IFB Industries Initiating Coverage Research Report By Nirmal Bang

Scalability Attained, Profitability To Follow

The home appliance industry in India offers highly promising growth prospects driven by its low penetration level as well as rising demand owing to improved affordability and easy availability of consumer durable finance. IFB Industries (IFB) is favourably placed to reap the benefits of this upturn owing to its marquee brand proposition, distribution network expansion, undisputed leadership in front-load washing machines, scaling up of other categories (top-load washing machines, microwave ovens, air-conditioners) as well as the impending launch of its refrigerators. While we expect IFB to post industry-leading 23.7% revenue CAGR over FY17-FY20E, the benefits of attaining scale (better absorption of fixed-cost overheads), operating leverage and achieving cost efficiency through import substitution in front-load washing machines will lead to substantial improvement in profitability. We expect IFB to post 500bps EBITDA margin expansion over FY17-FY20E, leading to 53.2% EBITDA CAGR and 65.4% earnings CAGR over FY17-FY20E. We initiate coverage on IFB with a target price of Rs1,900 and assign Buy rating to the stock.

A marquee brand and a superior growth franchise:

With a strong track record of high-quality product performance, IFB has developed strong reputation of a premium brand, product superiority and timely after-sales service which has helped it to develop a loyal consumer base. In addition, IFB has outpaced its peers with industry-leading revenue CAGR of 18.2% over FY10- FY17. We expect the strong growth momentum to sustain, driven by expansion of distribution reach (added 9,000 retailers in the past few quarters), industry leadership in front-load washing machines (market share of 42%-44%), enhancing top-load washing machine portfolio (with the impending launch of a mass market 6kg variant), foray into refrigerator category in 1HFY19 (which has a much larger industry size at Rs195bn), outpacing peers in microwave ovens (gained 20% market share) as well as possibility of scale-up in the air-conditioner segment.

Operating margin poised to leapfrog:

While IFB was always a strong gross margin franchisee (upwards of 41%), it had a much lower EBITDA margin compared to peers. However, with the home appliance business of IFB attaining the necessary scale (leading to better absorption of fixed-cost overheads such as distribution costs, advertising and sales promotion as well as trade discounts) and import substitution in front-load washing machines (from 27% to 12%-13% by 4QFY18 via domestic sourcing of electronic components), the operating margin profile of IFB is likely to substantially improve. We expect a healthy rise in the EBITDA margin of IFB from 5.6% in FY17 (and 7.5% in 1HFY18) to 10.6% in FY20E.

Outlook and valuation:

We expect IFB to post 23.7% revenue CAGR over FY17-FY20E. A 500bps EBITDA margin expansion over FY17-FY20E will translate into 53.2% EBITDA CAGR and 65.4% earnings CAGR over FY17-FY20E. This will lead to a significant improvement in IFB’s financial profile with stronger return ratios (RoE/RoCE rising from 11.5%/11% in FY17 to 26.5%/32.5% in FY20E, respectively) and higher free cash flow (Rs3bn over FY17-FY20E compared to Rs296mn over FY14-FY17). In addition, the working capital cycle remains lean (at 5%-6% of sales) while fixed-asset turnover will rise from 2.9x in FY17 to 3.8x in FY20E). The stock has traded at an average P/E of 36x over the past three years. We have valued IFB using the SOTP method by assigning a P/E of 36x FY20E earnings to its home appliance business (Rs1,810) and 15x FY20E earnings to its fine blanking business (Rs90). We initiate coverage on the stock with a Buy rating and a target price of Rs1,900, up 36% from the CMP.