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Butterfly aids revenue growth YoY

Crompton Greaves Consumer Electricals Ltd. (Crompton) is a Mumbai-based electrical equipment company. Its products include lighting and electrical consumer durables such as LED lighting and fans; pumps; and household appliances such as water heaters, air coolers, and kitchen appliances.

* Crompton’s consolidated revenue grew ~22.7% YoY (-8.8% QoQ) to Rs. 1,700cr in Q2FY23, aided by revenue from recently acquired Butterfly Gandhimathi Appliances (“Butterfly”) amid weakening consumer demand.

* EBITDA stood at Rs. 211cr in Q2FY23 vs. Rs. 231cr in Q2FY22. EBITDA margin narrowed 430bps YoY to 12.4% due to increased costs related to brand building and inflation.

* The management expects a higher inventory build-up of fans before summer and Butterfly’s restructuring to support revenue growth in the near term. Crompton’s continuous investments in advertisement & promotions(A&P), R&D, manufacturing excellence, and alternate channels have contributed to increasing its market share. We upgrade our rating to ACCUMULATE on the stock with a revised target price of Rs. 400 based on 32x FY24E adjusted EPS.

Lighting business and BEE transition drag performance

Crompton’s revenue in Q2FY23 rose 22.7% YoY (-8.8% QoQ) to Rs. 1,700cr (Rs. 1,385cr in Q2FY22), driven by the consolidation of Butterfly’s revenue. This is despite higher inflation and poor core performance. The electrical consumer durables (ECD) segment’s revenue fell 3.1% YoY (21.2% QoQ), impacted by slow channel filing in fans driven by the Bureau of Energy Efficiency (BEE) transition. The appliance business grew 12%, mixer grinder portfolio 15% and geysers 6% YoY during the quarter. Lighting performance was poor by 7% YoY, led by a sharp 35% YoY fall in the conventional lighting business and flat growth in the B2C LED business. Butterfly’s revenue declined 5% YoY to Rs. 368cr in the quarter due to restructuring in channel mix in favour of retail vs online. At the same time, Butterfly’s revenue increased by 20% YoY in H1FY23.

Margins maintained despite inflation

EBITDA was Rs. 211cr in Q2FY23 vs. Rs. 231cr in Q2FY22. EBITDA margin contracted 430bps YoY to 12.4% due to strategic investments in brand building and high inflation. Gross margin remained flat at 32.1%, owing to cost reduction strategies and product mix improvement. Management expects to maintain the gross margin at the current level while investing the cost savings in the business. Crompton reported a 17.7% YoY fall in profit after tax to Rs. 131cr in Q2FY23 vs. Rs. 159cr in Q2FY22.

Key concall highlights

* In Q2FY23, Crompton opened 20+ signature studios in the category of built-in kitchen appliances in 10 metro cities, receiving strong positive responses.

* Alternate channel’s contribution to total sales grew by 26% YoY, with rural and canteen, stores and department (CSD) channels leading the growth by 45% QoQ.

Valuation

Despite the slowdown in fans business, market share in premium fans increased sequentially. Specialty pumps business, being price sensitive, managed to grow 20% YoY. The management expects healthier margins in upcoming quarters as inflation levels off. Crompton is well poised to drive future topline growth and market share with ongoing innovation in butterfly and Crompton brands. We upgrade to ACCUMULATE with a revised target price of Rs. 400 based on 32x FY24E adjusted EPS.

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