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Robust margin profile sustained despite cost inflation

CROMPTON’s Q4FY22 consolidated sales grew 2% YoY to Rs15.5bn, 9% below our estimate. Jan’22 sales were impacted by Omicron but Feb-Mar’22 sales grew in double digits across categories. CROMPTON continues to manage gross margin better than peers, despite high commodity cost inflation, as it fell only 90bps YoY to 29.9%. Gross margin was supported by cost savings through Project Unnati (Rs680mn in Q4FY22), premiumization, price hikes (13-15% for ECD in FY22) and better product mix. EBITDA was flat YoY at Rs2.3bn with a robust operating margin of 14.8%, down only 20bps YoY and 80bps above our estimate. PAT was in-line with our estimate at Rs1.8bn. The management is cognizant of industry growth headwinds due to high inflation and rising interest rates, but aims to deliver superior earnings led by costs savings measures, GTM strategy and synergies from Butterfly (BGAL) acquisition. We factor in the impact of Butterfly’s financials leading to 13%/9% cut in our FY23E/24E earnings. Retain BUY with a revised target price of Rs475 (Rs550 earlier) based on 40x FY24E EPS.

ECD: Fans continue to gain market share; muted pumps category drag topline

ECD sales in Q4/FY22 grew 3%/15% YoY while ex-pump growth was at 7%/17%. FY22 sales were primarily value led (13-15% price hikes in FY22), implying volume growth in low single digit. Fans grew 9%/18% YoY in Q4/FY22 driven by TPW and premium ceiling fans, resulting in March 2022 market share of 29%. Appliances grew 18% YoY in FebMarch led by market share gains in water heaters (FY22 growth at 30% YoY), while air cooler sales were in low double digits in FY22. Pumps industry de-grew (CROMPTON grew 2% in FY22) due to last year’s excessive monsoon and 20% price hike dampening volumes. EBIT margin remains robust at 18.5%/19.2% for Q4/FY22.

Lighting: B2C continue to grow; B2G remains muted

Lighting sales fell 4% YoY at Rs3.2bn, while it was up only 4% YoY in FY22 at Rs10.8bn. Growth in B2C LED lighting was healthy with market share gains in LED downlighters, leading to share of fixtures rising to 60% of B2C LED sales. B2G (~25% of lighting sales) remains weak and will take time to recover, while B2B (~25% of lighting sales) is likely to grow by double digit. Conventional lighting (CFL & GLS) is declining 20-30% every year and its share in total sales is now down to single digit. EBIT margin were down YoY but remained at healthy level of 14.1%/11.8% for Q4/FY22.

BGAL update: Acquisition of 55% promoter stake was done on March 30 and open offer for 26% stake is underway (23 May to 3 June). Crompton has taken Rs11.5bn debt at 5.5% interest rate with repayment in Sept’22 and Mar’23. Key growth levers are premium products, ramp up in Southern states (ex-Tamil Nadu) and general trade (BGAL’s growth was e-commerce led). Operating margin recovery will be aided by 4-5% price hikes, recalibrating A&P spends and raw material sourcing synergies.

Maintain BUY, with a revised target price of Rs475

We expect CROMPTON to register 14% earnings CAGR over FY22-24E. Strong focus on margins, return ratios and cash flows along with renewed growth prospects post the Butterfly acquisition will support its valuation.

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