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Mixed performance; category expansion to strengthen portfolio

* Q1FY23 standalone revenues came in 6% below our estimates, with ECD/Lighting missing by 5%/12%. Despite commodity headwinds, standalone GM expanded by 100bps qoq to 30.7%. (Note that consolidated numbers include first full quarter of Butterfly consolidation.)

* Volume growth (ex-pumps) was 5% on a 3-yr CAGR basis, partially impacted by the inflationary scenario. Higher employee costs, including non-recurring items, suppressed EBITDA. Butterfly had surprised positively on revenue growth and operational fronts.

* The company has entered into the built-in kitchen appliances category to further strengthen its presence in the kitchen products space after the acquisition of Butterfly. It aims to achieve No. 3 position in Chimney+Hobs within three years.

* We have raised FY23-25 revenue/EBITDA estimates by 1-2% as we incorporate category expansion. However, higher depreciation charge has led to 1-6% EPS cut over the same period. Retain Buy with an unchanged TP of Rs435 (Jun’23E)

Sharp rise in employee expenses affects EBITDA: Standalone revenue, at Rs16.1bn, was up 53% yoy (3-yr CAGR: 6%). The ECD and Lighting segments recorded 3-yr revenue CAGRs of 8% and -1%, respectively. Butterfly’s revenues grew by 85% yoy, driven by cookers, stoves and mixers. Standalone EBITDA was up 58% yoy to Rs1.9bn on a low base, while EBITDA margin stood at 12.0% (-247bps qoq). Gross margins saw a 100bps qoq expansion but a contraction of 150bps yoy. Employee expenses rose meaningfully by 34% yoy and 42% qoq, 38% higher than estimates. Higher employee costs were mainly due to some non-recurring items, which included: 1) higher-than-provisioned incentive payouts; 2) annual increments; and 3) higher employee engagement activities. Standalone PAT was Rs1.3bn vs. our estimate of Rs1.7bn.

Outlook: With the launch of built-in kitchen appliances, Crompton announced the muchawaited category expansion. The company is targeting to become the No. 3 player (~10% market share) in Chimneys and Hob within three years, backed by differentiated product offerings and EBO-led distribution expansion to start with. ECD revenue growth remained impacted by sub-par performance from pumps and an inflationary environment that suppressed volume growth. If commodity prices stay at current levels, we believe that the key players will pass on the benefits to consumers to push volumes. However, management anticipates a lag in reflecting the volume increase from benign commodity prices. It remains confident about margin delivery despite increased investments in brand, R&D and distribution. The delay in Lighting’s revenue recovery continued. Key risks: demand moderation, market share losses, slow execution of new product launches, supply-chain disruptions, longer-thanexpected integration time and profit delivery in BGAL, and sustained commodity inflation..

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