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Strong growth momentum in ECD continues

Balance Sheet strengthens further

* CROMPTON’s topline came in ~6% higher than our estimate. The beat was driven by higher revenue growth in the ECD segment, with growth across Fans, Pumps, and Appliances. Margin in the Lighting segment continued to revive and stood at double-digits for the third consecutive quarter, with sequential expansion owing to sustained volume and value growth, coupled with cost rationalization. While the management does not expect the current margin in Lighting (~15% in 4QFY21) to sustain, a lower double-digit margin is achievable. It gained market share in Fans and continued its volume growth in the B2C Lighting category (+23% YoY) in 4QFY21.

* With commodity costs rising sequentially, the management is addressing the same via: a) Product premiumization, b) cost savings (INR600m savings in 4QFY21), and c) price hikes. It has raised prices by 10-12% across categories over Jan-May’21, which should help mitigate margin risks.

* Its Balance Sheet has improved further, with a net cash position of ~INR9b (v/s INR7.5b/INR2.4b in 1HFY21/FY20). Efficient working capital management has led to strong cash conversion, with FCF of ~INR8b in FY21 (v/s INR3.8b in FY20). While the demand momentum was strong till the end of Mar’21, the second COVID wave has led to disruption in offtake from midApr’21 onwards. Factoring the same, we have reduced our FY22E/FY23E EPS by 9%/5%. We maintain our Buy rating with a TP of INR460/share (40x FY23E EPS).

Sustenance of double-digit margin in Lighting segment surprises positively

* 4QFY21 snapshot: Revenue grew 49% YoY to INR15.2b and was 5.6% ahead of our estimate. Two-year revenue CAGR stood strong at 12%. EBITDA grew 62% to INR2.2b and was in line with our estimate. EBITDA margin expanded 120bp YoY to 14.8%. Adjusted PAT grew 70% to INR1.7b and was in line with our estimate. The company had a tax write-back of INR767m. Thus, reported PAT grew 147% YoY to INR2.5b and was 48% ahead of our expectation.

* FY21 snapshot: Revenue grew 5% YoY to INR47.5b. EBITDA came in at INR7.1b, up 18% YoY. EBITDA margin stood at 14.8%, up 160bp YoY. Adjusted PAT stood at INR5.2b, up 21% YoY.

* Segmental snapshot: a) ECD | 4QFY21: Revenue grew 61% YoY to INR11.9b. ECD margin came in at 18.1% (-190bp YoY). FY21: Revenue stood at INR37.6b (+11% YoY), with margin at 19.7% (-20bp YoY). b) Lighting | 4QFY21: Revenue grew 16% YoY to INR3.2b. Lighting margin came in at 15.4%. FY21: Revenue stood at INR9.9b (-12% YoY), with margin at 11.7% (v/s 6.1% in FY20).

Key highlights from the management commentary

* Fans grew 59% YoY in 4QFY21 (Jan-Feb’21: 29% YoY), driven by Premium Fans (+76% YoY) and Premium Decorative Fans (+72% YoY). CROMPTON gained 1% market share on a YTD basis. It has increased its reach in Fans by 3.3% on a YTD basis, with the brand now available in ~55% of total outlets. Pumps grew 61% YoY in 4QFY21 (Jan-Feb’21: ~18% YoY), with Residential/Agricultural Pumps growing 64%/53% YoY in value terms.

* The Appliances business continues to grow exponentially at 74% YoY (JanFeb’21: 40% YoY) driven by core categories – Air Cooler (+74%), Mixer Grinder (+81%), Geysers (+87%), and Iron (+86%).

* While CROMPTON has taken a 10-12% price increase across categories over JanMay’21, it has only covered 50-60% of commodity cost inflation, as commodity costs are up ~20% during the same period. Hence, the management expects margin pressure over the next two quarters.

* Market share across various categories stood at: Fans and Residential Pumps: 27-28%, B2C LED: 8-10%, Water Heaters: 15%, and Mixer Grinder and Air Coolers: single-digit.

Valuation and view

* CROMPTON has consolidated its position in Fans and Pumps, and has become the number two player in the Water Heaters segment. Two-year revenue CAGR stood at 12% in 4QFY21 v/s 10% for HAVL, indicating strong performance. With its strong distribution network, we expect CROMPTON to capitalize on pent up demand arising post lifting of lockdown restrictions. Factoring in disruption in demand from mid-Apr’21 onwards, we have reduced our FY22E/FY23E EPS by 9%/5%. Maintain Buy with a TP of INR460 per share (40x FY23E EPS).

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