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Business Overview

Crompton is our top pick in the Consumer Electrical sector due to (1) Strong margin sustenance capabilities through cost savings (2) Synergies from Butterfly takeover and (3) scale-up in newly entered built–in kitchen appliances space and and (4) favorable valuations. Target of Rs465 based on 40x FY24E EPS. 

Key investment rationale

* CROMPTON is a strong financial franchise with a robust track record of product innovation, market share gains, and tight cost control.

*  During the commodity cost inflation phase of past six quarters, it is the only firm among the electrical peers who has sustained its gross and EBITDA margin profile.

* Key market share gains over the past 5 years: Fans (28% vs. 21%), residential pumps (25% vs. 14%), water heater (13% vs. 6%) and lighting (8% vs. 4%).

* Butterfly acquisition synergies like (1) foray in the Kitchen appliances space, which has strong gross margin and high long term growth potential, (2) ‘Butterfly’ is a well renowned brand (establishing a totally new brand is extremely difficult), (3) BGAL is a sound financial franchise (hence no need to turn around the company), and (4) Better growth prospects for CROMPTON. 

Key medium term triggers

* Operating margin expansion of Butterfly from 9-10% to 15% led by (a) rationalizing historical legacy costs, (b) economies of scale in procurement and (c) normalization of ad-spends of Butterfly (currently at 10% of sales).

* Softening raw material cost like copper, aluminum and steel which will provide fillip to Crompton’s operating margins, which are already superior among peers.

Key risks

* Consumption slowdown and demand moderation in the economy.

* Any challenges emanating from Crompton – Butterfly business integration.

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