ambit_consumer durables - july 2011

July 28, 2011

Consumer Durables THEMATIC

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to disclaimer section on the last page for further important disclaimer.

Analyst contact

Vijay Chugh Tel: +91 22 3043 3054 [email protected]

Shariq Merchant Tel .: + +91 22 3043 3246 [email protected]

Exhibit 1: Company Rankings based on competitive advantages

Company Score

LG 35

Samsung 35

Sony 34

Godrej & Boyce 29

Whirpool 27

Videocon (Standalone) 27

Hitachi 23

IFB Industries 21

Symphony 20

Note: Above rankings are subjective and based on our assessment and channel checks; Source: Ambit Capital research

Exhibit 2: Indian Consumer Durables Market Share as of FY10

Colour TV

Refrige rator

Washing Machines ACs

LG 28% 26% 26% 22%

Samsung 18% 19% 21% 17%

Videocon 24% 15% 15% NA

Whirpool NA 19% 16% NA

Mirc Elec. 11% NA NA 11%

Source: CRISIL, Ambit Capital research

Exhibit 3: India Consumer Durables Sector Earnings Growth for FY06-11

1 Yr 3Yr 5Yr

Sales 35% 24% 23%

EBITDA 26% 20% 30%

PAT 26% 21% 29%

Note: Coverage universe comprises sample of listed consumer durable companies; Source: Company, Ambit Capital research

No Juicy “Apple” Consumer Durables represents the biggest opportunity in the Indian consumption space from a growth perspective and we expect the Indian market to be amongst the top 10 durables markets globally within a decade. Our analysis of current demand trends also suggests that there has been no major slowdown on account of macro-economic challenges. Similar to other markets, companies in India have low pricing power, single digit margins and the space is largely dominated by North Asian companies. However, from an investment perspective we find no suitable proxies as we believe North Asian companies will retain the competitive edge over Indian and other MNC counterparts.

The “Consumer Durables” category (excluding brown goods), in our opinion, should significantly outpace overall consumption growth of 14% by more than 400bps and achieve a scale of US$130bn by 2020. Sales growth and EBITDA growth for the sector in the past five years (FY06-11) was 24% and 31% respectively.

The impact of macro-economic challenges on short-term demand trends has been mixed as confirmed by our channel checks (dealers and manufacturers). However it could get accentuated after the recent 50 bps move by Reserve Bank of India (RBI). Demand trends for electronics, mobile phone and lifestyle products have been fairly resilient. Television demand trends have been in line but sales in the appliances division (air conditioner and refrigerator) has been marginally below expectations to some extent also influenced by seasonal factors (a short summer).

3D, Smartphones, Internet/Broadband, Touch and Nano Technologies are some of the key mega trends in technology which in our opinion will drive significant growth across various categories in India. Considering the demographic profile of Indian consumer, adaptation to these technologies will remain high, in our opinion, this will provide additional fillip to growth besides higher penetration in tier 2 and tier 3 markets. These trends also imply that growth opportunities, even in highly penetrated categories such as consumer electronics (audio/visual) and mobile phones, will remain promising.

Bargaining power of buyers will remain high as we expect fragmentation to continue. (After Korea, Japan, and to some extent, China will drive the next round of fragmentation.) Based on available investment information, we expect supply chain investments to significantly lag overall growth requirements on account of infrastructural challenges and lower tariff barriers.

North Asian companies in our opinion enjoy significant competitive advantages (innovation, brand equity, distribution and sourcing base) and therefore proxy investing in these North Asian names, we believe, is the best approach to the Indian Consumer Durables space. We prefer categories such as Autos (Bajaj Auto), Brown Goods (TTK Prestige), Distribution (Redington) and Retail (Titan) in the discretionary space from a long term investment perspective. On a specific basis in the consumer durable category we are negative on Videocon and Whirlpool from a long term perspective as they lag their peers in sustainable competitive advantages.

Consumer Durables

Ambit Capital Pvt Ltd 2

The durables market has come of age The Consumer Durables market in India has come a long way over the last 20 years with entry of several multinational players especially those from North Asia. Mobile Phones, Personal Computers (used for household consumption) and Televisions are the largest component of the consumer durables space with aggregate share of more than 80%. Microwaves have been the fastest growing category in the consumer durables space (31% CAGR from FY04-FY11), albeit on a low base. Mobile phones have grown at 24% CAGR over the same period and have achieved 81% penetration in urban and 23% in rural areas.

Maximum rural penetration has been achieved by television (45%) and mobile phone (23%) segments while air conditioner (2%), microwave (1%) and personal computer (2%) categories are relatively underpenetrated. In urban areas, again television (84%) and mobile phones (81%) have achieved maximum penetration while air conditioners (15%), microwaves (11%) and personal computers (24%) categories are relatively underpenetrated.

Samsung and LG are the dominant players across categories and have a controlling market share across most categories where they are present. Both companies see India forming a large part of their global revenue from current levels of 7% for LG and 3.5% for Samsung. Amongst the Indian players, Godrej and Videocon have significant presence in most categories.

Considering penetration and consumer purchase behaviour we expect microwaves (35%), televisions (20%) and air conditioners (20%) to remain the fastest growing segments over the next five years while mobile phones (11%) are expected to lag in overall growth rates.

Exhibit 4: Industry mix

Industry Size FY04 (Rsbn)

Size FY11 (Rs bn)

% CAGR FY04-FY11

Rural penetration %

Urban penetration % Key players Growth %

FY12-FY16

Mobile phones 100 450 24 23 81 Nokia, Samsung, Spice, Micromax, G’Five

14

Television 85 220 15 45 84 LG, Samsung, Sony, Videocon, Mirc Electronics

20

Personal computers (Household consumption)

60 190 18 2 24 Dell, Acer, Sony, Lenovo, HP 18

Refrigerators 38 84 12 10 40 LG, Samsung, Godrej, Videocon, Whirlpool

16

AC's 30 70 13 2 15 Samsung, Voltas, Carrier, Bluestar, LG

20

Washing machines 14 40 16 5 2

LG, Samsung, Whirlpool, Godrej, Videocon 18

Microwaves 2 13 31 1 11 LG, Samsung, Godrej, Mirc Electronics, Whirlpool

35

Note: Industry size includes effects of taxes and unorganised markets; Source: Ambit Capital research, Various market studies

Largest consumption opportunity in India with multiple growth drivers

The Consumer durables opportunity in India is huge and we expect the sector to be amongst the fastest growing sectors in the country. We estimate overall sector size (including mobile phones) to be in the region of US$25bn and assuming a CAGR of 18% over the next decade we expect the sector to exceed an overall value of US$130bn. From available public sources the growth over past five years has been in the region of 24% in sales and 30% in EBITDA.

Consumer Durables


Exhibit 5: Fastest growing consumption categories in India (Category size US$ bn)

Category (2010)

Incremental net additions (2010-2020)

Consumer durables (excluding brown goods) 25 105

Packaged foods 35 90

Processed dairy 11 29

Bottled water 2 10

Out of home(OOH) 2 8

Paints 3 8

Skin care 2 7

Personal care services 2 7

Juices 1 4

Cosmetics and deos 0.5 3.5

OTC pharma 0.1 2

Source: Ambit Capital research

Significant growth in per capita income and household income (high single digits) has resulted in a continued shift in the spend towards the discretionary and services category. On an aggregate basis we expect the share of staples to witness a decline by nearly 10% over the next decade from 50% to 40%. Discretionary and Services spend will witness an increase of a similar nature. This is the key underlying trend in discretionary spending which is driving strong growth for the consumer durables markets.

Exhibit 6: PFCE Trends and Composition

Segment 2005A 2010E 2015E 2020E

Staples 255 457 801 1,354

5-Year CAGR 12.4% 11.9% 11.1%

Discretionary 67 141 291 597

5-Year CAGR 15.9% 15.6% 15.5%

Services 146 310 667 1,401

5-Year CAGR 16.3% 16.6% 16.0%

PFCE Total 468 908 1,758 3,352

14.2% 14.1% 13.8%

Composition of PFCE

Staples 54.4% 50.3% 45.5% 40.4%

Discretionary 14.4% 15.5% 16.5% 17.8%

Services 31.2% 34.2% 37.9% 41.8%

Total 100% 100% 100% 100%


The demographic orientation of the society also suggests that the country’s dependency ratios remain on a downtrend, and should further boost consumption trends. The youth segment (10-24 age group) constituting nearly 25% of India’s population is extremely aspirational and arguably the most significant influencer of demand for the top three categories — Mobile Phones, Television and PCs.

