, 66% energy savings, super quiet operation(19db) and 99%

Mosquito Away, Himalaya Cool, sterilized air compared to conventional ACs. LG's ACs also offer

Monsoon Comfort and Hot &

"Mosquito Away" technology to drive away mosquitoes, "Himalaya

Cold comfort

Cool" technology for faster cooling, "Monsoon Comfort" for controlling

the humidity and "Hot & Cold" AC for all weather usage

Hitachi's Inverter ACs offer "iClean Plus" technology which

automatically cleans the dust in the air filter, "iSense" which regulates

"iCare" ACs with "iClean", "iSense" the temperature as per the person's active body movements and "iSee"

and "iSee" technology

which detects faces of people and directs air flow to everyone, Wifi

technology to control the AC from anywhere and uses R410 green

refrigerant which is eco friendly

Life Conditioner’ range offers a smarter life (65% energy saving), a

healthier life (99% purer air) and a faster life (35% faster cooling

through iAutoX). Panasonic Life Conditioners are equipped with Nanoe-

"Life Conditioner" AC range

G & PM 2.5 Air Purification that eliminates airborne particles. Econavi

inverter technology monitors the product’s operations, while iAUTO X

delivers faster cooling.

The ‘Aryabot’ range of ACs can through a user’s GPS location, switch off

the AC when one leaves the house and switch it on before one enters

the premises, it comes with a dedicated USB slot for a web cam

connection and the web cam streams live video on the smartphone,

keeps a tab of power consumption and through its budgeting feature,

one can set limits on electricity consumption, Voice command to

"Aryabot" range

control the remote, the Sleep Graph mode allows to set desired

temperature levels for each hour of the night, Aryabot can also sense

the outside temperature and automatically adjust to set temperature

inside. The AC also intelligently detects problem areas and suggests

remedial actions basis its algorithms.It also has the ability to contact

the service centre on its own and log in service requests

Daikin ACs offer 64% more power savings (Good for savings), 15.3%

more comfort (Good for comfort), 75% less CO2 emission(Good for

"Fill the air with goodness"

environment) and Swing Inverter Technology(Good for living). Its' ACs

campaign

also have dehumidifiers, Streamer discharge air purifier, Intelligent

Eye(adjusts cooling to human presence), Smart phone connectivity for

ACs, Stabilizer free operation and all season AC for heating/cooling

Blue Star has launched Wifi enabled ACs which can be used from any

remote location within the Wifi network, can work at high

"Nobody cools better"

temperatures upto 50 degrees and within a voltage range of 160-270V

campaign

without stabilizer, 30% power saving vs. 5 star split ACs, Purifiers for

eliminating odors, dust, bacteria and other pollutants

“NXW” ACs

The NXW is the most energy-efficient inverter AC in the country with an

Indian Seasonal Energy Efficiency ratio (ISEER) of 5.2. It is adaptable to

Indian climatic conditions and delivers high efficiency

Samsung’s Digital Inverter compressor offer power savings, stabilizer

free operation, Virus Doctor and Easy Filter to eliminate dust, Multi Jet

Plus technology for better cooling efficiency, Tropicalized compressor

for cooling till 52 degrees, Turbo Cooling, Good Sleep for regulating

temperature throughout the night, Full HD filter and Dry Cool for

comfort even in humidity

Source: Company websites, MOSL

Key products on offer

Voltas

Hitachi

Panasonic

Videocon

Daikin

Blue Star

Godrej Appliances

Samsung

“Digital inverter” ACs

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Industry shifting to higher energy-efficient models

Premiumisation trends to continue; five-star and inverter ACs to be in demand



The room AC industry is gradually shifting toward more energy-efficient models

over the last few years as customers are increasingly aware of the lifetime costs

of ACs vis-à-vis upfront costs.

To promote energy efficiency, BEE initiated star labeling in 2007 for fixed-speed

ACs, where the compressor cuts off or cuts in when the desired temperature has

been achieved or the room temperature increases. This program was conducted

in 2006, involving key stakeholders including consumer organizations, and

manufacturers of ACs and components. January 2007 became a voluntary year

for AC star ratings. It was made mandatory from January, 2010 for one star to

five star. The ratings were upgraded in January 2012 and January 2014.

Inverter ACs are to be voluntarily labeled from January 2016. These ACs are

considered to be more efficient than fixed-speed. Apart from power savings, the

key unique sales proposition of an inverter AC is that the set temperature is

precise, delivering better comfort. Since inverter ACs have variable compressors,

they have different standards compared to fixed-speed compressor ACs.

BEE proposes to merge the standards for fixed-speed and inverter ACs from

CY18 and mandate compulsory rating for the latter. This implies the rating for

fixed and variable compressors will converge into one: a four- or five-star rated

AC will be primarily inverters, while a current five-star rated AC would become a

three-star. In our opinion, the split ACs market would gradually move toward

inverter split AC over the next few years, and inverters might constitute 30% of

the market by FY18 and 50% by 2020.

Since June 2015, BEE has introduced the ISEER ratio for inverter ACs. ISEER is

defined as the ratio of total amount of heat that an AC can eliminate to total

energy consumed to remove this heat. The minimum ISEER for a five-star rated

inverter AC is 4.5.

Currently, inverter ACs comprise 10% of the overall market, while five-star rated

ACs account for 20%. However, three-star rated ACs are the largest contributors

in the market.

Exhibit 21: AC volume breakup (by tonnage)

5 Star

<1 ton

1 ton

1.5ton

>2 ton

Source: MOSL, Industry

Exhibit 20: India AC volume break-up (by rating)

20%

Inverter

3 Star

<3 Star

10%

60%

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 22: AC tonnage and cooling area

Tonnage

1 ton

1.5 ton

2 ton

Appropriate area

120–140sq ft

150–180sq ft

180–240sq ft

Source: MOSL, Industry



While inverters ACs are typically 25–35% more expensive than a similar non-

inverter model, the extra capital cost is recouped within approximately one year

as it uses 35-40% less power.

A 1 ton AC uses 1100W of electricity every hour or 1.1kwh. With a normal

household running the AC for 9 hour, the daily electricity consumption is 10

units and 300 units per month. With cost per unit at INR7, the monthly bill

would come to INR2,100. With an inverter AC, the electricity usage goes down

by 40%, so the monthly saving is INR800 which implies a payback time period of

~1 year (Typically, inverter ACs are INR8,000-10,000 more expensive than a

regular split AC).

According to Blue Star, inverters ACs are likely to account for 30% of the overall

industry by FY18 and 50% by FY20. This is expected to be driven by increasing

consumer preference for energy-efficient products and convergence of star

ratings from CY18 onward.

Within the inverter AC segment, Japanese players like Daikin, Mitsubishi Electric,

and Hitachi have an edge over Indian peers as they have introduced these

models earlier in the Indian market and have access to technology from the

parent company.

With effect from January 2016, BEE has stopped the sale of one-star rated ACs.

This indicates two-star rated ACs would become the new entry level models that

are ~INR20–30b more expensive than one-star.

