Tuesday, August 2, 2011

Hitachi Home & Life Solutions (India) Ltd- Cool is Hot !


Hitachi Home & Life Solutions (India) Ltd. (HHLI) is  a subsidiary of Hitachi Appliances Inc, Japan.

Products:

HHLI manufactures various kinds of products including Room Air-conditioners and Commercial Air-conditioners, and are into trading of VRF Systems, Rooftops, Chillers, and Refrigerators.
The company has a portfolio of 44 air-conditioners, including 25 in the split category from 0.9 to 3.5 tonnes and 10 in the window category from 1 to 2 tonnes.

Manufacturing & Marketing set up:

Headquartered in Ahemdabad, Gujarat, the company's manufacturing facility at Kadi, Gujarat, is among the top ten Hitachi air-conditioner facilities worldwide. The company also has a plant in Jammu.With a total installed capacity of 400,000 units in a year, HHLI is amongst the top air-conditioning companies in India. It has a strong nationwide distribution consisting of 18 Branches, 159 Exclusive Sales and Service Dealers, more than 1800 Showroom Dealers and 350 Service Points and  32 company owned and operated service centres-manned by 1200 techincians.
HHLI has a team of 680 employees plus 890 service technicians added recently.

Technology & portfolio:

HHLI has always pioneered in technology and innovation and has been ahead of the competition in introducing newer concepts and features in air-conditioning due to its high spending on R&D.
HHLI operates in mass premium segment. It currently holds 7 % market share in room air-conditioner segment however it is No. 1 in premium segment category.
In ductable commercial air-conditioner HHLI has 17% market share and in telecom tower air-conditioners category it enjoys leadership post ion with 28% market share.
“Kaze”, a new range of Split Air conditioner was launched for Tier ll & lll markets last year targeted at the mass premium segment.The response has been encouraging and momentum is expected to pick up further going ahead.
India’s first five star rated window AC’s launched last year in the 1.1 and 1.5 tonne category.
‘I-clean’ split AC with an automatic filter cleaning technology was launched last year.

Future plan:

Currently HHLI has a 7% volume share and 9% value share of the AC market.
It aims to capture 10% volume share and 12% value share within he next 12-18 months.
In the next five years, HHLI aims to capture 15 % volume share in the air-conditioner segment in the Indian market.
Dealer base is being ramped up from current 1800 to a targeted 3000 by 2011 year end.
The company aims to fully utilise the 4 lakh capacity this year and take a decision on expansion early next year.
The gas currently used in air-conditioners is not eco-friendly HHLI also plans to launch "green product" air-conditioners for both residential and commercial uses in 2012.

Financials:

Paid up Equity Capital: 22.96 cr
Debt: 89 cr ( 39 cr working capital + 50 cr ECB from parent company)
2010-11:
Revenue ( net of excise): 768 cr
PBDIT: 58 cr
PBT:40 cr
PAT: 29.32 cr
Cash EPS: Rs.19.76
EPS: Rs.12.77
Dividend per share: Rs.1.50
Current market price: Rs.184
Market cap: 423 cr

AC market in India:
Penetration : Just 3% currently
Penetration in the Chinese market: 20%
Penetration in the US market: 90%
Room AC market in India in 2002 was 7.6 lakh units valued at Rs.1930 cr in 2002. In 2010-11, the market was conservatively pegged at 33 lakh units valued at Rs.6800 cr. So in about 9 years, the growth in volume terms has been 4.5 times and 3.5 times in value terms.
India is expected to  pip USA to become the world's largest AC market for competitorLG Electronics in 2012, India contributed 18% to LG’s  global AC revenues in 2010, while the US contribution was over 30%.
LG  sold 9 lakh units of AC’s valued at 2500 cr in India in 2010 while Samsung sold about 6.5 lakh units as per publicly available data
India's room AC market is growing at more than 20-25% per year and is expected to touch  about 9 million by 2015-16

Split ACs now account for two-thirds of the market. With just 3% households having an AC, there is huge scope for the segment. Changing lifestyle, increasing disposable income, falling prices and wider availability have all contributed to the rise in air-conditioner sales.

Demand is rising in smaller cities and towns as well as more households join the buoying middle-class segment. The country's middle-income group is expected to grow19% a year for the next five years, according to a report by brokerage and investment banking services provider CLSA last year.

Challenges:

1)      Volatility in input (commodity- copper, steel, aluminium) costs, rising freight charges, costs incurred to make the product more energy efficient due to BEE standards.
2)      Rising interest costs may put a strain on funded consumer purchases. Inventory funding for dealers will also pose a challenge.
3)      Sales are skewed towards summer months.This year summer  set in late and the monsoons earlier than normal  which hampered demand for air-conditioners
4)      New entrants like Daikin are targeting the mass premium market. Already entrenched ones like LG, Samsung, Voltas and smaller ones like Videocon, Ondia, Whirlpool are becoming increasingly aggressive.

Valuation:

Without getting into detailed number crunching; if one uses HHLI current market cap ( 423 cr)  as a reference point and seeks to extrapolate the same with its 9% value share, the total industry valuations work out to about 4700 cr. For an industry with current sales of about 6800 cr and growing at 20-25%, this clearly indicates a lacunae in valuations.

In anticipation of the huge demand growth expected going ahead, over the past 12-18 months, HHLI has been continuously investing in strengthening its delivery capabilities through addition of service centres , skilled techinicians, capacity & new products .These investments have had the effect of temporarily straining the bottomline, as witnessed in Q1 2011-12. It is my belief that over the next 12-18 months, these will start paying off and unless there are huge macro headwinds, we should see a quantum growth in sales and net profit over the next 2-3 years. 

At the current price of Rs.184, HHLI offers great promise.

At the time of writing this report, the author /his family have an investment interest in the stock mentioned above. Under no circumstance does the information in this report represent a recommendation to buy or sell the above-mentioned stock.  This report has been prepared and issued on the basis of publicly available information, internally developed data & other sources believed to be reliable. This is just a suggestion solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Readers using the information contained herein are solely responsible for their actions and are advised to satisfy themselves before making any investments. 

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