Published on 5/06/2019 10:51:03 AM | Source: HDFC Securities Ltd

Buy Crompton Greaves Consumer Ltd For The Target Rs.300 - HDFC Securities

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Better days ahead

Crompton’s 4Q performance was mixed with miss on ECD margins (challenging quarter) but beat in lighting margins (recovered with various initiatives). We expect FY20 performance to improve led by (1) Healthy growth for ECD (new launches), (2) Lighting sustaining healthy margins (200bps YoY expansion in FY20E) and (3) GTM benefits kicking-in. Stock was flat in FY19 due to lack of fireworks in their performance. We expect a re-rating in the stock in FY20 (led by outperformance vs. peers). We value at 35x on Mar-21 EPS, arriving at a TP of Rs 300.



* Net revenues grew by 7.2% (13% in 4QFY18, 9.8% in 3QFY19) vs. exp of 9.8%. Management has not witnessed a slowdown in demand, moderate growth was on account of seasonality impact.

* ECD grew at a healthy pace of 10% (16% in 3QFY19, 10% in 4QFY18) despite the impact from extended winter. Fans, Pump and Air Coolers were the key drivers of growth. Co has gained market share in fans, retail value market share stood at 25.1/23.8% in 4Q/FY19.

* Lighting was up by 1.4% (-2.4% in 3QFY19, 21% in 4QFY18), impacted by price erosion in LED lamps and decline in conventional lighting. Focus on accelerating growth by (1) Distribution leveraging for B-C, (2) New product launches (anti-bacterial lamp, kills upto 85% of bacteria) and (3) Strengthening core for B-B (separate national sales team to focus with more depth).

* GM declined by 64bps (inline) to 31% (+200/-135bps in 4QFY18/3QFY19) led by commodity inflation and delay in price hike. Employee/other expenses up by 9/6%. EBITDA margin dipped by 64bps to 14% (exp 14.8%).

* ECD EBIT margin was down by 220bps to 19.5%, after 6 quarters of consistent expansion. Margin contraction on account of higher commodity inflation and delay in price hike (extended winter impacted trade sentiments). We expect margins to improve in FY20 led by favorable product mix, cost rationalisation and price hike.

* Lighting EBIT margin was up by 40/260bps YoY/QoQ to 11.5% (exp 9.8%). Co has taken various initiatives (sourcing of raw material, product mix, etc) in FY19 to recover the margin to sustainable level (low double digit). We model 200bps margin expansion in FY20.

* APAT (excluding tax written back) was up by 8% to Rs 1,118mn (exp Rs 1,201mn).



Crompton has been focusing on building long term structural platform (distribution) rather than reaping low hanging fruits. Management is focusing on (1) Strengthening leadership in fans (NPD for wider price points, offering 5 year warranty vs. 1-2 year by peers), (2) Leveraging distribution (GTM benefits), (3) Brand leveraging via entering in newer categories and (4) Cost reduction and product mix to drive margins. We model 20% EPS CAGR over FY19P-21E. Maintain BUY.


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