1QFY2013 Result Update | Cons.

Durables
August 14, 2012

Hitachi Home & Life Solutions

Performance Highlights
Y/E March (` cr)
Net sales EBITDA EBITDA margin (%) 1QFY2013 1QFY2012 % chg (yoy) 4QFY2012 376 26 6.8 14 328 26 7.8 13 14.8 (0.0) (101)bp 3.7 236 16 6.6 7 % chg (qoq) 59.5 64.8 22bp 85.1

ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Cons. Durable 387 68 1.0 188 / 93 29,726 10 17,728 5,380 HITA.NS HTHL IN

`114 `130
12 Months

Reported PAT
Source: Company, Angel Research

Hitachi Home & Life Science Solutions (HHLS) reported a better-than-expected top-line at `376cr in its 1QFY2013 results, which is 14.6% higher on a y-o-y basis from `328cr in 1QFY2012. The company disappointed on the EBITDA margin front which contracted by 101bp yoy to 6.8% from 7.8% in 1QFY2012 on account of higher other expenses. The net profit grew marginally by 3.7% yoy to `14cr owing to a lower interest cost during the quarter. Economic slowdown and INR depreciation to impact performance in the short term: A sluggish economic scenario has led to a fall in the demand for air conditioners (ACs) in the domestic market by 14% in FY2012. However, HHLS was able to grow at 1% in FY2012. We expect the companys revenue to grow at 8.7% in FY2013E. However, the EBITDA margin is expected to remain under pressure in FY2013E to 3.9% due to forex losses arising from foreign currency expenses and its plans to source (ACs) from the parent company. HHLS is expected to see some relief on the interest front due to its continued efforts to reduce foreign currency loans. In FY2014E, we expect a revival in the domestic economy leading to a recovery in the companys performance, resulting in an EBITDA margin of 6.6% and subsequently a net profit of `25cr for FY2014E. Outlook and valuation: We expect HHLS to post a 10.7% CAGR over FY2012-14E while the EBITDA margin is expected to expand by 293bp over FY2012-14E. PAT is expected to post a CAGR of 177% over FY2012-14E to `25cr in FY2014E on a lower base of `3cr in FY2012. At the current market price, HHLS is trading at a PE of 10.5x its FY2014E earnings. We recommend an Accumulate rating on the stock with a target price of `130, based on a target PE of 12x for FY2014E.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 69.9 2.8 8.1 19.2

Abs.(%) Sensex HHLS

3m 9.3

1yr 6.0

3yr 15.0 46.5

(6.5) (30.5)

Key financials
Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2011 763 19.3 17 (59.6) 5.9 7.3 15.5 1.5 10.6 12.9 0.4 7.2

FY2012 798 4.6 3 (80.7) 3.7 1.4 80.0 1.5 1.9 4.4 0.4 11.3

FY2013E 868 8.7 6 93.1 3.9 2.7 41.4 1.5 3.7 5.5 0.4 9.6

FY2014E 977 12.6 25 295.9 6.6 10.9 10.5 1.3 13.6 15.0 0.3 4.9

Shareen Batatawala
+91- 22- 3935 7800 Ext: 6849 shareen.batatawala@angelbroking.com

Please refer to important disclosures at the end of this report

HHLS | 1QFY2013 Result update

Exhibit 1: 1QFY2013 performance

Y/E March (` cr) Net Sales Net raw material (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM Interest (incl. forex losses) Depreciation Other Income PBT (% of Sales) Tax (% of PBT) Reported PAT PATM Equity capital (cr) EPS (`)
Source: Company, Angel Research

1QFY13 376 251 66.7 13 3.4 87 23.1 350 26 6.8 2 5 0 20 5.2 6 30.3 14 3.6 23 5.9

1QFY12 328 224 68.4 12 3.6 66 20.2 302 26 7.8 2 5 0 19 5.8 6 30.6 13 4.0 23 5.7

yoy chg (%) 14.8 11.9 9.6 31.3 16.1 (0.0) (101)bp (29.3) 3.7 50.0 3.2 2.1 3.7

4QFY12 236 151 63.9 15 6.3 55 23.2 220 16 6.6 3 5 0 8 3.6 1 13.1 7 3.1 23

qoq chg (%) 59.5 66.4 (12.9) 58.3 59.1 64.8 22bp (36.2) 1.7 80.0 130.7 433.3 85.1

