PL Stock Report - Crompton Greaves Consumer Electricals (CROMPTON IN) - Visit Update - Investing in growth - BUY

Crompton Greaves Consumer Electricals (CROMPTON IN) – Praveen Sahay – Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs293 | TP: Rs338

Visit Update - Investing in growth

We met CROMTON’s management to gauge how demand, competitive scenario and change in strategy is shaping overall business. Crompton has taken corrective measures like 1) restructured the business in five verticals, 2) hired/appointed second level management team, 3) addressed the frontend sales team attrition, and 4) increased focus on A&P and R&D for driving growth. Although the strategy might impact FY24 financials, we expect better growth from FY25 onwards.

Over FY17-23 Company’s Revenue/EDITDA/PAT CAGR stood at 9.9%/8%/8.7% while excluding Butterfly Revenue/EDITDA CAGR was at 6.4%/5.7%. Management expects 7-10% revenue growth in existing business and <30% in new vertical of large appliance business. Further, EBITDA margin is expected to be in 10-12% range over coming years. We estimate Sales/EBITDA/PAT CAGR of 12.0%/14.0%/21.6% over FY23-25E and revise our TP to Rs338 @ 32x FY25 EPS (Rs371 earlier). Maintain ‘BUY’.

Key takeaways:

♦ Focus on growth across segments: CROMPTON has delivered 6.4% revenue CAGR over FY17-23 in its core business (ex-Butterfly) due to lack of investment in growth against FMEG portfolio of Havells/Orient/V-Guard/Bajaj Electricals of 15.7%/10.8%/22.5%/13.2% over same period. The company is focusing on growth across verticals in coming year. It has guided 7-10% growth in existing business & ~30% growth in large appliance business (Built-in kitchen appliances, including chimneys, hobs, ovens and dishwashers).

♦ Restructuring of business to drive growth: The company has restructured its business in five verticals 1) Home Electrical (include Fan, Cooler & Water heater): Focused on increasing premium and BLDC fans segment, 2) Kitchen appliances (Butterfly and existing small appliances business of Crompton): Non-south expansion of Butterfly business & new product launches to drive growth, 3) Pump business – Residential pump accounts 80% rev. and coming years more focus will be on agricultural pumps growth. Crompton has extensive range of pumps for Residential, Agricultural & Special applications and with new brand architecture, segment is expected to show healthy growth. 4) Lighting: With focus on product innovation, cost efficiency and portfolio optimization, the company is well-positioned to continue its growth trajectory in both B2B and B2C markets. and 5) Large appliances: Expects >30% growth in the segment, with a strong focus on quality, reliability, and performance.

♦ Restricted operating margin: The company (consolidated) reported 11.2% EBITDA margin in FY23 and we believe it will contract further by ~20bps in FY24 due to corrective measures in terms of 1) employees (stabilizing frontend sales team attrition & hire leadership team), 2) increased focus on R&D and 3) rise in advertisement & promotion expenses (expected to reach 3.5-4% sales in coming years). However, it expected to improve from FY25 (PLe: 11.6%) onwards as a results of operational efficiency.

♦ Building second level management to drive business: The company has hired/appointed senior level managements for various functions and 30% total leadership positions on-board internally. Also, as per management, second level leadership team has been created to lead each business units e.g. Mr. Rajat Chopra has been elevated to lead Pump business etc.

♦ Focus on A&P expenses and increasing R&D team: The company expects to increase its A&P expenses and reach 3.5-4% revenue by FY24 onwards, which will help to drive its B2C revenue. Crompton also focus on investing in R&D (1.3% sales), where R&D team size increased to 161 people, to manufacture the innovative products across the verticals. It is also developing consumer-centric and technologically enabled products to drive growth in coming years.

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