Exhibit 23: Star rating for window ACs (valid from January 1, 2016- December, 2017)

Description

Star Level

1 Star *

2 Star **

3 Star **

4 Star ****

5 Star *****

Energy Efficiency Ratios (Watt)

Minimum

Maximum

2.5

2.69

2.7

2.89

2.9

3.09

3.1

3.29

3.3

Source: BEE; one-star rated ACs cannot be sold from January 1, 2016

Exhibit 24: Star rating for split ACs (from January 1, 2016- December, 2017)

Description

Star Level

1 Star *

2 Star **

3 Star **

4 Star ****

5 Star *****

Energy Efficiency Ratios (Watt)

Minimum

Maximum

2.7

2.89

2.9

3.09

3.1

3.29

3.3

3.49

3.5

Source: BEE; one-star rated ACs cannot be sold from January 1, 2016

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 25: Inverter ACs ISEER rating – mandatory from 1 January, 2018

Description

Star Level

1 Star *

2 Star **

3 Star **

4 Star ****

5 Star *****

ISEER

Minimum

3.1

3.3

3.5

4.0

4.5

Maximum

3.29

3.49

3.99

4.49

Source: BEE; one-star rated ACs cannot be sold from January 1, 2016

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Competitive intensity to remain high

Brand, Distribution reach, After sales and dealer margins key factors

We interacted with the largest dealers and channel partners with a presence across

India, to understand key summer trends in the AC industry. Our key takeaways are

described below.



Summer season off to a good start; growth target of 18–20% YoY in FY17:

The

summer season has begun earlier than normal in CY16; typically, AC sales start

by mid to end March. This year, the industry has witnessed an early onslaught of

summers, right from the middle of February. While the entire country witnessed

a relatively warm February, March saw a lot of traction in South India. Rising

temperatures in Maharashtra, Tamil Nadu, Kerala and Telengana pushed up

sales by up to 25 per cent for major manufacturers such as Daikin, Blue Star,

Carrier-Midea and Voltas between January and March. Dealers expect sales to

rise 18–20% YoY in CY16.



Inventory channelized during Q4; secondary sales in Q117:

Typically,

manufacturers start sourcing compressors/indoor units from China/Thailand

during Q4 (for the upcoming summer season) based on their AC sales forecast.

Thereafter, manufacturers channelize the summer inventory and follow it up

with marketing campaigns to promote their models.



Dealer margins:

Voltas and LG are dealer oriented and offer high margins, while

it differs for Samsung and Blue Star. Voltas offers a margin of 35–40% to some

bigger dealers and 28% to smaller dealers, while LG maintains 28–30% margin.

Blue Star has a lesser margin base of 25–26% and is relatively a newcomer in the

industry (entered the retail market in CY11). At the other end of the spectrum is

O General, which offers the lowest margin of 18–20%.

Exhibit 26: Dealer margins offered by various air conditioner manufacturer

Name of company

Voltas

Blue Star/Samsung/Lloyd Electric

Daikin/Hitachi

Mitsubishi

O General

Margin offered

+++++++

++++++

+++++

++++

+++

Source: Industry, MOSL, **higher denotes better margins



Energy efficiency – the way forward:

A clear shift toward five-star and inverter

ACs indicates customers are increasingly aware of the benefits of these

products. This is more so in the case of metros than in smaller cities and towns.

Inverter ACs:

Sales of inverter ACs are largely restricted to metros/Tier 1 cities

given their premium pricing (INR8, 000–10,000 higher relative to a three- star

with the same tonnage). Another factor that impedes growth is the high cost of

an annual maintenance contract (2x of fixed compressor variants). Moreover,

the converter chip (converts AC to DC power) is at a high risk of failure due to

voltage fluctuations. Each chip costs ~INR8, 000 and can prove to be a sizeable

cost for an end customer. To resolve this issue, inverter ACs would need to be

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

manufactured with in-built stabilizers.

Daikin, Mitsubishi, Sharp, Hitachi are the

bestselling inverter brands

Exhibit 27: Inverter AC sales for key manufacturers vs. the industry

Description

Industry

Daikin

Blue Star

Voltas

% of total

10%

32–35%

13–14%

5–7%

Source: MOSL, Company



AC prices retained at 2015 level:

With no change in the BEE star ratings in CY16,

most manufacturers have maintained last year’s prices for ACs. Conversely,

some brands, such as O General, Hitachi, and Blue Star, have hiked prices for

select models.

Sale promotions via exchange offers, discounts and free installations to

continue:

In order to promote sales during the summer season, brands are

offering exchange schemes for old aircons, free installation worth INR1500 and

discounts. Typical discounts being offered are in the region of 10-15% of the

MRP of the air conditioner. By company, the premium brands like Mitsubishi,

Hitachi, O General, Daikin the discounts are in the range of 8-12% while in case

of Voltas, LG the discounts are in the 12-15% range. This a regular feature during

the summer season and largely on expected lines. Companies are also offering

comprehensive warranty on the air conditioners for 5 years.

Increasing competition:

In terms of competition, our channel checks hinted

Daikin, Lloyd Electric, Panasonic, and LG are striving to increase market share/

volumes; in fact, Panasonic offered large dealer margins and witnessed

considerable growth in 2012, but could not sustain this trend. We believe Daikin

and Hitachi are trying to enter the “Popular” segment, which accounts for ~60-

70% of volumes from the erstwhile Premium category.

Voltas, Blue Star, LG, Daikin and Panasonic

are the most popular brands for

dealers. O General, Carrier, and Hitachi are considered premium brands, meant

for the discerning customer. Higher prices for these brands could be partly

ascribed to the use of 100% copper condensers.

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 28: Brand hierarchy in the Indian room AC market

Premium

• O General, Mitsubishi Electric, Carrier, Daikin, Toshiba,

Hitachi

Popular

• Voltas, Blue Star, LG, Whirlpool, Panasonic, Lloyd Electric,

Samsung

• Videocon, Electrolux, GREE, Midea

Economy

Source: Dealer feedback, Industry, MOSL



Voltas is expected to retain its leadership position in the industry. This has been

ascribed to the company’s persistent efforts to enhance brand name,

distribution reach and dealer support. Voltas’s focused advertising and brand

building exercise, along with the TATA brand, helped in gaining customers’ trust.

With more than 12,000 touch points in its distribution network, service network

and dealer margins are well ahead of competitors.

Daikin has started to focus on catering to the mid-range in the industry; earlier,

it was considered primarily a premium brand. The price difference between a

Daikin and a Voltas one ton (three-star) split AC has decreased to INR1,000–

2,000 from INR3,000–5,000 earlier. Globally, Daikin ranks number one in AC and

it aims to replicate this ranking in India by FY20. In our view, the company faces

two challenges: a) Daikin as a brand is not very well known outside of key

metros; therefore, the company needs to raise brand awareness. Nearly 50–55%

of industry sales are in Tier 2 to Tier 4 cities, where Daikin might not be very

popular; and b) Daikin’s distribution network stands at ~3,500 vis-à-vis Voltas’s

~12000, which gives the latter a strong edge.

Panasonic resorted to aggressive strategies in 2012 to gain a higher market

share; the company achieved the target by reducing prices and offering

significant discounts, but was unable to sustain at lower price points. Thereafter,

prices had to be normalized that, in turn, resulted in loss of market share.

Panasonic has resurfaced in 2016, with dealer margins raised to 27–28%. The

company is providing exclusive models to dealers to ensure no price under

cutting and launched a fresh marketing campaign to regain lost share in the

industry.

