Hitachi Home and Life Solutions

Institutional
Equity
Research
Hitachi Home and Life Solutions

HTHL IN; HITA.BO
Consumer Durables | India
Initiating Coverage
Current price (20 Aug)
Target price
Upside/(downside)
Market data
Mkt capitalisation
Average daily vol
52-week H/L
Shares O/S
Free float
Promotor holding
Foreign holding
Face value
BUY
417
616
48
Rs
Rs
%
Rs bn
'000
Rs
mn
mn
%
%
Rs
11.3
96.8
428.9 / 100
27.2
7.0
74.3
1.0
10.0
Price performance (%)

Nifty (abs)
Stock (abs)
Relative to Index
1m
2.8
16.1
13.4
3m
8.2
118.3
110.1
Performance
480
(Rs)
6m
29.3
212.2
182.9
(%)
1yr
45.8
301.3
255.5
300
360
200
240
100
120
0
Aug-13
(100)
Nov-13 Feb-14 May-14 Aug-14
Hitachi Home (LHS)
Rel. to BSETCG (RHS)
Source: Bloomberg, SSLe
August 21, 2014
Plugging into growth!

Hitachi Home and Life Solutions India Ltd (HHLS) is at an inflexion point. We like the
stock due to a) operational improvements from a refurbished plant at Kadi wherein we
expect ~20% rise in assembly efficiency, b) reduction of lead time in procurement of
some key raw material leading to controlled working capital cycle, c) improved focus
on operation and marketing to reap the benefits from an upcoming growth of the
industry. Its an industry that we believe will see a 20% CAGR in air conditioners (AC)
and a 15% CAGR in refrigerators over F14-F17e. With an operating leverage
unshackled by volume gains and plant efficacy, we expect the company to double its
EBITDA margin to ~8%, in-line with EBITDA margin of peers. Our estimates suggest
~118% EPS growth over F14-17e (32% during F11-14). Yet the stock is trading at
17.5x/13.9x F16e/F17e EPS that is a 20% discount, on an average, to peers on F17e
earnings. Assigning 20x on F17 earnings, we see a 48% upside with a TP of Rs616.
Market share improvement with sub-premium product diversification: HHLS, which so
far catered to the premium segment, is now entering tier-II and tier-III cities with subpremium priced products to be sold through a burgeoning B2B self-employed distributors &
services network. This strategy enmeshes well with Indias future growth that will come from
smaller towns and their rising aspirations that seek advanced, high quality & premium
products. Acknowledging these aspirations, HHLS has launched a new range of window and
split AC in sub-premium categories hoping to reach out to a vast majority of customers from
middle-level income groups. This will help HHLS gain market share over the current 10%
(F14) in the Room Air Conditioners (RAC) segment. RAC constitutes ~80% of the total Airconditioning revenue. The focus on improving the share of B2B from ~40% to 50% by the
end of F15e will boost the growth of the company over that of the industry.
Improving margin backed by rise in volume and operational efficiency: Low volume
due to weak consumer spends and costly import due to INR depreciation was hurting the
industry badly over last three years. Along with the bad industry performance, HHLS bore
the brunt of a fire incident at its Kadi factory at the end of F13. Now, with a new refurbished
plant in place, improved consumer sentiments and increased customer focus, we see 20%
volume CAGR over F14-17e in its RAC segment leading to a 21% CAGR growth in sales.
Combined with a volume growth, expectations of stable currency and efficient cost
management are seen uplifting the EBITDA margin from 4.3% to 8.7%. With limited near
term capex and improving utilisation levels, we expect the return ratios, RoE/RoCE, to
improve from 3.4%/4.1% in F14 to 21.3%/15.7% by F17e.
Localisation content to increase, so would customer reach: With the refurbishment of
the plant at Kadi, we expect operational efficiency of the company to improve by ~20% from
F15. Except critical electronics and compressors (~30% of the cost), the company
manufactures majority of the parts of RAC in-house. Global sourcing of equipments from
Hitachi group plants and the commissioning of a compressor plant in Gujarat of a Hitachi
Associate, HHLS will have greater control over its working capital. Moreover, a rapid
expansion of manpower (~300 people addition in F13 and F14 as against ~40 people
addition earlier) has been rather timely just when the industry bottomed out. The company
inducts 30% of its new work force in to sales and services every year.
Key risks: Strained working capital due to currency volatility, seasonality in air-conditioner
purchases market and further increases in BEE rating may impact volume growth.
Financial Summary
Rabindra Nath Nayak
+91 22 4227 3310
rabindra.nayak@sbicapsec.com
Alok Ramachandran
+91 22 4227 3478
alok.ramachandran@sbicapsec.com
Aakash Fadia
+91 22 4227 3460
aakash.fadia@sbicapsec.com
Y/E Mar (Rs mn)

