Building strong base for growth May 16, 2018 Kunal Sheth kunalsheth@plindia.com +91 22 66322257 Shreyans Jain shreyansjain@plindia.com +91 22 66322256 Rating BUY Price Rs228 Target Price Rs299 Implied Upside 31.1% Sensex 35,388 Nifty 10,741 (Prices as on May 16, 2018) Trading data Market Cap. (Rs bn) 143.0 Shares o/s (m) 626.0 3M Avg. Daily value (Rs m) 276 Major shareholders Promoters 34.38% Foreign 34.79% Domestic Inst. 15.45% Public & Other 15.38% Stock Performance (%) 1M 6M 12M Absolute 1.4 (5.8) (6.1) Relative (1.8) (12.7) (21.8) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2019 6.7 6.7 2020 7.9 8.2 (3.4) Price Perf. (RIC: CROP.BO, BB: CROMPTON IN) (Rs) 300 250 200 150 100 50 0 May 17 Jul 17 Source: Bloomberg Sep 17 Nov 17 Jan 18 Mar 18 May 18 Crompton Greaves Consumer Electricals (CGCEL) delivered in line numbers with a 29% growth in PAT at Rs1bn. Revenues came in at Rs11.2bn, up 7.6% YoY (adjusted comparable growth 13% YoY). CGCEL continued to gain healthy market share in core categories of Fans and the Lighting (LED) segment. The company s focus is on a) investing and increasing brand awareness, b) developing innovative products in core categories like Fans/lighting and Air Coolers and c) strengthening the go tomarket in order to increase its reach (both quality and quantity of reach) and significantly increasing focus on retail/distributor. While the implementation of goto market strategy and excessive focus on retail are creating short term disruptions, they are also creating a base for strong and sustainable growth for the future. The company launched a pilot in the Window Cooler segment and the response has been encouraging. The company aspires to be at least among the top three players in the Air cooler category in the near/medium term. While the company has successfully executed the first leg of strategy of setting Fan/Lighting/Agro pump on a strong growth footing, maintenance of the growth and successful scale up in other categories will be the key monitorables. We expect sales to grow at a CAGR of 12% and earnings CAGR of 20% over FY17 20E. We maintain BUY with a TP of Rs299. Strong margin beat: Revenues came in at Rs11.2bn, up 7.6% YoY (Adjusted comparable growth 13% YoY). Sales for Electric consumer products segment grew by 2% YoY, while sales for Lighting segment was up 12% YoY. EBITDA came in at ~Rs1.6bn, up 27.5% YoY which included an ESOP charge of ~Rs143mn. EBITDA Margin improved 230bps to 14.6%. CGCEL s continued focus on improving efficiency and cost saving projects have started showing results, with EBIT margins improving by 260bps and 470bps in Consumer Products and Lighting Segment to 21.7% and 11.1%, respectively. PAT came in at Rs1bn, up 29% YoY. Contd...2 Key financials (Y/e March) 2017 2018 2019E 2020E Revenues (Rs m) 39,009 40,797 48,024 55,359 Growth (%) 115.3 4.6 17.7 15.3 EBITDA (Rs m) 4,846 5,310 6,592 7,652 PAT (Rs m) 2,857 3,238 4,182 4,932 EPS (Rs) 4.6 5.2 6.7 7.9 Growth (%) 139.8 13.3 29.2 17.9 Net DPS (Rs) 1.5 1.8 3.0 3.5 Profitability & Valuation 2017 2018 2019E 2020E EBITDA margin (%) 12.4 13.0 13.7 13.8 RoE (%) 71.1 55.4 63.5 58.1 RoCE (%) 33.5 29.7 35.3 35.8 EV / sales (x) 3.8 3.6 3.1 2.6 EV / EBITDA (x) 30.7 28.0 22.5 19.1 PE (x) 50.1 44.2 34.2 29.0 P / BV (x) 24.9 24.1 19.8 14.7 Net dividend yield (%) 0.7 0.8 1.3 1.5 Source: Company Data; PL Research Q4FY18 Result 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
Fans segment: 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 (against historical growth rate of 7 8%), CGCEL continues to grow in double digits led by premium fans. The focus on innovation to drive the business continues to be at the core. Their Anti Dust fans sales were more than Rs2bn. The company has introduced a new range, Air360, which has received an encouraging initial response. CGCEL fans now have a 27% market share in the fan segment (300bps market share gain in last 2 3 years). As a part of its go to market strategy, CGCEL is focussing more on retail/distributor. The company has started to implement the same in the North markets in the recent quarters leading to some disruption there in the near term. Implementation of the go to market strategy in the initial quarters might see some weakness in sales; however, a strong growth is expected soon after once the model settles. South markets witnessed a 25% growth for two consecutive quarters and the