Hitachi Home Life Solutions

At The Current Market Price, Its P/E Of 10 Exceeds The Average For Past 5 Years

WITH the recovery in demand for consumer durables, Hitachi Home Life Solutions (HHLS), Rs 400-crore subsidiary of Japan's Hitachi Appliance, also demonstrated a revival in its financial performance during the last two quarters. The stock outperformed both the Sensex and ET Consumer Durables index as its market cap has more than tripled since 2009 against a 70% gain in Sensex. The stock reached its all time high recently after the company reported a 61% y-o-y jump in its topline for the quarter ending Decmeber 2009. 

   Hitachi manufactures a range of home and commercial air conditioners. The company is also in the business of trading VRF (Virtual Routing and Forwarding) systems, rooftops, chillers and refrigerators. The company is also engaged into marketing a wide range of products including storage systems, information and physical security products, nuclear medical equipments, power and industrial equipments, and plasma & LCD TVs. The company's brand positioning has strengthened in the past couple of years backed by extensive advertising and brand promotion. 

   In the past five years, Hitachi topline has grown at a compounded annual growth rate (CAGR) of 18% while the net profit has expanded at a rate of 38% during the period. The profitability has showed a rebound in the latest two quarters when considered on an year-end basis. After a decline of 1% y-o-y for the quarter ending March 2009, the revenue showed a rebound in the past three quarters. While the topline has more than doubled in the quarter ending December 2009 compared to last year, the operating and net profit showed a rebound from an average loss of about Rs 4 crore each in the corresponding quarter last year. 

   The company's performance in the first two quarters of FY10 was also affected by an increase in the inventories. In the past five financial years, its inventories have grown at an alarming CAGR of 85%. The company has, however, has showed a healthy growth of 57% in the cash flow from operating activities during the period compounded annually. 

   The company now has plans to push its products in tier-II and tier-III towns and has launched a new line of air-conditioners branded Kaze (Japanese for coolest breeze). The brand is being launched in about 60 towns across the country. Hitachi is targeting a market share of 5-6% in air-conditioners and refrigerators across the country, without giving up on its premium brand status. 

   While the stock is trading near its all-time high, at the current market price, its P/E ratio stands at around 10, which is higher than its average for the past five years and the valuation looks overstretched.