IFB Industries - Initiating Coverage - Leveraging brand across categories

IFB Industries - Initiating Coverage - Leveraging brand across categories

Rating: Buy; Target Price: Rs465; CMP: Rs339; Upside: 37%



Leveraging brand across categories



We initiate coverage on IFB Industries which is expected to benefit
from market leadership in the front load washing machine segment,
domestic manufacturing of top load washing machines from Q3FY15 and
uptick in the refrigerator and air conditioner segments from Q4FY15.
Fine blanking segment is also expected to grow at steady double
digits. Stable Rupee, reducing share of traded imported goods,
reduction in imported raw materials and domestic manufacturing of top
load washing machines will aid margins along with turnaround in IFB
Points. Improving return ratios, debt free status, better working
capital cycle and generation of FCF augur well from a long term
perspective.

$ Maintains leadership in front loading washing machine segment: IFB
Industries is expected to maintain its leadership (~47% market share)
in the front load washing machine segment due to its strong product
offerings and pricing. It plans to start domestic manufacturing of top
load washing machines which is 90% of the washing machine market at
its Goa facility in Q3FY15 and increase market share in this high
volume category. With mere ~35% capacity utilization at the Goa
facility for front load washing machines, it is in advanced stages of
talks with a Japanese conglomerate for contract manufacturing which
will aid margins and act as a natural hedge due to high imports by the
company.

$ To leverage IFB brand across multiple home appliances: We expect
refrigerators and air conditioners to be a strong focus area
accounting for 18% of sales in FY17E from 10.3% in FY14. In the India
Today MDRA Consumer Survey 2014, IFB Refrigerators were overall ranked
first despite its availability only through IFB Points as these
products were introduced only in late FY13. Microwave category
accounts for 14.5% of sales in FY14 and we expect the share of home
appliances (ex-washing machines) to increase from 33% in FY11 to 42%
in FY17E. IFB currently has more than 7000 dealers and ~275 IFB Points
through which it markets all it products. IFB Points contributed more
than 17% to sales in Q1FY15 compared to 9% in FY13.

$ Strong Financials: We expect the company to post revenue CAGR of
17.2% over FY14-17E with the home appliances division expected to grow
at CAGR of 18% and fine blanking division at 13.3%. Operating margins
will expand from a low of 4.4% in FY14 to 9.7% in FY17E on the back of
stable Rupee, reducing share of traded imported goods and reduction in
imported raw materials. Domestic manufacturing of top load washing
machines will aid margins along with turnaround in IFB Points. We
expect the return ratio to improve significantly with RoE increasing
to 20.7% by FY17E and RoCE to 18.6%. We believe the company will
generate significant FCF from FY16E onwards.

$ Valuation & Risks: We believe IFB is attractively positioned at
16.1x and 12.4x FY16E and FY17E PE respectively. Between FY10 and FY12
when the financial performance of the company was at its best, the
stock was trading at PE valuations of 20x, ~15% discount to Whirlpool
but at a premium to Symphony. We believe in the next 2 years the
company will replicate its performance which it demonstrated in
FY10-12 and hence command significant valuation premium going ahead.
On the back of this, we initiate coverage on the stock with a target
price of Rs465 (17x FY17E EPS of Rs27.4) giving ~15% discount to its
best FY10-12 valuations. Key risks are aggressive pricing by the
competition and limited success of new launches.