Consumer Durables


Exhibit 7: Improving income and demographic profile

800

1,300

1,800

2,300

2,800

3,300

3,800

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

58

59

60

61

62

63

64

65

Per Capita Income % of population between 15-64 (RHS)


Although financing of durables is not very significant we believe availability of good financing options will also drive overall growth particularly among income households in the quintiles 3-5 (where Quintile 1 is the most affluent) and tier 2-3 markets. While the quarterly trends for credit growth in the consumer durables industry have been very volatile, FY11 saw credit growth increase from Rs82.9bn in March 2010 to Rs101.6bn in March 2011. This was in the wake of credit growth declining from Rs.98bn in March 2008 to Rs.82bn in March 2009 and remaining flat in March 2010. One of the largest lenders in the consumer durables segment, Bajaj Finance, has grown its consumer durables loan book from Rs4.3bn in FY10 to Rs8.9bn in FY11.

Exhibit 8: Credit growth in the Consumer Durables industry

Date Amount (Rsbn) QoQ growth % YoY growth %

Sep-07 101.6 5.7 NA

Dec-07 100.8 -0.8 NA

Mar-08 98.0 -2.8 NA

Jun-08 89.0 -9.2 -7.5

Sep-08 89.7 0.8 -11.7

Dec-08 91.3 1.8 -9.4

Mar-09 81.9 -10.3 -16.4

Jun-09 77.8 -4.9 -12.5

Sep-09 80.8 3.8 -10.0

Dec-09 78.8 -2.4 -13.6

Mar-10 82.9 5.2 1.3

Jun-10 83.4 0.6 7.2

Sep-10 90.8 8.9 12.5

Dec-10 90.4 -0.5 14.7

Mar-11 101.6 12.4 22.4

Source: RBI, Ambit Capital research

Several Mega Technology Trends will provide an additional fillip to long-term growth

In our opinion growth will get an additional fillip from several mega technology (innovation) trends such as 3D, Smartphones, Internet/Broadband, Touch and Nano Technologies. In the recent past color television, laptops and affordable handsets were amongst the biggest drivers of penetration and replacement growth in the consumer durable space. Considering the demographic profile of the Indian consumer, adaptation to these technologies remains high. Importantly these innovations also help drive growth in tier 2 and tier 3 markets.

Consumer Durables


Market leaders Samsung and LG have led the innovation agenda. While Samsung has introduced the dual core processor in mobile phones, LG has launched a magic motion remote for televisions. Samsung’s new air wash technology for washing machines, LG’s linear compressors for more spacious refrigerators and Hitachi’s self cleaning air conditioners are some of the new innovations in the consumer durables space. Apple, with its path breaking iPad, has also redefined the tablet computer market.

Exhibit 9: New innovations in the Consumer Durables space

Model Product Company Price point Innovative feature

Samsung Galaxy SII

Smart phone Samsung 30,000 Amoled screen, dual core processor

LG 47LW550T Television LG 130,000 Magic motion remote, 3D TV

WD8754CJZ Washing machine

Samsung 44,000 Air wash technology

Wonder Door Refrigerator LG 175,000 Linear compressor for more space, Wonder Door

RAU517IRD Air conditioner (1.5T)

Hitachi 45,000 Self cleaning technology

iPad 2 Tablet PC 32,000 Touch screen, portability, battery life


The TV industry has seen the innovation of LCD and LED TVs, which have become significant drivers of growth for the industry driven by the shift from conventional TVs to the LCD/LED TVs. According to CRISIL estimates, while conventional TVs are expected to grow at 11% in the next five years, the LCD segment, already constituting 40% of new TV sales, is expected to grow at 50% from FY11 to FY16.

The washing machine segment is witnessing a rise in demand for the fully automatic variant, and is expected to grow at 20% from FY11 to FY16 according to our channel checks, while the semi automatic variant is expected to grow at 12% during the same period. Despite prices of the fully automatic machines being more than twice that of the traditional model, they command nearly 34% of the market.

The refrigerator segment is witnessing a higher demand for frost free refrigerators from the urban areas, while the rural areas see higher demand for direct cool refrigerators. Being a penetration story, CRISIL expects the direct cool segment to grow quicker at 17% in the next five years, as against 10% for the frost free segment. Frost free refrigerators presently command a 34% market share.

The air conditioning market is witnessing a shift from window ACs to split ACs due to lower noise levels, higher aesthetic value and narrowing price differential. Split ACs have attained a majority market share of 53%. Split ACs, priced at a premium of around 40% to traditional ACs, are expected to grow at 22% from FY11 to FY16 versus 12% for window ACs as per our discussions with our channel partners.

Smartphones have already captured almost 3% of the cell phone market despite being priced at a minimum 200% premium to traditional phones. While the traditional phones are expected to grow at 11%, driven more by replacement demand, the upgrading of consumers to smartphones is expected to witness volume growth of over 26% over the same period.

Laptops are a fast growing segment and already constitute 30% of sales. With the narrowing price differential between laptops and desktops, consumer preference is directed towards the laptop segment. Laptops are expected to grow at 26% compared to 12% for desktops.

Consumer Durables


Exhibit 10: New innovation growth

Industry Legacy product

Technological innovation

Average pricing premium in new product %

Volume share of new product %

Growth of legacy product %

Growth of new product %

Colour TV CRT LCD/LED 150 40 11 50 Washing Machine

Semi Automatic

Fully Automatic 120 34 12 20

Refrigerators Direct Cool Frost free 50 28 17 10 Air Conditioners Window AC Split AC 40 53 12 22

Mobile Phones

Traditional phones

Smartphones 200 3 11 26

Personal Computers

Desktop Computers

Laptops 30 30 12 26

Source: CRISIL, various market reports, Ambit Capital research

Impact of Macro-Economic Challenges on short term demand trends has been limited

Whilst the recent IIP consumer durables growth numbers have been somewhat disappointing (4% in April, 2011 v/s 14% in April 2010), correlation between industry growth figures and the IIP consumer durables volume growth has been rather weak historically. For instance, while the IIP data indicated that consumer durables grew 26% in FY07 and 33% in FY08, the industry reported growth of 13% in FY07 and 15% in FY08. Similarly, while the IIP indicated only 14% volume growth for FY11, the industry reported growth of 29%.

Our channel checks with manufacturers, dealers and retailers have also indicated that demand continues to be robust and the near term outlook remains positive. Demand trends for electronics, mobile phone and lifestyle products have been fairly resilient. Television demand trends have been in line but sales in the appliances division (air conditioner and refrigerator) has been marginally below expectations, to some extent also influenced by the shorter summer this year. Based on revenue growth numbers from the industry as well as our channel checks, we are of the opinion that there has been no significant retracement of demand.

In our opinion the differences in trends, to some extent, can be explained by data points which may be outdated (such as conventional and LCD/LED television sets), and data sources which could be limited. In particular, the IIP data, possibly excludes data from foreign manufacturers such as LG and Samsung who are now the key constituents of the market.

Our primary data sources suggest that key segments such as television are witnessing good uptrading trends (LCD/LED TVs) and there are no major discounts being offered by manufacturers. However, these trends could change with the recent aggressive move by the RBI to raise interest rates.

Exhibit 11: Comparison of industry growth v/s IIP Consumer Durables growth

(%) FY2007 FY2008 FY2009 FY2010 FY2011

Industry 13 15 12 27 29

IIP Consumer Durables 26 33 12 19 14


Competitive advantages matter a great deal considering the fragmented nature of the industry

Similar to durables markets in other countries, the market in India also remains extremely competitive and fragmented. Manufacturers enjoy limited pricing power and the product cycle tends to be short. After the Koreans, we expect the next round of fragmentation to be led, by the Japanese and Chinese players.

Building and sustaining competitive advantages in a fragmented market such as India is critical to maintaining a meaningful and profitable presence. In our

Consumer Durables


opinion some of the key areas of competitive advantages in the sector are product portfolio and innovation track record, brand equity, distribution franchise and supply chain capabilities.

As markets in India are extremely heterogeneous, companies with wide product portfolio capabilities tend to gain higher customer acceptance. Growth rates have varied significantly across categories and diversity in product mix reduces dependence on growth dynamics of particular category. Also, the Indian consumer is as aspirational as his counterparts in other developed markets; therefore companies must be contemporary and innovative with technologies.

Brand equity tends to influence purchase decision a great deal in the Indian consumer durables space; therefore it is a source of significant competitive advantages. In order to retain this advantage, companies constantly engage in brand building efforts primarily through the medium of television and the media. In a ‘me too market’, brand equity is an important indicator of loyalty and ability to charge some premium versus competition. Brand equity in our opinion is also an important driver of higher marketshare trend which ensures a stable relationship and better control over distribution channels.

Markets in India are extremely heterogeneous therefore a wide distribution franchise decreases any geographical risk which could arise from changes in customer preferences. It is also improves company’s capability to introduce multiple products and is critical in launching new products. A wide network is also helpful in improving brand profile and bargaining power with trade.

Pricing power in the industry is usually low; therefore a low cost structure and an efficient supply chain is critical to maintaining healthy profitability trends and reasonable return on capital. An efficient supply chain significantly enhances the pricing ability of the company and helps in achieving better operating rates during slowdown.

