IFB Industries. Institutional Equities. 1QFY17 Conference-call Update NOT RATED. 29 July Reuters: IFBI.BO; Bloomberg: IFBI IN

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1 1QFY17 Conference-call Update IFB Industries 29 July 2016 Reuters: IFBI.BO; Bloomberg: IFBI IN We hosted the conference-call of IFB Industries (IFB) recently to discuss its 1QFY17 financial performance. IFB was represented by Mr. Prabir Chatterjee (executive director and chief financial officer), Mr. Rajshankar Ray (chief executive officer - home appliances division), and Mr. Arup Das (head of marketing and sales - engineering division). IFB Industries (IFB) posted 18.7% YoY rise in net revenues to Rs4.2bn for 1QFY17, in line with consensus estimate. Home appliances division grew 19.6% YoY to Rs3.5bn (83% of total revenues) while engineering division grew 14.3% YoY to Rs713mn (17% of total revenues). Gross margin was up 30bps YoY at 41.5% for the quarter. With a sharp rise in other expenses by 26.7% YoY to Rs1.1bn, EBITDA expansion was capped at 13.5% YoY to Rs249mn, in line with consensus estimate. Other expenses as a percentage of sales rose 170bps YoY to 26.1%. EBITDA margin fell 20bps YoY to 6% for the quarter. EBIT margin of home appliances division was at 4.3% (up 20bps YoY) while that of engineering division stood at 6.9% (up 50bps YoY). With 8% YoY decline in depreciation (to Rs105mn) and a lower tax rate (5% in 1QFY17 versus 22% YoY), PAT grew 41.5% YoY to Rs149mn compared to 16.2% YoY rise in PBT (Rs157mn). The bottom-line was 23% above consensus estimate of Rs121mn. Following are the key takeaways: Net revenues grew 18.7% YoY to Rs4.2bn because of 19.6%/14.3% YoY growth in home appliances/engineering divisions revenues, respectively. In the top-loading washing machine category (6.5kg and above), the market share gain within a year of launch has been significant at 15% compared to a low single-digit share in FY15. Front-loading washing machines (42.2% of home appliances segment s revenues in 1QFY17) grew 6%-7% in volume terms during the quarter. Sales stood at 3,00,000 units in FY16 versus 2,74,000 units in FY15. Top-loading washing machines (15.5% of home appliances segment s revenues in 1QFY17) grew 128% YoY in volume terms during the quarter on a very low base. IFB sold 1,19,000 units of top-loading washing machines in FY16 versus 40,000 units in FY15. The management expects 13%-15% growth in front-loading washing machine category in FY17. Front-loading washing machine sales is pre-dominantly in the southern market (a bigger market for appliances compared to northern region) while top-loading washing machines are expected to increase revenue contribution in northern region as well (following strong sales pan India). Margins in top-loading washing segment improved in 1QFY17 because of operating leverage driven by healthy sales volume. As it scales up further, in two to three quarters its margins will converge with front-loading washing machines. Gross margin was up 30bps YoY at 41.5% for the quarter. The total impact of forex movement in 1QFY17 was ~Rs77mn, which has been mitigated by better cost control on the raw material buying front and also cost reduction projects that have started yielding results for the company. EBITDA margin fell 20bps YoY to 6% for the quarter as other expenses as a percentage of sales rose 170bps YoY to 26.1%. In FY16, IFB continuously added counter sales staff in order to drive top-line growth and also retrospective effect of Bonus Act came in (increasing employee costs), which in turn hurt margins. As per the management, it spends ~Rs50mn every month on counter sales staff and their compensation package includes a fixed salary of Rs4,000-Rs7,000 per month, depending on the level of experience, and an incentive structure based on actual sales. Addition of counter sales people helped revenues to increase in top-loading washing machine category and the management expects it