Lighting margin to rebound over next 2 quarters
* Below estimate operating performance:
Sales grew 8% YoY to INR10b, below our estimate of INR11b due to weak performance in the Lighting segment (-4% YoY), whereas Electrical Consumer Durables segment continues to deliver in-line growth (+15% YoY). EBITDA registered marginal growth of 3% YoY to INR1.2b. Margin compressed 70bp YoY to 11.9% on weak margins in the Lighting division (EBIT margins of 6.3% v/s 12.6% in 2QFY18). Net profit grew 9% YoY to INR0.8b, ahead of our estimate of INR0.7b supported by higher-than-estimated Other Income. For 1HFY19, Sales/EBIDTA/PAT grew 11.1%/16%/19%, respectively, and for 2H we expect Sales/EBIDTA/Pat growth of 10%/10%/11%, respectively.
* Margin compression due to pricing and cost pressure in lighting segment:
Lighting business, which contributed 31% to revenue (v/s 35% in 2QFY18), saw 630bp margin decline YoY to 6.3%. Drop in Lighting margin was on account of price erosion in LEDs and due to cost pressure on account of INR depreciation. Consumer Durables, which accounted for 69% of revenue (v/s 65% in 2QFY18), registered 110bp margin expansion to 18.9%. Ad spends for 2QFY19 stood at INR10m.
* Key concall highlights.
(1) There was price erosion of 10-12% in the Lighting segment along with cost pressure due to foreign exchange variation, (2) Plan is to restore margins in the Lighting segment to double-digit over the next two quarters, (3) Price hike was taken Oct’18 onwards in the Lighting segment in order to increase profitability, (4) Plans to increase insourcing of Lighting products with an intent to improve quality and service.
* Valuation and view:
We like CROMPTON for its strong product portfolio, established brand, market leadership, wide distribution network, and robust RoE/RoCE profile. We maintain our BUY rating, with a TP of INR260 (35x FY20E EPS, in line with its historical P/E multiple since listing.
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