We have ranked the various industry players on the basis of their competitive advantages after considering the aforesaid mentioned factors. Korean companies — LG and Samsung — emerge as the strongest followed by Videocon and Whirlpool. Domestic players trail their foreign counterparts on overall and specific rankings.

Exhibit 12: Companywise rankings on competitive advantage (marks out of 10 for each category)*

Rank Company Product portfolio & innovation

Brand equity

Distribution franchise

Supply chain capabilities Total

1 LG 10 9 8 8 35

2 Samsung 10 9 8 8 35

3 Sony 9 9 8 8 34

4 Godrej & Boyce 7 8 7 7 29

5 Whirpool 7 7 6 7 27

6 Videocon (Standalone)

7 6 7 7 27

8 Hitachi 7 5 5 7 24

9 IFB Industries 6 4 6 6 22

10 Symphony 6 3 6 6 21

Source: Ambit Capital research, *Above rankings are subjective and based on our assessment and channel checks

Consumer Durables


Exhibit 13: Product mix of various players

(%) Colour

TV Refrigerators Air conditioners

Washing machines Others Total

LG 30 17 17 7 29 100

Samsung 32 18 11 7 32 100

Videocon 56 NA 7 NA 37 100

Whirlpool 0 64 7 18 11 100

Mirc Electronics 51 0 17 7 25 100


Exhibit 14: Market shares

(%) Colour TV Refrigerators Washing machines Air conditioners

LG 28 26 26 22

Samsung 18 19 21 17

Videocon 24 15 15 NA

Whirpool NA 19 16 NA

Mirc Electronics 11 NA NA 11

Total 81 79 78 50


Supply Chain investments in India will lag overall growth

Although the domestic market in India will exceed several other markets in Asia (such as Korea and Thailand) in size, we expect these countries to continue to be important sourcing bases. Infrastructure challenges and low tariff barriers arising out of free trade agreements imply that imports in areas of electronic components will continue to remain high. The investment plans of various Indian players in the industry also suggest that these players are likely to satisfy demand in the mass category. Most mid- and premium categories in the consumer durables segment will continue to have high dependence on imports. In order to boost the domestic production base, the Government will have to support the scaling up of several basic components such as semi-conductors, specialized plastics and panels. Amongst the players that have so far committed substantial investments into the country are Videocon (Rs16bn), LG (Rs13bn) and Panasonic (Rs10bn).

Exhibit 15: Expected investments by leading companies

Company Investment (Rsbn)

Videocon 16

LG 15

Panasonic 10

Samsung 4.5

Havells 2

Godrej 1

Mirc Electronics 0.6

Voltas 0.4

Bajaj Electricals 0.25

Blue Star 0.21

Source: Business Standard, Business Line, Ambit Capital research

Distribution getting more organized

The Consumer Durables industry, in common with other consumption categories, has a high dependence on hundreds of distributors and thousands of store owners. This is changing rapidly as we see emergence of several regional (Vijay Sales, Vivek) and pan India players (Croma, EZone and Next). In our opinion this

Consumer Durables


organized distribution infrastructure can serve as an important growth catalyst. The Consumers’ experience at most of these new outlets is superior and we believe this element can play a critical role in driving premiumisation across the industry.

Companies are also stepping up their penetration and distribution foray by setting up exclusive brand outlets. All players have plans to increase distribution reach by setting up similar outlets to aid margins as well as visibility. LG currently has the largest network with 1,200 exclusive outlets.

Exhibit 16: Modern retailing in electronics (stores)

Current Planned by FY12

Retailers

Next* 600 750

Viveks 44 94

Croma 63 72

Ezone 47 NA

Vijay Sales 38 NA

Exclusive brand outlet rollouts

Videocon 1000+ 3000

LG 1200 2000

Sony 800 1500

Samsung 300 450

Panasonic 116 200

Whirlpool 70 150

Mirc Electronics 0 30

Note: *based on FY14 guidance; Source: Whirlpool annual report, mydigitalfc.com, indiaretialing.com, company websites, Ambit Capital research

Consumer Durables


Porter’s Analysis

Exhibit 17: Porter's 5 Forces


Although topline growth is expected to remain buoyant considering that the Indian Consumer enjoys a high degree of bargaining power, we expect improvement in margins and return on capital/equity to be capped.

Bargaining power of buyers (HIGH)

Large number of brands across categories and segments at attractive price points. Almost a buyers’ market

Threat of substitutes (HIGH)

Many local brands in competition with each other at aggressive price points on similar products

Chinese imports and Private Labels from retailers also serve as substitutes

Competitive rivalry (HIGH)

Number of well established players with increasing A & P budgets

Narrow product differentiation amongst top players

Bargaining power of suppliers (MEDIUM)

All manufacturers are significantly dependent on imports. However the vendor base is reasonably large. Indian manufacturers importing goods generally have at least 2-3 international vendors

Threat of new entrants (MEDIUM)

Nearly all MNC players already have a meaningful presence in India. Japanese and Chinese players are looking to expand their scope of operations and this could lead to some more fragmentation

Low-end categories may see new players. Lag effect in replicating technology by local players (LCD,LED)

New entrants will have to invest in brand development and distribution

Bargaining power of buyers (HIGH)

Large number of brands across categories and segments at attractive price points. Almost a buyers’ market

Threat of substitutes (HIGH)

Many local brands in competition with each other at aggressive price points on similar products

Chinese imports and Private Labels from retailers also serve as substitutes

Competitive rivalry (HIGH)

Number of well established players with increasing A & P budgets

Narrow product differentiation amongst top players

Bargaining power of suppliers (MEDIUM)

All manufacturers are significantly dependent on imports. However the vendor base is reasonably large. Indian manufacturers importing goods generally have at least 2-3 international vendors

Threat of new entrants (MEDIUM)

Nearly all MNC players already have a meaningful presence in India. Japanese and Chinese players are looking to expand their scope of operations and this could lead to some more fragmentation

Low-end categories may see new players. Lag effect in replicating technology by local players (LCD,LED)

New entrants will have to invest in brand development and distribution

Consumer Durables


Financial Analysis Expect healthy topline growth trends to sustain - Sales in the consumer durable space have grown at a median of 24% from FY06 to FY11 in our Indian company sample. While most companies have delivered double digit growth on the topline, LG grew slower at 14% CAGR. The best performers were Symphony — 61% CAGR over FY06-FY11 and Samsung India — 32% CAGR over FY06-FY10. In EBITDA, Samsung India with 68% CAGR (FY06-FY10) and Whirlpool India with 59% CAGR (FY06-FY11), beat the median of 31%, while LG India growing slower at 8% CAGR was a laggard during the period.

Globally, the space has seen moderate growth with a median of only 5% from CY05 to CY10. Apple and HTC were the top performing companies with sales growth of 36.2% CAGR and 31.2% CAGR respectively over the period. Panasonic and Dell were stark underperformers, with CAGRs of -0.3% and 1.5% respectively. In EBITDA, Apple and HTC were the top performers with 61% growth CAGR and 29% CAGR respectively from CY05 to CY10, against a median of 0%. LG Electronics and American music equipment manufacturer, Harman International were the underperformers with sales decline of 23% CAGR and 14% CAGR respectively during the period.

Considering our industry growth forecast and track record for the past five years we expect the industry to maintain a growth rate of more than 20%. We expect market leaders such as Samsung and LG to report growth in line with industry. Some of the other smaller players could have a mixed track record and overall we expect them to underperform the leaders.

Exhibit 18: Sales and EBITDA growth in India from FY06-FY11

Whirpool Samsung*

Symphony

IFB Industries

Videocon (Standalone)LG* Hitachi

MIRC Electronics

Sales growth (20%)

EBITDA growth (25%)

Note: *Figures up to FY10; Source: Ambit Capital research

Exhibit 19: Sales, EBITDA growth globally from CY05-CY10

Sharp Apple Canon HP Electrolux Whirlpool

Gome Electrical Toshiba HTC

Dell Nokia Harman International Panasonic Sony LG Electronics

Sales growth (5%)

EBITDA growth (0%)


Operating Margin growth could lag topline growth. On comparing EBITDA margins across the industry, we find that the foreign players with scale (except Whirlpool, 9%) operate on lower margins whereas some of the smaller players such as Symphony (30%) and IFB Industries (11%) have margins significantly higher than the median of 7%. Globally, Apple (30%) and Cannon (18%) have the best margin profile whereas LG (2%) and Sony (6%) have a poor margin profile.

On the Advertising and promotion spends front, the industry has averaged around 4.7% of sales from FY07 to FY11, while it stood at 4.5% in 2011. Hitachi has traditionally had a high advertising spend at an average of 6.5% of sales, while Videocon has been more conservative at 1.3% of sales.