to happen in other product categories as well. The management has no plans to add more people in this space and expects an increase in productivity to drive the growth rate. IFB aims to achieve higher margins by increasing the level of localisation in order to minimise the currency impact. Currently, front-loading washing machines have ~25% imported components while top-loading washing machines have 35%-40% imported components. The management aims to bring down this level to ~10%/15% in case of front-loading/top-loading washing machines, respectively, over the years and achieve a higher level of localisation. It initiated this exercise in 4QFY16 and believes it will be completed by the end of FY17. The management also believes that higher level of localisation will help in protecting against forex-related fluctuations. Production costs are expected to decline by 2%-3%. It intends to do this mainly for both front and top-loading washing machine segments. In air-conditioner or AC and microwave oven segments (both currently imported), IFB intends to continue the current structure of importing these products wherein manufacturing is done by two Chinese companies and designing is handled by IFB. The management believes that it can maintain 20%-25% CAGR going forward in the appliances segment. On the back of localisation initiative (1%-1.5% impact) and various value- engineering initiatives, it intends to improve gross margin by ~3-%3.5% in FY17 and also improve EBITDA margin level with the focus on controlling employee costs. We are participating in AsiaMoney s Brokers Poll We would be pleased if you vote for us as the feedback helps us align our equity research offerings to meet your requirements. Click Here NOT RATED Sector: White Goods CMP: Rs384 Chirag Muchhala chirag.muchhala@nirmalbang.com Chitvan Oza chitvan.oza@nirmalbang.com Key Data Current Shares O/S (mn) 40.5 Mkt Cap (Rsbn/US$mn) 15.6/ Wk H / L (Rs) 603/280 Daily Vol. (3M NSE Avg.) 32,122 Price Performance (%) 1 M 6 M 1 Yr IFB Industries 17.0 (6.5) (19.1) Nifty Index Source: Bloomberg

2 Exhibit 1: Financials Y/E March (Rsmn) FY11 FY12 FY13 FY14 FY15 FY16 Revenues 6,797 8,029 9,159 10,215 12,615 15,009 YoY (%) EBITDA EBITDA (%) Reported PAT Adjusted PAT FDEPS (Rs) YoY (%) (2.5) (39.4) (9.7) (31.3) (36.9) RoCE (%) RoIC (%) RoE (%) P/E (x) P/B (x) EV/EBITDA (x) Source: Company, Nirmal Bang Research Air-conditioners: This division (21.1% of home appliances revenues in 1QFY17) posted a 34.5% increase (higher than industry growth of 15%-20% because of lower base of the company) to Rs730mn in 1QFY17. It sold 30,000 units in 1QFY17 (1Q and 4Q being peak quarters because of seasonality factors) and intends to sell 80,000-1,00,000 units in FY17. IFB finished the redesigning of its product range in 3QFY16 and introduced a completely redesigned product range in 1QFY17. As per the management, the sales performance during the summer season has been as per expectation and this category is likely to have a positive impact on profitability in FY17 as channel and volume expansion takes place. Currently, market share of IFB in ACs is less than 1%, but intends to improve it over the years. Front-loading washing machines: In this category (42.2% of home appliance revenues in 1QFY17), new models are now fully commercialised and revenue impact of this will be fully realised in FY17. This segment grew 6%-7% in 1QFY17. Some of the new models are at introductory price-points and will help increase volume and market reach across India. These gains are expected to be visible in FY17. The market share in this product is ~45% currently, and volume growth stood at 6%-8% in 1QFY17. Top-loading washing machines: This category has fully automatic top loading washing machines (15.5% of home appliance revenues in 1QFY17) in 6.5kg to 9.5kg range with high-end deep-clean technology and unique wash features. These machines have created a niche position in the market with