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Buy Crompton Greaves Consumer Electricals Ltd For Target Rs.504

Crompton has largely maintained its profitability in a tough year (FY22), maintaining healthy revenue growth and market shares in almost all segments. Its timely price hikes, improvement in revenue mix and cost-saving initiatives (Rs2.03bn via project Unnati) were chief reasons for retaining profitability. While ECD business grew in mid-teens during the year, decline in B2G lighting dragged the overall lighting revenue growth. The company now commands all-time high market share in fans. Further, rural channel growth of 182% YoY in FY22 indicates strong returns on its channel expansion investments. While the integration of BGMAL is largely on-track, we model acquisition of BGMAL to be earnings accretive FY24E onwards. We model the company to report earnings CAGR of 4% over FY22-24E and remain structurally positive on Crompton given its strong investments in brand building and distribution expansion. We maintain our BUY rating on the stock with DCF-based target price of Rs504.

* Five-dimensional growth strategy: Crompton has identified five pillars that will enable it to drive growth. The company aims to achieve excellence in (1) brand, (2) portfolio, (3) go-to-market, (4) operations and (5) organisation.

* Segment-wise performance: Electrical Consumer Durables (ECD) segment reported strong revenue growth of 14.7% YoY; however, lighting segment revenue grew only 3.5% YoY. Fans reported strong growth of 19% YoY. While B2C lighting grew YoY, B2B and B2G lighting continued to face slowdown. Pumps business was also affected due to prolonged monsoon during the year.

* Market share gains and distribution expansion: The company gained ~200bps market share in fans segment and now operates at its all-time high market share. It also gained share in ceiling lights. We note the company’s investment in rural channel has helped it acquire market shares in rural markets too. Rural channel and ecommerce reported 182% and 39% YoY growth, respectively, in FY22. We model strong growth in rural market to continue in FY23-24.

* Healthy profit margins achieved due to cost saving initiatives: Crompton’s efforts to save costs (via project Unnati), focus on premiumisation and timely price hikes helped it protect its profitability in an unfavourable inflationary environment. It saved Rs2.03bn through project Unnati in FY22.

* Maintain BUY: We model Crompton to report PAT CAGR of 4% over FY22-FY24E and RoE of 26.2% in FY24E. We remain positive on the company’s business model due to its competitive advantages and growth opportunities. We maintain BUY on the stock with DCF-based TP of Rs504 (implied P/E of 51x FY24E EPS).

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