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Surprises continue; market share story intact

Crompton continued its strong run in 3QFY21 as revenue/EBITDA grew by 26/46% YoY (HSIE 19/32%). ECD saw 32% YoY broad-based growth, as Fans/Pumps/Geysers posted 36/19/49% YoY growth. Crompton saw market share gains across its portfolio, share gain in fans by 1% YoY. Lighting sustained recovery, B-C clocked 13% volume growth while B-B remained a laggard. Consistent focus on distribution reach (mainly in rural), cost optimisation, and product innovation is driving overall performance. EBITDA margin was up >200bps YoY despite RM inflation, as cost control, product mix, and oplev supported margin. We expect earnings momentum to sustain in the coming quarters too. We increase EPS by 6/4% for FY22/23. We value Crompton at 40x P/E on Mar-23E EPS to derive a TP of Rs 460. Maintain BUY.

* ECD-led beat in revenue: Revenue grew by 26% YoY (+4% in 3QFY20 and +13% in 2QFY21), beating our expectation of 19% YoY growth. ECD revenue was up by 32% YoY (+11% in 3QFY20 and +32% in 2QFY21). Lighting revenue was up by 10% YoY (-11% in 3QFY20 and -2% in 2QFY21). ECD saw broad-based growth while Lighting B-C was strong (13% growth) with weak B-B. E-com and MT grew by >50% YoY while rural grew by 88% YoY.

* Robust margin expansion: GM expanded by 13bps YoY (+21bps in 3QFY20 and+106bps in 2QFY21) vs expectation of 25bps YoY expansion. Employee/Other expenses grew by 20/9% YoY as operations returned to normal for the company. EBITDA margin expanded by 206bps YoY to 14.8% (+54bps in 3QFY20 and 373bps in 2QFY21). EBITDA grew by 46% YoY (HSIE 32%).

* Lighting margin recovery sustained: EBIT margins were healthy for Lighting with an expansion of 539bps YoY (-198bps in 3QFY20 and +651bps in 2QFY21) while ECD margin remained flat YoY (+119bps in 3QFY20 and +182bps in 2QFY21). Price stability in Lighting supported margins. However, ECD margins were impacted by the sharp increase in commodity inflation. PBT clocked 46% YoY growth while PAT declined by 6% YoY due to tax refund in the base quarter.

* Concall takeaways: (1) Capacity utilisation is 30-40% higher YoY; (2) secondary data indicated no inventory buildup in the channel; (3) Crompton took a 5-8% price hike in ECD due to commodity inflation; (4) the company intends to restore ECD margin to industry-leading level; (5) several players including Crompton announced a 5% price hike in B-C Lighting in Jan’2021; (6) premium fans saw 51% YoY growth.

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