their aesthetics, features and wash performance. This category is expected to be key revenue and margin driver in FY17. In top-loading washing machine category, market share gains within a year of their launch have been significant at 15% (considering only 6.5kg and above category), from a low single-digit share in FY15 while overall (including 6kg and below category where IFB doesn t have its presence) the market share in 1QFY17 stood at 8%-9%. The management believes that overall market share will improve and will cross 10% by the end of 2QFY17 itself. Dish-washers, clothes dryers and industrial segment (washing and laundry equipment): IFB continues to enjoy a market share of ~80% in clothes dryers and ~50% in domestic dish-washers. The new range of dish-washers with enhanced wash capabilities is fully available for retail customers and is expected to drive gains in market share as well as volume for IFB, as per the management. IFB continues to operate with a strong market share of ~37% in value terms in industrial dish-washer segment. The management believes that shift made by customers (mainly hotels, restaurants etc) from washing to industrial washing (driven by wastage and breakages of plates in manual washing) will help improve growth in this segment. Currently, IFB has a 40-member dedicated sales staff in this segment and other sales force is also being trained to increase the number of orders. A complete new range with contemporary features based on customer feedback has commercially stabilised in the market at the end of 1QFY17. In industrial laundry equipment, IFB continues to be among the top two players in terms of value share and continues to foresee good market development in this segment in future. Overall, margins are greater than 20% in industry laundry equipment segment with a healthy growth of 20%-30% every quarter. 2 IFB Industries

3 Kitchen appliances: o o Modular kitchen: This product was launched in Goa in 3QFY16 and a pilot store became operational. Bangalore and Kolkata stores are now operational (commenced in 1QFY17) and an additional store in Kolkata will be operational in 2QFY17. The company will expand the business fully in the new financial year after the stabilisation at these three places. This will result in integration of kitchen appliances and modular kitchen businesses, offering a complete product range to customers. There won t be additional recruitment of staff for this business as it will be a part of the existing bigger stores of ~2,000sqft in size. The potential of modular kitchen business is very high and IFB has high expectation from this segment going forward. Microwave oven: IFB is the third-largest player with ~18% market share as of 1QFY17-end. As per the management, a complete new pipeline of products with unique oil-fee technology is driving volume and market share gains. IFB is one of the few companies actually registering strong and healthy growth in this segment. Multi-brand stores/ifb exclusive stores (IFB points and IFB website)/canteen Services Department or CSD accounted for ~60%/24%/3% of volume, respectively, while IFB with a channel of dealers, who are also service providers, contributed ~4% and the channel of distributors accounted for ~9% of sales volume in 1QFY17. As of 1QFY17-end, IFB has ~380 IFB points (intend to make it ~500 by FY17-end) across India of which ~85 are company-owned and operated stores. The distributor channel is key to expansion of IFB s reach into small towns and up-country areas across India. Currently, IFB has its presence on ~6,000 counters across the country. Regional mix: Front-loading washing machine sales is pre-dominantly in the southern region (a bigger market for appliances compared to northern region) while top-loading washing machines (which are growing strongly pan India) are expected to increase revenue contribution in southern region as well. Overall, Tier 2 and 3 towns are growing at a