LG Electronics' first quarterly results post-listing reveals a 27.7% drop in Ebitda, impacted by commodity costs and promotional expenses. Yet, it commands a high valuation, possibly driven by the absence of alternative pure-play consumer durable stocks.
LG Electronics' first quarterly results post-listing reveals a 27.7% drop in Ebitda, impacted by commodity costs and promotional expenses. Yet, it commands a high valuation, possibly driven by the absence of alternative pure-play consumer durable stocks.
The maiden quarterly result of LG Electronics India Ltd after it listed in October was nothing close to electrifying. Ebitda fell 27.7% year-on-year to ₹548 crore in the September quarter (Q2FY26) and the margin contracted 350 basis points (bps) to 8.9%.
Profitability was marred by commodity cost inflation. Raw material costs increased to 70.6% of sales from 68.2% year-on-year and sales promotion expenses were higher. This led to steep earnings per share cuts by brokerages.
Revenue grew 1% year-on-year to ₹6,174 crore. Even so, this was better than industry peers that reported revenue declining in Q2. LG also gained market share, said Centrum Broking.
The implementation timeline of GST 2.0 weighed on LG's Q2 result. LG raised prices by 1.5%-2% for refrigerators and washing machines, which together accounted for 48% of its sales in FY25. This should ensure that LG returns to a double-digit Ebitda margin. The demand outlook for H2FY26 is positive, led by the GST rate cut and improved customer sentiment aided by the wedding season, the management said.
Currently, LG's valuation is demanding, considering a muted Q2. The stock is up 40% from its public offer sale price of ₹1,140. It trades at a high absolute valuation of 40x P/E, based on Bloomberg consensus estimates for FY27.
The absence of alternative pure-play consumer durable stocks could be one factor driving this. In other words, "there is no alternative (TINA)" may be at play. No other listed entity in India is present across home appliances and home entertainment with clear focus only on consumer durables and market leadership in most products.
Rivals' disadvantage
Voltas Ltd and Blue Star Ltd have exposure to electromechanical project divisions. This puts them a disadvantage to LG. This business has lumpy and intensive working capital requirements, so asset turnover tends to be lower. Also, the EBIT margin in this business is not significantly higher than that of the consumer durable business, which could cap RoCE prospects.
Except for air-conditioners, Voltas does not have 100% ownership of the home appliances business, which is housed in Voltbek, a joint venture with Turkey's Beko wherein it has a 49% stake.
The other competitor, Whirlpool of India Ltd, is a smaller-sized business (just about one-third of LG, based on FY25 revenue) with a low Ebitda margin. Additionally, the US parent company is looking to sell a majority stake in the Indian subsidiary.
LG is the only company that has managed an almost double-digit Ebitda margin in the three years to FY25. Product innovation has been LG's strength that comes from its parentage.
But this comes at a cost as the royalty that LG pays as a percentage of revenue has increased from 1.5% in FY22 to 1.9% in FY25. This is almost double of what Whirlpool India pays its US parent as royalty, which remained at about 1% of revenue over the three years to FY25. Any further increase in royalty could be a potential downside risk for LG.
Another monitorable is LG's parent company's 85% stakeholding in the Indian entity. LG's parent will have to bring down its stake to 75% through even more share sales over three years to comply with listing norms. In that scenario, a temporary over-supply of shares could cap the stock's near-term price gains.