In the medium term, for domestic players we do not expect any significant margin improvements, given the high input cost pressures and competitive intensity. The introduction of GST and moderation in commodity costs could help margin trends over the longer term. On an aggregate basis we expect the industry to deliver operating growth of about 15%-20% which is about 10 percentage points lower than the growth rate witnessed in the past five years.

Consumer Durables


Exhibit 20: Advertising & Promotion as % of Sales

Company FY07 FY08 FY09 FY10 FY11

Videocon (Standalone)* 1.4% 1.2% 1.3% NA NA

Whirpool 2.9% 2.9% 3.1% 3.4% 3.3%

MIRC Electronics 4.7% 4.3% 3.6% 5.0% 4.8%

Hitachi 7.4% 7.0% 6.0% 7.8% 4.3%

Symphony 7.3% 6.7% 5.0% 3.5% NA

IFB Industries 5.3% 5.8% 4.1% 4.9% 4.7%

Median 5.0% 5.1% 3.8% 4.9% 4.5% Source: Ambit Capital research

Exhibit 21: Sales and EBITDA margins in India for FY11

LG* Whirpool

Samsung* Videocon (Standalone)

Hitachi Symphony*

MIRC Electronics IFB Industries

Sales (US$500mn)

EBITDA margin (7%) Note: *Figures for FY10; Source: Ambit Capital research

Exhibit 22: Sales and EBITDA margins globally for CY10

Panasonic Apple

Dell HP

Sony Nokia

Toshiba

Whirlpool Canon

Gome Electrical Electrolux

Harman International Sharp

LG Electronics HTC

EBITDA margin (9%)

Sales (US$50bn)


Net Margin trends and growth will be moderate. For the period FY06-FY10 median net earnings growth for the industry was 34%, Samsung India reported a CAGR of 110% and Whirlpool India had a CAGR of 73%. Videocon Industries was a laggard growing at 12%. If net margin performance were to be considered, Symphony (19%) and IFB Industries (7%) enjoyed the best margins, while LG Electronics (3%) and Samsung India (3%) had lower margins.

Globally, median earnings performance was negative 4% for the period CY05 to CY10 (understandable, given recessionary conditions). Apple with 60% CAGR and HP with 30% CAGR were the best performers while Sharp and Dell performed poorly with profits falling by 42% and 14% CAGR respectively over the period. In net margins, Apple (21%) and HTC (14%) came up leaders while Panasonic (-1%) and Sony (-1%) were laggards.

In line with operating margin trends, we expect net margins in India also to remain under pressure largely on account of variable costs. On an aggregate basis we expect net earnings growth to be in the region of 15%-20%, which is nearly 10 percentage points below the growth seen in the past five years.

Exhibit 23: Net income growth, India, FY06-FY11

Symphony

LG IFB Industries

Samsung WhirpoolHitachi Videocon (standalone)

MIRC Electronics

Net Margins (5%)

Net income growth (15%)

Note: *Figures up to FY10; Source: Ambit Capital research

Exhibit 24: Net income growth globally from CY06-CY11

LG Electronics Apple Whirlpool HP Electrolux Gome Electronics

HTC Dell Nokia Panasonic Harman International Sharp Canon Sony Toshiba

Net Margins (4%)

Net income growth (-4%)


Consumer Durables


Valuation and Recommendation Durable Index Performance is in line with the broad index but has underperformed the FMCG index. The Indian Consumer Durable space has limited proxies and on an aggregate basis the performance of these companies has been somewhat lacklustre. Over the last six years performance of the Ambit Consumer Durables Index has largely been in line with the BSE Small Cap and BSE200 indices (average annual return of approx 14%). However, our Consumer Durables Index has underperformed the Nifty and BSE FMCG indices that have delivered higher returns (16% and 22% respectively).

Exhibit 25: Ambit Consumer Durables index v/s BSE Small Cap index

100150200250300350400450500

Jan-

05

May

-05

Sep-

05

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BSE Small Cap Ambit Consumer Durables Index Source: Bloomberg, Ambit Capital research

Exhibit 26: Ambit Consumer Durables index v/s BSE 200 index

100150200250300350400450500

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-05

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Ambit Consumer Durables Index BSE 200 Source: Bloomberg, Ambit Capital research

Exhibit 27: Ambit Consumer Durables index v/s BSE FMCG index

100150200250300350400450500

Jan-

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BSE FMCG Ambit Consumer Durables Index

Source: Bloomberg, Ambit Capital research

Exhibit 28: Ambit Consumer Durables index v/s NIFTY index

100150200250300350400450500

Jan-

05

May

-05

Sep-

05

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-06

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Nifty Ambit Consumer Durables Index Source: Bloomberg, Ambit Capital research

Stock price performance. Although long term (3-year and 5-year) performance of the domestic durables companies has been encouraging, the emergence of macro-economic challenges has resulted in underperformance in the short term. Symphony and Whirlpool have been the best outperformers amongst their domestic peers whereas Videocon has significantly underperformed.

Consumer Durables


Exhibit 29: Absolute and relative returns (%)

Absolute returns Relative returns (NIFTY)

3M 1Yr 3Yr 5Yr 3M 1Yr 3Yr 5Yr

Indian companies

Symphony (22) 125 236 161 (18) 119 205 130

IFB Industries 5 10 63 50 11 8 48 32

Videocon 3 (9) (11) (13) 8 (12) (19) (23)

MIRC Electronics (12) (13) 15 13 (11) (18) 4 (1)

Whirpool (18) (17) 71 58 (14) (19) 55 39

Hitachi (11) (40) 14 25 (7) (42) 3 10 International companies

HTC (17) 102 36 26 (16) 82 23 11

HP 4 78 8 22 9 74 (2) 8

Apple 15 53 35 45 21 50 23 28

Harman International (11) 43 2 (10) (6) 40 (8) (21)

Gome Electrical 34 38 11 19 39 34 1 5

Dell 9 25 (10) (5) 15 23 (18) (16)

Canon 5 14 (6) (4) 9 8 (15) (15)

Toshiba (1) (8) (17) (10) 4 (11) (25) (21)

Whirlpool (19) (15) 2 1 (15) (19) (7) (11)

Panasonic (5) (18) (24) (16) (0) (20) (31) (26)

Sony (14) (19) (22) (16) (9) (21) (29) (26)

LG Electronics (20) (19) (8) 10 (16) (21) (17) (3)

Sharp (2) (24) (21) (16) 3 (27) (28) (26)

Electrolux (21) (22) 21 9 (17) (27) 10 (4)

Nokia (31) (41) (36) (21) (32) (46) (42) (30) Note: Dividends are assumed to be reinvested; Source: Bloomberg, Ambit Capital research

Relative valuation

Indian Consumer Durable valuations have seen significant improvement since March 2009 coinciding with the rally in the broad market. Most stocks are currently trading at a premium to their historical median over the past five years. In our opinion, these valuations fairly reflect the improvement seen in operating performance over the last five years. On an EV/EBITDA basis, median multiples for Indian durable stocks are approximately 9x, which is nearly twice the international average. Symphony trades at a premium to the sector reflecting its above-average growth performance whereas Videocon and IFB trade at a discount.

Apple, HTC and LG trade at a premium amongst international companies whereas Nokia, Electrolux and Whirlpool (which have been facing a slowdown in their home markets and stiff competition from North Asian companies in international markets) are trading at a discount.

Consumer Durables


Exhibit 30: Comparative tables for Indian companies for FY12

Company Mcap (US$mn) EV/EBITDA P/E

(x) EV/Sales

(x) Earnings CAGR (%)

FY06-11

Videocon+ 1,321 6.9 9 1.6 12

Whirpool 662 8.3 11 1.1 73

Symphony# 200 10.4 17 2.2 156

IFB^ 131 4.9 8 0.8 9

Hitachi* 105 10.8 16 0.8 15

Mirc Electronics* 71 8.9 11 0.3 -13

Note:*Figures based on FY11A, #figures based on year ending June’10 and CAGR from FY07-10, +figures pertain to 12 months ending September 2010; ^CAGR from FY07-11; Source: Bloomberg, Ambit Capital research

Exhibit 31: Comparative tables for CY11

Company Mcap (US$mn) EV/EBITDA P/E

(x) EV/Sales

(x) Earnings CAGR

(%) FY06-11

Apple 373,998 9.5 14.8 2.6 60

HP 77,719 4.6 7.4 2.7 30

Canon 66,449 6.6 19.2 1.1 -4

Dell 32,278 4.5 9.0 0.4 -14

HTC 28,810 9.1 11.6 1.1 NA

Panasonic 28,801 6.3 69.8 0.4 NA

Sony 26,332 3.1 23.8 0.2 28

Toshiba 22,421 5.3 12.3 0.4 NA

Nokia 21,718 8.3 28.6 0.3 -11

LG Electronics 11,533 11.4 13.0 0.3 12

Sharp 10,309 5.1 1,820.7 0.5 -42

Gome Electrical 7,943 12.9 19.5 0.6 37

Electrolux 6,097 5.0 10.5 0.4 19

Whirlpool 5,472 4.6 6.2 0.4 8

Harman International 3,139 8.3 20.9 0.7 -7

Note: NA indicates loss incurred; Source: Bloomberg, Ambit Capital research

Investment Implications Listed Indian and MNC names such as Videocon and Whirlpool have seen significant improvement in performance over the last five years supported by general buoyancy, moderation in indirect taxes and improved supply chain capabilities. In the short term we expect twin challenges of inflation and higher interest rate could have significant impact on demand and cost dynamics. Therefore we do not envisage any significant improvement in operating performance from current levels and this in our opinion will negatively impact their stock price performance. Also on valuations most stocks are trading above their median valuations and this too does not augur well for outperformance.

