Johnson Controls - Hitachi Air Conditioning India Ltd (JCH) (NSE: JCHAC, BSE: 523398) was established on 1st October 2015 as a joint venture between Hitachi Appliances, Inc. (now Hitachi Global Life Solutions, Inc.) and Johnson Controls. Hitachi Appliances carved out and contributed its air-conditioning business to the JV, in which Johnson Controls acquired a 60% stake while Hitachi Global Life Solutions, Inc. continued to hold 40%. The company has emerged as one of the main players in the Indian air-conditioning market with a market share of 12% in Room Air Conditioners (RAC)s and significant presence in commercial ACs.
Key Positives
Leading market share in RAC segment and aggressive product launches – JCH had positioned itself as a premium player in the RAC market, but is now entering the popular segment (mass premium), which is already crowded with established players. For this, the company has introduced a new series of inverter RAC products and repositioned its brand for the mid-market, while maintaining its strength in the premium segment. With the company’s strong brand recognition and premium products offered at lower prices, JCH stands to gain market share. With the entry into the mass segment, JCH has product for every category of consumer.
The company is continuously focusing on aggressive new launches in inverter ACs and has launched many new products in this range, designed for the first-time buyer and mid segment. JCH has 122 models for this calendar year.
JCH has also seen a significant shift to inverter ACs from fixed-speed ones. The share of inverter ACs increased to 66% in FY19 from 22% in FY15, which resulted in the company moving into the league of top players in inverter split ACs. The company expects the share of inverter ACs to become 90% over the next 2-3 years.
JCH is aggressively improving its product offering by adding products in the upper segments of RACs and in inverter ACs. It is strong in the 2-tonne category and plans to enter higher-than-2-tonne categories too, where it will compete with Mitsubishi, Daikin, and O-General.
Increasing presence in commercial air conditioners – In commercial ACs, JCH’s growth was only 6% over FY12-19, mainly dented by the telecom sector. However, in products like Variable Refrigerant Flow System (VRF), growth was 21% in FY13-19, mainly driven by new product launches and a stronger distribution network. The presence of VRF in the commercial and premium-residential market is rising.
JCH continues to dominate the Packaged air conditioning (PAC) segment; it is the single-largest AC solutions provider for cooling requirement in telecom towers. However, stiff competition and stressed margins in the telecom industry have severely impacted this segment over the last 2-3 years. With a revival in this industry, when private investment-cycle kick starts, this category is expected to start reporting growth.
Extending its branch and distribution network - Hitachi is one of India’s oldest and most reputed brands with a strong recall among consumers. It enjoys strong brand equity with a panâ€India distribution network of 10,000 touch points with significant presence in the B2B market. To strengthen its presence in RACs, JCH added 4,000 selling points in Tier-2 and 3 cities over the last two years. It is aggressively focussing on advertising through TV, print, hoardings, and other media. It is more focused on in-shop branding (offline branding) as it is more cost efficient. Currently, the company is spending about 3% of sales in brand building.
Its robust B2C sales network is supported by a strong team of more than 100 members. Currently, it has 10,000 selling points across 1,350 cities and a strong presence in north and east India markets.
JCH has partnered with more than 500 distributors in the PAC (Packaged air conditioning) segment and more than 200 distributors in the VRF segments to enhance its B2B presence in more than 140 cities across India.
Strong manufacturing and R&D capabilities – JCH has cutting-edge manufacturing facilities at Kadi - Gujarat. At 182,000 sqm, they are one of the largest AC manufacturing facilities in India. Its manufacturing unit holds the capacity to assemble under a single roof, a wide range of cooling products that cover both residential and commercial cooling. Over last 2-3 years, company has increased its utilization level by increasing its in-house manufacturing share (Currently, 85% in-house). This has resulted in improving utilization levels in its manufacturing facilities to 80% +.
JCH is setting up a Global Development Centre (GDC) in India (in Kadi, Gujarat) at a total capex of INR 1.5 billion. This state-of-the-art facility will focus on RAC and PAC products for India, Southeast Asia, Middle East, and EU markets. This development centre will increase JCH’s product development capabilities, particularly in commercial ACs and RAC systems. In addition, a range of capabilities related to user experience, industrial design, simulation, controls, design quality, project management and engineering information systems will be established at this centre. From 1 October 2018, GDC has started providing design and development services related to air conditioning to group companies outside India. GDC support to global companies of JCH in product development and design will lead to higher service revenue, which is high-margin.
