I agree with some points made by you here regarding low margins and cash flow conversions.
Traditionally white goods business is of low margins due to very high competition from marque brands in the market and air conditioners are no different.
The few points I would like to make are
- AC penetration in India is around 8-10%.
- There is strong tailwind and runway for AC companies as India’s hot weather is here to stay due to various reasons. Penetration will go up as affordability increases.
- Over last 10 years the company is able to increase sales from 600r to 2200cr, with capex of 600cr. Going forward as the company achieves critical mass in terms of sales, the asset turns will improve further and more sales will be done from existing asset base.
- The company has come out with VRF technology which gives it good competitive advantage.
This company cannot be valued on traditional PE multiple valuation models. Here one needs to value it on Market cap to sales. Margins will improve over time and that in turn will improve cash flows and low capex requirements will improve return ratios going forward.
Disc: Invested