Over longer term we expect North Asian Companies will continue to enjoy significant competitive advantages (product portfolio and innovation, brand equity, distribution and supply chain base) and therefore proxy investing in our opinion is likely the best approach to the Indian Consumer Durables space. We also prefer Autos, Brown Goods, Distribution and Retailing as categories for investment from a long term perspective in the discretionary space. In the Auto space, our top pick is Bajaj Auto. In brown goods, we prefer TTK Prestige and in retail and distribution our best picks are Titan Industries and Redington India.

Some of the listed Indian and MNC names in our opinion are engaged in significantly improving their portfolio, brand equity and sourcing capabilities.

Consumer Durables


Although these efforts are laudable we do not expect any meaningful change in their competitive advantage position vis a vis their North Asian peers. We are negative on Videocon and Whirlpool even from from a long- term perspective, as they lag in market share and the previously mentioned sources of sustainable competitive advantages.

Exhibit 32: International Players in India (US$ bn)

Company Global Sales Asia Sales India Sales India as % of sales

Position in Indian Market

Nokia 58.7 22.9 3.9 6.6% 1 Samsung (Electronics)

103.6 69.4 3.54 3.4% 2

LG 49.4 21.9 2.91 5.9% 1

Sony 89.1 49.1 1.27 1.4% 4

Suzuki 26.8 18.7 6.24 23.3% 1

Unilever 58.7 23.5 3.9 6.6% 1

Colgate 15.6 3.0 0.44 2.8% 1

Reckitt Benckiser 13.5 2.6 0.44 3.3% 1

Note: Data refers to CY10 for Global and Asia Sales and FY10 for Indian Sales; Source: Bloomberg, Company, Ambit Capital research

Exhibit 33: Valuations in the discretionary space

Recomme Mcap P/E EV/EBITDA EPS Growth (%)

ndation CMP (US$mn) FY12E FY13E FY12E FY13E FY12E FY13E

Auto

Maruti Suzuki SELL 1206 7,922 14.4 13.2 7.8 6.3 2.7 9.3

Tata Motors BUY 957 11,705 6.0 5.2 3.9 3.4 13.5 15.8

Hero Honda SELL 1802 8,179 16.7 14.1 16.2 12.9 7.1 18.5

Bajaj Auto BUY 1434 9,431 14.2 12.6 10.0 9.0 11.7 13.0

Brown Goods

TTK Prestige NOT RATED

3054 784 29.3 22.7 19.5 15.0 41.0 28.8

Distribution

Redington BUY 98 883 13.6 10.8 7.2 5.9 27.5 25.4

Retail

Pantaloon SELL 342 1,564 20.6 15.5 8.1 7.1 31.1 32.5

Shoppers Stop NOT RATED

433 809 44.2 32.3 21.3 15.9 77.4 36.9

Titan Industries BUY 225 4,533 28.3 22.8 19.7 15.1 31.5 24.3

Source: Bloomberg, Ambit Capital research

Exhibit 34: Indian companies key ratios for FY11 (%)

Company EBITDA margin Net profit margin RoA RoE

Videocon+ 18.8 4.9 2.4 7

Whirpool 9.4 6.1 13.1 55

Symphony 30.1 19.4 39.0 54

IFB 10.6 7.6 14.8 27

Hitachi* 7.3 3.8 5.5 18

MIRC Electronics* 7.5 1.5 3.6 11

Median 10.0 5.5 9.3 23 Note: #figures based on year ending June’10, +figures pertain to 12 months ending September 2010; Source: Bloomberg, Ambit Capital research

Consumer Durables


Exhibit 35: Foreign companies key ratios for CY10

Company EBITDA margin Net profit margin RoA RoE

Apple 29.8 21.5 22.8 35

HP 14.1 7.0 7.3 24

Canon 17.9 6.7 6.3 9

Dell 7.2 4.3 7.3 42

Panasonic 7.7 0.9 0.9 3

Sony 7.3 (3.6) (2.0) (9)

HTC 16.2 14.2 25.6 57

Toshiba 7.8 2.2 2.5 16

Nokia 9.0 4.4 4.9 13

LG Electronics 2.5 2.2 3.8 9

Sharp 11.6 0.6 0.7 3

Gome Electrical 4.9 3.9 5.5 15

Electrolux 9.2 3.8 5.5 26

Whirlpool 8.9 3.4 4.0 19

Harman International 6.7 4.7 6.3 6

Median 8.9 3.9 5.5 15.3 Source: Bloomberg, Ambit Capital research

Major Players

Samsung India Electronics

Televisions and mobile phones are the main revenue drivers for Samsung India. The share of Television sales in total revenues has reduced from its peak of 33% in FY07 to 28% in FY09. Sales of IT and other products increased from 35% to 42% over the same period, primarily driven by mobile phones.

The company has guided for revenue of Rs.220bn in the current year, an increase of 40% from the previous year. The management expects 50% of revenue to be derived from mobile and IT products.

Exhibit 36: FY09 Revenue breakup for Samsung India

Monitors, IT Products & Others, 42

Washing Machines, 6

Air Conditioners, 8

Refrigerators, 15

Colour Television, 28


LG Electronics

While Monitors, IT products and televisions form the bulk of revenue for LG India, the refrigerator and air conditioners division also makes a substantial contribution to turnover, higher than its competitor Samsung. The proportion of refrigerators have risen from 16% in FY06 to 20% in FY09, while televisions and air

Consumer Durables


conditioners have fallen from 36% and 17% in FY06 to 30% and 13% in FY09 respectively.

The company has indicated that it will invest a further Rs.15bn in the current year, of which Rs.8bn would be towards capacity expansion and India specific R&D, and Rs.7bn in marketing and enhancing brand visibility. The company also plans to increase its exclusive brand outlets from the present 375. The company is targeting a turnover of Rs.200bn in 2011 from the Rs.160bn posted in 2010.

Exhibit 37: FY09 Revenue breakup for LG Electronics

Monitors, IT Products & Others, 30

Washing Machines, 7

Air Conditioners, 13

Refrigerators, 20

Colour Television, 30


Whirlpool of India

Whilst the proportion of refrigerators in total sales has remained fairly constant at 63% of sales, the proportion of washing machines has increased from 16% in FY06 to 19% in FY10. The proportion of air conditioning sales have also increased from 3% to 7% over the same period. During FY11, the company has posted volume growth of 65% for air conditioners, 24% for washing machines and 21% for microwave ovens.

With Whirlpool India being one of the two fastest growing markets for Whirlpool Corporation, the management is focused on developing the Indian market by driving penetration levels. The company has also set up 70 exclusive outlets as part of its expansion program.

Exhibit 38: FY10 Revenue breakup for Whirlpool of India

Others, 11

Air Conditioners, 7

Washing Machines, 19 Refrigerators,

63


Videocon

The contribution of television sales to turnover has increased from 52% in FY06 to 56% in FY09, while the crude and natural gas division turnover has reduced from 19% to 11% of sales over the same period.

Consumer Durables


Exhibit 39: FY09 Revenue breakup

Others, 26

Crude oil & Natural gas, 11

Air Conditioners, 7

Television & sub assemblies, 56

Note: The company follows a September year end; Source: CRISIL, Ambit Capital research

Mirc Electronics

The colour television space continues to remain the areas of focus for the company forming almost half of all sales. However, the proportion of turnover from televisions has reduced from 68% in FY06 to 49% in FY10. The biggest beneficiary has been the air conditioning segment which has risen from 7% of turnover to 19% of turnover over the same period.

They hold a 4% market share in the LCD segment currently and a 12% share in the colour TV space.

Exhibit 40: FY10 Revenue breakup

Colour Televisions, 49

Washing Machines, 6

Air Conditioners, 19

DVD, TV Components &

Others, 26


Consumer Durables


Annexures

Television The Television (TV) industry, a significant part of the consumer durables pie, clocks sales of over 12mn units annually. Volumes have grown at a CAGR of 6% over FY05 to FY10. Overall growth has, however, been led by a better mix with maximum growth seen in LCD and LED products .