Voltas’s all-weather smart ACs are primarily sold in North India, where the

consumer also requires a heater during winter. As Mumbai is characterized by

mild winters, most dealers do not stock this model.

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Key air conditioner manufacturers’ summer strategy

Based on media articles/channel checks and company feedback, we have

highlighted key strategies adopted by various players for the upcoming summer

season.

Blue Star – Impressive lineup of AC models; market share target at 12–13%



The company has a strong position in the inverter split AC segment, which,

along with five-star ACs, generates 30% of revenues. Inverter ACs contribute

10% to domestic industry sales compared to over 50% in China. Also, operating

costs (primarily electricity) for an inverter AC are 30% lower. Management

expects the market share of inverter ACs to triple over the next few years.

Blue Star’s line-up of new inverter split ACs are among the first to comply with

BEE’s voluntary labeling program (mandatory for inverter ACs from 2018). All

models have been designed to operate non-stop at 50 degrees and can function

smoothly without an external voltage stabilizer. In FY17, the company plans to

allocate INR300mn for further product development.

The company’s distribution network comprises 3,800 outlets across 500

locations, with smaller towns generating 50% of total sales. Blue Star plans to

introduce a same-day installation facility in NCR. IN our view, this is the largest

market for ACs in the country, with Voltas enjoying nearly 30–35% share in

several areas.

Blue Star currently has 70 exclusive product stores and targets to reach 100 by

the end of FY17. Also, it aims to open the first Blue Star Platinum Store in New

Delhi in 2016. These stores encompassing an area of ~2,000sq ft will

comprehensively display the entire product range; thereafter, Blue Star plans to

replicate the initiative in other metros.

The company’s targeted spending for summer 2016 stands at INR400mn. Blue

Star continues to use the brand message, ‘Nobody Cools Better’. The company’s

current market share (in value terms) stands at 10.5% and is projected to reach

12% in FY17.

Voltas – targeting a double digit growth this summer season



Voltas (~21.8% share) continued to lead the room AC industry in 9M16, aided by

a robust dealer network, strong brand name (trust in the TATA brand), and

focused advertising.

The company recently launched the ‘All Star ratings’ AC range based on the core

value proposition of ‘Run 2 ACs at the cost of 1 AC’ and the unique ‘Steady Cool’

compressor, which operates on a ‘two stage inverter’ technology. This cutting-

edge technology leads to significant power savings vis-à-vis an ordinary

compressor. In addition, the All Star ACs are environment-friendly and efficient

with super silent operation (noise levels as low as 18 decibels), high ambient

cooling (efficient in temperatures as high as 54 degree Celsius) and an advanced

air purifier. The company is offering this unique range with a five-year warranty.

Voltas introduced a range of advanced ‘All Weather Smart ACs’ by integrating

three smart features: a) Smart Access: Wi-Fi enabled ACs can be operated from

anywhere and anytime through a smart phone using local Wi-Fi or GPRS

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point



connection; b) Smart Sense: The AC senses outside weather conditions and

adapts to the changing environment without any manual intervention; and c)

Smart Analytics: It keeps a tab on the energy usage and consumption trends. In

addition, the company revamped the new Smart AC mobile app.

Voltas expects a double digit growth in FY17 and is expecting a long and severe

summer in CY16; this along with pent up demand from customers will lead to

good growth in the industry.

With the latest launches, Voltas now has a strong product portfolio of over 150

variants of split ACs through more than 12,000 touch points in the country.

Daikin India – target to expand reach and market share



Under the leadership of the current MD, Mr. K. Jawa, Daikin plans to double

sales to 1mn units in 4–5 years, with the commissioning of a second plant.

Globally, the company ranks first in ACs and targets to achieve the same

position in India by 2020.

Over the last few years Daikin ACs were generally perceived as expensive;

nevertheless, the company has reduced the prices with effect from CY15. Daikin

aim is to sell at the right price, and use the right technology and right product

range to capture the market, including semi-urban areas.

The company’s plant in Neemrana was set up at a cost of INR11b and produces

0.5mn ACs, 6,000 ductable and 18,000 chiller units. Daikin intends to set up a

second plant at an investment of INR6b. The new facility, estimated to have a

manufacturing capacity of 1mn units per year, is scheduled to commence

operations in 2017–18.

Daikin will build its first R&D facility at an investment of INR0.6b which is

presumed to be the foremost in the country by an AC manufacturer. The center

is expected to become fully operational in 2016.

The company has tied up with the Delhi Daredevils IPL team to enhance brand

image and reach.

Daikin has launched its marketing campaign under the tag “Fill the air with

goodness” which reiterates the company’s commitment to provide state of the

art technology that offers comfort, great saving and is environment friendly.

Videocon – Targets 15% share in room ACs



Videocon is depending on sales network expansion and product launches to sell

0.6mn AC units this year and thereby garner 15% market share.

The company introduced eight split AC models, priced between INR34, 000 and

INR39,000, under the ‘Aryabot’ range.

To gain an additional 5% share, Videocon targets to increase its dealer strength

from 7,000 to 9,000 and sell 0.6mn units during summer.

The ‘Aryabot’ range of ACs are compliant with BEE ratings and can pair up with

smartphones and smart watches by enabling GPS access—through a user’s GPS

location, the feature notifies the need to switch off the AC when one leaves the

house and switch it on before one enters the premises.

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Panasonic – ‘A better life, a better world’



Panasonic’s new advertising campaign is titled ‘A Better Life, A Better World’;

the campaign reiterates the company’s commitment to improve the quality and

standard of living, and creating a better world for the entire community.

‘Life Conditioner’, a new range of ACs enhance consumer experience by

providing pre-requisite cooling features and using latest Japanese technology.

The range is reported to offer 65% energy saving, 99% purer air and 35% faster

cooling. Panasonic Life Conditioners are equipped with Nanoe-G & PM 2.5 Air

Purification that eliminates airborne particles. Econavi inverter technology

monitors the product’s operations, while iAUTO X delivers faster cooling.

The advertising campaign features Panasonic’s brand ambassador, Katrina Kaif,

who, with a strong youth appeal, connects with techno-savvy consumers

seeking products aligned to global standards.

Godrej Appliances – Eyeing 15% share in the inverter AC segment



Godrej Appliances has rolled out an energy-efficient AC under its premium NXW

brand, which was used for super premium refrigerators until date. The company

targets to acquire 15% share in the inverter AC market.

The company highlighted it is the most energy-efficient inverter AC in the

country with an Indian Seasonal Energy Efficiency ratio (ISEER) of 5.2. Since June

2015, BEE has introduced ISEER for inverter ACs. ISEER refers to the ratio of the

total amount of heat that an AC can eliminate to total energy consumed to

remove the heat. The minimum ISEER for a five-star rated inverter AC is 4.5.

Godrej’s inverter AC is expected to be among the top five-star rated inverter

ACs, with 31% savings over a five-star AC. It is adaptable to Indian climatic

conditions and delivers high efficiency. The NXW range would be available as

3440W and 5000W, and the company is offering a five-year condenser warranty

and a 10-year compressor warranty.

After gaining a 15% share in the premium and five-star rated AC segments,

Godrej now looks to acquire a similar share in the inverter AC market.

