HDFC Securities is bullish on Crompton Consumer has recommended buy rating on the stock with a target price of Rs 300 in its research report dated May 23, 2019.
HDFC Securities' research report on Crompton Consumer
Net revenues grew by 7.2% (13% in 4QFY18, 9.8% in 3QFY19) vs. exp of 9.8%. Management has not witnessed a slowdown in demand, moderate growth was on account of seasonality impact. ECD grew at a healthy pace of 10% (16% in3QFY19, 10% in 4QFY18) despite the impact from extended winter. Fans, Pump and Air Coolers were the key drivers of growth. Co has gained market share in fans, retail value market share stood at 25.1/23.8% in 4Q/FY19. Lighting was up by1.4% (-2.4% in 3QFY19, 21% in 4QFY18), impacted by price erosion in LED lamps and decline in conventional lighting. Focus on accelerating growth by (1) Distribution leveraging for B-C, (2) New product launches (anti-bacterial lamp, kills upto85% of bacteria) and (3) Strengthening core for B-B (separate national sales team to focus with more depth). GM declined by 64bps (inline) to 31% (+200/-135bps in 4QFY18/3QFY19) led by commodity inflation and delay in price hike.Employee/other expenses up by 9/6%. EBITDA margin dipped by 64bps to 14% (exp 14.8%). ECD EBIT margin was down by 220bps to 19.5%, after 6 quarters of consistent expansion. Margin contraction on account of higher commodity inflation and delay in price hike (extended winter impacted trade sentiments). We expect margins to improve in FY20 led by favorable product mix, cost rationalisation and price hike. Lighting EBIT margin was up by 40/260bps YoY/QoQ to 11.5% (exp 9.8%). Co has taken various initiatives (sourcing of raw material, product mix, etc) in FY19 to recover the margin to sustainable level (low double digit). We model 200bps margin expansion in FY20. APAT (excluding tax written back)
was up by 8% to Rs 1,118mn (exp Rs 1,201mn).
Crompton’s 4Q performance was mixed with miss on ECD margins (challenging quarter) but beat in lighting margins (recovered with various initiatives). We expect FY20 performance to improve led by (1) Healthy growth for ECD (newlaunches), (2) Lighting sustaining healthy margins (200bps YoY expansion in FY20E) and (3) GTM benefits kicking-in. Stock was flat in FY19 due to lack of fireworks in their performance. We expect a re-rating in the stock in FY20 (led by outperformance vs. peers). We value at 35x on Mar-21 EPS, arriving at a TP of Rs 300.
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