Exhibit 41: Television sales growth

-

2

4

6

8

10

12

14

2005-06 2006-07 2007-08 2008-09 2009-10

70,000

80,000

90,000

100,000

110,000

120,000

130,000

Volume (mn) Value


The share of the traditional CRTs has fallen from 96% of total TV sales in FY07 to 76% in FY10. The share of CRT is expected to drop further to 24% by FY13 while LCDs are expected to command a share of 75% by FY13. Plasmas are expected to hold the balance 1% stake. This analysis excludes Tamil Nadu government’s initiative to procure 5mn TV sets for free distribution.

Exhibit 42: Television market share

Market Segment

0

20

40

60

80

100

2007 2008 2009 2010 2011E 2012E 2013E

CRT LCD Plasma

Source: CEAMA, Ambit Capital research

An improved mix of LCD TVs has enabled companies to improve margins despite higher input costs. LCD TVs delivered 6.9% margins in FY11, while flat colour TVs (FCTV) and conventional colour TVs (CCTV) delivered 4.5% and 2.5% respectively. Overall margins have increased from 4.8% in FY07 to 5.6% in FY11. They are likely to be maintained in FY12.

Consumer Durables


Exhibit 43: Segment wise profitability margins

1.5%

2.5%

3.5%

4.5%

5.5%

6.5%

7.5%

8.5%

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

CCTV FCTV LCD Overall


We expect volume growth of 10% in urban areas largely on account of replacement demand whereas rural demand is expected to increase at 11% arising from higher penetration. Currently, replacement demand accounts for around 42% of total CTV demand.

Whilst LG and Samsung are the largest players in the FCTV as well as the high-end TV market, the third spot is occupied by Videocon for FCTV and Sony in the higher end segment. The change in market shares are driven essentially by innovation of newer technologies, distribution channels and availability at attractive price points.

Exhibit 44: Player-wise volumes

Volumes ('000)

2500

1400

2300

31003700

0

500

1000

1500

2000

2500

3000

3500

4000

LG VideoconGroup

Samsung Onida Others

Source: ADI Media, Ambit Capital research

New Innovations

Smart TVs that have been recently launched enable the user to access an internet browser and enable sharing of data through the television. It also enables the user to make video calls. Samsung, LG and Sony have launched a line of smart TVs.

Consumer Durables


Refrigerators The Rs65bn refrigerator industry has grown volumes at 12% CAGR from 3.6mn units in FY06 to 5.6mn units in FY10. The market is highly concentrated with Godrej, LG, Samsung, Videocon and Whirlpool commanding 97% of the market.

Exhibit 45: Refrigerator sales growth

0

1000

2000

3000

4000

5000

6000

2005-06 2006-07 2007-08 2008-09 2009-10

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

Volume ('000) Value (RHS)


The market, segmented into the low end direct cool and high end frost free refrigerators, is slowly moving towards frost free segment, which currently commands around 20% of total sales.

Exhibit 46: Sales volumes for refrigerator manufacturers

Sale Volumes

123318

620

17.2340

1258 1215

2000

181

1060

0

500

1000

1500

2000

2500

Videocon Whirlpool LG Haier Godrej

Frost Free Direct Cool ('000 units)


While frost-free refrigerators historically have enjoyed higher margins than direct cool refrigerators, margins are expected to converge this year. Overall profitability margins have fallen from 6% in FY07 to 4.9% in FY11 and are expected to be 4.5% in FY12.

Consumer Durables


Exhibit 47: Segmentwise profitability

Segment wise profitability

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Direct cool Frost free Overall


The market shares are fairly evenly distributed amongst the leading players with LG being the largest with 26% share, followed by Whirlpool and Samsung at 19%. While Samsung has been the highest gainer of market share from 15% in FY07 to 19% in FY10, Whirpool has lost most share from 25% in FY07 to 19% in FY10. The market is still highly under penetrated with only 40% urban penetration and 10% rural penetration.

Exhibit 48: Refrigerator market shares

1

6

11

16

21

26

LG Samsung Videocon Godrej Whirlpool Others

2006-07 2007-08 2008-09 2009-10

Note: Videocon Brands includes Videocon, Sansui, Akai, Hyundai, Kenstar & Toshiba; Source: CRISIL, Ambit Capital research

New Innovations

Innovations in the refrigerator space include energy saving, efficient storage, less noise, quick freezing and LED touch dispensers.

Washing Machines The washing machine market in India is a highly under penetrated market with only 25% of the urban population using washing machines and less than 5% of the rural population. The market currently valued around Rs.32bn is likely to see growth driven essentially by penetration in both urban and rural areas.

Consumer Durables


Exhibit 49: Washing machine sales growth

0

1000

2000

3000

4000

5000

6000

2005 2006 2007 2008 2009 2010 2011

10%

15%

20%

25%

30%

35%

40%

Washing Machines % Growth


The washing machines market segregated mainly into semi-automatic and fully automatic categories. Both categories have grown significantly, with semi automatic washing machines growing from 1.2mn units in FY06 to 3.2mn units in FY11 at 22% CAGR and fully automatic washing machines growing from 0.5mn units in FY06 to 1.8mn units in FY11 at 29% CAGR. Fully automatic machines are expected to continue to grow faster than semi automatic machines, especially in urban areas.

While LG, Samsung and Videocon are market leaders in the overall washing machine market, the fully automatic segment sees only LG and Samsung as meaningful players.

Exhibit 50: Player wise sales volumes

Sale Volumes ('000 units)

270150

937

236

463

675

90 50

423

40

344

75

0

200

400

600

800

1000

Godrej Haier LG Onida Samsung Videocon

Semi Automatic Fully Automatic


The washing machine manufacturers continue to focus on the urban markets, as incremental absolute growth continues to be driven by the urban areas.

Minimal penetration has been achieved in the rural markets, with urban penetration numbers also quite dismal.

Consumer Durables


Exhibit 51: Washing machine market penetration

Market Penetration

4

12 2

5

1513

10

02468

10121416

Haier LG Onida Videocon

Rural Urban


Margins for both the fully automatic as well as semi automatic segment have come off in the past few years from 6.2% in FY07 to 4.9% in FY11 for fully automatic and 4.8% in FY07 to 3.8% in FY11 for semi automatic machines. Overall margins have dropped from 5.4% to 4.4% over the same period and are expected to drop to 4% in FY12.

Exhibit 52: Segment wise profitability

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Fully Automatic Semi Automatic Overall


LG continues to dominate market with 26% share. Samsung has increased share from 16% in FY07 to 21% in FY10. Videocon has lost share from 18% in FY07 to 15% in FY10, along with other smaller players.

Exhibit 53: Market Shares

0

5

10

15

20

25

30

LG Samsung IFB Videocon* Godrej Whirlpool Others

2006-07 2007-08 2008-09 2009-10

Note: Videocon Brands includes Videocon, Sansui, Akai, Hyundai, Kenstar & Toshiba; Source: CRISIL, Ambit Capital research

New Innovations

Consumer Durables


New innovations in the washing machine space include air washes using hot air and blowers, lower water consumption, voltage controllers, quick washes and automatic load detectors for the appropriate washing method.

Air Conditioners The Rs.55bn air conditioning market in India is estimated to be one of the fastest growing segment within consumer durable markets. Underpentration favourable and favourable weather conditions are the key underlying drivers of growth for the Indian air conditioning industry. On account of short summer industry sales growth could see a bit of moderation in FY12 however the long term growth outlook of the segment remains intact. India produced almost 4mn units in 2011 compared to 3.25mn units in 2010, a growth of 23%. Globally, 2009 saw a production of 73.8mn units of room air conditioners, with China selling 28.2mn units, USA 11.8mn units, Europe 4.9mn units, Japan 7.4mn units and the rest of Asia 9.9mn units.

Exhibit 54: Air conditioner sales volumes

Sales Volumes ('000 units)

8440 30

190

63

280

156 170

37

310

162

500

0

100

200

300

400

500

600

Videocon Onida Whirpool Samsung Godrej LG

Window Split


Penetration in urban market stands at 15% whereas in rural areas it is less than 2%. In International Markets Air Conditioners have penetration in excess of 40% with 97% in Japan, 90% in France, 45% in Spain and 40% in Italy.

Exhibit 55: Air conditioning market penetration

Market penetration

0.0%

0.5%

3.0%

0.5% 0.5%

3.0% 3.0%

0.0%

2.0%

1.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Godrej LG Onida Videocon Whirlpool

Rural Urban


Split ACs dominate the industry forming almost 65% of sales, with the market slowly trending towards split ACs from the conventional window ACs due to higher aesthetic appeal, narrowing price differential and lesser noise produced. On the market segmentation front, most manufacturers see around 80% of sales from urban areas.

