Enough headroom for growth in core categories February 20, 2018 Kunal Sheth kunalsheth@plindia.com +91 22 66322257 Shreyans Jain shreyansjain@plindia.com +91 22 66322256 Rating BUY Price Rs232 Target Price Rs297 Implied Upside 28. Sensex 33,775 Nifty 10,378 (Prices as on February 19, 2018) Trading data Market Cap. (Rs bn) 145.0 Shares o/s (m) 626.0 3M Avg. Daily value (Rs m) 254.9 Major shareholders Promoters 34.38% Foreign 35.14% Domestic Inst. 14.59% Public & Other 15.89% Stock Performance (%) 1M 6M 12M Absolute (11.8) 2.9 22.7 Relative (6.9) (4.3) 4.1 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2019 6.4 6.7 5.0 2020 7.8 8.2 4.3 Price Performance (RIC: CROP.BO, BB: CROMPTON IN) (Rs) 300 250 200 150 100 50 0 Feb 17 Apr 17 Jun 17 Aug 17 Oct 17 Dec 17 We met the management of Crompton Greaves Consumer Electrical (Crompton) and came back convinced about the medium/long term opportunities for growth and management s strategy/focus to capitalize on the opportunities. Key focus areas for the management from here includes a) Continued growth in core categories led by innovation b) ramp up in Geyser/Cooler segment to be top 2/3 players in the segment over next few years. c) Implementation of the Go to Market programme successfully d) building adjacencies in terms of product category (aligned with goal of profitable growth and not just add top line) e) geographical expansion in markets like Africa/Middle East (meaningful presence in these markets in few categories). We believe head room for continued growth in core categories, ramping up of new segment and improved reach should help the company deliver above market growth. Focus on premiumization, improved volumes and cost control measure should help improve margins. We expect the growth to revive in near term as new launches in fans/pumps segment start showing results along with sustained growth in lighting. We also expect sales to grow at a CAGR of 12% and earnings CAGR at 19% over FY17 20E. We maintain BUY with a TP of Rs297. Contd...2 Key financials (Y/e March) 2017 2018 2019E 2020E Revenues (Rs m) 39,759 41,715 48,024 55,359 Growth (%) 119.5 4.9 15.1 15.3 EBITDA (Rs m) 4,902 5,223 6,360 7,508 PAT (Rs m) 2,932 3,193 4,009 4,904 EPS (Rs) 4.7 5.1 6.4 7.8 Growth (%) 146.1 8.9 25.6 22.3 Net DPS (Rs) 1.5 2.0 3.0 3.5 Profitability & Valuation 2017 2018 2019E 2020E EBITDA margin (%) 12.3 12.5 13.2 13.6 RoE (%) 76.4 51.2 50.1 48.3 RoCE (%) 34.4 28.1 30.3 31.8 EV / sales (x) 3.8 3.6 3.1 2.6 EV / EBITDA (x) 30.8 28.7 23.4 19.5 PE (x) 49.5 45.5 36.2 29.6 P / BV (x) 26.9 20.5 16.2 12.8 Net dividend yield (%) 0.6 0.9 1.3 1.5 Source: Company Data; PL Research Visit Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Lighting Still bright: The lighting segment has seen significant traction under the new management. Crompton is now the 2 nd largest lighting company after Philips. In two years it has grown to become large player from being marginal player in lighting segment. Lighting segment has seen mid teen growth over last 2 years. The distribution push is showing result with both B 2 B and B 2 C sales growing at a healthy pace. LED sales are now 7 of Lighting segment sales (66% and 7 in Q1 and Q2FY18). The segment has still enough head room to keep growing at double digits growth rates over next few years. Crompton believes it can maintain margin in lighting segments in double digits with scope of some improvement over medium term. The company passed on large part of cost optimization benefits to consumers to drive volumes and reach a position of strength, it could possibly be able to retain some portion of gains from here on. Fans going permium: CGCEL s focus on distribution and growth in the premium Fans segment continues to help the company grow faster than the market. While the Fan market has been flat YTD till Nov 17 (against historical growth rate of 7 8%), CGCEL continues to grow at a meaningful pace. Share of premium Fans continues to improve and now stands at of Fan segment sales (16.5% and 18% in Q1 and Q2FY18). While the premium fans are already of fans segment sales (against share in fan market of 17 18%), Crompton believes head room to grow premium fans business continues to be there based on pipeline of innovative product it has lined up for the market. The company is focussed on expanding the category through innovation as given that the possibility of market share gains will be limited once it starts to hit high base. Bounce back in overall fans market and continued growth in premium fans will continue to support growth in fans segment. Pumps segment hiccups addressed: While Crompton was dominant in residential pumps market with ~28% market share, Agri pumps were weak link with 8% market share. Residential pump segment saw some challenges in the current quarter due to increased competitive intensity, especially in North and East region. The market has seen introduction of a large number of mid and low priced pumps by smaller players. CGCEL responded by introducing Rain drop mid sized pumps in the Crest range whose response has been encouraging. Crompton has taken various measure in last 2 years in product and reach strategy to improve market share in Agri pumps, however weak underlying market trends in market due to better monsoon, demonetization etc has delayed the visible benefits of this startegy. It has started to see some green shoots (Agricultural pumps grew by 19% YoY in Q3FY18). February 20, 2018 2