FY12 798 522 65.4 53 6.6 194 24.4 769 29 3.7 9 18 1 3 0.3 (0) (16.8) 3 0.4 23

FY11 763 504 66.1 44 5.8 169 22.2 718 45 5.9 7 16 6 27 3.6 11 38.6 17 2.2 23 7.3

% chg 4.6 3.4 19.8 14.8 7.1 (35.6) (228)bp 20.9 14.1 (84.6) 12.6 (104.4) (80.7)

3.7

3.2

85.1

1.4

(80.7)

Exhibit 2: 1QFY2013 Actual vs Angel estimates

Actual (` cr) Net Sales EBITDA EBIDTA margin Adjusted PAT
Source: Company, Angel Research

Estimate (` cr) 326 30 9.3 17

Variation (%) 15.5 (15.6) (251)bp (21.4)

376 26 6.8 14

Top-line above expectation, EBITDA margin disappoints

For 1QFY2013, HHLS reported a top-line of `376cr, 15.5% better than our expectation of `326cr and 14.4% higher on a y-o-y basis. The EBITDA margin came in at 6.8%, 251bp lower than our expectation of 9.3% and 101bp lower on a y-o-y basis, mainly on account of higher other expenses. Thus, a lower than expected margin led to a net profit of `14cr, 21.4% lower than our expectation of `17cr.

August 14, 201

HHLS | 1QFY2013 Result update

Investment rationale
Penetration opportunity in the RAC market in India
The penetration level for the room air conditioner (RAC) market in India is currently at 3%, which is very low compared to other countries such as China, Malaysia, Korea and Taiwan. China has a 20% penetration rate, while penetration in the US stands at 90%. The per capita income in India grew at a 14.3% CAGR over FY2007-12 from `31,198 in FY2007 to `60,972 in FY2012 while HHLSs AC sales volume posted a 20.3% CAGR over the same period. On a conservative basis, we expect the per capita income to grow at a CAGR of 12.3% and HHLSs AC volumes to post an 11.8% CAGR over FY2012-14E.

Exhibit 3: RAC sales volume for HHLS vs per capita income

350 300 250
('000 units)

77 68 61 55 46 41 36
135 133 190 243 246 263 289

80 70 60
(` in '000's)

200 150 100 50 0 FY2008 FY2009 FY2010

50 40 30 20 FY2011 FY2012 FY2013E FY2014E

AC volume (LHS)
Source: RBI, Angel Research

Per capita income (RHS)

Innovation and energy-efficient products to drive growth

Growing concerns about global warming, surging electricity prices and increasing calls to use energy-efficient products by the government have spurred demand for star-rated appliances in the country. The company launched i-Clean with an automatic filter clean technology with high energy efficiency and having a five-star rating. With the launch of window ACs with efficiency equivalent to split ACs and increasing five-star rated ACs in its product portfolio, we expect the company to increase its market share in the premium segment. The company has been continuously spending on R&D to come up with innovative products. HHLS currently has 38 split AC models with capacities ranging from 1.0Tr to 3.5Tr and 17 RAC models within 1.0Tr to 2.0Tr capacities.

Entry into tier-II and tier-III cities with low-price split AC Kaze
HHLS, which caters to the premium segment, has entered the low-price home AC segment with the launch of Kaze, with a two-star and three-star rating to cater to the middle level income group. The company has increased its presence from 236 towns in June 2010 to 317 towns in FY2012 and is increasing its dealer and distributer base as well. Since tier-II and tier-III cities are expected to be the major contributors to the consumer durable segment going forward, revenue contribution from these segments would add to the top-line growth.

