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Strong investments and growth in Rural and ecommerce channels to continue

Crompton continued its focus on rural and e-commerce channels (which doubled revenue contribution from 4% to 9%, YoY). We believe the investments in these two channels will lead to market shares gains for the company. We also note it has stepped-up investments in brand building and R&D. Innovative and premium products are key growth drivers for the company. Working capital investments are likely to normalize in next 2-3 quarters with resumption of business activities.

We model Crompton to report PAT CAGR of 7.5% over FY21-23E and remain structurally positive on it given its strong investments in brand building, distribution expansion, and steady launch of premium products. Maintain ADD with a DCF-based target price of Rs504 (44x FY23E; Earlier TP: Rs490).

* Price hikes to pass on additional costs: Due to steep increase in commodity prices, the company has hiked prices in Apr’21 and May’21, across segments. We believe pick-up in demand in June’21 signals acceptance of price hikes by the market.

* Improved product mix and cost-saving measures: The company focused on improving the product mix (share of premium and decorative fans increased from 11% in FY20 to ~17% in FY21 in total fans revenues). It also increased cost saving measures under Project Unnati which helped save Rs380mn costs in Q1FY22.

* Re-commencement of investments: The company revamped its key investment programs which were postponed due to covid. It increased its spends in advertisement, R&D, new product development and long term sourcing. The investments in rural markets and e-commerce were also stepped up.

* Increased contribution from rural and e-commerce: In Q1FY22, 9% of business was contributed from rural and e-commerce channels, up from 4% in Q1FY21. The rural channel registered strong revenue growth of 195% YoY.

* Steady launch of new products: Despite lockdown, the company continued to launch innovative products across segments. It is working on energy efficient pumps, which can reduce investments for the customers.

* Increase in distribution expansion: Crompton focused on improving the reach of its products during the quarter expanding reach by 4%. There was a consistent market share growth in modern trade and ecommerce. It has also done investments in technology to track secondary sales (~80% currently) from the dealers. It believes there is no significant change in channel inventory levels.

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