Geysers and Air coolers: CGCEL believes it has not innovated enough in this segment and is yet to come out with cutting edge products. The company is already working on the strategy to revive growth in this segment. The company had experienced an increase in the competitive intensity and had lost some market share. CGCEL has a single digit market share in the Rs20bn market of Geysers and is 4th or 5th in this segment. It aspires to be number 2 3 player in both Geyser and Air cooler segment over near/medium term. Led by innovation, the company plans to launch some products in the next 6 9 months. Go to market programme: The current reach for Crompton is ~3000+dealers and 1,00,000+ retail touch points, it expects to increase its touch points to ~ 1,50,000 in next few years through its go to market programme. Crompton had implemented pilot programme for B 2 C business in lightning to improve retail reach. It has got very encouraging results (achieved 36% increase in store reach) and now implements the same in lighting segment pan India. It has also started with pilot programme for fan and pumps and implements it on a pan India basis based on the above achieved response. Exhibit 1: LED Growth over the quarters LED Growth YoY % to total LED sales (RHS) 16 1 1 10 8 6 64% 66% 7 7 53% 55% 1 9 83% 54% 57% 41% 25% Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1FY18 Q2FY18 Q3FY18 8 7 6 3 Exhibit 2: Crompton s Share in Product Categories Market share FY17 Fans 27% Lighting Top 3 player Pumps 8 9% Appliances Small February 20, 2018 3
Exhibit 3: Premium Fans growth over the quarters depicts the shift in focus Growth of premium fans % to total fan sales (RHS) 7 6 3 18% 16% 17% 15% 13% 6 23% 25% 28% 15% Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1FY18 Q2FY18 Q3FY18 25% 15% 5% Exhibit 4: EBITDA and Margin movement over the years 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 EBITDA (Rs m) Margin (%) (RHS) FY15 FY16 FY17 FY18E FY19E FY20E 14.0 13.5 13.0 12.5 12.0 11.5 11.0 10.5 Exhibit 5: Organised and Unorganised Markets Organised Unorganised 120 100 80 60 40 20 40 60 25 30 75 70 0 Lighting Fans Pumps February 20, 2018 4
Income Statement (Rs m) Net Revenue 39,759 41,715 48,024 55,359 Raw Material Expenses 27,349 28,450 32,848 37,755 Gross Profit 12,411 13,266 15,175 17,604 Employee Cost 2,252 3,037 3,341 3,675 Other Expenses 5,257 5,006 5,475 6,422 EBITDA 4,902 5,223 6,360 7,508 Depr. & Amortization 110 120 129 135 Net Interest 655 655 655 655 Other Income 195 248 320 442 Profit before Tax 4,331 4,695 5,896 7,159 Total Tax 1,399 1,502 1,887 2,255 Profit after Tax 2,932 3,193 4,009 4,904 Ex Od items / Min. Int. Adj. PAT 2,932 3,193 4,009 4,904 Avg. Shares O/S (m) 626.8 626.8 626.8 626.8 EPS (Rs.) 4.7 5.1 6.4 7.8 Cash Flow Abstract (Rs m) C/F from Operations 3,105 4,024 4,545 5,727 C/F from Investing (3,151) (500) (500) (250) C/F from Financing (154) (2,159) (2,911) (3,287) Inc. / Dec. in Cash (200) 1,365 1,133 2,190 Opening Cash 900 700 2,064 3,198 Closing Cash 700 2,064 3,198 5,388 FCFF (1,720) 2,996 3,398 4,822 FCFE (262) 2,996 3,398 4,822 Key Financial Metrics Growth Revenue (%) 119.5 4.9 15.1 15.3 EBITDA (%) 134.0 6.5 21.8 18.0 PAT (%) 146.1 8.9 25.6 22.3 EPS (%) 146.1 8.9 25.6 22.3 Profitability EBITDA Margin (%) 12.3 12.5 13.2 13.6 PAT Margin (%) 7.4 7.7 8.3 8.9 RoCE (%) 34.4 28.1 30.3 31.8 RoE (%) 76.4 51.2 50.1 48.3 Balance Sheet Net Debt : Equity 1.1 0.7 0.4 0.1 Net Wrkng Cap. (days) Valuation PER (x) 49.5 45.5 36.2 29.6 P / B (x) 26.9 20.5 16.2 12.8 EV / EBITDA (x) 30.8 28.7 23.4 19.5 EV / Sales (x) 3.8 3.6 3.1 2.6 Earnings Quality Eff. Tax Rate 32.3 32.0 32.0 31.5 Other Inc / PBT 4.5 5.3 5.4 6.2 Eff. Depr. Rate (%) 1.3 1.3 1.3 1.4 FCFE / PAT (8.9) 93.8 84.8 98.3. Balance Sheet Abstract (Rs m) Shareholder's Funds 5,392 7,073 8,946 11,352 Total Debt 6,676 6,676 6,676 6,676 Other Liabilities Total Liabilities 12,067 13,749 15,621 18,028 Net Fixed Assets 8,797 9,170 9,661 9,911 Goodwill Investments Net Current Assets 3,270 4,579 5,961 8,118 Cash & Equivalents 700 2,064 3,198 5,388 Other Current Assets 11,653 11,543 13,157 15,015 Current Liabilities 9,083 9,029 10,394 12,285 Other Assets Total Assets 12,067 13,748 15,621 18,028 Quarterly Financials (Rs m) Y/e March Q4FY17 Q1FY18 Q2FY18 Q3FY18 Net Revenue 10,762 10,555 9,597 9,382 EBITDA 1,386 1,294 1,207 1,165 % of revenue 12.9 12.3 12.6 12.4 Depr. & Amortization 29 32 32 32 Net Interest 153 161 157 158 Other Income 69 97 35 66 Profit before Tax 1,252 1,198 1,054 1,040 Total Tax 388 395 346 345 Profit after Tax 864 803 708 695 Adj. PAT 885 803 708 695. February 20, 2018 5
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