Consumer Durables

India I Equities
Company Update

8 September 2020

Not Rated
Johnson Controls-Hitachi A/C, India
Share Price: `2,222
`22bn revenue since FY18, RoICE dips to 11%, from peak 21%

Expands product range in room/commercial ACs. Johnson Controls- Key data JCHAC IN / HITA.BO
52-week high/low `3484 / 1580
Hitachi (JCH) continued to focus on Indian consumers’ need for A/Cs and
Sensex / Nifty 38365 / 11317
had launched inverter ACs with expandable capacity. These are suitable for 3-m average volume $0.4m
the extremely hot conditions of North India and humidity of the coastal Market cap `61bn / $827.2m
states. In room A/Cs it had 96 SKUs. It also launched new models designed Shares outstanding 27m
specially to cater to needs of first-time and mid-segment AC buyers, aimed at
penetrating tier-II and -III towns of India.
Exports ramp up on lower base since FY16. Since FY16 JCH had started
exporting from India, registering a 144% CAGR on a low base. Component Shareholding pattern (%) Jun'20 Mar'20 Dec'19

exports can be ramped up as JCH already has a manufacturing base in India Promoters 74.3 74.3 74.3
- of which, Pledged - - -
and has developed a global development centre (GDC) manned by more than
Free float 25.8 25.8 25.8
120 engineers.
- Foreign institutions 1.0 0.98 0.95
RoICE of 11.2%, the lowest since FY16. While the company was affected - Domestic institutions 13.6 13.3 12.0
- Public 11.2 11.5 12.8
by unseasonal rainfall in the summer of FY19, the Covid-19 lockdowns took
a toll in the peak summer of FY20. The effect of these was seen in debt rising
from `127m in FY18 to `1.59bn in FY20 for working capital. This slashed
FY20 return ratios. The RoICE contracted from 21% in FY18 to a low 11%
in FY20.
Relative price performance
Valuation. JCH is not one of the companies we cover. Hence, we do not 3,500
have detailed estimates and a rating on the stock. At the CMP of `2,222, it 3,000
trades 83x/37x its Bloomberg-based EPS of `26.9/59.3 for FY21/FY22. Key 2,500
JCHAC

monitorables: (a) reducing inventory stuck with channel partners, (b) pick-up
in demand for residential and commercial air-conditioning on the return to 2,000

normal, post-covid and (c) competitive intensity arising from local peers and 1,500

MNCs. Risks: Unseasonal summer rainfall and slowdown in consumer 1,000

Sensex

financing.
Sep-19

Nov-19
Dec-19

Aug-20
Sep-20
Feb-20
Mar-20

Jul-20
Oct-19

Jan-20

Apr-20
May-20
Jun-20

Source: Bloomberg

Key financials (YE: Mar) FY16 FY17 FY18 FY19 FY20

Sales (` m) 16,405 19,173 21,854 22,413 21,974
Net profit (` m) 500 813 1,002 859 835
EPS (`) 18.4 29.9 36.8 31.6 30.7
PE (x) 65.9 60.8 67.8 55.4 75.2
Nirav Vasa
EV / EBITDA (x) 27.9 29.7 34.0 30.0 37.3
Research Analyst
PBV (x) 9.1 11.2 12.7 7.8 9.1
RoE (%) 14.8 20.2 20.5 15.0 12.8
RoCE (%) 12.1 17.1 19.8 13.3 10.8 Surbhi Lodha
Dividend yield (%) 0.1 0.1 0.1 0.1 - Research Analyst
Net debt / equity (x) 0.4 0.1 (0.0) 0.3 0.2
Source: Company

Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

Anand Rathi Research India Equities

8 September 2020 Johnson Controls-Hitachi A/C, India – `22bn revenue since FY18, RoICE dips to 11%, from peak 21%

Quick Glance – Financials and Valuations

Fig 1 – Income statement (` m) Fig 2 – Balance sheet (` m)
Year-end: Mar FY16 FY17 FY18 FY19 FY20 Year-end: Mar FY16 FY17 FY18 FY19 FY20
Net revenues 16,405 19,173 21,854 22,413 21,974 Share capital 272 272 272 272 272
Growth (%) 5.3 16.7 7.6 (0.8) (2.0) Net worth 3,640 4,402 5,352 6,130 6,885
Direct costs 10,128 12,198 13,925 14,439 13,974 Debt 1,335 595 127 1,896 1,587
SG&A 5,050 5,297 5,940 6,336 6,278 Minority interest - - - - -
EBITDA 1,227 1,678 1,989 1,638 1,722 DTL / (Assets) (39) (81) (139) (166) (142)
EBITDA margins (%) 7.5 8.7 9.1 7.3 7.8 Capital employed 4,937 4,916 5,340 7,860 8,330
- Depreciation 456 519 529 442 563 Net tangible assets 2,403 2,343 2,222 2,157 3,799
Other income 18 68 74 154 82 Net intangible assets 278 245 208 153 197
Interest expenses 101 44 20 27 50 Goodwill - - - - -
PBT 688 1,183 1,514 1,324 1,191 CWIP (tang. & intang.) 8 15 16 941 65
Effective tax rate (%) 27.4 31.3 33.8 35.1 29.4 Investments (strategic) 12 12 13 12 11
+ Associates / (Minorities) 0 0 0 0 0 Investments (financial) - - - - -
Net income 500 813 1,002 859 835 Current assets (ex cash) 8,458 8,273 9,606 11,662 11,447
Adjusted income 500 813 1,002 859 843 Cash 42 236 358 299 179
WANS 27 27 27 27 27 Current liabilities 6,264 6,208 7,082 7,364 7,368
FDEPS (` / sh) 18.4 29.9 36.8 31.6 30.7 Working capital 2,194 2,065 2,523 4,298 4,079
FDEPS growth (%) -36 63 23 -14 -3 Capital deployed 4,937 4,916 5,340 7,860 8,330
Gross margins (%) 38.3 36.4 36.3 35.6 36.4 Contingent Liabilities 216 252 274 316 355

Fig 3 – Cash-flow statement (` m) Fig 4 – Ratio analysis

Year-end: Mar FY16 FY17 FY18 FY19 FY20 Year-end: Mar FY16 FY17 FY18 FY19 FY20
PBT 772 1,159 1,460 1,196 1,152 P/E (x) 65.9 60.8 67.8 55.4 75.2
+ Non-cash items 456 519 529 442 563 EV / EBITDA (x) 27.9 29.7 34.0 30.0 37.3
Oper. prof. before WC 1,227 1,678 1,989 1,638 1,715 EV / Sales (x) 2.1 2.6 3.1 2.2 2.9
- Incr. / (decr.) in WC (183) 129 (458) (1,775) 219 P/B (x) 9.1 11.2 12.7 7.8 9.1
Others incl. taxes (189) (370) (512) (464) (348) RoE (%) 14.8 20.2 20.5 15.0 12.8
Operating cash-flow 855 1,437 1,019 (601) 1,586 RoCE (%) 12.1 17.1 19.8 13.3 10.8
- Capex (tang. + intang.) (688) (433) (372) (1,247) (1,373) RoIC 12.2 17.6 21.0 14.0 11.2
Free cash-flow 167 1,004 647 (1,848) 214 DPS (` / sh) 1.5 1.5 1.5 1.5 -
Acquisitions Dividend yield (%) 0.1 0.1 0.1 0.1 -
- Div.(incl. buyback & taxes) (41) (41) (41) (41) - Dividend payout (%) - incl. DDT 8.2 5.0 4.1 4.7 -
+ Equity raised (0) - - - - Net debt / equity (x) 0.4 0.1 (0.0) 0.3 0.2
+ Debt raised (60) (740) (469) 1,770 (309) Receivables (days) 62 54 69 73 42
- Fin investments (70) (29) (15) 59 (25) Inventory (days) 110 88 74 90 121
- Misc. (CFI + CFF) (12) 0 (1) 0 1 Payables (days) 93 84 80 85 86
Net cash-flow (16) 194 122 (59) (119) CFO : PAT % 171.1 176.7 101.7 (69.9) 189.9
Source: Company Source: Company

Fig 5 – Price movement Fig 6 – Revenue mix - FY20

(`) Others
3,500 7%
JCHAC Service income
7%
3,000
Home appliances
2,500 5%

2,000

1,500 Commercial Acs

12%
1,000

500
Room Acs
0 69%
Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20
Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Source: Bloomberg Source: Company