faster pace compared to Tier 1 cities, but demand in Tier 1 towns in volume terms is significantly higher. Competitive intensity: The management believes that Bosch Siemens is giving heavy discount to dealers to gain market share in India in washing machine category. IFB doesn t intend to replicate this strategy and believes such high incentives to dealers are not sustainable and is instead focusing on product quality, servicing and customer value proposition. Fine-blanking division: IFB reported 15.5% revenue growth in 1QFY17 in this division. The after-market (AFM) vertical achieved a growth of 33% YoY with turnover of Rs65.3mn in 1QFY17. The management expects the AFM vertical to improve its performance in FY17 as it expands further. The Ultramiles brand will expand by reaching all states in India in FY17 and expects to grow and become profitable. Capex: The management envisages a capex of Rs650mn-Rs750mn for FY17 and intends to spend ~Rs350mn in fine-blanking space (Rs250mn in Bangalore facility for adding capacity and heat furnaces and ~Rs100mn in Kolkata facility). Goods and Services Tax or GST impact: The management expects benefit on logistics, distribution and rates front on implementation of GST, but hasn t given any specific guidance on the same. Investment in Trishan Metals: IFB has made a strategic investment in Trishan Metals Pvt Ltd through acquisition of 12mn equity shares of Rs10 each amounting to Rs120mn, or 51.12% of Trishan Metals equity holding. The objective of this acquisition is to obtain quality material in time as Trishan Metals is currently in the business of manufacturing CRCA & CRFH steel, specialising in medium and high carbon steel strips. Currently, IFB is facing quality and delivery problems from some of its suppliers, and this investment will help in having control over quality of materials and also Just in Time (JIT) delivery of products. 3 IFB Industries

4 Exhibit 2: Quarterly performance Y/E March (Rsmn) 1QFY16 4QFY16 1QFY17 YoY (%) QoQ (%) FY15 FY16 YoY (%) Net sales 3,520 3,685 4, ,615 15, Raw material expenses 2,072 2,086 2, ,108 8, % of sales Employee expenses (4.5) 1,224 1, % of sales Other expenses 860 1,094 1, (0.4) 3,417 4, % of sales Total expenditure 3,300 3,595 3, ,750 14, EBITDA (19.8) OPM (%) Interest costs (6.8) Depreciation (7.8) Other income (48.8) (75.2) (11.7) PBT (40.7) Tax (72.7) (60.2) Effective tax rate (%) Adjusted PAT (37.0) NPM (%) EPS (Rs) (36.9) Source: Company, Nirmal Bang Research Exhibit 3: Segment-wise analysis (Rsmn) 1QFY16 4QFY16 1QFY17 YoY (%) QoQ (%) FY15 FY16 YoY (%) Segmental revenues Home appliances 2,896 2,985 3, ,252 12, Engineering ,363 2, Total 3,520 3,685 4, ,615 15, EBIT Home appliances (40.7) Engineering (18.2) Total (38.1) EBIT (%) Home appliances (221.2) Engineering (308.5) Total (9.9) (739.0) Source: Company, Nirmal Bang Research 4 IFB Industries

5 Exhibit 4: Revenue break-up of home appliances division (Products) 1QFY16 4QFY16 1QFY17 YoY (%) QoQ (%) FY15 FY16 YoY (%) Revenue break-up (%) Washing machine Microwave oven ACs Dish-washer Clothes dryer IDW/ILE/EA/MK Others Total Net revenues (Rsmn) Washing machine 1,682 1,785 1, ,237 7, Microwave oven (13.1) 1,327 1, ACs ,143 1, Dish-washer (5.4) (1.8) Clothes dryer (4.2) IDW/ILE/EA/MK (8.1) Others Total 2,886 2,985 3, ,208 12, Source: Company, Nirmal Bang Research Exhibit 5: Segment-wise data 1QFY16 4QFY16 1QFY17 YoY (%) QoQ (%) FY15 FY16 YoY (%) Appliances Revenues 2,886 2,977 3, ,208 12, EBITDA (24.4) EBITDA margin (%) (72)bps 344bps (276)bps EBIT (40.7) EBIT margin (%) bps 375bps (223)bps Capital employed 2,371 2,666 2, (3.1) 2,116 2, RoCE (annualised) (%) bps 2,060bps (1,122)bps Fine blanking Revenues ,173 2, EBITDA EBITDA margin (%) bps 29bps bps EBIT EBIT margin (%) bps 6bps (93)bps Capital employed 1,226 1,396 1,219 (0.6) (12.7) 1,237 1, RoCE (annualised) (%) bps 246bps (109)bps Source: Company, Nirmal Bang Research 5 IFB Industries