Consumer Durables


Exhibit 56: Market segments

Market Segment

80 72100

80

20 20022

0

20

40

60

80

100

120

Videocon Onida Godrej LG

Urban Rural


Split AC margins have fallen from 8.6% in FY07 to 7.2% in FY11 while window AC margins have fallen from 4.8% in FY07 to 3.7% in FY11. They are expected to further decline to 6.9% and 3.5% respectively in FY12. Overall industry margins have declined from 9% in FY07 to 6.1% in FY11 and are expected to fall to 5.8% in FY12.

Exhibit 57: Segment wise profitability

3%

4%

5%

6%

7%

8%

9%

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Split ACs Window ACs Overall


LG, Samsung and Voltas continue to be the largest players with LG being the largest player in the market with 22% share.

Exhibit 58: Air conditioning industry market shares

Market Shares

Others, 34%LG, 22%

Samsung, 17%

Voltas, 16%Mirc

Electronics, 11%

Source: Adi Media, Company, Ambit Capital research

New Innovations

Consumer Durables


New innovations in the air conditioning space include using smart inverters to save electricity, auto cleaning evaporator coils, turbo cooling to the set temperature and high density filters for cleaner air.

Mobile Phones India is now the second largest mobile handset market in the world after China. The market is expected to rise from 120mn handsets currently to 208mn handsets by 2016, growing at a CAGR of 11.4% annually. As of 2010, there were 68 players in the mobile phone market, expected to rise to 200 next year.

The smartphone market currently accounts for 2.5% of total handset sales. However, they form close to 10% of the industry turnover. Sale of smart phones are expected to rise from 2.9mn units currently to 29.4mn units by 2016, growing at a CAGR of 26% annually.

The total mobile phone market in India is pegged at Rs. 300bn. Around 50% of Indians currently use utra low cost handsets, while only a small percentage use smart phones.

The replacement market currently accounts for around 70% of total handset sales in India. Sales of replaced handsets are expected to increase 15% annually.

Nokia, Samsung, Spice, Micromax, G’Five are the largest players in the market in terms of number of handsets sold. Globally, Nokia, Apple and RIM (Blackberry) were the largest players in 2010, with Nokia losing share over 2009 while Samsung and HTC gained share.

Exhibit 59: Global smartphone market share

Vendor 2010 Units 2010 Market Share 2009 Units 2009 Market Share YoY Growth

Nokia 100.3 33% 67.7 39% 48%

RIM 48.8 16% 35 20% 41%

Apple 47.5 16% 25.1 15% 89%

Samsung 23 8% 5.5 3% 318%

HTC 21.5 7% 8.1 5% 165%

Others 61.5 20% 32.6 19% 89%

302.6 100% 173.5 100% 74%

Source: Plugged.in, Ambit Capital research

New Innovations

The launch of smartphones with dual core processors, graphic processing units, light weight, abundant memory and 24/7 connectivity have changed the way phones are used. Rapid developments in operating systems such as the android, iOS and Blackberry OS have also improved the interface significantly.

Consumer Durables


Appendix 1 Exhibit 60: Foreign Consumer Durables companies (US$mn)

CY05 CY06 CY07 CY08 CY09 CY10 % CAGR Sales 13,931 19,315 24,578 37,491 42,905 65,225 36.2 EBITDA 1,822 2,678 4,734 8,823 12,474 19,412 60.5 EBITDA margin 13.1% 13.9% 19.3% 23.5% 29.1% 29.8% Depreciation 179 225 327 179 734 1,027 Interest - - - - - - PBT 1,808 2,818 5,006 1,808 12,066 18,540 59.3

Apple

PAT 1,328 1,989 3,495 6,119 8,235 14,013 60.2 Sales 49,205 55,788 57,420 61,133 61,101 52,902 1.5 EBITDA 4,588 4,776 3,541 4,130 3,961 3,024 -8.0 EBITDA margin 9.3% 8.6% 6.2% 6.8% 6.5% 5.7% Depreciation 334 394 471 334 769 852 Interest 16 29 45 16 93 160 PBT 4,445 4,608 3,345 4,445 3,324 2,024 -14.6

Dell

PAT 3,043 3,602 2,583 2,947 2,478 1,433 -14.0 Sales 86,696 91,658 104,286 118,364 114,552 126,033 7.8 EBITDA 7,304 9,123 12,001 14,185 15,798 17,736 19.4 EBITDA margin 8.4% 10.0% 11.5% 12.0% 13.8% 14.1% Depreciation 2,344 2,353 2,705 2,344 4,773 4,820 Interest 334 336 531 334 585 505 PBT 3,543 7,191 9,177 3,543 9,415 10,974 25.4

HP

PAT 2,398 6,198 7,264 8,329 7,660 8,761 29.6 Sales 3,031 3,248 3,551 4,113 2,855 3,364 2.1 EBITDA 470 537 521 337 59 226 -13.6 EBITDA margin 15.5% 16.5% 14.7% 8.2% 2.1% 6.7% Depreciation 119 130 127 119 146 128 Interest 11 13 10 11 21 30 PBT 335 376 382 335 (529) 49 -31.9

Harman International

PAT 233 255 314 108 (432) 159 -7.4 Sales 42,541 51,664 69,991 74,589 57,150 56,310 5.8 EBITDA 6,658 7,685 12,599 9,680 5,423 5,096 -5.2 EBITDA margin 15.7% 14.9% 18.0% 13.0% 9.5% 9.0% Depreciation 886 895 1,653 886 2,488 2,349 Interest 22 28 59 22 339 337 PBT 6,185 7,190 11,334 6,185 1,341 2,369 -17.5

Nokia

PAT 4,499 5,410 9,877 5,866 1,242 2,454 -11.4 Sales 34,144 35,744 38,089 39,715 34,340 42,346 4.4 EBITDA 7,358 8,335 9,336 8,123 5,698 7,582 0.6 EBITDA margin 21.5% 23.3% 24.5% 20.5% 16.6% 17.9% Depreciation 2,055 2,255 2,904 2,055 3,375 3,155 Interest 16 19 13 16 4 22 PBT 5,566 6,184 6,531 5,566 2,347 4,488 -4.2

Canon

PAT 3,493 3,915 4,151 2,999 1,409 2,817 -4.2 Sales 81,141 78,667 77,918 79,625 77,590 79,994 -0.3 EBITDA 5,903 6,401 6,649 7,375 4,373 5,270 -2.2 EBITDA margin 7.3% 8.1% 8.5% 9.3% 5.6% 6.6% Depreciation 3,031 2,737 2,718 3,031 3,645 3,216 Interest 213 192 179 213 194 277 PBT 2,231 2,835 3,766 2,231 (3,662) (311) NA

Panasonic

PAT 545 1,366 1,858 2,475 (3,786) (1,116) NA Sales 23,651 24,739 26,757 30,008 28,449 29,719 4.7 EBITDA 2,983 3,097 3,381 3,945 2,494 3,411 2.7 EBITDA margin 12.6% 12.5% 12.6% 13.1% 8.8% 11.5% Depreciation 1,577 1,649 1,785 1,577 3,049 2,852 Interest 53 57 66 53 91 84 PBT 1,194 1,238 1,354 1,194 (2,040) 66 -43.9

Sharp

PAT 716 784 870 895 (1,257) 47 -41.9

Consumer Durables


Foreign Consumer Durables companies (US$mn) (contd.) CY05 CY06 CY07 CY08 CY09 CY10 % CAGR

Sales 66,670 66,428 70,968 77,891 77,235 77,794 3.1 EBITDA 4,533 5,380 4,036 7,046 1,775 4,343 -0.9 EBITDA margin 6.8% 8.1% 5.7% 9.0% 2.3% 5.6% Depreciation 3,472 3,377 3,422 3,472 4,051 4,001 Interest 229 256 233 229 244 243 PBT 1,734 2,649 1,546 1,734 (1,748) 290 -30.1

Sony

PAT 1,526 1,093 1,081 3,244 (989) (440) NA Sales 54,346 56,106 60,879 67,326 66,490 68,817 4.8 EBITDA 3,689 4,377 4,716 5,428 995 4,488 4.0 EBITDA margin 6.8% 7.8% 7.7% 8.1% 1.5% 6.5% Depreciation 2,248 2,248 2,505 2,248 3,495 3,224 Interest 203 218 273 203 337 385 PBT 1,036 1,576 2,553 1,036 (2,790) 269 -23.6

Toshiba

PAT 429 692 1,176 1,119 (3,433) (213) NA Sales 43,406 48,550 57,498 58,620 43,732 48,239 2.1 EBITDA 4,472 3,903 7,316 7,163 3,388 1,192 -23.2 EBITDA margin 10.3% 8.0% 12.7% 12.2% 7.7% 2.5% Depreciation 2,801 3,898 4,280 2,801 1,055 1,116 Interest 549 576 620 549 298 202 PBT 866 (426) 2,560 866 2,258 376 -15.4