The company plans to double advertising spending and thereby increase market

share in FY17.

Carrier Midea – Targets 40% growth in CY16



The company has projected 40% growth in overall sales (INR10b in CY15), driven

by a strong performance in the AC division. Carrier Midea, a 40:60 JV between

US-based Carrier Corporation and China's G D Midea, is also expanding the sales

network to include 3,200 retail outlets by the end of March 2016 to sell its

product range.

Carrier Midea India has adopted a strategy of not increasing the price of existing

AC models this season due to local manufacturing and localization. The company

has a manufacturing unit at Bawal, Haryana, with a capacity of 0.7mn AC units

per year.

This season, the company’s product range would encompass 115 AC models,

wherein 78 would be sold under the Carrier brand and the remaining 37 as

Midea.

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Lloyd Electric – 11% share and still rising



The company accounted for ~11% in the Indian room AC industry during FY16

(8% in FY15). Lloyd continues to aggressively strengthen presence in the AC

market.

Lloyd’s TV campaign would be telecast during T20 World Cup series to garner

mindshare with customers.

As per a recent company release, Lloyd has already sold 0.2mn ACs in Q416

which is a record set by it.

LG – Looks to close the gap with market leader



With a new MD, Mr. Kim ki Wan at the helm, LG has already turned aggressive

in terms of dealer margins and discounts to gain a sizeable market share.

(http://articles.economictimes.indiatimes.com/2015-11-30/news/68661316_1_lg-india-

lg-electronics-lg-products).



Our channel checks indicate the company is targeting a growth rate of 15% in

FY17, based on new product launches such as dual inverter ACs that are more

efficient than normal inverter ACs.

Sales growth would come primarily from the Northern region where LG expects

a double digit growth in sales.

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 29: Comparison of AC features across companies

Name of company

Key features offered

Voltas has launched its "All Star" airconditoners with the theme of "Run

2 ACs at the cost of 1" which has significant power savings,

environment friendly, super silent operations, advanced air purifier and

"All Star" ACs"

ambient cooling at high temperature. It has introduced its advanced

All Weather Smart A/C's"

"All Weather Smart ACs" which can be operated by a phone using Wifi

/GPRS, senses outside temperature and adapts to the weather and

keeps a tab on power usage and consumption

With the tagline " The AC that saves every day", LG ACs offer 30% faster

"Smart Inverter" ACs with

cooling, 66% energy savings, super quiet operation(19db) and 99%

Mosquito Away, Himalaya Cool, sterilized air. LG's ACs also offer "Mosquito Away" technology to drive

Monsoon Comfort and Hot &

away mosquitoes, "Himalaya Cool" technology for faster cooling,

Cold comfort

"Monsoon Comfort" for controlling the humidity and "Hot & Cold" AC

for all weather usage

Hitachi's Inverter ACs offer "iClean Plus" technology which

automatically cleans the dust in the air filter, "iSense" which regulates

"iCare" ACs with "iClean", "iSense" the temperature as per the person's active body movements and "iSee"

and "iSee" technology

which detects faces of people and directs air flow to everyone, Wifi

technology to control the AC from anywhere and uses R410 green

refrigerant which is eco friendly

Life Conditioner’ range offers a smarter life(65% energy saving), a

healthier life(99% purer air) and a faster life(35% faster cooling through

iAutoX). Panasonic Life Conditioners are equipped with Nanoe-G & PM

"Life Conditioner" AC range

2.5 Air Purification that eliminates airborne particles. Econavi inverter

technology monitors the product’s operations, while iAUTO X delivers

faster cooling.

The ‘Aryabot’ range of ACs can through a user’s GPS location, switch off

the AC when one leaves the house and switch it on before one enters

the premises, it comes with a dedicated USB slot for a web cam

connection and the web cam streams live video on the smartphone,

keeps a tab of power consumption and through its budgeting feature,

one can set limits on electricity consumption, Voice command to

"Aryabot" range

control the remote, the Sleep Graph mode allows to set desired

temperature levels for each hour of the night, Aryabot can also sense

the outside temperature and automatically adjust to set temperature

inside. The AC also intelligently detects problem areas and suggests

remedial actions basis its algorithms.It also has the ability to contact

the service centre on its own and log in service requests

Daikin ACs offer 64% more power savings(Good for savings), 15.3%

more comfort(Good for comfort), 75% less CO2 emission(Good for

environment) and Swing Inverter Technology(Good for living). Its' ACs

"Fill the air with goodness"

also have dehumidifiers, Streamer discharge air purifier, Intelligent

Eye(adjusts cooling to human presence), Smart phone connectivity for

ACs, Stabilizer free operation and all season AC for heating/cooling

Blue Star has launched Wifi enabled ACs which can be used from any

remote location within the Wifi network, can work at high

"Nobody cools better"

temperatures upto 50 degrees and within a voltage range of 160-270V

without stabilizer, 30% power saving vs. 5 star split ACs, Purifiers for

eliminating odors, dust, bacteria and other pollutants

NXW ACs

The NXW is the most energy-efficient inverter AC in the country with an

Indian Seasonal Energy Efficiency ratio (ISEER) of 5.2. It is adaptable to

Indian climatic conditions and delivers high efficiency

Samsung’s Digital Inverter compressor offer power savings, stabilizer

free operation, Virus Doctor and Easy Filter to eliminate dust, Multi Jet

Plus technology for better cooling efficiency, Tropicalized compressor

for cooling till 52 degrees, Turbo Cooling, Good Sleep for regulating

temperature throughout the night Full HD filter and Dry Cool for

comfort even in humidity

Source: Company websites, MOSL

Key products on offer

Voltas

Hitachi

Panasonic

Videocon

Daikin

Blue Star

Godrej Appliances

Samsung

Digital inverter ACs

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Takeaways from ACREX 2016: Asia’s largest exhibition

for ACs, HVAC, refrigeration and energy efficiency

Industry growth at 15% YoY in CY16; no respite in competition

We visited ACREX, Asia’s largest exhibition for ACs, HVAC, refrigeration and energy

efficiency where we met the leading air conditioner manufacturers in the country.

Key takeaways are listed below.



AC manufacturers expect the industry to grow 10–15% YoY in CY16, following a

subdued CY15; sales from March–June (summer months) account for 50–55% of

industry volumes and companies expect a normal summer season.

Inventory has been cleared after strong industry growth in Q316 (35% YoY);

currently, channel filling is underway for the upcoming summer season.

As BEE star ratings remain unchanged, AC manufacturers do not expect any

price increases in CY16. However, if the rupee posts a substantial decline,

companies may to have to pass it on to end consumers.

Consumers have increasingly opted for energy-efficient products; five-star and

inverter AC sales constitute 30% of the market and are growing in high double-

digits.

After strong festive season sales in Q316, secondary sales have been subdued in

January, especially in the North and West, due to extended winters. However,

secondary sales have picked up over the past week in Tamil Nadu and Kerala.

Competitive intensity remains high with established players in the Premium

category (Daikin and Hitachi) seeking to enhance presence in the Popular

category (50–60% market share); smaller players like GREE, Midea, Lloyd Electric

and Videocon are also struggling to increase their share in the Popular segment.