August 14, 201

HHLS | 1QFY2013 Result update

Financials
Exhibit 4: Key assumptions
FY2013E Air conditioner volume growth (%) Realization growth of ACs (%) Change in copper price (%)
Source: Angel Research

FY2014E 10.1 3.0 5.0

6.8 2.0 3.0

Exhibit 5: Change in estimates

Y/E March Net sales (` cr) OPM (%) EPS (`)
Source: Angel Research

Earlier estimates FY2013E 857 6.9 10.2 FY2014E 968 8.4 16.0

Revised estimates FY2013E 868 3.9 2.7 FY2014E 977 6.6 10.9

% chg FY2013E 1.3 (294)bp (73.0) FY2014E 0.9 (184)bp (32.2)

Sluggish economic scenario to impact short term revenue growth

We expect HHLS to post a lower revenue growth of 8.7% in FY2013E to `868cr owing to sluggish economic scenario. However, the growth rate is expected to increase to 12.6% in FY2014E to `977cr assuming revival in the economic conditions.

Exhibit 6: Lower revenue growth due to economic slowdown

1,200 1,000 800 36.1 40 35 30 25 19.3 8.7 470 5.3 4.6 640 FY2010 763 FY2011 798 FY2012 868 FY2013E 977 FY2014E 12.6 20 15 10 5 0

(` cr)

600 400 200 0

FY2009

Revenue (LHS)
Source: Company, Angel Research

Revenue growth (RHS)

August 14, 201

(%)

HHLS | 1QFY2013 Result update

EBITDA margins to be under pressure in FY2013E

The EBITDA margin contracted in FY2012 to 3.7% from 8.4% and 5.9% in FY2010 and FY2011 respectively mainly on account of higher other expenses resulting from foreign exchange fluctuations. In FY2013E, we expect the company to face pressure on the raw material front post the fire at Kadis AC manufacturing unit in July 2012. The company plans to substitute the AC production at Kadi unit by increasing production at the Jammu plant and sourcing ACs from Hitachi Appliances Inc, which would lead to an increase in the cost of purchase considering the recent depreciation of the INR against JPY. In addition, other forex expenses would continue to put pressure on margins. In FY2014E, we expect the EBITDA margin to recover to 6.6%, an expansion of 293bp over FY2012-14E. HHLS also faces the impact of INR depreciation on interest cost as it has loans in foreign currency. Reduction in foreign currency loan from JPY930mn in FY2011 to JPY465mn in FY2012 would result in reduced interest cost. Consequently, the net profit is expected to post a CAGR of 177% over FY2012-14E on a lower base of `3cr in FY2012 to `25cr in FY2014E.

Exhibit 7: EBITDA margin to face short term pressure

70 60 50 8.4 9 8 6.6 6.0 5.9 7

Exhibit 8: Net profit margin to recover to historical level

45 36 27 18 1.6 9 8 0 FY2009 FY2010 FY2011 PAT (LHS) 42 17 6.5 7 6 5
(` cr)

(` cr)

(%)

30 20 10 0 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E EBITDA (LHS) EBITDA margin (RHS) 28 54 45 29 3.7 34 3.9 64

5 4 3 2

2.2 0.4 3 FY2012 0.7 6 FY2013E 25

2.6 3 2 1 0 FY2014E

PAT margin (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

August 14, 201

(%)

40

HHLS | 1QFY2013 Result update

Outlook and valuation

We have revised our earnings estimates downwards considering impact of foreign currency fluctuation in FY2013E. We expect revenue to post a 10.7% CAGR over FY2012-14E and EBITDA margin to expand by 293bp over FY2012-14E from 3.7% in FY2012 to 6.6% in FY2013E. Net profit is expected to bounce back in FY2014E to `25cr from `3cr in FY2012. At the current levels, the stock is trading at a PE of 10.5x its FY2014E earnings and P/BV of 1.3x for FY2014E. We recommend an Accumulate rating on the stock with a target price of `130, based on a target PE of 12x for FY2014E.

Exhibit 9: One-year forward PE band

400 350 300 250
(`)

200 150 100 50 0 Aug-07 Aug-08 Price Aug-09 5x Aug-10 10x 15x Aug-11 20x Aug-12

Source: Company, Angel Research

Exhibit 10: Relative valuation

Year end HHLS Blue Star Voltas FY2014E FY2014E FY2014E Sales (` cr) 977 3,328 6,057 OPM (%) 6.6 6.9 6.3 PAT (` cr) 25 146 323 EPS (`) 10.9 16.2 8.8 ROE (%) 13.6 28.2 17.4 P/E (x) 10.5 11.9 11.4 P/BV (x) 1.3 3.0 1.9 EV/EBITDA (x) 0.3 0.5 0.5 EV/Sales (x) 4.9 7.5 8.5

Source: Angel Research, Bloomberg

August 14, 201

HHLS | 1QFY2013 Result update

Risks
Volatile raw-material prices
Steel and copper are the major raw materials used to manufacture ACs. Copper prices have been volatile since the past one year. Such volatility in raw-material prices will affect the companys profitability in the long run.

