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CROMPTON’s consolidated sales were at Rs15.2bn, while standalone sales ex-Butterfly fell 10% YoY to Rs12.6bn. While consumer demand was weak, CROMPTON refrained from channel filling of non-rated fans, leading to a decline in ECD revenue by 7% YoY to Rs10.2bn. Lighting sales fell 20% YoY to Rs2.5bn with weakness in both B2C and B2B business. Consolidated gross margin was healthy at 32.5% while EBITDA margin was at 10.1%, below our/consensus estimate of 12.5% each. Margin was affected due to lower volumes and investments towards A&P, capability building for new businesses, R&D and GTM. Lower operating profit and higher depreciation/interest costs (post
Butterfly deal) led to weaker PAT at Rs853mn, below our/consensus estimate of Rs1.3bn/ Rs1.2bn. CROMPTON expects a quicker primary sales of star rated fans vs. peers (in second half of 4QFY23) while margins would recover once industry growth revives. We trim our earnings estimates for FY24E/25E by 11%/8% and maintain BUY rating with a revised target of Rs445 (Rs490 earlier) based on 40x 1HFY25E EPS.

ECD: Fans and Pumps underperform while Appliances post healthy growth

ECD segment sales fell 7% YoY to Rs10.2bn while EBIT margin was down by 360bps YoY and 130bps QoQ to 15.8%. Fans growth was impacted as CROMPTON started selling BEE fans and unlike peers, refrained from offering heavy discounting for non-rated fans. It believes that this deliberate strategy will help to bring a star-rated better product in the hands of consumers earlier than peers in the entry and mid-price segment. The price premium of BEE rated fans is 5-6% over non-star rated fans, while CROMPTON might discount it by 1-2% initially. Pumps industry is facing demand slowdown and aggressive competition from regional players. To counter it, CROMPTON has launched revamped product at a lower pricing. Despite dull festive season, Appliances grew 13% YoY led by Mixer Grinders (+20%) and Geysers (+12%) and has touched Rs10bn annual sales.

Lighting: B2B and B2C both face growth challenges but margin sustained
Lighting sales fell 20% YoY to Rs2.5bn with EBIT margin at 10.3%, flat YoY. B2C LED lights were impacted due to pricing pressure amidst high competitive intensity while conventional lighting sales fell 30% YoY. CROMPTON has taken pricing action and expects growth to recover in next quarter. B2B lights saw deferment of government capex on street lighting, where CROMPTON has highest exposure.

Butterfly: On course for the planned ramp-up strategy
Butterfly sales were at Rs2.5bn, flat YoY with EBIT margin of 7.3%. While Mixer grinder and Wet grinder had muted growth, Kettles and Flasks grew strongly. The acquisition is expected to be cost neutral in FY23, with Butterfly expected to deliver Rs1bn PBT in FY23. Key focus remains on new product development (introduced pressure cooker with laminated material offering better heat transfer), ramping up sales from general trade, reducing price disparity with e-commerce and improving margin profile.

Maintain BUY, with a revised target price of Rs445
We believe the underperformance in fans in 3QFY23 is transient and tactical in nature. We expect growth to revive led by Butterfly, BEE rated fans and Appliances. Proven focus on margins through cost control along with healthy cash flows will support valuation.

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