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Strong traction in premium product portfolios…

About the stock: Crompton Greaves Consumer (CGCEL) is among India’s leading fast moving electrical goods (FMEG) companies, present in electrical consumer durables (78% of revenue) and lighting businesses (22% of revenue).

* Market leader in the domestic fan industry with value market share of 24%. The company has increased focus on increasing market share in home appliances categories like (air coolers, water heater and kitchen appliances)

* Robust balance sheet with RoE & RoCE of 34% & 39% (three-year average), respectively, with stringent working capital policy

Q1FY22 Results: Higher other costs delayed recovery in the EBITDA margin.

* Reported revenue growth of 46% YoY to | 1050 crore (down 31% QoQ)

* Price hikes (5-6%) better product mix help maintain gross margin YoY. However, higher advertisement cost and other costs led to ~215 bps EBITDA margin correction to 12% YoY

* PAT increased 27% YoY to | 95 crore, tracking topline growth

What should investors do?

CGCEL’s share price has grown by ~3x in the past five years (from ~| 157 in July 2016 to ~| 467 levels in July 2021).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value CGCEL at | 540 i.e. 45x P/E on FY23E EPS

Key triggers for future price performance:

* Total ~1.7 crore new houses under PMAY, replacement of ~20 million water pumps under government’s flagship scheme KUSUM, urbanisation and rising aspiration are demand boosters of home appliances

* Dealer addition in areas with population 10-100k in the next five years

* Focus on launches of premium products to drive margin

* Model revenue, earnings CAGR of 17%, 10%, respectively, in FY21-23E

Alternate Stock Idea: Apart from CGCEL, we also like Havells in the same space.

* Trigger for Havells’ future revenue growth would be revival in Lloyds revenues and improvement in margin

* BUY with a target price of | 1345

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