HDFC Securities is bullish on Crompton Consumer has recommended buy rating on the stock with a target price of Rs 339 in its research report dated October 24, 2019.
HDFC Securities' research report on Crompton Consumer
Net revenues grew by 4% (8% in 2QFY19, 12% in 1QFY20) vs. exp of 11%. Revenue miss was attributed to weak show in lighting (-12% vs. 6% exp). ECD (73% revenue mix) continued its steady growth of 11% (15% in 2QFY19 and 16% in 1QFY20) vs. exp of 13%. ECD growth was driven by market share gains in fans (+70-80bps) and robust growth in appliances (~30% growth in last 3 quarters). In the last one year, Crompton has re-launched its appliances portfolio (geysers, pumps and air coolers) and invested in marketing to accelerate growth. Co’s focus now shifts to mixer grinders. We expect 13% growth in ECD over FY20-FY21E. Lighting performance ex-EESL was tad better at -3%. In LED bulbs, price erosion continues to be steep at 15% despite manufacturing costs stabilizing. Crompton’s focus is on driving volume growth and maintaining gross margins in lighting. Co is now re-investing in building their infrastructure to grow their B-B business. As a result, we don’t expect double digit EBIT margins in lighting in the near-term. GM expanded by 330bps (exp. 125bps) to 31.9% (-174bps 2QFY19) led by favorable base, benign commodity inflation and price hikes (2% in fans). Employee/other expenses were up by 20/26%. EBITDAM expanded by 10bps to 12% (exp 12.9%). ECD EBIT margins expanded by 31bps to 19.2% (exp 19%) led by premiumisation and oplev. Lighting EBIT margins declined by 110bps YoY to 5.2% (exp 8%). Lighting margins were under pressure owing to price erosion, higher A&P and investments in B-B business.
Crompton’s 2Q performance was weak. Dull show in lighting overshadows ECD performance. Crompton remains committed to improve their lighting biz via investments in B-B (inspired by Havells). We believe Crompton’s 2HFY20 performance will be similar to 1H and hence don’t expect a sharp recovery (unlike peers). We cut EPS by 3-5% over FY19-22E. We value the co at 35x on Sep-21 EPS, arriving at a TP of Rs 339. Maintain BUY.
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