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Prioritizing margin protection over growth; underlying demand looks strong; maintain BUY

Our view

2Q saw a steady growth with B2C business continuing with low double‐digit growth. Most of this growth was value‐led (a combination of price hikes and premium sales mix) as the company decided to fully pass on the commodity inflation which would have had some impact on growth for the quarter. Unlike industry peers, the company has managed to protect its gross margins despite significant commodity inflation which is a key positive and will facilitate more aggressive investments in future growth.

Aggressive cost savings initiatives are expected to continue going forward as well. Despite passing on prices, CROMPTON has managed to gain or protect its market share in its key categories which augurs well for the company. With the company expected to continue its steady growth in focus segments and a solid cost structure which should ensure margin protection despite RM volatility, a gradual re‐rating should be expected with a rising scale of business.

Result Highlights

* Quarter Summary  ‐ CROMPTON delivered steady revenue growth of 14% yoy with ECD growing at 18% and Lighting growing at just 2.6% yoy. B2C lighting has grown by 18% yoy. CROMPTON has managed to protect its gross margins despite significant commodity headwinds which shows the strength of the brand.

* ECD – ECD continues with broad based growth momentum registering 18% yoy growth. Fans grew 17% yoy with large contribution from premium and decorative fans, while Appliances business grew 37% yoy driven by core categories of mixer grinders and Geysers.  

* Market share performance – Crompton continues to gain market share in Fans (+1.8%) to 27% maintaining its leadership position. Market share gains despite passing on most of the commodity inflation augurs well for future growth.  

* Working capital and operating cashflow – Company continues to generate healthy operating cashflow despite carrying additional raw material inventory which it had booked to take advantage of lower prices.

Valuation

We expect steady growth momentum to continue in B2C with stable margins; furthermore, we expect company to continue its market share gains given its strong thrust on R&D and brand investments. We build in FY21‐24E Revenue/EBITDA/PAT CAGR of 13%/12%/9% and arrive at our PT of Rs569 valuing the company at 45x FY24EPS, a 20% discount to our target multiple on Havells and maintain our BUY rating.

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