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After a series of disappointments, Crompton’s 4QFY23 print surprised positively with consolidated revenue growth of 16% YoY/+18% QoQ (+10% 4-year CAGR; 14% above JMFe), led by 8% growth in the ECD business and Butterfly Gandhimathi’s consolidation (BGAL; acquired in Mar’22). Fans volume/value was flat YoY on account of BEE rating transition, which was more than offset by 42% YoY growth in appliances. Lighting segment, on the other hand, remained under pressure (-12% YoY) given sluggish demand and change in strategy. EBITDA margin contracted by 300bps YoY (+180bps QoQ) to 11.8% as the company continued to invest in long-term strategic initiatives (A&P, capability building for new business, R&D, alternate channels, etc.). Crompton reiterated its focus on revenue absolute recovery and profit growth (instead of % operating margin) and has earmarked a) Small appliances (including BGAL and other kitchen appliances), b) Lighting (getting the sales strategy right) and c) Large appliances as future growth drivers. We raise our FY24-FY25 estimates by 4% each to reflect 4QFY23 beat and outlook. We value Crompton on SOTP basis and assign 28x each to Crompton and BGAL’s FY25EPS respectively to arrive at a Mar’24TP of INR 280 (Mar’24 TP of INR 260 earlier). We maintain HOLD

* 4QFY23 Summary: Consolidated revenue grew 16% YoY (+10% 4-year CAGR; +18% QoQ) to INR 17.9bn (14% above JMFe) led by growth in the ECD business. ECD revenue grew 8% YoY (+11% 4-year CAGR) while Lighting revenue fell 12% YoY (-5% 4-year CAGR). EBITDA margin declined by 300bps YoY (+180bps QoQ) due to 190bps/ 280bps increase in employee cost and other expenses as Crompton continued to invest in A&P, R&D, etc., to achieve its long-term strategic objective of stronger topline growth and profit growth. EBITDA fell by 8% YoY (+6% 4-year CAGR; +39% QoQ) to INR 2.1bn. ECD segment EBIT margin contracted 210bps YoY (+60bps QoQ) to 16.4% while Lighting segment EBIT margin contracted 320 YoY (+60bps QoQ) to 10.9%. Reported PAT was INR 1.3bn, down 26% YoY.

* Fans flat on BEE transition; strong growth in pumps and appliance: Within ECD, fans continued to witness pressure with flat YoY growth during the quarter on account of BEE rating transition. However, within fans, the premium category witnessed strong growth of 24% YoY as BLDC fans grew 2.5x (Crompton sold 3lakh BLDC fans in 4QFY23 and is believed to be #2 with Atomberg being #1). Crompton believes lower channel inventories enables it to initiate marketing spend and offer energy efficient/superior products to consumers before others. To lead the BEE transition, the company is taking steps such as a) educating customers b) focusing on mitigating cost inflation c) strategic pricing intervention. From a cost perspective, the BEE transition has led to around 15% rise in cost. The company is trying to mitigate 5-7% of the cost by driving cost efficiencies through the Unnati scheme. However, it hasn’t been able to pass on the increase in cost to customers and, thus, pressure on margins is expected to remain. Pumps grew 15% YoY in 4QFY23 as Crompton has initiated a) pricing correction vs. peers, and b) changes in brand architecture, driving premium products mix. Healthy momentum continued in Appliances, which grew by 42% YoY led by mixer and grinders (+70%), and air cooler combined (+34%). Built-in kitchen appliances, which was launched in 1QFY23, is progressing as per plan and 55 brand stores have been opened across 12 cities

* Lighting business remains weak: Lighting business revenue fell due to continued weakness in its B2B and B2C trade. Volume in the segment was flat in the quarter. The company has said that the lighting category, which was earlier under centralised sales force, will now be brought under the category head to enhance focus on the same and drive demand. This will be further supported by innovation, pricing, marketing and costing and the management expects to see the impact in the next 2 quarters.

* Butterfly 4QFY23 performance- New normal has set in: Butterfly’s revenue fell by 6% YoY to INR 1.9bn (+6% 4-year CAGR; -25% QoQ), largely led by de-scaling of the e-com business with the retail channel growing 19% YoY on the back of launch of 25 new SKUs in 3QFY23. The company said that e-commerce de-scaling is behind it and expects e-com to also grow in future; it added that it will launch channel-specific products. The company has started hiring experienced professionals in sales, category marketing and manufacturing. New product launches during the quarter contributed 15% to total revenue. Gross margin expanded by 13.3% YoY to 38.9% on a low base and was driven by improving channel mix and cost-efficiency measures. EBITDA was INR 78mn (-6% 4- year CAGR; -64% QoQ) as compared to INR -174mn last year (due to one-off adjustment of INR 220mn). Margin expanded by 13ppt (-450bps QoQ) to 4.2%. PAT was INR 16mn (8% 4-year CAGR; -87% QoQ) as compared to loss of INR 128mn last year.

* FY23 performance: Revenue/EBITDA/PAT rose 27%/0%/-19% YoY respectively in FY23. Fans category grew 5% YoY and the management said that it maintained its market share in the overall fans business. Pumps and appliances grew at 9% and 30% YoY respectively while lighting declined 1%. Due to the company’s thrust on growing the retail channel, A&P spend was 3.6% of revenue in FY23 as compared to 2.8% last fiscal. The company paid a dividend of Rs 3/share for FY23.

* Raise estimates by 4% each; maintain HOLD: We raise our FY24-FY25 estimates by 4% each to reflect 4QFY23 outperformance and commentary. We value Crompton on SOTP basis and assign 28x each to Crompton and BGAL’s FY25EPS respectively to arrive at a Mar’24TP of INR 280 (Mar’24 TP of INR 260 earlier). We maintain HOLD on Crompton given fair valuation. Key Risk: Slower-than-expected recovery and difficulty in BGAL integration.

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