Crompton Consumer up 3%; Citi initiates with buy on growth, RoE

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Moneycontrol Bureau

Citi has initiated coverage on Crompton Greaves Consumer Electrical with a buy rating and target price of Rs 174, citing growth prospects and return on equity (RoE).

The brokerage house expects a 13 percent sales compounded annual growth rate (CAGR) and 74 basis points operating profit margin expansion in FY16-19.

It feels refinancing/repayment of debt should rapidly lower interest costs and in part drive a 25 percent EPS CAGR in FY17E-19, leading to sector-high RoEs of around 50 percent.

Crompton Greaves Consumer Electricals is top player in fans, domestic lighting and pumps in India.

The brokerage house says structural tailwinds are driving India's consumer electrical goods, which are:-GDP growth is leading to higher per-capita income,-Power availability is improving,-Urban/ rural housing is growing,-Government is pushing low-cost housing,-VIIth Pay Commission recommendations are being implemented, and -Potential GST would further shrink the unorganised sector

Citi expects India's lighting market to expand at a CAGR of 18 percent to Rs 35,000 crore by FY20, appliances at 15 percent driven by low penetration rates, fans at 5-7 percent to Rs 7,500 crore, and water pumps at 8-10 percent to Rs 8,100 crore.

Management aims to achieve faster than market growth, bottomline growth that at least matches topline growth, and a generation of good operating cash flow. It will be achieved through brand building, premium products, an asset-light model, strengthening distribution, and tight working capital management.

According to the brokerage house, key risks are raw material price increase/unavailability, dependence on a limited number of suppliers, inability to respond to changes in technology and consumer preferences, obsolescence in assets, and outsourcing risks.

At 10:12 hours IST, the scrip of Crompton Greaves Consumer Electrical was quoting at Rs 143.05, up Rs 2.80, or 2.00 percent on Bombay Stock Exchange.Posted by Sunil Shankar Matkar