Net sales
growth (%)
EBITDA margin (%)
Adjusted net profit
EPS (Rs)
growth (%)
P/E (x)
EV/EBITDA (x)
F13
9,300
16.5
5.0
153
6.7
369.0
64.5
23.3
F14
10,997
18.3
4.3
80
3.0
(47.4)
145.3
26.7
F15e
13,616
23.8
8.6
574
21.1
613.2
20.4
10.3
F16e
16,292
19.7
8.6
669
24.6
14.2
17.5
8.5
F17e
19,277
18.3
8.7
838
30.8
20.1
13.9
7.0
Dividend yield (%)
3.5
3.5
3.5
3.7
3.7
RoE (%)
7.5
3.4
21.6
20.7
21.3
RoCE (%)
5.9
4.1
15.5
15.4
15.7
Source: Company, SSLe
SBICAP
Research on Bloomberg SBICAP <GO>, www.securities.com
Please refer to our disclaimer given at the last page.
Hitachi Home and Life Solutions (India) Initiating Coverage
SBICAP Securities Ltd
Investment Rationale
Market share improvement with sub-premium product diversification: Rising
aspirations amongst Indias smaller towns where residents are increasingly seeking
advanced, high quality & premium products has not escaped notice of most.
Acknowledging this trend HHLS, which so far catered to the premium segment, is now
entering tier-II and tier-III cities with sub-premium priced products. Its entry rides upon
an equally aspirational and a burgeoning B2B self-employed distributor & service
network. This strategy is starting to pay rich dividends and HHLS is aggressively
launching a range of new window and split ACs in sub-premium categories hoping to
reach out to a vast majority of customers from middle-level income groups. We foresee
HHLS gaining market share over the current 10% (F14) in the Room Air Conditioners
(RAC) segment ahead. RAC constitutes ~80% of the total Air-conditioning revenues
for HHLS. The focus on improving the share of B2B from ~40% to 50% by the end of
F15e will boost the growth of the company over that of the industry.
Exhibit 1: HHLS market share set to improve from the current 10% in F14
Indian Airconditioning Market - 2013
Others
39%
Voltas & LG
41%
Panasonic
9%
Samsung
11%
Source: TV VEOPAR, SSLe
Improving margin backed by rise in volume and operational efficiency: The last
three years saw the industry struggle with low volumes accompanying weak consumer
spends and depreciating rupee hurting their margins due to a high degree of reliance
on imported kits. HHLS not only buckled under this twin blow it also bore the brunt of a
fire incident at its Kadi factory at the end of F13. However, these are now relegated to
the past as HHLS has a new refurbished plant in place that also is integrated well
enough to offer good cost advantage. Moreover, with improved consumer sentiments
and increased customer focus we see 20% volume CAGR over F14-17e in its RAC
segment leading to a 21% CAGR growth in sales. Accompanying a strong growth in
volume, expectations of stable currency and efficient cost management are seen
uplifting the EBITDA margin from 4.3% to 8.7%. That should drive improvements in
return ratios, RoE/RoCE, from 3.4%/4.1% in F14 to 21.3%/15.7% by F17e even as we
foresee limited near term capex and rising utilisations.
rabindra.nayak@sbicapsec.com I alok.ramachandran@sbicapsec.com | aakash.fadia@sbicapsec.com
August 21, 2014 | 2
Exhibit 2: Revenues to grow by 23.8% in F15e; net profits to grow by a CAGR 118% over F14-17e as volumes in ACs are set to
improve
7.5
750
(Rs mn)
1,000
(%)
10.0
5.0
2.5
500
250
0.0
0
F12
F13
F14e
EBIDTA Margin
F15e
F16e
F17e
F12
EBIT Margin
F13
F14
F15e
F16e
F17e
Adjusted PAT
Localisation content to increase, so would customer reach: HHLS localisation