Key differentiators in the AC market are brand name, distribution network, after

sales and dealer margins. Reduction in pricing alone would not lead to

sustainable market share gains.

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Company-wise key takeaways from ACREX, 2016

Blue Star



The company expects industry growth of 15%. Blue Star’s sales are projected to

accelerate by 25% YoY, driven by new model launches, increased distribution

network and focused advertising.

Blue Star has 30 inverter split AC models voluntarily rated as three and five-star.

The company aims to increase market share to 12% from the current 10%. Blue

Star has introduced a total of 130 AC models, of which 40–50 operate on green

gases (R410A/R22).

The company accounted for a market share of 11–12% in FY16 (FY15: 8–9%)

with sales rising 40% YoY. Hitachi expects the share to reach 13% by selling

0.5mn units in this year; the company currently ranks third in the industry after

Voltas and LG. Daikin and Lloyd Electric rank lower in terms of volumes.

Hitachi has voluntarily rated all of the inverter AC models for BEE star labeling; it

is now focusing on energy efficiency for boosting sales.

Though industry growth decelerated in CY15, the company expects CY16 to be a

strong year.

Hitachi has been targeting the Popular segment and has AC models across the

Premium, Popular and Economy level categories.

Competition is intense with Daikin, Midea, GREE and Lloyd Electric aggressively

targeting the market.

Extended winters during the year—normally winter ends by mid-January, but

this year it continued well into late Jan – early February; strong heat since then

has been positive for Voltas’s secondary sales over the last few days.

Generally, markets are weak after Diwali (festival of lights in

October/November) and sales are yet to pick up.

The company’s new AC model can be monitored from any Wi-Fi enabled

environment. Voltas raised the prices of this product and the SMART All

weather model by INR1, 500.

Since star ratings have remained unchanged, the company has largely not

resorted to price increases; however a sharp fall in the rupee could have an

adverse impact.

Voltas lags behind peers in inverter ACs and needs to launch models in this

segment – 2016 “All Star ACs” are being launched to aggressively enter this

market; moreover, the government needs to provide tax incentives to improve

usage. Indian consumers are price conscious and hence, the market may not

witness exponential growth.

LG’s sales grew 15% in CY15 and it projects 30% growth in CY16 given the early

onset of summer and predictions of an above normal summer in CY16.

In terms of market share, the company undertakes significant amount of B2B

sales to residential developers. This has not been captured in the Gsk Neilson

data that is only for multi-brand outlets. They are ahead and the market leader

in the room air conditioner segment.

Hitachi



Voltas



20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Marketing campaigns by key players

Aggressive campaigns planned to gain market share

Exhibit 30: LG - “The AC that saves every day” with its smart inverter AC

Source: Media reports, MOSL

Exhibit 31: LG - Smart Inverter technology with Mosquito away, Himalaya Cool and

Monsoon Comfort are additional features on offer

Source: Media reports, MOSL

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 32: Panasonic – “The Life Conditioner” - Faster cooling, Air purifier and Energy

savings as well

Source: Media reports, MOSL

Exhibit 33: Voltas – “All Star air conditioner” – Highlighting its inverter compressor which

enables “Run 2 aircons at the cost of one; bring home All Star savings”

Source: Media reports, MOSL

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 34: Lloyd Electric – “Khushiyon ki gurantee”. Offering 60 months warranty on air

conditioners to celebrate its 60 years in India

Source: Media reports, MOSL

Exhibit 35: Kohinoor – exchange offer plus free standard installation with 5 year condenser

and 10 year compressor warranty on select brands

Source: Media reports, MOSL

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 36: Vijay Sales – Promotional offer

Source: Media reports, MOSL

Exhibit 37: Daikin – “Fill the air with goodness”

Source: Media reports, MOSL

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 38: Onida – “Regalio”

Source: Media reports, MOSL

Exhibit 39: Hitachi – IClean technology for automatic cleaning of filters while ISee to sense

people in the room and direct the air flow to them

Source: Media reports, MOSL

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 40: Godrej Appliances – NXW range which is the highest rated inverter AC in India

Source: Media reports, MOSL

Exhibit 41: Whirlpool – 3D cool Xtreme AC

Source: Media reports, MOSL

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Exhibit 42: Carrier – “Round the clock” care

Source: Media reports, MOSL

Exhibit 43: Blue Star – “Nobody cools better” ad campaign

Source: Media reports, MOSL

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Companies

BSE Sensex: 25,844

Companies Covered

Voltas

Blue Star

Hitachi

*Prices as on 20 April 2016

S&P CNX: 7,915

April 2016

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

20 April 2016

Update

| Sector:

Capital Goods

Voltas

Buy

BSE SENSEX

25,844

S&P CNX

7,915

CMP: INR302

TP: INR350(+16%)

Leader in India’s room AC market

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

12M Avg Val (INR M)

Free float (%)

Key focus areas – brand, distribution, after sales service and dealer

support

VOLT IN

330.9

360/211

9/10/12

90.6

1.4

592

69.7



Financials Snapshot (INR b)

Y/E MAR

2016E 2017E 2018E

Net Sales

56.7

62.0

72.2

EBITDA

4.0

4.8

6.1

Adj PAT

3.3

4.0

5.0

EPS(INR)

9.9

12.0

15.1

EPS Gr. (%)

-3.4

21.9

25.7

BV/Sh. (INR)

70.9

79.9

91.1

RoE (%)

14.7

16.0

17.7

RoCE (%)

14.3

15.3

16.8

P/E (x)

30.7

25.2

20.0

P/BV (x)

4.3

3.8

3.3

Shareholding pattern (%)

As On

Promoter

DII

FII

Others

Dec-15 Sep-15 Dec-14

30.3

27.0

26.8

26.1

21.6

21.1

21.8

21.1

21.8

Channel checks indicate strong demand for air conditioners in upcoming

season:

We did a dip-stick study across large dealers and retail chains to

understand the demand scenario for the upcoming summer season,

competitive intensity, and new product launches in the market. Dealers

highlighted (1) robust demand for air conditioners (ACs) across brands, (2)

likely growth of 15-20% for the industry, and (3) intense competition,

preventing major price hikes across brands. There is a clear shift by consumers

towards energy efficiency, with more 4/5-star ACs being sold.

MEP business facing near-term headwinds:

VOLT’s MEP business posted a loss

in 3QFY16 and EBIT margins turned negative after six quarters (-1.2%). This was

because while the company booked costs for the UAE project, it is yet to book

the acceleration claim. Business environment in the Middle East remains

challenging, with slow project execution, reluctance to officially extend project

timelines, ‘engineered’ delays in settlement of commercial entitlements,

increasing tendency to legally dispute and go to arbitration. This has impacted

margins in the MEP segment – blended margins remain below the guided 4-5%.

Air cooler sales to kick in meaningfully from FY17:

To diversify its product

range in the Unitary Cooling Products (UCP) segment and as a natural

extension of its existing brand, VOLT has diversified into air coolers. It has

launched 11 models (7 desert coolers, 3 personal coolers, and 1 window

cooler) across India. It intends to be among the top-3 players in the country in

the next three years and is currently focused primarily on the residential cooler

market. The air cooler season begins from December and lasts up to May;

VOLT is focusing on the upcoming season to increase volumes. The residential

cooler market is estimated at 5m-6m units, with a market size of ~INR40b

(INR6,660 per unit), 80% of which is unorganized. Even if VOLT is able to gain 2-

3% of the overall market (8-12% of the organized market), it could add sales of

INR0.7b-1.2b in the UCP segment.

