Hitachi Home & Life Solutions (India) Ltd (HHLS) reported a disappointing set of
numbers for 2QFY2016. Although the decline in the top-line is of 1.2% on a yoy
basis to Rs251cr, but the same is far lower than our expectation of Rs320cr. HHLS
reported an EBITDA loss of Rs4.5cr for the quarter as against a positive EBITDA of
Rs16.3cr in the same quarter last year. A jump of 387bp yoy and 398bp yoy in
raw material cost and other expenses as a percentage of sales, respectively, led to
an 822bp yoy decline in the EBITDA margin. As a result, HHLS reported a net loss
of Rs10.7cr for the quarter as against a net profit of Rs9.1cr in the corresponding
quarter of the previous year.
Favorable outlook for the room AC (RAC) segment to support growth: The
domestic economy is now expected to improve, after having witnessed a phase of
lackluster growth in the past few years. We believe that steady economic growth
will lead to higher disposable incomes in the hands of the consumers, thus
triggering higher demand for room ACs. Also the company will benefit from the
improved demand from the commercial/institutional clients for its ductable ACs.
Strong technological support from parent: HHLS has been sourcing advanced
technology from its Japanese parent which has enabled it to launch superior
products in the Indian market. “Hitachi” enjoys a strong brand pull, which has
helped the company to steadily grow its market share in India. As per HHLS, their
market share in the room AC segment has improved from a mere 5.3% in
FY2009 to 13.3% in FY2015. We expect the company to successfully leverage on
both, the technical support and brand strength, to grow in India.
Outlook and valuation: We expect HHLS to post a 15.0% CAGR in revenue over
FY2015-17E to Rs2,081cr. The EBITDA margin is expected to be at 8.8% in
FY2017E. PAT is expected to post a CAGR of 8.1% over FY2015-17E to Rs91cr. At
the current levels, the stock is trading at a PE of 40.2x its FY2016E earnings which
we believe is expensive. We maintain our Neutral view on the stock.

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