of most parts of an AC is helping negate currency fluctuation-linked costs. Except
critical electronics and compressors (~30% of the cost), the company
manufactures majority of the parts of RAC in-house. The refurbishment of the plant
at Kadi now allows an operational efficiency improvement of the order of ~20%
from F15 according to us. Also, with global sourcing of equipments from Hitachi
group plants and the commissioning of a compressor plant in Gujarat of a Hitachi
Associate, HHLS will have greater control over its working capital. Outside of the
plant, a rapid expansion of manpower (~300 people addition in F13 and F14 as
against ~40 people addition earlier) has been rather timely just when the industry
bottomed out. The company inducts 30% of its new work force into sales and
services every year.
August 21, 2014 | 3
Valuation
With a pickup in demand for air-conditioners, we expect 21% and 118% CAGR in
sales and PAT to Rs19.3bn and Rs0.8bn, respectively, over F1417e. The company
went in a cost spiral in F13 & F14 primarily due to the volatile currency that impacted
margins and thereby leading to lower earnings. With profitability expected to grow at a
CAGR of 118% over F14-17e, we expect multiples to return to normal levels.
Exhibit 3: 1-year fwd P/E chart
50
40
(x)
30
20
The stock trades at 18x on a one-year-forward EPS. We
expect 118% CAGR in PAT over F1417e.
10
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
Dec-12
Oct-12
Aug-12
Jun-12
Exhibit 4: Peer Valuation

EPS (Rs)
Company name
F15e
Voltas
8.8
F16e
10.5
P/E (x)
F17e
11.9
F15e
26.5
F16e
22.2
ROA (%)
F17e
19.6
F15e
6.0
F16e
6.4
ROE (%)
F17e
6.4
F15e
15.2
F16e
16.1
F17e
16.2
Blue Star
10.8
14.6
19.3
29.6
21.8
16.5
4.2
5.2
6.1
19.4
23.6
27.1
Havells India
45.4
52.9
62.2
27.8
23.8
20.3
10.3
10.9
11.4
30.0
27.8
26.2
Hitachi Home & Life Solutions (India)
21.1
24.6
30.8
19.4
16.6
13.3
15.3
16.7
18.2
21.6
20.7
21.3
Whirlpool of India
Crompton Greaves
12.0
15.4
22.1
38.3
29.9
20.9
10.2
11.9
NA
18.3
19.4
26.0
7.5
11.0
14.1
27.9
19.0
14.7
4.2
5.8
7.2
12.2
16.1
18.1
August 21, 2014 | 4
Financial Analysis
Revenues to grow at a CAGR 21% over F14-F17e to Rs19.27bn
Approximately 69% population resides in rural areas of the country. However, they
contributed only 35% of the companys sales. Seeking a higher penetration from an
improving distribution reach, the company expects rural sales contribution to increase
to ~45% in the near future. Rural markets are expected to post much faster growth
than urban markets in the medium term led by increased rural incomes, increased
distribution reach of consumer durable companies and customized products for rural
consumers. Buoyed by the improving demand environment, we expect HHLS
revenues to grow at a CAGR of 21% over F14- F17e to Rs19.27bn.
Exhibit 5: Air-conditioners to drive revenue growth; Refrigerators to grow at a 15% over F14-17e
18,000
100%
95%
(Rs mn)
13,500
90%
9,000
85%
4,500
80%
75%
0
F 11
Air Conditioners
F 12
F 13
Refrigerators
F 14
F 15e
F 16e
F 11
F 17e
Spares and Accessories
Others
F 12
Air Conditioners
F 13
F 14
Refrigerators
F 15e
F 16e
Spares and Accessories
F 17e
Others
Margins to structurally improve

Higher sales, primarily driven by volume, combined with efficient cost management
and reduced currency volatility should help EBITDA margins at least double from the
current levels of 4.3% in F14. Moreover, the business is set to structurally change as
asset utilisation pick-ups.
Exhibit 6: EBITDA margins set to improve as volumes pick up, accompanied by improving asset turn
6.0
10.0
4.9
7.5
4.5
5.0
3.0
(x)
(%)
4.6
2.5
4.2
3.9
3.9
3.9
1.3
1.3
1.4
F12
F13
F14
1.5
0.0
F12
F13
F14e
EBIDTA Margin
F15e
F16e
EBIT Margin
F17e
1.6
1.6
1.6
F15e
F16e
F17e
0.0
Asset turnover
Gross Fixed Asset Turnover
August 21, 2014 | 5
With improving geographical reach by enhancing production capacity we see the

company engage its customers with ever more customer touch points. Resultant high
sales, in our opinion, should also generate much higher free-cash flows. We foresee
an ~10x jump in FCFs from F12 levels to Rs556.8mn in F17e.
1,100
24
700
18
(%)
(Rs mn)
Exhibit 7: Free-cash to turn positive as future capex minuscule; Return ratios to set to improve
300
(100)
12
(500)
F12
F13
F14
Operating Cash Flow
F15e
F16e
F17e
0
F12
Free Cash Flow
F13
RoE
F14e
ROCE
F15e
F16e
F17e
ROIC
August 21, 2014 | 6
Key Risks
Key risks to our target price:
Currency risk: With an appreciating rupee, the company may not be able take full
advantage of the currency unlike some competitors.
High competition in the air-conditioning segment
Weaker-than-expected growth in air-conditioner & refrigerator sales.
Significant increase in working capital impacting margins
Exhibit 8: Key Assumptions

