Buy Supreme Industries Ltd For Target Rs.465- Centrum Broking
New avenues to aid growth; Margins to improve from Q2FY23
CROMPTON’s consolidated Q1FY23 revenue stood at Rs18.6bn (Q1FY20?23 CAGR at 11.4%) and was higher than our estimate of Rs17.2bn. Gross margin improved QoQ by 150bps to 31.4%. While commodity prices started softening from end?May, its benefit would likely accrue from Q2FY23. EBITDA stood at Rs2.2bn (Q1FY20?23 CAGR at 4.6%) leading to EBITDA margin of 11.8%. Margin was lower than our estimate of 13.3% due to higher A&P spend (at all?time high of Rs450mn) and higher one?time variable pay. However, margins improved each month in Q1FY23 with exit margin of June being back to FY22 levels, which will be sustained. PAT stood at Rs1.2bn (Q1FY20?23 CAGR was flat), below our estimate of Rs1.4bn. The current demand situation remains challenging amidst high inflationary environment as the industry is witnessing slower volume growth. Factoring in the investment planned for built?in kitchen appliances, we cut our earnings estimates by 5%/2% for FY23E/24E. We retain BUY rating with a revised target price of Rs465 (Rs475 earlier) based on 40x FY24E EPS.
ECD: Fans continue to gain market share; pumps facing prolonged slowdown
ECD sales stood at Rs13.5bn (Q1FY20?23 CAGR at 8%) with EBIT margin at 17%, down 60bps/150bps YoY/QoQ due to higher input costs. Market share of Fans rose by 2% to 28% led by stronger growth in premium and TPW fans. However, past 3 years volume CAGR remains muted at 5%. Pumps is facing prolonged industry?wide slowdown due to 20?25% price hikes. Appliances sales doubled YoY led by air coolers, which posted 3 year CAGR of 45% and has crossed Rs1bn in sales.
Lighting: B2C continues to grow; B2G gradually picking up
Lighting sales stood at Rs2.6bn (Q1FY20?23 CAGR was flat) due to strong performance in B2C LED lights. Battens and panels posted volume/value growth at 64%/98% YoY. EBIT margin fell 190bps YoY to 8.8% after 7 quarters of double digit margin. Margin were lower due to 1% extra spend on advertising and higher ECL provision, however, structural margins are intact. While B2B business has picked up, the scale of EESL business is unlikely to revert to old levels. Near term growth will continue to be led by B2C.
Built?in kitchen appliances: Built?in kitchen appliances (chimneys, gas hobs, built?in ovens, microwave, dishwashers) has range of 38 models. Exclusive brand outlets named ‘Crompton Signature Studios’ will be expanded from 17 currently to 40?50 over next 2 quarters with eventual plan to cover 100 cities. Crompton aims to take 10% market share over the next 3 years in this Rs22bn industry, which is growing at 10% CAGR.Built?in kitchen appliances: Built?in kitchen appliances (chimneys, gas hobs, built?in ovens, microwave, dishwashers) has range of 38 models. Exclusive brand outlets named ‘Crompton Signature Studios’ will be expanded from 17 currently to 40?50 over next 2 quarters with eventual plan to cover 100 cities. Crompton aims to take 10% market share over the next 3 years in this Rs22bn industry, which is growing at 10% CAGR.Built?in kitchen appliances: Built?in kitchen appliances (chimneys, gas hobs, built?in ovens, microwave, dishwashers) has range of 38 models. Exclusive brand outlets named ‘Crompton Signature Studios’ will be expanded from 17 currently to 40?50 over next 2 quarters with eventual plan to cover 100 cities. Crompton aims to take 10% market share over the next 3 years in this Rs22bn industry, which is growing at 10% CAGR.
Butterfly updates: With business continuity progressing smoothly, CROMPTON aims to achieve synergies in sourcing as well as cost reduction through project Unnati. While sustaining Butterfly’s strong e?commerce presence, CROMPTON aims to grow off?line and has added 1,000 retailers and 100 direct channel partners, which formed 5% of sales.
Maintain BUY, with a revised target price of Rs465
We expect CROMPTON to register 13% earnings CAGR over FY22?24E. Strong focus on margins, return ratios and cash flows along with renewed growth prospects post the Butterfly acquisition and built?in kitchen appliance foray will support its valuation.
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