LG Electronics

PAT 591 257 1,323 406 1,803 1,062 12.4 Sales 2,276 3,239 3,598 4,835 4,376 8,858 31.2 EBITDA 400 812 956 989 775 1,434 29.1 EBITDA margin 17.6% 25.1% 26.6% 20.4% 17.7% 16.2% Depreciation 20 21 22 20 30 32 Interest 1 0 0 1 0 0 PBT 378 828 981 378 769 1,429 30.4

HTC

PAT 367 776 881 909 685 1,256 27.9 Sales 14,317 18,080 19,408 18,907 17,099 18,366 5.1 EBITDA 1,291 1,428 1,717 1,295 1,339 1,637 4.9 EBITDA margin 9.0% 7.9% 8.8% 6.8% 7.8% 8.9% Depreciation 442 550 593 442 525 555 Interest 130 204 203 130 219 225 PBT 598 620 786 598 294 586 -0.4

Whirlpool

PAT 422 433 640 418 328 619 8.0 Sales 17,368 14,107 15,518 16,069 14,360 14,794 -3.2 EBITDA 1,365 976 1,093 682 1,161 1,368 0.0 EBITDA margin 7.9% 6.9% 7.0% 4.2% 8.1% 9.2% Depreciation 457 375 406 457 453 463 Interest 132 107 96 132 72 56 PBT 431 520 598 431 458 738 11.3

Electrolux

PAT 237 523 433 56 343 556 18.7 Sales 2,192 3,102 5,586 6,605 6,246 7,523 28.0 EBITDA 104 114 296 295 270 365 28.5 EBITDA margin 4.7% 3.7% 5.3% 4.5% 4.3% 4.9% Depreciation 6 15 35 6 52 50 Interest - 8 25 - 51 65 PBT 106 134 201 106 268 371 28.4

Gome Electrical

PAT 61 103 148 151 206 290 36.6 Source: Bloomberg, Ambit Capital research

Consumer Durables


Exhibit 61: Indian Consumer Durables companies financials (US$mn) FY06 FY07 FY08 FY09 FY10 FY11 % CAGR

Sales 1,211.0 1,604.2 1,841.2 2,167.5 2,036.2 3,202.2 21.5 EBITDA 161.2 334.2 427.1 502.0 404.7 603.1 30.2 EBITDA margin 13.3% 20.8% 23.2% 23.2% 19.9% 18.8% Depreciation 51.6 74.6 111.5 146.7 128.3 158.4 Interest 51.4 56.6 74.9 96.0 147.9 211.2 PBT 58.1 203.0 240.6 259.3 128.5 233.4 32.0

Videocon (standalone) *data to CY10

PAT 95.0 181.9 190.0 189.8 89.0 165.5 11.7 Sales 56.9 72.2 99.2 104.5 142.2 168.6 24.3 EBITDA 5.2 6.7 12.6 8.3 15.6 12.3 19.0 EBITDA margin 9.1% 9.2% 12.7% 8.0% 11.0% 7.3% Depreciation 1.0 1.0 1.7 1.8 2.6 3.6 Interest 0.6 0.7 0.5 0.6 0.3 0.5 PBT 3.5 4.9 10.4 5.9 12.7 8.9 20.5

Hitachi

PAT 3.3 4.3 9.4 4.7 10.3 6.5 14.6 Sales 278.3 328.0 396.9 429.8 565.4 684.3 19.7 EBITDA 0.3 10.0 18.5 31.7 56.7 64.3 59.1 EBITDA margin 0.1% 3.1% 4.7% 7.4% 10.0% 9.4% Depreciation 8.1 7.6 8.3 8.7 8.8 9.9 Interest 4.0 3.6 3.8 3.8 1.8 1.3 PBT (11.9) (1.3) 6.4 19.2 46.0 53.2 NA

Whirlpool

PAT (8.5) (1.2) 7.2 15.7 32.2 36.9 NA Sales 1,394.3 1,645.4 1,771.5 1,986.8 2,375.8 NA 14.3 EBITDA 99.9 82.0 106.0 91.7 134.8 NA 7.8 EBITDA margin 7.2% 5.0% 6.0% 4.6% 5.7% NA Depreciation 29.3 25.1 24.6 28.3 29.7 NA Interest 7.8 8.6 3.3 2.3 0.2 NA PBT 62.9 48.3 78.2 61.1 104.9 NA 13.7

LG

PAT 38.1 32.7 55.9 44.4 77.2 NA 19.3 Sales 847.7 906.5 1,123.5 1,731.6 2,591.8 NA 32.2 EBITDA 21.1 37.1 58.1 79.0 167.4 NA 67.9 EBITDA margin 2.5% 4.1% 5.2% 4.6% 6.5% NA Depreciation 10.1 11.6 20.8 31.9 31.2 NA Interest 3.0 2.4 3.0 7.4 2.8 NA PBT 7.9 23.2 34.3 39.7 133.5 NA 102.7

Samsung

PAT 4.6 14.5 (17.0) 9.2 89.4 NA 110.4 Sales 270.5 336.3 339.4 317.7 333.7 424.9 5.4 EBITDA 20.2 20.3 19.5 12.7 13.3 16.6 -9.9 EBITDA Margin 3.9% 4.0% 4.0% 5.7% 6.0% 7.5% Depreciation 5.0 4.4 5.3 4.1 4.4 4.8 Interest 4.0 4.5 5.2 6.3 3.9 3.9 PBT 11.2 11.4 9.0 2.3 5.0 7.8 -18.1

Mirc Electronics

PAT 7.3 7.6 7.7 2.0 4.1 6.1 -13.5 Sales 5.6 9.3 16.3 27.6 42.3 NA 66.1 EBITDA (0.2) 0.9 3.3 13.5 12.7 NA NA EBITDA Margin -3.7% 9.2% 20.6% 48.8% 30.1% NA Depreciation 0.4 0.3 0.2 0.3 0.3 NA Interest 0.0 0.1 0.0 0.0 0.1 NA PBT (0.7) 0.5 3.1 13.2 12.3 NA NA

Symphony

PAT (0.7) 0.5 2.7 9.6 8.2 NA NA Sales 56.9 72.1 93.8 108.9 134.0 169.6 24.4 EBITDA 4.0 11.0 10.6 72.3 14.9 18.0 39.3 EBITDA Margin 7.0% 15.3% 11.3% 66.4% 11.1% 10.6% Depreciation 4.1 2.8 1.9 1.7 1.9 2.3 Interest 2.8 0.1 0.2 0.3 0.2 0.4 PBT (2.9) 8.1 8.5 70.3 12.8 15.3 NA

IFB Industries

PAT (3.1) 7.8 8.3 70.0 11.9 11.2 NA

Source: Capitaline, Bloomberg, Ambit Capital research

Consumer Durables


Institutional Equities Team

Saurabh Mukherjea, CFA

Managing Director - Institutional Equities – (022) 30433174

[email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Aadesh Mehta Banking / NBFCs (022) 30433239 [email protected]

Ankur Rudra, CFA IT/Education Services (022) 30433211 [email protected]

Ashish Shroff Technical Analysis (022) 30433209/3221 [email protected]

Ashvin Shetty Consumer/Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power/Capital Goods (022) 30433252 [email protected]

Chandrani De, CFA Metals & Mining (022) 30433210 [email protected]

Chhavi Agarwal Construction, Infrastructure (022) 30433203 [email protected]

Gaurav Mehta Derivatives Research (022) 30433255 [email protected]

Hardik Shah Technology (022) 30433291 [email protected]

Krishnan ASV Banking (022) 30433205 [email protected]

Nitin Bhasin Construction, Infrastructure, Cement (022) 30433241 [email protected]

Pankaj Agarwal, CFA NBFCs (022) 30433206 [email protected]

Parita Ashar Metals & Mining / Media / Telecom (022) 30433223 [email protected]

Puneet Bambha Power/Capital Goods (022) 30433259 [email protected]

Rakshit Ranjan, CFA Mid-Cap (022) 30433201 [email protected]

Ritika Mankar Economy (022) 30433175 [email protected]

Ritu Modi Cement (022) 30433292 [email protected]

Shariq Merchant Consumer (022) 30433246 [email protected]

Subhashini Gurumurthy IT/Education Services (022) 30433264 [email protected]

Vijay Chugh Consumer (incl FMCG, Retail, Automobiles)

(022) 30433054 [email protected]

Sales

Name Regions Desk-Phone E-mail

Deepak Sawhney India / Asia (022) 30433295 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / Europe (022) 30433053 [email protected]

Pramod Gubbi, CFA India / Asia (022) 30433228 [email protected]

Sarojini Ramachandran UK / US +44 (0) 20 7614 8374 [email protected]

Consumer Durables


Explanation of Investment Rating Investment Rating Expected return

(over 12-month period from date of initial rating)

Buy >5%

Sell <5%

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ambit_consumer durables - july 2011

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