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Facing growth challenges in the near term; downgrade to Neutral

Our interaction with Crompton dealers/distributors hint at near-term growth issues for the company amid sluggish demand for Fans and Lighting. For Fans, lower-thenexpected demand in April & May caused higher-than-normal inventory. Dealers reckon inventory to be setteled by July end to mid-August. In case of Lighting, demand is muted and is expected to remain so in the near future. Dealers are pinning hopes on the festive season for a demand revival. Small appliances and new products like built-in large appliances are likely to deliver double-digit growth, albeit with low contribution to the overall revenue. Butterfly turnaround won’t be anytime soon, given low demand for kitchen appliances downtrading in certain product categories. Margins would likely languish at lower levels given higher R&D and marketing/distribution costs, as also increased employee costs to stem recent attrition. We remain cautious and downgrade the stock to Neutral with PT of Rs302 as there is limited upside from current levels. We continue to value the stock at 27x FY25 EPS and believe an opportunity to enter the stock is likely at lower levels.

* Core product categories to face growth challenges: Crompton’s core stack of Fans, Lighting and Pumps would endure growth challenges in FY24. Demand for fans in month of April and May were subdued. June has seen some pickup but it is not sufficient to make up for the low demand hangover. On the lighting front, demand is flattish and expected to stay so going forward. Lighting demand is expected pick up during the festive season from Q3 onwards.

* Appliances and new products (large appliances) to script faster growth: Small appliances and new product category likes large appliances are likely to witness strong double digit growth given low base and channel expansion. Having said that, this would not meaningfully add to overall growth as the contribution is a mere ~10% of overall revenue.

* Complete turnaround of Butterfly appliances to take time: Current demand for kitchen appliances is sluggish as urban demand has dropped following a buoyant span of 18 months. Also, rural customers are downtrading and preferring lower price local brands amid a high inflationary environment. The company will have to increase A&P and marketing spends to boost visibility of Butterfly products beyond the southern markets.

* Near-term Margins to languish at lower end: CROMPTON’s EBITDA margins on consolidated basis are likely to hover in the range of 11.5-12% vis-à-vis historical EBITDA margin of 13-14%. Lower margins are attributable to i) higher A&P/marketing & distribution spends for improving brand visibility for new products and Butterfly products; ii) higher employee spends to stem attrition and iii) increased R&D expenditure to focus on innovation.

Our Take: Our recent interaction with dealers/distributors of FMEG products hint at a sluggish demand for Fans given the unexpected summer demand drop on the back of erratic weather conditions. Lighting demand continues to remain subdued even as dealers grapple with high inventory and harbor hopes of a demand revival in festive season. Considering the above and especially the fact that large part of revenue comes from Fans and Lighting segments which are grappling with growth challenges, we downgrade the stock to Neutral.

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