Buy Crompton Consumer; target of Rs 400: HDFC Securities

HDFC Securities' research report on Crompton Consumer

Crompton’s Q1FY24 print was a mixed bag with ECD revenues surpassing expectations but disappointing on margins. Overall EBITDA was in line at INR 1.9bn (HSIE: INR 1.9bn). ECD revenue grew 6% YoY (TTM for Crompton was up 1% YoY vs. flat for Havells and -5% for Orient, which continue to see impact of the BEE rating change). Within ECD, appliances clocked 19% growth, followed by fans at 5% (premium fans grew 22%) while pumps were flat. ECD margins fell 425bps to 12.7% (16.4% in Q4), given (1) higher A&P spends (150bps); (2) GM pressure in fans due to rating change and delayed price hike (150bps); and (3) built-in kitchen loss which is in investment phase (50bps). Crompton 2.0 is focusing on accelerating revenue with increase in branding, distribution and R&D expenses. These costs are upfront in nature, thereby impacting operating margin. We believe revenue acceleration will be visible gradually but in interim cost increase may impact margin in the near term. In our opinion, if management executes this strategy well, then investors’ confidence on valuation multiple will improve.

Outlook

We marginally cut our EPS for FY24/25 and value the stock at 35x on Jun‘25E EPS to derive a TP of INR 400. Maintain BUY.