YES Securities' research report on Crompton Greaves CE
Crompton has reported lower than estimated revenue with ECD growing at 16.5%, while lighting and Butterfly products registering decline of 11.5% and 16.9% respectively. ECD growth was on back of strong growth in Fans (+18%) and small domestic appliances (+17%). Pumps too has exhibited growth of 10% led by robust traction in residential and agriculture segment. Lighting segment continues to be impacted by industry level challenges in B2C lighting, with price erosion being witnessed across players as competition continues to remain high. On Butterfly front shift in festive season has resulted in delayed pre-buying, this coupled with one off corporate sale in the base quarter has accentuated revenue decline. Gross margins at 31.3% have been lower as increased cost on shifting to BEE ratings in Fans have not been passed on, while operating margins were lower as company continues to invest in business, leading to increased A&P spends and investing in alternate channels. CROMPTON have started to implement its 2.0 strategy where its aiming at accelerated growth by Premiumization of the portfolio and focusing on the alternate channel has started to see initial success. Premium Fans for Crompton has seen growth of 31% in Q2 and now contributes 28% to overall fans sales, while its alternate channel is has growing at 2x the rate vs its GT with salience of 17% vs 13% of the overall sales. CROMPTON will have to continue with its investments which will result in lower profitability in the near term, while heightened competitive intensity and sluggish demand trend will result in longer than expected time to reap benefits of the changes that have been under implementation. We now feel recent initiatives taken by CROMPTON will require sustained efforts and investments.
Outlook
Considering increased investments, we have trimmed our margin estimates for FY24 and FY25. We now bake in FY23-25E Revenue/EBITDA/PAT CAGR of 10%/12%/17% and arrive at our PT of Rs 306 valuing the company at 30x FY25EPS maintaining our Neutral rating.
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