Whirlpool of India Limited MANAGEMENT DISCUSSION AND ANALYSIS REPORT Industry Structure and Developments: The home appliances industry saw a modest revival of unit growth in 2014-15 after a prolonged period of flat to declining volumes, going back to FY 2012. The two peak selling seasons - summer and Diwali - fared better than brceding years, and this translated to volume growth in all appliance categories for the year, barring Microwaves which remained flat. However, our understanding suggests that this growth has not been secular and specific, category segments, channels and geographies grew ahead of others. Therefore the business lever that continues to cause highest concern is consumer demand. We believe that current demand is being fuelled largely by replacement buyers and industry will see robust and sustainable growth only when the significantly larger slice of primary or first time buyers come in to make purchases that have been deferred due to economic factors. The second and third quarters of the last financial year saw supply-side benefits such as a sharp decline in oil prices, reduction of commodity prices, moderation in inflation, modest reduction in interest rates, and stability of currency fluctuations. However, some of these began to recede as the year closed. With oil prices rising, it is not unlikely that we will see a return of growth inhibiting factors such as inflation and high interest rates. A weaker rupee cannot be ruled out either. All these will adversely impact cost of manufacture as well as buying behaviour. That said, we are cautiously optimistic that 2015-16 will be a better year than the brvious and plan to grow in all appliance categories we are brsent in. The basic structure of the industry has not seen significant changes. The Air Conditioner and Microwave categories are highly fragmented due to a proliferation of brands in these categories. Air Conditioners are seeing greater technology changes, inverter technology being a case in point, which is now 10% of the split air conditioner market, and growing. Consumer demand for Microwaves has declined with a shift in brference to induction hobs. Water Purifiers has seen a huge increase in the number of players and is seeing a higher throughput in retail. The fact that the market leaders in the segment are making changes in their business model and placing higher emphasis on retail is an indication that this is fast becoming a category for mainstream retail. The number of imported offerings in the brmium end across all categories has seen steady increase. The enabling factor is Free Trade Agreements that India has entered with Thailand, South Korea and ASEAN, and brands with manufacturing base there are able to bring in such products with relative ease. Whirlpool's Built In business, operating at the super brmium price point, is seizing the niche opportunity it brsents and growing its business quarter after quarter. This business will boom when growth in brmium housing returns. Outlook and Opportunities: Demand in the short term will be modest but long term demand for appliances, given the low levels of ownership, remains secure. It is the long term opportunity that has attracted a number of overseas brands to enter India, intensifying the battle for the consumer's share of mind and wallet. Home appliance is still an urban notion. Consumption is brdominantly in the top 50 urban centers. However, appliance brsence is expanding to smaller urban centers, led by brands who also market televisions. Modern retail formats are also setting up shop in towns beyond state capitals, recognition that markets are sources of future growth. Whirlpool too is working on expanding its brand brsence in Tier 2 and 3 towns. Outlook on Threats, Risks and Concerns: Revival of growth is the single largest concern for the industry. It is therefore imperative that GDP growth returns to the 8%+ level, creates surplus income in the hands of consumers, which is a critical factor for discretionary businesses such as ours to thrive. Given the high import dependence for materials and components, volatility in currency poses a risk. The recent weakening of the rupee is thus a concern. Rise in oil prices may reverse the softening of commodity prices and lead to price increase. The regulatory framework governing appliances has become tighter. Energy efficiency for Direct Cool (or single door) refrigerators, which was voluntary until December 2014, has become mandatory from January 2015. Energy norms for Air Conditioners and Frost Free refrigerators will get tougher in January 2016. e-Waste Rules, which came into effect in May 2012, is being revised to make producers more accountable. Finally, CSR is now mandatory for companies such as ours. All these have added to cost, both direct and indirect. The only legislation that could brsent a cost opportunity is GST, targeted for implementation in April 2016. More FTA's are on the anvil, e.g. with Australia, Japan and EU. India is actively participating in the Regional Combrhensive Economic Partnership (RCEP) agreement, a formation of 16-member countries comprising of 10 ASEAN members and its six FTA partners namely India, China, Japan, Korea, Australia and New Zealand. This may alter the contours of trade for our industry and company. However, India is neither part of Trans Pacific Partnership (TPP), nor Trans-Atlantic Trade and Investment Partnership (TTIP) between US and EU. The TPP in particular, led by US, which is a formation of 12 countries including countries in RCEP and ones with which India is negotiating FTA's, such as Japan and Australia, New Zealand and Peru, is likely to lead to trade diversion and challenge India's industry in many ways. Of high concern is the establishment of a more stringent and demanding framework of rules of trade engagement. How this will impact home appliances is as yet unknown. The government is in continuous dialogue with industry through industry associations and think-tanks and the message being broadcast is that Indian industry needs to gear up to meet the challenges that would emerge from these mega trade pacts. Segment wise Performance, Internal Controls, and Financial Performance The company operates in only one segment of White Goods. Gross domestic sales in value terms grew by 19.6% and overall sales grew by 19.3%. Internal Control Systems and Adequacy The Company has in place adequate internal control systems and procedures commensurate with the size and nature of business. These procedures are designed to ensure that: • all assets and resources are acquired economically, used efficiently and are adequately protected; • Significant financial, managerial and operating information is accurate, reliable and is provided timely; and • All internal policies and statutory guidelines are complied with. The composition and competencies of the audit team and effectiveness of internal controls is continuously reviewed by the Audit Committee. The scope of internal audit extends to all functions and locations of the company. Financial Performance & Human Resources Developments The financial performance & developments in human resources and industrial relations of the Company has been given separately in the Directors' Report. |