Y/E Mar
F15e
F16e
F17e
20.0
20.0
20.0
Refrigerators
15.0
15.0
15.0
Spares
25.0
20.0
20.0
61.0
61.0
61.0
Growth (%)
Airconditioners
Operating Expenses
Raw material & project costs as % of Sales
Man power as a % of Sales
Other Expenses as a % of Sales
7.4
7.4
7.3
23.0
23.0
23.0
Source: SSLe
August 21, 2014 | 7
Company Profile
Hitachi Home & Life Solutions (India) Ltd (HHLS) is a subsidiary of Hitachi
Appliance Inc, Japan. Since its inception HHLS has focused on developing and
supplying high-quality products and technology that contribute to the overall
prosperity of the society. HHLS manufactures various kinds of products, including
Room Air-conditioners, Commercial Air-conditioners, Chillers and is into trading of
VRF Systems, Rooftop ACs and Refrigerators.
Headquartered in Ahmedabad, Gujarat, the company's manufacturing facility at
Kadi, Gujarat, is among the ten Hitachi air conditioner facilities worldwide. With a
total installed capacity of 230,000 units (in a single shift) a year HHLS is amongst
the top air-conditioning companies in India. It has a strong nationwide distribution
consisting of 5 regional offices, 21 branch offices and over 200 exclusive sales and
service dealers. It has over 1,500 sales points, 33 company owned service centres
(HCS) and 600 other service points including multi brand S&S and franchisees.
The company believes in simplifying life, which is why, it constantly innovates,
brings in world-class technology, newer concepts and incorporates advanced
features in its products to make life comfortable.
Exhibit 9: Management Team
Shinichi Iizuka
Chairman
Shoji Tsubokuta
Managing Director
Amit Doshi
Executive Director
Anil Shah
CFO & Executive Director
Vinay Chauhan
Executive Director
Ashok Balwani
Director
Dr. Devender Nath
Director
L G Ramakrishnan
Director
Mukesh Patel
Director
R S Mani
Director
Ravindra Jain
Director
Vinesh Sadekar
Director
August 21, 2014 | 8
Financials
Income Statement
Y/E Mar (Rsmn)
Net sales
Balance Sheet
F13
F14
F15e
F16e
F17e
9,300
10,997
13,616
16,292
19,277
growth (%)
16.5
18.3
23.8
19.7
18.3
Operating expenses
8,835
10,522
12,438
14,893
17,604
464
476
1,177
1,399
1,672
18.8
19.5
EBITDA
growth (%)
53.5
2.4
147.5
Depreciation &amortisation
202
300
320
340
360
EBIT
263
175
857
1,059
1,312
Other income
16
57
30
30
30
Interest paid
72
119
90
90
90
Extraordinary/Exceptional items
PBT
207
113
797
999
1,252
Tax
54
33
223
330
413
25.9
28.9
28.0
33.0
33.0
153
80
574
669
839
Effective tax rate (%)

Net profit
Minority interest
Reported Net profit
153
80
574
669
838
Non-recurring items
Adjusted Net profit
153
80
574
669
838
growth (%)
369.0
(47.4)
613.2
14.2
21
211
246
F14
F15e
F16e
6,179
7,340
8,832
1,775
1,955
1,985
1,995
1,985
66
18
18
18
18
222
315
373
446
528
Total assets
8,312
7,604
9,093
10,698
12,678
Current liabilities
4,151
3,677
4,777
5,539
6,412
Borrowings
1,659
1,249
1,025
1,135
1,304
138
277
364
478
630
5,948
5,203
6,166
7,153
8,346
Net fixed assets

Goodwill & intangible assets
Other non-current assets
Other non-current liabilities