VOLT trades at 25x FY17E and 20x FY18E EPS. We maintain Buy; our target

price is INR350 (earlier INR290) which values the UCP segment at INR300 (25x

FY18E EPS) and the Engineered Product Segment at INR50 (15x FY18E EPS). In

our view, there are multiple triggers for the stock, which include (1) positive

impact of 7th Pay Commission hikes, (3) structural uptrend in the air

conditioner market, and (3) potential improvement in the MEP business, with

pick-up in domestic construction activity.



FII Includes depository receipts

Stock Performance (1-year)

Voltas

Sensex - Rebased

400

350

300

250

200

Valuation and view



20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Financials and Valuations

Income Statement

Y/E March

Total Revenues

Change (%)

Raw Materials

Staff Cost

Other Expenses

EBITDA

% of Total Revenues

Other Income

Depreciation

Interest

Exceptional Items

PBT

Tax

Rate (%)

Reported PAT

Change (%)

Adj. Consolidated PAT

Change (%)

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Minority Intetest

Loans

Deferred Tax Liability

Capital Employed

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Investments

Goodwill

Curr. Assets

Inventory

Debtors

Cash & Bank Balance

Loans & Advances

Current Liab. & Prov.

Creditors

Other Liabilities

Net Current Assets

Application of Funds

E: MOSL Estimates

2012

51,857

(0.1)

37,800

5,995

4,698

3,365

6.5

985

340

314

(1,505)

2,191

571

26.1

1,620

(44.7)

3,126

(0.7)

2013

55,310

6.7

41,670

6,325

4,934

2,380

4.3

901

278

326

121

2,798

728

26.0

2,070

27.8

1,955

(37.5)

2014

52,660

(4.8)

38,543

5,947

5,515

2,656

5.0

1,002

248

225

215

3,399

941

27.7

2,458

18.7

2,238

14.5

2015

51,831

-2

35,974

5,899

5,857

4,100

7.9

1,087

280

233

462

5,136

1,276

3,860

3,381

2016E

56,663

40,468

6,165

6,029

4,001

7.1

1,083

282

162

4,640

1,392

3,264

-15

3,264

-3

2017E

61,955

44,385

6,442

6,316

4,812

7.8

1,199

288

198

5,525

1,547

3,978

(INR Million)

2018E

72,220

52,743

6,732

6,617

6,129

8.5

1,332

294

223

6,943

1,944

4,999

(INR Million)

2018E

331

29,800

30,131

161

2,717

(349)

32,660

4,849

3,524

1,326

10,939

814

53,446

12,081

18,652

8,401

3,631

33,909

18,510

15,399

19,537

32,659

2012

331

14,469

14,800

170

2,214

(242)

16,941

4,451

2,448

2,003

3,116

890

35,271

8,334

20,977

2,710

3,249

24,384

14,730

9,654

10,887

16,941

2013

331

15,926

16,256

118

2,612

(222)

18,765

4,678

2,568

2,110

4,074

888

38,352

9,784

21,927

3,498

3,142

26,658

17,191

9,186

11,694

18,766

2014

331

17,862

18,193

138

2,629

(239)

20,721

4,198

2,113

2,086

7,320

798

36,974

9,010

22,039

2,818

3,108

26,476

16,267

10,208

10,499

20,721

2015

331

20,690

21,021

161

1,217

(349)

22,049

4,114

2,223

1,891

10,939

798

34,844

8,671

21,051

2,516

2,606

26,466

15,414

11,051

8,378

22,050

2016E

331

23,119

23,450

161

1,717

(349)

24,979

4,649

2,941

1,708

10,939

814

39,631

9,479

14,634

4,289

2,849

28,157

16,076

12,082

11,473

24,979

2017E

331

26,080

26,411

161

2,217

(349)

28,440

4,749

3,229

1,520

10,939

814

45,060

10,364

16,001

6,418

3,115

29,938

16,728

13,210

15,122

28,439

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Financials and Valuations

Ratios

Y/E March

Basic (INR)

Adj EPS

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation (x)

P/E

Cash P/E

EV/EBITDA

EV/Sales

Price/Book Value

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors. (Days)

Asset Turnover (x)

Leverage Ratio

Debt/Equity (x)

Cash Flow Statement

Y/E March

PBT before EO Items

Add : Depreciation

Interest

Less : Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

(Inc)/Dec in FA

Free Cash Flow

Investment in liquid assets

CF from Investments

(Inc)/Dec in Debt

Less : Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

E: MOSL Estimates

2012

9.5

4.9

10.5

44.7

1.6

38.0

2013

5.9

6.3

6.8

49.2

1.6

29.8

2014

6.8

7.4

7.5

55.0

1.9

29.2

2015

10.2

11.1

63.6

2.3

23.3

2016E

9.9

10.7

70.9

2.2

25.6

2017E

12.0

12.9

79.9

2.6

25.6

2018E

15.1

16.0

91.1

3.3

25.6

23.8

34.2

20.0

1.0

2.9

1.1

22.6

20.9

18.3

1.5

3.6

1.0

30.7

28.3

24.4

1.7

4.3

0.7

25.2

23.5

20.0

1.5

3.8

0.9

20.0

18.9

15.4

1.3

3.3

1.1

21.1

23.3

12.0

15.8

12.3

16.3

16.1

21.9

14.7

14.3

16.0

15.3

17.7

16.8

148

152

3.1

145

158

2.9

153

164

2.5

148.2

61.1

161.4

2.4

94.3

61.1

103.6

2.3

94.3

61.1

98.6

2.2

94.3

61.1

93.6

2.2

0.1

0.2

0.1

2012

2,191

340

314

(571)

(3,651)

(1,378)

(289)

(1,666)

(430)

(719)

847

(314)

(615)

(83)

(2,179)

4,890

2,710

2013

2,798

278

326

(728)

(202)

2,472

(181)

2,291

(957)

(1,139)

399

(326)

(619)

(546)

787

2,710

3,497

2014

3,399

248

225

(941)

3,030

462

3,492

(3,247)

(2,785)

(225)

(716)

(925)

(679)

3,497

2,818

2015

5,136

280

233

(1,276)

1,425

5,798

5,856

(3,619)

(3,561)

(1,412)

(233)

(894)

(2,539)

(302)

2,818

2,516

2016E

4,640

282

(1,392)

(1,323)

2,208

(100)

2,108

(100)

500

(835)

(335)

1,773

2,516

4,289

2017E

5,525

288

(1,547)

(1,520)

2,747

(100)

2,647

(100)

500

(1,017)

(517)

2,129

4,289

6,418

2018E

6,943

294

(1,944)

(2,432)

2,862

(100)

2,762

(100)

500

(1,278)

(778)

1,983

6,418

8,401

20 April 2016

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Update

| Sector:

Capital Goods

Blue Star

Not Rated

BSE SENSEX

25,844

S&P CNX

7,915

CMP: INR414

Strong contender in India’s AC market

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

Avg Val ( INRm)/Vol m

Free float (%)