Anand Rathi Research 2

8 September 2020 Johnson Controls-Hitachi A/C, India – `22bn revenue since FY18, RoICE dips to 11%, from peak 21%

Key observations: FY20 annual report

 Expands product range in room/commercial ACs: From Apr’19
to Feb’20, JCH’s room ACs grew 19%; its inverter ACs, 34%, before
the effect of Covid-related lockdowns was felt in the peak of summer.
It continued to focus on Indian consumers’ needs and launched
inverter ACs with expandable capacity, which are required in the
extremely hot conditions of North India and humid conditions of the
coastal states. It had 96 SKUs in room ACs, including the launch of
1.25TR models and Takeshi ACs, with 15-metre air-flow abilities.
It also launched new models designed specially to cater to needs of
first-time and mid-segment AC buyers, aimed at penetrating tier-II and
-III towns of India. In commercial ACs, it launched airCloud Pro in
the Indian market. With this, customers can access and control an
entire VRF system centrally, sending smart-phone alerts which can help
trouble-shooting and flexible use/management of an entire VRF AC
system.
Commercial cooling products grew a robust 34% between Apr’19 and
Feb/20 before the effect of Covid-19 was felt. With a global
development centre being developed in Gujarat, its focus remains on
expanding its product range in domestic and commercial room ACs
and can be the key monitorables ahead.

Fig 7 – JCH’s product range across multiple categories

Residential products Commercial products Home appliances
Inverter / fixed-speed ACs Packaged ACs Refrigerators
Window ACs Chillers Air-purifiers
VRF
Space-makers
Source: Company

Anand Rathi Research 3

8 September 2020 Johnson Controls-Hitachi A/C, India – `22bn revenue since FY18, RoICE dips to 11%, from peak 21%

Fig 8 – Product range across each category in which JCH operates

Source: Company

 Since FY16, exports ramped up on lower base: JCH had started

exporting from India from FY16. Its exports registered a 144% CAGR
(on a lower base). It has started exporting to South Asia (Nepal,
Bhutan, Sri Lanka and Maldives), south-east Asia (Indonesia and
Vietnam) and west Asia (the UAE, Qatar, Bahrain, Iraq, Kuwait and
Saudi Arabia).
Its exports of component can be ramped up ahead as JCH already has
a manufacturing base in India and has established a global development
centre (GDC) manned by more than 120 engineers. A favourable
policy expected from the government of India to boost manufacturing
AC components and supply-chain rebalancing measures to implement
a China+1 strategy augur well for its Indian operations.

Anand Rathi Research 4

8 September 2020 Johnson Controls-Hitachi A/C, India – `22bn revenue since FY18, RoICE dips to 11%, from peak 21%

Fig 9 – Exports increased 55% in FY20

(`m)
1,300

975

650

325

FY16

FY17

FY18

FY19

FY20
Exports

Source: Company, Anand Rathi Research

Financial analysis
Revenue stagnates at `22bn for third consecutive year: FY20 revenue
dipped 2% y/y as the impact of the Covid-related lockdowns intensified in
the peak of summer (Mar’20). For Apr’19 to Feb’20, JCH reported 19%
growth in room ACs, and 34% in commercial cooling. Robust growth in
the pre-Covid period of FY20 resulted in flat revenue in commercial and
residential ACs; home appliances declined 21% y/y in FY20.

Fig 10 – Revenue break-up across multiple segments in FY20

(` m) FY19 FY20
Room ACs 15305 15075
Others
Commercial ACs 2665 2651 7%
Service income
Home appliances 1470 1161 7%
Service income 1396 1523 Home appliances
Others 1577 1563 5%

Total 22413 21974

Commercial Acs
Y/Y 12%
Room ACs -2
Commercial ACs -1
Home appliances -21 Room Acs
69%
Service income 9
Others -1
Total -2
Source: Company

EBITDA margin expanded only 50bps on stagnant revenue: The

Anand Rathi Research 5

8 September 2020 Johnson Controls-Hitachi A/C, India – `22bn revenue since FY18, RoICE dips to 11%, from peak 21%

FY20 EBITDA margin expanded 50bps y/y, supported by the 80bp gross-
margin expansion and as other manufacturing costs were 3% lower y/y.

