Whirlpool India’s Margins and Profitability Are Under Pressure; How Is Management Planning to Fix Them?
The shares of this small cap company majorly engaged in manufacturing and marketing of major home appliances in the country which includes washing machines, refrigerators and many more were in focus after the company neared Q2 Results.
With the market capitalization of Rs.10,938 Crores, the shares of Whirlpool of India Ltd were trading at around Rs. 862 per share which is 40 percent discount from its 52 week high of Rs. 1438 per share and is trading at a P/E of 40.2 whereas industry P/E stands at 34.4
Why Did Whirlpool India’s Margins Come Under Pressure?
According to Whirlpool India, this was an earnings-accompanied tough quarter. Earnings before interest, taxes, depreciation, and amortization (EBITDA) stood at ₹120 crore at 4.6%. Profitability margin declined by 377 basis points. According to the management, there was a decline in the profit margin by around 320 basis points when compared to last year. This is attributed to cost hikes never seen before due to geopolitics and Middle Eastern wars.
Also read: Ind-Swift Laboratories’ CFO Expects Its Margins to Cross 20% by Q3; But What Is the Reality?
What Led to the Margin Squeeze?
Some of the reasons for the increased expenses were listed by management. The price of crude oil rose to about USD 97 from USD 67, during the same period last year, thus having a considerable effect on raw materials and components that were dependent on oil prices. Another factor was currency depreciation, as the currency lost more than 10%, while typically it lost only 4%-5%.
The firm also stated that it had taken some prices hikes in the quarter in order to reduce the effect of those expenses. Nevertheless, according to management, these prices hikes were not enough to offset 100% of the cost increase. Therefore, there was an under-recovery of costs, which resulted in squeezing the margin. This is an explanation for the firm’s pressure on profitability, despite prices hikes.
How Is Whirlpool Working to Improve Margins?
Whirlpool said that its P4G (Productivity for Growth) initiative is still performing well. The management referred to the P4G as a programme targeting cost productivity in all lines of the profit and loss statement. In particular, these are design productivity, negotiation productivity, and indirect procurement productivity. According to the management, such initiatives are on course; however, the war situation, among other cost drivers, has been ahead of the game.
When Could the Margin Outlook Improve?
Management said the near-term environment remains difficult because refrigerators and air conditioners account for more than two-thirds of our revenue, while JAS is the weakest quarter for refrigerators and air conditioners. At the same time, management said the commodity costs are very high and the forex is very high.
Management thus anticipates that the current quarter will not be an easy one in terms of finance. It further indicated that the company was optimistic that external problems will sort themselves out, thus enabling cost levels to revert to a more normal level. Currently, the margin recovery tools highlighted during the call include pricing and the P4G (Productivity for Growth) cost productivity initiative.