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Decent quarter, marred by one-offs

Crompton’s 1QFY23 revenue grew at a 3-year CAGR of 11% (+77% YoY on a low base and 12% above JMFe) on a consolidated basis led by a) 8% 3-year CAGR in the ECD portfolio b) B2C LED growth of 82% led by battens and panels, and c) consolidation of Butterfly (BGAL) post acquisition. The pumps segment continued to be under pressure while the weak B2B/B2G portfolio offset B2C LED growth. Although Crompton continued to deliver industry leading superior margin performance, EBITDA margin contracted by 300bps QoQ to 11.8% on account of a) higher-than-estimated performance linked payouts to the leadership team (estimated to be INR120-130mn impact in 1Q) b) doubling of advertisement spends YoY and c) expenses attributable to built-in kitchen appliances foray. Adjusting for performance-linked payouts and launch expenses, EBITDA would have been 13%-13.3%. Butterfly Gandhimathi (BGAL) 1QFY23 performance was as per management expectations and integration remains on track. Although the management expects near-term pressure on volume (due to inflation), it will look to stimulate volume by passing on some of the benefits accruing from the recent commodity softening. We maintain BUY with a Sep’23 TP of INR 530, basis 40x Sep’24 EPS.

* 1QFY23 Summary: Consolidated Revenue grew 11% on 3-year CAGR (+77% YoY on low base; +20% QoQ) to INR 18.6bn (12%/ 18% above JMFe/ consensus) led by 8% 3- year CAGR in the ECD segment (+52% YoY) and consolidation of Butterfly acquisition from 30th Mar’22. Within ECD, fans grew by 55% YoY (+10% 3-year CAGR) while Appliances grew by 88% YoY. The Pumps segment continued to be soft and dragged otherwise robust growth in ECD (+62% excluding Pumps). Lighting segment sales declined 1% 3-year CAGR (+58% YoY; -17% QoQ) to INR 2.6bn (1% below JMFe) as strong B2C lighting growth (+82%YoY) was offset by sustained pain in the B2B/B2G portfolio. Gross margin rose 150bps QoQ (-100bps YoY) to 31.4% (30bps above JMFe) on a) calibrated pricing action, b) cash advances paid to secure commodities, c) cost optimisation, and d) product mix. However, EBITDA margin declined by 300bps QoQ largely on account of higher employee cost (+42% QoQ) and other expenses (+21% QoQ) at the standalone level. Adjusting for certain non-recurring costs (estimated to be c.INR120-130mn incentives to the leadership team and new launch-related expenses of c.INR40-50mn), margin would be 13%-13.3% (vs. reported 12%). A&P spends doubled YoY to INR 450mn. EBITDA grew by 5% 3-year CAGR (+76% YoY) to INR 2.2bn (4%/6% below JMFe/consensus). The ECD segment EBIT margin contracted 70bps YoY (-160bps QoQ) while lighting segment EBIT margin contracted 180bps YoY/-530bps QoQ on account of higher corporate costs and advertisement spend. Adjusted PAT was up 1% on 3-year CAGR (+34% YoY) to INR 1.3bn (10%/ 16% below JMFe/ consensus).

* Soft Pumps/ B2G lighting sales pull down overall growth: Demand for pumps continued to be weak as the industry faces slowdown on account of a) 20-25% price hike in the past 18 months to combat inflation, and b) GST rate hike from 12% to 18%. The management expects the industry to remain under pressure for a couple of quarters. ExPumps, ECD revenue grew by 62%YoY. Within lighting, although B2B trade business has started to pick up and is nearing pre-Covid levels, B2G (particularly EESL) remains nonexistent. The management expects B2C business (+82% YoY) to lead growth in lightingin the near term and expects the B2B portfolio to start contributing to growth in a couple of quarters.

* Forays into built-in kitchen appliances; aims for top 3 position: During the quarter, Crompton forayed into the built-in kitchen appliances segment by launching a comprehensive range of 38 models across Chimneys, Gas Hobs, Built-in Ovens & Microwaves and dishwashers. In this INR 22bn industry (chimneys and hobs), which is growing at 10% annually, Crompton is targeting to garner the top 3 position within the next 3 years through a) opening 40+ Crompton Signature Studios in top 10 cities in FY23 b) tie-up with kitchen dealers, retail chains and online channel in another 300 cities, which will represent 90% of the addressable market, and c) providing a meaningful consumer differentiation across products offered. Crompton is confident of maintaining gross margins similar to the present businesses while attaining company level EBITDA margins over the next 3 years.

* Butterfly integration on track; 1QFY23 performance encouraging: Butterfly’s revenue grew 19% on 3-year CAGR basis with robust growth witnessed across categories and regions. After reporting a loss (both EBITDA and PAT) in 4Q22 due to uncertainties related to transition post acquisition and certain provisions made on inventories and expected credit loss, business returned back to profitability with EBITDA at INR 258mn (+30% on 3-year CAGR) and PAT at INR 132mn (+82% 3-year CAGR). The management believes current margins are sustainable and has initiated work on identifying and implementing all synergies between the two businesses. They have already identified opportunities in purchase synergies, cost-reduction programme (similar to Unnati in Crompton), which will aid margin improvement and help generate funds that will be redeployed for future expansion and growth. In 1QFY23, BGAL added 1,000+ new retail outlets and added 100+ new direct channel partners. After the open offer, Crompton now holds 81% stake in BGAL.

* Marginal cut in estimates; Maintain BUY: We cut our FY23/24 estimates by 1%/4% respectively to reflect 1QFY23 performance and interest expense on borrowings. We introduce FY25 estimates and value Crompton at 40x Sep’24 EPS to arrive at a Sep’23 TP of INR 530 (earlier Mar’23 TP of INR 520). We maintain BUY on Crompton given reasonable valuation (30.1xFY24EPS). Key Risk: Slower-than-expected recovery and difficulty in BGAL integration.

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