Exhibit 11: Copper price trend

480 450

(` per kg)

420 390 360 330 300 Feb-11

May-11

Aug-11

Nov-11

Feb-12

May-12

Aug-12

Source: Bloomberg

Foreign exchange risk

The company has ECBs of JPY465mn from Japan due to which the interest rate was at 3.1% (excluding forex loss) for FY2012. The company also pays royalty, technical know-how fees and consultancy fees denominated in JPY. The depreciation of INR against the JPY has led to a dented profit of `3cr during FY2012. Thus, volatility in foreign currency poses a risk to the companys earnings.

August 14, 201

HHLS | 1QFY2013 Result update

Company Background
HHLS is a subsidiary of Japan's Hitachi Appliances, which holds a 68% stake in the company. HHLS manufactures and sells ACs and is engaged in the trading of refrigerators, washing machines and chillers. The companys air conditioners segment includes home ACs, commercial/ ductable ACs and telecom ACs. The company operates in the mass premium segment. HHLS currently holds 8% market share in the RAC segment and is No. 1 in the premium segment. In ductable commercial ACs, HHLS has a 17% market share. In the telecom tower AC category, HHLS is a leader with a 56% market share.

Exhibit 12: Market share in Air conditioner Industry (India)

Bluestar 4% Others 28% Hitachi 8%

LG 18%

Panasonic 10%

Samsung 10% Voltas 18%

Whirlpool 4%
Source: Industry

The company has AC manufacturing facilities in Kadi (north Gujarat) and Jammu with a total capacity of 2,30,000 units per annum. The AC manufacturing unit in Kadi caught fire in July 2012. However, this is not expected to impact the company since the unit was completely insured and the company made arrangements to fulfill the market demand by increasing production at the Jammu unit and by sourcing certain finished goods from other manufacturing facilities of Hitachi Appliances Inc. The company is increasing its focus on refrigerators with the launch of the 2012 range ie side-by-side refrigerator with inverter technology and washing machine.

August 14, 201

HHLS | 1QFY2013 Result update

Profit & Loss Statement

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Total operating income % chg Net Raw Materials Other Mfg costs Personnel Other Total Expenditure EBITDA % chg (% of Net Sales) Depreciation EBIT % chg (% of Net Sales) Interest (incl. forex loss on ECB) Other Income (% of Net sales) PBT % change Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Adjusted EPS (`) % chg FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 519 49 470 470 5.3 305 22 115 442 28 (37.2) 6.0 8 20 (45.8) 4.3 14 7 1.5 13 (71.2) 6 43.0 8 8 (81.8) 1.6 3.3 3.3 (81.8) 686 46 640 640 36.1 417 31 137 586 54 90.6 8.4 12 42 107.7 6.6 2 12 1.8 52 297.6 11 20.8 41 (0) 42 455.8 6.5 18.2 18.2 455.8 829 66 763 763 19.3 504 44 169 718 45 (15.9) 5.9 16 29 (30.5) 3.8 7 6 0.7 27 (47.5) 11 38.6 17 17 (59.6) 2.2 7.3 7.3 (59.6) 867 69 798 798 4.6 522 53 194 769 29 (35.6) 3.7 18 11 (62.9) 1.4 9 1 0.1 3 (89.8) (0) (16.8) 3 3 (80.7) 0.4 1.4 1.4 (80.7) 947 80 868 868 8.7 568 55 211 834 34 17.1 3.9 20 14 29.8 1.6 6 1 0.1 9 222.4 3 30.0 6 6 93.1 0.7 2.7 2.7 93.1 1,067 90 977 977 12.6 618 63 233 913 64 88.6 6.6 23 41 192.8 4.2 7 1 0.1 36 295.9 11 30.0 25 25 295.9 2.6 10.9 10.9 295.9

