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B2C business continues strong growth momentum with market share gains; maintain BUY

Our view

1Q saw strong growth across B2C product categories, while B2B and B2G continuing to face headwinds. On geographical front, North and West recovered first, while East and South were particularly weak. Company has continued with its A&P investments despite demand challenges on back of second wave of pandemic. Company’s focus on distribution and technology has led to improved reach and better tracking of secondary sales through ERP. Sales through E‐comm and modern trade have grown exponentially. 

Crompton’s improving efficiencies, R&D capabilities, increased brand investments and strong distribution presence across channels with increasing investments in rural areas bodes well for continued market share gains. We expect strong growth momentum to continue in B2C followed by gradual recovery in B2B business from 2HFY22; furthermore, we expect higher operating leverage and increased efficiencies to drive higher earnings growth. We build in FY21‐24E Revenue/EBITDA/PAT CAGR of 13%/13%/9% and roll forward valuations to FY24E to arrive at our PT of Rs578 valuing the company at 45x FY24EPS, a 20% discount to our target multiple on Havells and maintain our BUY rating.  

Result Highlights

* Quarter Summary – ECD and B2C lighting saw broad based growth across all product categories; while B2B and B2G lighting continue to face slow order pick up by Govt. Institutions. Gross margin contracted on yoy basis, however sequentially it has improved despite adverse commodity prices.   

* ECD – ECD continues with its strong growth momentum registering 48% yoy growth. Strong performance was aided by favourable base, 63% growth in Fans driven by premium and decorative Fans and exponential growth in Appliances.  

* Market share & Channel performance – Crompton continues to gain market share in Fans (+1%) to 27%. E‐commerce and modern retail continue to grow exponentially delivering 149% yoy growth. Rural channel grew 195% yoy given increase in reach.

* Working capital and operating cashflow – Operating cash flow has been negative for the quarter on back of higher inventory & advances for securing commodity at lower prices. Company continues to maintain healthy balance sheet enabling them to grow faster than industry.  

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