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Tepid quarter, Growth metrics to revive

Crompton Consumer (Crompton) had a tepid quarter largely due to transition of Fans business to the new BEE norms impacting ECD segments (-7% YoY) while Appliances delivered growth with strong momentum. However, weakness was seen across lighting (-21% YoY) and pumps business. Overall revenues at Rs.15.2bn grew 7.5% YoY. Despite lower scale and inflationary pressures, gross margins were relatively resilient and improved 90bps yoy/ 40bps qoq to 32.5%. But higher spends higher A&P, R&D, new business development and Rs.160mn BEE transition cost) for future growth and additional support in the fans business led to a 424bps yoy/131bps qoq EBITDA margin decline to 10.1%. Management expects an improvement in margins with improvement in volumes. APAT stood at Rs.843mn declined 43% YoY (BGAL PAT grew 29% YoY). Crompton continues to focus on product innovation (differentiated and premium products), GTM (improved reach) and branding (omni channel branding) as also on cost optimisation (Unnati program, better sourcing, etc) will reap benefits. We believe these initiatives will likely bode well with steady market share gains and margin improvement over the medium term. The acquisition of Butterfly Gandhimathi Appliances will increase synergies and enhance growth opportunities in Kitchen Appliances space. We have pruned down our estimates and target price accordingly given the 9MFY23 performance and remain positive on the upcoming summer season and improving operating performance along with recovery in B2C demand and shrinking unorganized market. Hence, we maintain our Buy stance with a revised PT of Rs.394.

Q3FY23 Summary

Consolidated revenues grew 7.5% yoy to Rs.15.2bn. ECD fell 7% YoY to Rs.10.2bn due to weak consumer demand (impact in fans business due to slow channel stocking over BEE transition). Lighting revs fell 21% YoY led by 30% decline in conventional and weak B2C. Rural business grew by 40% yoy while alternate channel contributed to 15% of business (+45% growth YoY). Overall, standalone revenues de-grew by 10% YoY to Rs.12.7bn due to weak consumer demand (high retail inflation & price volatility). OPM contracted 424bps YoY to 10.1% due to negative operating leverage (revenue decline) and higher other expenses (higher A&P, R&D, new business development and Rs.160mn BEE transition cost). Notably, GMs were relatively resilient at 32.5% (+90 bps YoY +40bps QoQ) led by cost reduction initiatives (?460mn in Q323 Project Unnati savings), strategic inventory stocking, higher mix of premium products, etc. Accordingly, EBITDA de-grew by 24.4% YoY to Rs.1.5bn.

Outlook and Valuation

Crompton continues to focus on product innovation (differentiated and premium products), GTM (improved reach) and branding (omni channel branding) as also on cost optimisation (Unnati program, better sourcing, etc) will reap benefits. We believe these initiatives will likely bode well with steady market share gains and margin improvement over the medium term. We have pruned down our estimates and target price accordingly due to the weakness during the quarter but remain positive on the upcoming summer season and improving operating performance along with recovery in B2C demand and shrinking unorganized market. Hence, we maintain our Buy stance with a revised PT of Rs.394.

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