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Medium term demand driver in place amid near term sluggishness; reiterate ADD

We interacted with Mr Kaleeswaran Arunachalam (CFO) and Natasha Kedia (Head – Investor Relations) of CROMPTON to get update on various initiatives undertaken to drive growth ahead of peers and industry. To achieve industry leading growth the company is implementing certain action plans which includes i) restructuring Butterfly business by focusing on innovation and projecting it as customer centric innovative brand; ii) continuing CROMPTON to be volume and scale driven brand; iii) working towards achieving excellency in human resource, sourcing and other supply chain initiatives enabling to bring down costs; iv) Increasing thrust towards alternate channels as alternate channels like quick commerce provides additional opportunity for growth and v) premiumization. CROMPTON has charted out the above strategy and is currently implementing it as it gets set for next phase for growth in medium term with which will enable the company to outperform the industry. Margins is expected to improve from the current levels as unit economies continues to remain strong and gross margins have come back to normalized levels, while operating margins will improve as company realizes benefit of leverage given the brand investments company is currently undertaking. We remain optimistic on the company’s prospects and reiterate our ADD with PT of Rs510 valuing the stock at 45x FY26 EPS.

 * Strategies under implementation phase to achieve industry leading growth: Crompton is investing in R&D, implementing new GTM structure and increasing focus on alternate channels, increasing brand spends and focusing on premiumization to achieve industry leading digit revenue growth. The company is working towards achieving in excellency in human resources, sourcing and managing supply chain to improve efficiencies.

 * Butterfly transformation will be completed by festive season: Restructuring that has been undertaken in the butterfly products (which includes reducing its dependency on e-commerce and lowering its institutional sales) have been largely done with and company expects restructuring to be completed by festive post which one can expect stability in the revenue for Butterfly products. Management expects growth to improve from 2HFY25 and margins are expected to be in mid-single digit in FY25 and improve to ~7% in FY26 and further improve as the scale increases. The company has taken two rounds of price increase which will result in gross margins to reach normalized levels.

 * Thrust on alternate channels, new products, and innovation to result in market share gains: Crompton is putting emphasis to increase its presence on alternate channels like e-commerce, modern retail, and quick commerce to improve its share and grow faster than the industry. The company is looking to increase its presence in Agri, Solar and Submersible pumps, increasing proportion of higher value of ceiling lights and accessories and launching of innovative regmote BLDC fans. These initiatives will help the company to increase its market share.

 * Medium term demand drivers in place, despite near term sluggishness: Demand for Fans and Kitchen appliances in Q2 is expected to remain muted as customers have preponed its fans purchase on back of heatwaves across the country which had resulted in exceptional Q1. However, the strong growth in real-estate in metros, tier i and tier ii cities along with replacement cycle in kitchen space expected to provide tailwind for the next phase of growth. We are expecting 14% revenue CAGR from FY24-26E.

Our Take: Considering the restructuring is in the last lag and with leadership team along strategies in implementation we believe company can achieve industry leading growth with gradual margin improvement as scale and efficiencies improve. We reiterate our ADD rating with PT of Rs510.

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