|
Mar-15 |
Mar-16 |
Mar-17 |
Mar-18 |
Mar-19 |
|
|
Operating Revenue INR Cr. |
1,572.84 |
1,640.54 |
1,917.30 |
2,185.39 |
2,241.30 |
|
YOY Growth % |
- |
4.30 |
16.87 |
13.98 |
2.56 |
|
Operating Profit INR Cr. |
145.2 |
124.51 |
174.54 |
206.26 |
179.22 |
|
YOY Growth % |
- |
-14.25 |
40.18 |
18.17 |
-13.11 |
|
Operating Margin (%) |
9.23 |
7.59 |
9.10 |
9.44 |
8.00 |
|
Net Profit INR Cr. |
77.76 |
49.98 |
81.33 |
100.15 |
85.94 |
|
YOY Growth % |
- |
-35.73 |
62.73 |
23.14 |
-14.19 |
|
Net Margin (%) |
4.92 |
3.04 |
4.23 |
4.57 |
3.81 |
|
ROCE (%) |
26.74 |
16.27 |
24.1 |
29.27 |
20.00 |
|
ROE (%) |
28.13 |
14.9 |
20.38 |
20.53 |
14.97 |
|
EPS Growth (%) |
866.08 |
-35.73 |
62.74 |
23.14 |
-14.19 |
Risks/Concerns
Impact of COVID-19 & Outlook
The Indian RAC industry has witnessed robust CAGR of 11% in volume (FY12 to 19). Improving micro-economic conditions, increase in population, cheaper financing options, development of smarter cities, high potential for economic growth and greater product availability with increased electricity reach is likely to boost the demand for air conditioners. Currently, India is experiencing a continuous shift towards inverter ACs, which now contribute over 50% of the overall industry (wall-mounted split air conditioner sales). India also has the least penetration of RACs when compared to global peers.
Indian HVAC market has been witnessing a considerable growth due to rise in commercial offices and buildings, industries, hospitals, data centres, server rooms, and universities. Further, rising infrastructure spending in the country is also driving the growth of the Indian HVAC market. Several infrastructure projects such airports and metro railway expansion projects are coming up across the country, leading to strong growth in the segment. Indian HVAC market has witnessed CAGR of 9% over CY10 to 19.
While the Indian AC industry has good tailwinds in place, the COVID-19 outbreak and the subsequent lockdown has cast a shadow on the upcoming earnings of the companies in the industry.
The primary focus at this point of time for any long-term investor is to check whether a company will be able to survive the lockdown and the next few quarters of tepid demand. Consumer durables sector is expected to be highly impacted by the lockdown. Even though size of the market may shrink in the interim, stronger companies could end up gaining market share in their respective segments.
|
|
ROE (%) (Dec '19) |
ROA (%) (Dec '19) |
Debt to equity (FY19) |
Cash Conversion Cycle (FY19) |
Trade Receivables (INR Cr.) |
Inventory (INR Cr.) (Dec '19) |
Cash (INR Cr.) (Dec '19) |
|
Johnson |
18.49 |
10.32 |
0.31 |
62.33 |
187.76 |
316.04 |
132.22 |
|
Blue Star |
24.11 |
7.05 |
0.40 |
14.35 |
900.54 |
589.35 |
148.57 |
|
Voltas |
13.94 |
7.87 |
0.08 |
6.33 |
1623.81 |
815.68 |
282.40 |
Margins of all the players in the AC segment are expected to take a hit in the upcoming quarters. However, companies like Johnson and Voltas who cater more to the retail segment are expected to slightly insulate from the low demand than a company like Blue Star who mostly cater to the institutional segment. With summer coming up, the management expects that there will be some revival in the demand for air conditioners.
JHC is coming out after a massive capex in terms of ramping up its capacity and R&D capabilities. While this has its impact on its margins, with improved cost mechanisms, foray into mass segments and new product launches, the company is expected to see improved asset utilisation and margins once lockdown is removed and demand flows back to the industry. RAC segment is expected to continue to drive sales in the coming years.
However, with every crisis new opportunity rises. According to a report from Local Circles (a Noida based social media survey company), more than 50 percent households need AC repairs. Their survey is based on speaking to more than 17,000 people from different parts of the country. JCH has been investing in the training and upgradation of technical skills to ensure growth stability. This could lead higher service revenue in the coming quarters.
JCH is currently available at INR 2,355.70 (as on April 29, 2019) and PE of 53.98, which is just below its 5-year median PE of 56.70. Promoter holding is at 74.25% as on December 2019.
While the long-term story of the company is intact, the effect of the new capex and entry into mass segment are yet to be seen in the company’s financials. Given the current valuations, the long-term investor should wait for more favourable margin of safety.
Team 3C Capitals
Sources
