IGI Logo

Strong FCF with robust balance sheet

Crompton’s FY21 Annual Report focuses on the five-dimensional growth strategy adopted over the pandemic-affected year. Launching new products and deepening the reach within existing product categories were among the key focus areas for the year gone by. Here are the key highlights:

Push for cost savings program intact:

Under Project Unnati, Crompton saw cost savings worth INR1.5b, constituting 3.2% of FY21 sales (~3.1% of sales in FY20). Savings were seen across areas such as product design optimization, in-house manufacturing, commercial negotiations, and ad spends. While employee costs were up 8% YoY (~5% increase in employee count), other expenses declined 11% YoY, largely led by a 17% reduction in ad spends and sales promotions. These measures led to EBITDA margin expansion of 160bp YoY to 14.8%.

Strengthening the distribution network:

Under the Go-To-Market (GTM) strategy, the company doubled its retailer reach from FY17. Leveraging data analytics and technology, Crompton can now track ~80% of secondary sales (v/s 50% in FY20).

Targeting tier 2/3 towns:

Crompton has developed a ‘Son-of-Soil’ model to focus on rural channels, and is increasing reach in towns with a population ranging from 10–100k. With encouraging results, the management aims to cover ~60% of such towns in the near future. It has tied up with microfinance institutions to enable easy access to finance for rural customers purchasing Crompton products.

Higher use of data analytics to drive sales:

With the COVID outbreak, Crompton pioneered the RAG (Red-Amber-Green) concept using data analytics and by marking different markets based on the number of COVID cases into Red (Highly risky), Amber (Moderately risky), and Green (Safe). The management concentrated entirely on the Amber and Green markets to drive sales.

Existing product portfolio expansion on track:

The management continued to focus on new product launches across categories, such as Fans, Pumps, Lighting, and Appliances. Notable launches in Fans include the launch of ‘SilentPro IoT’ fans – the flagship product of the Silent Fans category, compatible with the MyCrompton app. In Pumps, Crompton launched a premium range of pumps – Mini Neo, with a two-year warranty for longer life. The company strengthened its Water Heater portfolio with the launch of the 6L category to fill the portfolio gap. In Lighting, Crompton engineered and designed a higher wattage streetlight with highway optics. This is the first in-house streetlight with an optic design (Lens), which led to a reduction in the total cost of ownership by more than 10%.

R&D spends scaled up further:

While the company rationalized most of the variable costs due to the COVID pandemic, it continues to spend on R&D scale-up, albeit on a small base. R&D spends now form ~0.5% of total sales, up 27% YoY (v/s 0.4% in F20).

Capex intensity moderates:

Crompton moderated the capex intensity to INR223m in FY21 (v/s ~INR500m in FY20), with the COVID outbreak leading to spending only on maintenance activity. The company set up in-house production capabilities for TPW fans, which were earlier imported. Other activities include a power coating and liquid painting project, lighting automation and assembly projects, and molds for appliances.

Segment-wise performance and outlook highlights:

The Electrical Consumer Durables (ECD) segment recovered its lost sales during the COVID pandemic with a robust performance in 2HFY21 – it was up 11% YoY for FY21. While Lighting revenue declined 12% YoY on account of a muted offtake in the B2B segment, B2C LED Lighting continued to see robust volume growth. Margins for the Lighting segment almost doubled to 11.7%, indicating LED price erosion is a thing of the past.

FY21 performance highlights:

(a) P&L highlights: Revenue was up 5% YoY to INR47.5b, led by robust growth in the ECD segment. EBITDA came in at INR7.1b (up 18% YoY). The EBITDA margin was up 160bp YoY to 14.8% on account of cost rationalization measures and an uptick in the offtake from 2HFY21. Adjusted PAT was up 21% YoY to INR5.3b. (b) BS highlights: The working capital cycle was down to 8 days from 23 days in FY20; largely owing to vendor contract renegotiations. Net D/E remained comfortable at -0.1x (-0.2x in FY20). (c) Cash flow highlights: Cash flow from operations almost doubled to INR8.1b. Coupled with muted capex, FCF was strong at ~INR8b (FY20: INR3.7b). (d) Return ratios: RoE declined to 28% (from 30% in FY20), while RoIC stood at 27% (v/s 29% in FY20).

Valuation and view:

CROMPTON has consolidated its position in Fans and Pumps, and has scaled up to the number two position in the Water Heaters segment. The 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 any pent-up demand emerging post the lifting of lockdown restrictions. Maintain Buy, with TP of INR515 per share (45x FY23E EPS).

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer