“BUY” This Large Cap Capital Goods Stock For +53% Gain: Motilal Oswal

Analysts predict large-cap equities to outperform mid-cap stocks as the economy continues to thrive. During market corrections, weve seen equity investors thicken out their portfolios with large-cap stocks over the near run. We have also seen a correction in bank Nifty stocks, pharma stocks, and even consumer goods stocks in the previous week due to market uncertainty and volatility. Last week, the capital goods index surged 2.61% and as a consequence, Motilal Oswal, a renowned Indian brokerage company is optimistic about the shares of Whirlpool of India, with a target price of Rs. 2,900. The brokerage estimates a substantial growth of +53 percent for the stock from its present market price of Rs. 1,894 and has initiated a buy recommendation. Motilal Oswal in its research report has noted that While demand has swiftly normalized for Consumer Electricals categories, the offtake for white goods has been relatively slower. WHIRLs 2QFY22 two-year revenue CAGR at 7% was weaker v/s peers, with the absence of volume growth in entry-level segments being a possibility. Current trends suggest heightened competitive intensity and, hence, the inability of white goods companies to pass on commodity price increases. However, our margin assumption factors in such near-term risks. The longer-term demand trends remain in place, while valuations are attractive now, relative to peers such as Voltas and Havells.Advertisement According to Motilal Oswal WHIRL provides the best opportunity in the White Goods listed space owing to its strong exposure to Refrigerators (industry size: ~USD3.5b) and Washing Machines (industry size: ~USD1.5b) v/s other listed players that are largely in a single category (i.e., the highly competitive AC segment). The penetration of Refrigerators / Washing Machines stands at 30%/~10%. Both categories are expected to benefit on account of upscaling (Refrigerators: direct cool to frost-free / higher capacity / double-door; Washing Machines - semi-automatic to fully automatic). As per our estimates, WHIRL commands a volume market share of 17-18% in each category. It has been gaining market share in volume terms and its product portfolio is poised for strong structural growth of 12-14% over the next decade - beyond the low-base-led growth due to the COVID-19 outbreak. The brokerage has also claimed that the company entered into the Air Purifiers segment in CY18 and acquired a 49% stake in Elica PB India, a manufacturer of kitchen cooktops. The company has focused on brand endorsements via celebrities and the print media. Furthermore, it maintained its ad spends of ~1.7% of sales in FY21 (v/s ~1.9% in FY20) despite the COVID disruption. In 2QFY22, WHIRL acquired an additional shareholding of 38.25% in Elica PB India (49% earlier) for a cash consideration of ~INR4.3b. Motilal Oswal has further reported that WHIRL currently has three manufacturing facilities in Faridabad, Puducherry, and Pune. The Faridabad and Pune facilities cater solely to Refrigerators while Washing Machines are produced in Puducherry. The company spent ~INR8.6b on CAPEX over FY17-21, believing in the long-term benefits of in-house manufacturing capabilities - in fair contrast with other White Goods companies such as VOLT and BLSTR. Despite such high CAPEX, its RoIC is best in class, suggesting strong profitability and cash flow generation. According to the brokerages research report Unlike peers, WHIRL did not resort to aggressive cost-cutting measures in FY21. However, it has started addressing the cost structure now, as reflected in employee cost and other expense trends. As and when demand recovers, we expect strong operating leverage to play out for WHIRL. We forecast an FY21-24E revenue / EBITDA / adj. PAT CAGR of 16%/25%/28%, aided by the low base of FY21. Our TP stands at INR2,900/share as we value WHIRL at 50x FY24E EPS. We maintain our Buy rating. Note that we are yet to assign any value to the stake in ELICA. The stock has been picked from the brokerage report of Motilal Oswal Financial Services Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.