6 Company background IFB Industries is a part of IFB Group, which includes IFB Agro Industries and IFB Automotive. IFB Industries operates in two segments - home appliances (82% of FY16 net revenues) and fine-blanking (18% of FY16 net revenues). The fine-blanking division, earlier known as Indian Fine Blanks, started operations in India in 1974 in collaboration with Heinrich Schmid AG of Switzerland. Its initial products ranged from fine-blanked components and tools to related machines like straighteners, decoilers, strip loaders etc. Its engineering divisions are located in Kolkata and Bangalore. The home appliances division was started in The division has products such as washing machines, clothes dryers, dish-washers, microwave ovens, air-conditioners, refrigerators, cooker hoods and modular kitchens. The company has a service network comprising 250 franchisees and 2,200 service engineers. The fine-blanking business has two manufacturing units, one each in Kolkata and Bangalore. The appliances segment has its manufacturing facility in Goa for front-loading washing machines 6 IFB Industries

7 Financials Exhibit 6: Income statement Y/E March (Rsmn) FY12 FY13 FY14 FY15 FY16 Net sales 8,029 9,159 10,215 12,615 15,009 % growth Raw material expenses 4,707 5,372 5,866 7,108 8,607 Staff costs ,224 1,556 Others 2,212 2,436 2,918 3,417 4,152 Total expenditure 7,618 8,657 9,763 11,749 14,315 EBITDA % growth (33.3) 22.0 (10.1) 91.6 (19.8) EBITDA margin (%) Other income Interest costs Depreciation Profit before tax % growth (45.6) 16.0 (32.4) (40.7) Tax Effective tax rate (%) Net profit % growth (36.4) (1.8) (31.3) (36.9) Extraordinary items Reported net profit % growth (39.3) 3.0 (31.3) (36.9) Source: Company, Nirmal Bang Research Exhibit 8: Balance sheet Y/E March (Rsmn) FY12 FY13 FY14 FY15 FY16 Equity Reserves 2,059 2,744 2,960 3,457 3,771 Net worth 2,422 3,156 3,372 3,870 4,183 Short-term loans Long-term loans Total loans Deferred tax liability Liabilities 2,576 3,451 4,083 4,473 4,605 Gross block 4,117 3,795 4,328 5,141 5,841 Depreciation 2,556 1,927 2,071 2,411 2,864 Net block 1,561 1,868 2,258 2,730 2,977 Capital work-in-progress Long-term Investments Inventories 1,093 1,320 1,555 2,231 2,144 Debtors ,155 Cash Other current assets Total current assets 2,705 2,865 3,636 4,405 4,768 Creditors 1,091 1,199 1,420 2,267 2,266 Other current liabilities ,042 Total current liabilities 1,835 1,933 2,329 3,237 3,308 Net current assets ,307 1,169 1,460 Total assets 2,576 3,451 4,083 4,473 4,605 Source: Company, Nirmal Bang Research Exhibit 7: Cash flow Y/E March (Rsmn) FY12 FY13 FY14 FY15 FY16 EBIT (Inc.)/dec. in working capital (239) (154) (138) (99) (255) Cash flow from operations (14) Other income Depreciation Deferred Liabilities (1) Interest paid (-) (3) (2) (14) (17) (22) Tax paid (-) (54) (120) (77) (95) (38) Dividends paid (-) (3) (15) (241) (265) (289) Extraordinary Items (15) Net cash from operations Capital expenditure (-) (367) (527) (679) (790) (643) Net cash after capex (101) (158) (579) (225) (420) Inc./(dec.) in short-term borrowing (133) (191) Inc./(dec.) in long-term borrowing (Inc.)/dec. in investments 362 (468) 195 (144) 348 Others Equity issue/(buyback) Cash from financial activities (12) 456 Opening cash balance Closing cash balance Change in cash balance 269 (92) 236 (237) 37 Source: Company, Nirmal Bang Research Exhibit 9: Key ratios Y/E March FY12 FY13 FY14 FY15 FY16 Per share (Rs) EPS Book value Valuation (x) P/E P/sales P/BV EV/EBITDA EV/sales Return ratios (%) RoIC RoCE RoE Margins (%) EBITDA margin PBIT margin PBT margin PAT margin Turnover ratio Asset turnover ratio (x) Avg. inventory period (days) Avg. collection period (days) Avg. payment period (days) Solvency ratios (x) Debt-equity Interest coverage Growth (%) Sales EBITDA (33.3) 22.0 (10.1) 91.6 (19.8) PAT (39.3) 3.0 (31.3) (36.9) Source: Company, Nirmal Bang Research 7 IFB Industries

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