Total liabilities
Share capital
230
272
272
272
272
Reserves & surplus
2,135
2,128
2,655
3,273
4,060
Shareholders' funds
2,364
2,400
2,927
3,545
4,331
8,312
7,604
9,093
10,698
12,678
Minority interest
F14
F15e
F16e
113
797
999
1,252
202
300
320
340
360
2.8
1.6
1.6
0.7
RoE
7.5
3.4
21.6
20.7
RoCE
5.9
4.1
15.5
15.4
RoIC
4.9
2.3
15.3
16.7
18.2
8.7
Depreciation
6.3
6.5
6.8
Chg in working capital
(375)
(316)
(31)
(84)
(212)
4.2
4.1
4.3
Total tax paid
(43)
(66)
(223)
(330)
(413)
21.3
Other operating activities
687
548
15.7
Operating CF
677
580
864
925
988
(408)
(423)
(431)
Capital expenditure
(1,141)
(556)
Chg in investments
(1)
(199)
11
38
23.0
27.2
27.2
27.2
27.2
Other investing activities
6.7
3.0
21.1
24.6
30.8
Investing CF
FCF
6.7
3.0
21.1
24.6
30.8
15.5
14.0
32.9
37.1
44.1
103.0
88.3
107.6
130.4
159.3
15.0
15.0
15.0
16.0
16.0
Valuation ratios (x)

64.5
145.3
F17e
8.6
Per share data (Rs)
P/BV
5,096
F13
NPM
PE
5,533
Other Current assets

Investments
207
EBITM
DPS
1,315
Pre-tax profit
8.6
BV
F17e
899
Y/E Mar (Rsmn)
4.3
CEPS
F16e
537
F17e
5.0
FDEPS
F15e
220
Cash Flow Statement

F13
EBITDAM
EPS
F14
716
Total equity & liabilities
Profitability and return ratios (%)
O/s shares (mn)
F13
Cash & Bank balances
20.1
Key Financials ratios

Y/E Mar
Y/E Mar (Rsmn)
20.4
17.5
13.9
(1,132)
(717)
(408)
(423)
(431)
(455)
(137)
455
503
556
Equity raised/(repaid)
547
Debt raised/(repaid)
688
(431)
Dividend (incl. tax)
(40)
Other financing activities
(52)
Financing CF
(47)
(48)
(51)
(51)
(83)
(90)
(90)
(90)
1,143
(558)
(138)
(141)
(141)
4.2
4.9
4.0
3.3
2.7
23.3
26.7
10.3
8.5
7.0
Net chg in cash & bank bal.
688
(695)
317
362
416
1.2
1.2
0.9
0.7
0.6
Closing cash & bank bal
716
220
537
899
1,315
D/E (x)
0.7
0.5
0.4
0.3
0.3
DSO (days)
61
59
55
55
57
EV/EBITDA
EV/Sales
Other key ratios
Du Pont Analysis - RoE

NPM (%)
1.6
0.7
4.2
4.1
4.3
Asset turnover (x)
1.3
1.4
1.6
1.6
1.6
Equity multiplier(x)
3.5
3.3
3.1
3.1
3.0
RoE (%)
7.5
3.4
21.6
20.7
21.3
August 21, 2014 | 9
SBICAP Securities Limited

Corporate Office: Mafatlal Chambers, A-Wing, 2nd Floor, N. M. Joshi Marg, Lower Parel, Mumbai -400013.
Tel.: 91-22-42273300/01 | Fax: 91-22-42273335 | Email: sbicapresearch@sbicapsec.com | www.sbismart.com
KEY TO INVESTMENT RATINGS (w.e.f. February 2013)

Guide to the expected return over the next 12 months. 1=BUY (expected to give absolute returns of 15 or more percentage points);
2=HOLD (expected to give absolute returns between -10 to 15 percentage points); 3=SELL (expected to give absolute returns less then 10 percentage points)
DISCLAIMER
We, Rabindra Nath Nayak, M. Sc. (Math), CFA Lead Analyst, Alok Ramachandran, MMS (Finance) Jr. Analyst, Aakash Fadia, MMS (Finance) Research Associate, authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about
any and all of the subject issuer(s) or securities. This report has been prepared based upon information available to the public and sources, believed to be
reliable. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this
report.
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Hitachi Home and Life Solutions - Initiating Coverage 21-08-14

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Hitachi Home and Life Solutions - Initiating Coverage 21-08-14

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Institutional

Consumer Durables | India

Price performance (%)

Hitachi Home (LHS)

Rel. to BSETCG (RHS)

Source: Bloomberg, SSLe

August 21, 2014

Plugging into growth!

Y/E Mar (Rs mn)

Dividend yield (%)

Source: Company, SSLe

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