August 14, 201

HHLS | 1QFY2013 Result update

Balance Sheet
Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders Funds Total Loans Deferred Tax Liability
Other Long Term Liabilities Long Term Provisions

FY2009 FY2010 23 82 105 51 1 0 0 156 110 45 65 18 0 0 0 0 254 23 33 116 82 0 181 74 0 156 23 124 147 60 1 0 0 207 159 54 105 15 0 0 0 0 330 28 25 180 96 0 243 88 0 207

FY2011 FY2012 23 149 172 65 0 0 9 246 199 68 131 6 0 0 14 0 472 2 17 327 125 1 376 96 0 246 23 148 171 70 (-3) 0 10 249 214 84 130 13 0 0 17 0 434 3 14 268 148 0 343 90 0 249

FY2013E 23 151 173 77 (-3) 0 11 260 246 104 142 15 0 0 18 0 435 10 17 258 149 0 350 85 0 260

FY2014E 23 171 194 85 (-3) 0 13 290 282 127 155 15 0 0 20 0 482 32 20 264 167 0 383 99 0 290

Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments
Long term Loans & adv Other non current assets

Current Assets Cash Loans & Advances Inventory Debtors

Other current assets

Current liabilities Net Current Assets Mis. Exp. not written off Total Assets

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10

HHLS | 1QFY2013 Result update

Cash Flow Statement

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Inc.)/Dec. in Investments (Incr)/Decr In L.T loans & adv Balances in current/ credit/ FD Interest received Others Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans (Decr)/Incr in long term provision Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 13 8 (2) 17 (6) 30 (45) 1 7 (10) (46) 39 (7) 32 17 6 23 52 12 (8) (8) (11) 37 (46) 4 12 (12) (43) 10 (3) 5 11 6 23 28 27 16 (34) (7) (11) (9) (30) (14) (5) 6 8 (36) 5 9 (3) 8 19 (26) 28 2 3 18 6 (1) 0 26 (22) (3) (0) 1 3 (21) 5 1 (3) (8) (5) 1 2 3 9 20 13 (1) (3) 39 (34) (1) 1 (35) 7 1 (4) 3.9 8 3 10 36 23 7 (1) (11) 54 (37) (2) 1 (38) 8 1 (4) 5.1 21 10 32

August 14, 201

11

HHLS | 1QFY2013 Result update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover Inventory / Sales (days) Receivables (days) Payables (days) WC (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage 0.3 1.0 1.4 0.2 0.6 27.8 0.4 1.4 4.0 0.4 2.3 1.2 0.4 2.0 2.3 0.3 0.8 6.0 4.3 92 67 153 39 4.0 85 51 132 31 3.8 121 53 157 37 3.7 136 63 171 41 3.5 111 63 153 35 3.5 97 63 153 27 16.0 20.7 8.0 23.1 30.1 33.2 12.9 14.5 10.6 4.4 4.6 1.9 5.5 5.9 3.7 15.0 17.2 13.6 4.3 0.6 4.1 10.0 16.1 0.3 8.3 6.6 0.8 3.9 20.3 2.0 0.2 24.3 3.8 0.6 3.2 7.5 7.0 0.4 7.7 1.4 1.2 3.4 5.4 14.8 0.4 1.7 1.6 0.7 3.7 4.2 5.6 0.4 3.7 4.2 0.7 4.0 11.9 5.6 0.3 13.6 3.3 3.3 6.8 0.0 45.5 18.2 18.2 23.3 1.5 63.9 7.3 7.3 14.3 1.5 74.9 1.4 1.4 9.4 1.5 74.6 2.7 2.7 11.5 1.5 75.6 10.9 10.9 21.0 1.5 84.7 34.7 16.8 2.5 0.0 0.6 10.2 1.8 6.2 4.9 1.8 1.3 0.5 5.4 1.4 15.5 7.9 1.5 1.3 0.4 7.2 1.3 80.0 12.1 1.5 1.3 0.4 11.3 1.3 41.4 9.9 1.5 0.4 0.4 9.6 1.3 10.5 5.4 1.3 0.4 0.3 4.9 1.1 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

August 14, 201

12

HHLS | 1QFY2013 Result update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock

Hitachi Home & Life Solutions No Yes No No

3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 14, 201

13