Gaining market share across segments

BLSTR IN

89.9

411/290

15/24/40

35.7

0.5

24 / 0.68

60.5



Financials Snapshot (INR b)

Y/E MAR

2013

2014

Net Sales

27.7

27.9

EBITDA

1.0

1.5

PAT

0.4

0.9

EPS (INR)

4.5

10.3

Gr. (%)

-145.1 130.6

BV/Sh (INR)

RoE (%)

RoCE (%)

9.3

15.5

P/E (x)

35.4

32.4

P/BV (x)

2.9

5.7

2015

30.8

1.7

1.1

12.2

18.0

16.3

27.4

4.8

Plans to increase share in room AC market by focusing on North India:

Blue

Star intends to increase its share in the room air conditioner market from the

current 10% to 12% in FY17 by expanding its distribution network and focusing

on North India. Its market share is weak in the North as compared to the South

and the West. North India currently constitutes ~45% of the air conditioner

market. To improve its focus and market share, Blue Star plans to set up two

new manufacturing facilities (Jammu and Sri City), with a capex of INR2.5b. We

believe that dealer network expansion, introduction of new product line (135

new models with star rating for inverter ACs) and new facilities to cater to

demand from the North and South would help the company to beat industry

growth.

Capex revival to aid growth in the projects business:

Electromechanical

projects and packaged air conditioning systems business, which contributes

about 52% of Blue Star’s total revenue, has witnessed muted growth over the

last five years due to weak macroeconomic scenario, delay in execution of

orders and the company’s focus on profitable growth. However, revival in

commercial construction and urban infrastructure activity will help grow the

electromechanical contracting business. Blue Star is the leader in the domestic

HVAC segment, with every third commercial building in the country having a

Blue Star-installed AC. Despite muted ordering activity in the industry, for

9MFY16, order inflow in the MEP segment has remained strong for Blue Star at

INR14.3b (up 40% YoY).

Focus on exports to support growth:

Blue Star intends to increase its revenue

share from exports from the current 5%. To increase exports, it plans to tap

new opportunities in AC&R products, MEP projects, after-sales services as well

as systems integration and agency business. It plans to export to the Middle

East, Africa, SAARC and ASEAN regions. Middle East Expo 2020, FIFA World Cup

2022, changes in rules and regulations in the GCC market for energy-efficient

air conditioners, and higher FDI limits in the SAARC and ASEAN regions would

be the key drivers for the air conditioning market.



Valuation and view



Focus on expanding dealer network, introduction of new models, and brand

strengthening through higher ad spends should help Blue Star to increase its

market share in the air conditioning business from the current 9.5% to 12% in

FY17. Bloomberg standalone earnings estimates are INR17.6 for FY17 and

INR19.9 for FY18. The stock trades at 28x FY17E and 21x FY18E EPS. We do not

have any rating on the stock.

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Financials and Valuations

Income Statement

Y/E March

Total Revenues

Change (%)

Raw Materials

Staff Cost

Other Expenses

EBITDA

% of Total Revenues

Other Income

Depreciation

Interest

Exceptional Items

PBT

Tax

Rate (%)

Reported PAT

Change (%)

Adj. Consolidated PAT

Change (%)

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Minority Intetest

Loans

Deferred Tax Liability

Capital Employed

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Investments

Goodwill

Curr. Assets

Inventory

Debtors

Cash & Bank Balance

Loans & Advances

Current Liab. & Prov.

Creditors

Other Liabilities

Net Current Assets

Application of Funds

E: MOSL Estimates

2010

25,250

0.9

18,821

1,849

1,833

2,747

10.9

311

347

140

2,766

651

23.5

2,115

17.3

1,975

9.6

2011

28,589

13.2

20,432

2,061

3,610

2,486

8.7

340

317

244

2,269

719

31.7

1,550

-26.7

1,546

-21.7

2012

27,008

-5.5

20,858

2,069

4,186

-105

-0.4

238

314

703

-884

-0.8

-891

-157.5

-891

-157.7

2013

27,671

2.5

20,379

2,155

4,149

988

3.6

365

329

499

526

124

23.5

402

-145.1

402

-145.1

2014

27,895

0.8

19,577

2,340

4,470

1,507

5.4

264

347

496

-169

759

0.0

759

88.7

928

130.6

(INR Million)

2015

30,808

10.4

21,335

2,568

5,168

1,736

5.6

101

393

435

419

1,428

-86

-6.0

1,514

99.4

1,095

18.0

(INR Million)

2015

180

6,071

6,251

3,319

-165

9,405

5,438

3,063

2,374

2,319

17,043

4,628

7,081

363

2,385

12,356

8,408

3,947

4,688

9,405

2010

180

4,737

4,917

-15

4,991

3,519

1,542

1,977

13,928

2,580

6,282

132

1,324

10,971

5,531

5,440

2,957

4,992

2011

180

5,555

5,735

4,214

-7

9,942

3,741

1,809

1,931

253

1,018

19,382

4,945

7,786

465

1,427

12,642

6,890

5,752

6,740

9,943

2012

180

4,559

4,739

3,462

8,201

4,146

2,087

2,059

315

1,214

16,919

4,372

6,935

508

1,692

12,306

7,030

5,276

4,613

8,201

2013

180

4,764

4,944

3,760

8,704

4,620

2,390

2,230

1,214

17,479

5,088

7,296

110

2,034

12,294

7,527

4,767

5,184

8,704

2014

180

5,116

5,296

4,337

9,633

4,994

2,681

2,314

1,208

18,830

5,814

7,329

473

2,450

12,718

7,893

4,825

6,111

9,633

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Financials and Valuations

Ratios

Y/E March

Basic (INR)

Adj EPS

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation (x)

P/E

Cash P/E

EV/EBITDA

EV/Sales

Price/Book Value

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors. (Days)

Asset Turnover (x)

Leverage Ratio

Debt/Equity (x)

Cash Flow Statement

Y/E March

PBT before EO Items

Add : Depreciation

Interest

Less : Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

(Inc)/Dec in FA

Free Cash Flow

Investment in liquid assets

CF from Investments

(Inc)/Dec in Debt

Less : Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

E: MOSL Estimates

2010

22.0

25.8

54.7

8.0

34.0

2011

17.2

20.7

63.8

7.0

40.6

2012

(9.9)

(6.4)

52.7

1.0

-10.1

2013

4.5

8.1

55.0

3.0

67.1

2014

10.3

14.2

58.9

4.0

47.4

2015

12.2

16.5

69.5

5.0

29.7

27.4

20.2

19.0

1.1

4.8

1.5

46.0

45.6

29.0

22.9

-17.0

-2.0

8.3

9.3

18.1

15.5

19.0

16.3

5.1

2.9

3.3

3.2

103

2.9

100

3.3

0.0

0.7

0.8

0.5

(INR Million)

2015

1,009

393

1,314

2,803

-103

2,700

-1,111

-1,214

-1,018

-526

-1,544

473

363

2010

2,627

347

-666

-1,667

641

-216

425

-214

-184

-839

-1,023

-596

-504

2011

2,265

317

-712

-3,450

-1,580

-509

-2,088

-976

-1,485

4,125

-732

3,393

329

132

461

2012

-884

314

2,170

1,600

-504

1,096

-195

-699

-753

-105

-857

465

508

2013

526

329

-124

-969

-238

-262

-500

-262

299

-270

-471

508

110

2014

928

347

-564

711

-103

607

-97

577

-421

156

769

110

473

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Update

| Sector:

Capital Goods

20 April 2016

Hitachi

BSE SENSEX

25,844

S&P CNX

7,915

CMP: INR1,495

Not Rated

Greater focus on room ACs

India a key market for growth

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

Avg Val ( INRm)/Vol m

Free float (%)

HTHL IN

27.2

31.7

0.5



Financials Snapshot (INR b)

FY13A FY14A FY15A

Y/E MAR

Net Sales

9.3

11.0

15.7

EBITDA

0.5

1.4

PAT

0.2

0.1

0.8

EPS (INR)

5.6

3.0

28.6

Gr. (%)

369.6 -47.6 868.7

BV/Sh (INR)

87.0

88.3 115.1

RoE (%)

7.5

3.4

28.1

RoCE (%)

8.3

6.1

26.7

P/E (x)

0.0 506.6

52.3

P/BV (x)

0.0

16.9

13.0

Gaining market share through penetration in ‘Popular’ segment of room ACs:

Historically, Hitachi has focused on the ‘premium’ segment of room ACs, where

it has been a leader. However, over the last few years, Hitachi has also begun

targeting the ‘popular’ segment, which accounts for 60-65% of total volumes.

Hitachi’s’ room AC sales have grown 53% in FY15, significantly higher than the

23% industry growth. Growth in Hitachi’s sales has been driven by (a)

increasing dealer presence, especially in North India, (b) introduction of a wider

range of models, and (c) increased advertising spends (INR1.1b; 7% of sales in

FY15, higher than industry average of 2% of sales). Hitachi’s’ dealer touch

points now exceed 4,000 across India and it has 41 service centers to take care

of after sales services.

Betting on inverter and 5-star ACs for growth:

Hitachi has been an early

identifier of the market trend of customers shifting to energy efficient ACs and

has focused on 5-star/inverter ACs. 65% of its models are of this variety. In

FY15, sales of Hitachi’s 5-star/inverter ACs grew by 63%. As per our channel

checks, inverter ACs are likely to touch 30% of the market by FY18 and 50% by

FY20.

JV with Johnson Controls strengthens presence in HVAC segment:

On January

21, 2015, US-based Johnson Controls and Hitachi had entered into an

agreement to form a 60:40 JV for the global air conditioning business of Hitachi

Appliances. The JV would build on the strengths of Johnson Controls in the

HVAC market and incorporate Hitachi’s strengths in the room AC, VRF and

chiller segments. In India, the JV is seen as a strong contender in the air

conditioner market.



Valuation and view



Focus on expanding dealer network, introduction of new range of models and

higher ad spends should help Hitachi to increase its market share in the room

air conditioning business from the current 11%. Bloomberg standalone

earnings estimates are INR35.8/share for FY17 and INR50.2/share for FY18. The

stock trades at 38x FY17E and 30x FY18E EPS. We do not have any rating on the

stock.

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Financials and Valuations

Standalone - Income Statement

Y/E March

Total Income from Operations

Change (%)

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT bef. EO Exp.

EO Items

PBT after EO Exp.

Current Tax

Deferred Tax

Tax Rate (%)

Less: Mionrity Interest

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY10

6,409

36.3

5,824

90.9

585

9.1

118

467

118

570

115

-6

19.1

461

119.0

7.2

FY11

7,640

19.2

7,053

92.3

587

7.7

161

427

399

108

-2

26.6

293

-36.4

3.8

FY12

7,981

4.5

7,689

96.3

291

3.7

183

108

-30

-16.8

-88.9

0.4

FY13

9,300

16.5

8,835

95.0

465

5.0

202

263

207

25.9

153

369.6

1.6

FY14

10,997

18.3

10,522

95.7

476

4.3

300

175

120

113

-6

29.0

-47.6

0.7

(INR Million)

FY15

15,729

43.0

14,348

91.2

1,381

8.8

359

1,022

1,010

212

23.0

778

868.7

4.9

Standalone - Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Deferred Tax Liabilities

Total Loans

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Other Current Liabilities

Provisions

Net Current Assets

Deferred Tax assets

Appl. of Funds

E: MOSL Estimates

FY10

230

1,237

1,466

601

2,101

1,589

543

1,046

152

3,302

1,804

960

284

255

2,427

1,610

686

131

875

2,101

FY11

230

1,490

1,720

900

2,658

1,986

677

1,309

4,857

3,267

1,252

317

3,600

3,117

332

151

1,258

2,658

FY12

230

1,483

1,712

992

2,726

2,136

840

1,296

128

4,502

2,681

1,481

314

3,247

2,665

406

176

1,255

2,726

FY13

230

1,588

2,364

1,659

4,075

2,599

823

1,776

109

6,428

3,057

1,645

716

1,010

4,288

3,603

461

224

2,140

4,076

FY14

272

2,128

2,400

1,249

3,719

3,052

1,097

1,955

5,622

2,905

1,884

220

613

3,954

3,085

492

377

1,668

3,719

(INR Million)

FY15

272

2,857

3,129

108

1,396

4,632

3,811

1,381

2,430

8,327

4,903

2,838

528

6,244

5,044

761

439

2,083

4,632

20 April 2016

Capital Goods | Room air conditioners: At an inflexion point

Financials and Valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per share

Return Ratios (%)

RoE

RoCE

Working Capital Ratios

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Working Cap. Turnover (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

FY10

17.0

21.3

53.9

1.3

8.7

FY11

10.8

16.7

63.2

1.3

13.6

FY12

1.2

7.9

63.0

1.3

122.7

FY13

5.6

13.1

87.0

1.5

31.2

FY14

3.0

14.0

88.3

1.5

59.4

506.6

106.8

16.9

3.8

87.7

0.1

0.9

3.4

6.1

3.0

102

1.4

1.5

0.5

FY15

28.6

41.8

115.1

1.5

6.3

52.3

35.8

13.0

2.7

30.4

0.1

-7.9

28.1

26.7

3.4

114

117

1.3

12.4

0.4

0.1

-0.6

36.7

32.4

3.1

103

1.4

30.9

0.4

0.1

-17.4

18.4

20.2

2.9

156

149

1.3

5.8

0.5

0.1

1.9

4.4

2.9

123

122

1.4

1.2

0.6

0.1

-15.9

7.5

8.3

2.3

120

141

1.5

3.6

0.7

Standalone - Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(Inc)/Dec in FA

Free Cash Flow

Others

CF from Investments

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Closing Balance

FY10

570

118

-4

-85

-186

413

-42

371

-388

-17

-37

-425

124

-15

109

229

284

FY11

399

161

-3

-84

-606

-133

-89

-385

-474

-361

246

-20

-40

187

-263

284

FY12

183

-41

-8

248

262

-210

-207

-63

-40

-49

FY13

207

202

-43

-395

664

677

-1,109

-432

-22

-1,131

1,234

-52

-40

1,143

689

716

FY14

113

300

-66

-313

504

580

-556

-518

-428

-83

-47

-559

-496

716

220

FY15

1,010

359

-216

-677

514

547

-762

-215

-712

146

-96

-47

-163

220

20 April 2016

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