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Sunday, Sep 08, 2002

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Whirlpool of India: Hold/Buy on declines

Suresh Krishnamurthy

Earning numbers still caught in a whirl.

SHAREHOLDERS of Whirlpool of India can hold onto the stock. Fresh investments can be considered at declines in the stock price from the present levels. Given the depressed economic forecasts and the difficult operating environment for consumer durable companies, the near-term outlook continues to be bearish. However, the sustained improvement in operations by the company augurs well for investors. The stock continues to be an attractive long-term proposition.

Positive signs

The operating environment for consumer durable companies has been adverse for more than a few years now. Intense competition has spelt considerably lower pricing power. It has not been different for Whirlpool of India.

However, the company has been able to improve its topline and profitability. This will be fully felt when there is expansion in demand for consumer durable goods.

For the quarter ended June 2002, Whirlpool of India recorded a 13 per cent rise in net sales over the corresponding previous period. The incidence of excise duty on gross sales has rose by 1.7 percentage points. This suggests that the contribution of air-conditioners (which attracts higher excise duty) to sales is likely to have risen. In fact, the contribution of air-conditioners to the incremental growth is likely to be quite significant. Given the poor offtake of washing machines, the growth may have been restricted to refrigerators and air-conditioners in the quarter ended June.

Overall, this is a positive factor. Improvements in product mix with strong contributions from washing machines, refrigerators and air-conditioners are necessary to sustain increase in profitability.

Whirlpool of India's operating profitability declined marginally in quarter ended June 2002 over the corresponding previous period. This may be due to the higher contribution of air-conditioners. Profitability in air-conditioners is likely to be lower for Whirlpool now because the product was launched only recently. In other words, the lower margin may not indicate declining efficiency in refrigerators and washing machines.

In fact, there are signs of improvement. One, despite the 13 per cent rise, work-in-progress and finished goods actually declined during the quarter ended June 2002. Whirlpool has been consistently reducing inventory levels over the past few quarters. Sustained reduction in inventory levels accompanied by rising sales growth is necessary to improve profitability. Whirlpool's show on this count, when the operating environment is adverse, is encouraging from a long-term perspective. This is being reflected in a lower interest-cost-to-sales ratio and the 24 per cent rise in profit before tax.

Long-term proposition

The per share earnings for the 12-month period ended June 2002 of Whirlpool of India now works out to only just more than a rupee. The stock trades at a multiple of around 20 times its earnings. If we consider the possible expansion in margins and profitability that demand growth can facilitate, this multiple is not high.

However, there are two issues. One, the near-term outlook for demand is not favourable. Second, the undecided issue of royalty payable to Whirlpool Corporation, US, the parent company. These factors militate against buying the stock at current levels. It is, however, an attractive proposition at lower levels because of its fundamental strengths. As such, any weakness in price can be used to accumulate the stock.

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