Fig 11 – Major cost heads booked in other manufacturing expenses

(Rs mn) FY16 FY17 FY18 FY19 FY20
Revenue 16,405 19,173 21,854 22,413 21,974
Y/Y (%) 5.3 16.7 7.6 (0.8) (2.0)

Major expenses
Contract labour 422 492 471 507 544
Royalty 343 367 434 440 422
Annual maintenance charges 280 281 289 336 324
Freight and forwarding expenses 706 826 795 824 700
Warranty expenses 242 316 402 431 489

% of revenues
Contract labour 2.6 2.6 2.2 2.3 2.5
Royalty 2.1 1.9 2.0 2.0 1.9
Annual maintenance charges 1.7 1.5 1.3 1.5 1.5
Freight and forwarding expenses 4.3 4.3 3.6 3.7 3.2
Warranty expenses 1.5 1.6 1.8 1.9 2.2
Source: Company

Generates free cash-flows despite challenging times: JCH generated

`214m in free cash-flows in FY20 aided by `1.59bn cash-flows from
operations. NWC was a steady 77 days as the impact of the 31-day rise in
inventory days was negated by receivables days coming down by 30, with
payable days steady at 86.

Fig 12 – Free cash-flow of `214m generated in FY20

(` m) FY16 FY17 FY18 FY19 FY20
CFO 855 1,437 1,019 (601) 1,586
Less: Capex (688) (433) (372) (1,247) (1,373)
Free cash flows 167 1,004 647 (1,848) 214

NWC FY16 FY17 FY18 FY19 FY20

Inventory days 110 88 74 90 121
Receivable days 62 54 69 73 42
Payable days 93 84 80 85 86
NWC days 79 57 63 78 77
Source: Company

Anand Rathi Research 6

8 September 2020 Johnson Controls-Hitachi A/C, India – `22bn revenue since FY18, RoICE dips to 11%, from peak 21%

RoICE of 11.2%, its lowest since FY16. While the company was affected
by unseasonal rainfall in the summer of FY19, the Covid-19 lockdowns
took a toll in the peak summer of FY20. The effect of these was seen in
debt rising from `127m in FY18 to `1.59bn in FY20 for working capital.
The higher working-capital required and shrunken summer sales resulted in
FY19 and FY20 return ratios contracting. The RoCE shrank from 19.8% in
FY18 to a low 10.8% in FY20.

Fig 13 – Return ratios have contracted since FY18

(%)
22

20

18

16

14

12

10
FY16

FY17

FY18

FY19

FY20
ROACE(%) - post tax ROANW(%) ROIC - post tax (%)

Source: Company

Fig 14 – How RoICE has dipped from 21% in FY18 to 11% in FY20
(` m) FY16 FY17 FY18 FY19 FY20
Net worth 3,640 4,402 5,352 6,130 6,885
Loans 1,335 595 127 1,896 1,587
Deferred tax assets (39) (81) (139) (166) (142)
Capital employed 4,937 4,916 5,340 7,860 8,330
Less: Cash / Bank balance (42) (236) (358) (299) (179)
Invested capital 4,895 4,680 4,982 7,562 8,151
Average invested capital 4,681 4,788 4,831 6,272 7,856
EBIT 790 1,227 1,533 1,351 1,241
Tax rate (%) 27 31 34 35 29
RoICE (post-tax) 12.2 17.6 21.0 14.0 11.2
Source: Company

Anand Rathi Research 7

8 September 2020 Johnson Controls-Hitachi A/C, India – `22bn revenue since FY18, RoICE dips to 11%, from peak 21%

Valuation
JCH is not one of the companies we cover. Hence, we do not have detailed
estimates and a rating on the stock. At the CMP of `2,222, it trades
83x/37x its Bloomberg-based EPS of `26.9/59.3 for FY21/FY22. Key
monitorables: (a) reducing inventory stuck with channel partners, (b) pick-
up in demand for residential and commercial air-conditioning on the return
to normal, post-covid and (c) competitive intensity arising from local peers
and MNCs.
Risks
 Unseasonal rainfall in summer
 Slowdown in consumer financing.

Anand Rathi Research 8

Appendix
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