Inflation spells double trouble for Whirlpool

Inflation spells double trouble for Whirlpool

Whirlpool of India Ltd reported a 41.8% rise in operating profit on the back of a 19% increase in revenue. The company’s shares, which had underperformed the market in the past few months, rose by 5% after the results were announced.

In the September quarter, profit was more or less flat at year-ago levels despite a 20% increase in revenue, as margins fell by about 150 basis points. On the contrary, margins rose by about 120 basis points on a year-on-year basis last quarter, thanks to the price increases taken by the firm in September and December.

Unit volume growth stood at 13% last quarter. Volume and revenue growth has reduced considerably compared with the first half of 2010.

According to Shantanu Dasgupta, vice-president (corporate affairs and strategy) for Asia South at Whirlpool, volume growth has reduced since the second half of 2010 owing to inflationary pressures on its consumers’ wallets. About 70% of the sales of washing machines and refrigerators in India are in the entry-level segment, which includes single-door refrigerators with a capacity of less than 200 litres and semi-automatic washing machines.

Due to inflation, entry-level consumers are putting off purchases of white goods. So while replacement demand and the offtake of premium products is strong, it’s notenough to offset the sluggish trend in the entry-level segment. Dasgupta says volume growth is no longer the name of the game; the focus now is maintaining profitable growth. Arvind Uppal, president (Asia-Pacific) at Whirlpool, says in a press release: “We are cautiously optimistic on maintaining profitable growth and have implemented actions to counter the unprecedented inflation in commodities."

The stock markets have, to some extent, adjusted to the reality of lower volume growth for the company. At first, impressed by the strong volume growth in FY10, the company’s shares had risen sharply and traded at nearly 30 times trailing earnings as recently as October. They have now corrected to around 18 times trailing earnings, which, again, doesn’t leave much margin for error. The company’s operating profit has grown by 18.7% in the first nine months of this fiscal. Since high inflation is not only increasing costs, but also affecting consumer demand, it would be a challenge to increase profits at a higher rate going forward.