East markets grew 25% and 15 16% in Q3 and Q4, respectively, after implementation of go to market strategy. Lighting segment: Lighting segment clocked growth of more than 20% for the year driven by their focus on B 2 C and go to market strategy. The distribution push is showing results with both B 2 B and B 2 C sales growing at a healthy pace. There is huge headroom for growth in the LED sales, as only 20% of the traditional lights have been converted to LED and LED offers more value added benefits than CFL. Pumps segment: To counter the competitive intensity faced by the company in the North and East region in the last quarter, CGCEL had launched Crest Mini, a mid range Pump. These pumps competed against a large number of mid and low priced pumps by smaller players and the product was a success. CGCEL saw growth in sales volume by about 25% and the overall pumps business also pulled back with CGCEL experiencing market leading growth rates (13 14% in value terms). Air Coolers: CGCEL has launched a pilot project to test a new unique 50L window cooler in the market which offers 60% better cooling and company is also offering free onsite installation. The pilot covered 15 20% of the market and the company is now planning to push the product in the coming season. The initial signs/response have been positive for the company. It aspires to be amongst the top three players in the Air cooler segment over near/medium term led by innovative product offering. Go to market programme: The current reach for CGCEL is ~3000+dealers and 1,00,000+ retail touch points; it expects to increase its touch points to ~1,50,000 in the next few years through its go to market programme. CGCEL had implemented pilot programme for B 2 C business in lightning/fan segment to improve its retail reach. It has got very encouraging results in most regions where it has been implemented (achieved 36% increase in store reach in lighting, 20 25% in sales etc.). CGCEL has also started with a pilot programme for fan and pumps and is implementing it on a pan India basis based on the above achieved response. While go to market strategy is a continuous effort, channel switch should completed in this year for all market and segments. May 16, 2018 2
Exhibit 1: Q4FY18 Result Overview (Rs mn) Y/e March Q4FY18 Q4FY17 YoY gr. (%) Q3FY18 FY18 FY17 YoY gr. (%) Net Sales 11,263 10,463 7.6 9,382 40,797 39,009 4.6 Expenditure Operating & Manufacturing Expenses 7,704 7,371 4.5 6,277 27,996 27,335 2.4 % of Net Sales 68.4 70.4 66.9 68.6 70.1 Personnel Cost 700 739 (5.3) 742 2,827 2,322 21.7 % of Net Sales 6.2 7.1 7.9 6.9 6.0 Other Expenses 1,215 1,064 14.2 1,198 4,664 4,506 3.5 % of Net Sales 10.8 10.2 12.8 11.4 11.6 Total Expenditure 9,618 9,173 4.9 8,217 35,486 34,163 3.9 EBITDA 1,645 1,290 27.5 1,165 5,310 4,846 9.6 Margin (%) 14.6 12.3 12.4 13.0 12.4 Other income 109 69 58.8 66 308 195 57.8 Depreciation 31 29 6.6 32 126 110 14.2 EBIT 1,723 1,330 29.6 1,199 5,492 4,931 11.4 Interest 161 153 5.3 158 637 655 2.7 PBT 1,562 1,177 32.7 1,040 4,854 4,276 13.5 Total Taxes 530 377 40.7 345 1,617 1,419 13.9 ETR (%) 33.9 32.0 33.2 33.3 33.2 PAT 1,032 800 29.0 695 3,238 2,857 13.3 Source: Company Data, PL Research Exhibit 2: Segmental Break up (Rs mn) Q4FY18 Q4FY17 YoY gr. (%) Q3FY18 FY18 FY17 YoY gr. (%) Revenue Lightning products 3,379 3,022 11.8 3,265 12,770 11,296 13.1 Electric Consumer Products 7,884 7,739 1.9 6,117 28,281 28,871 (2.0) EBIT Lightning products 374 191 95.7 452 1,473 991 48.6 EBIT margin (%) 11.1 6.3 4.7 13.8 11.5 8.8 Electric Consumer Products 1,711 1,479 15.7 1,112 5,347 4,950 8.0 EBIT margin (%) 21.7 19.1 18.2 18.9 17.1 Source: Company Data, PL Research May 16, 2018 3
Income Statement (Rs m) Net Revenue 39,009 40,797 48,024 55,359 Raw Material Expenses 27,335 27,996 32,848 37,865 Gross Profit 11,674 12,801 15,175 17,493 Employee Cost 2,322 2,827 3,109 3,420 Other Expenses 4,506 4,664 5,475 6,422 EBITDA 4,846 5,310 6,592 7,652 Depr. & Amortization 110 126 135 144 Net Interest 655 637 637 637 Other Income 195 308 331 331 Profit before Tax 4,276 4,854 6,150 7,201 Total Tax 1,419 1,617 1,968 2,268 Profit after Tax 2,857 3,238 4,182 4,932 Ex Od items / Min. Int. Adj. PAT 2,857 3,238 4,182 4,932 Avg. Shares O/S (m) 626.8 626.8 626.8 626.8 EPS (Rs.) 4.6 5.2 6.7 7.9 Cash Flow Abstract (Rs m) C/F from Operations 2,663 3,341 4,362 4,877 C/F from Investing (3,151) (308) (169) 81 C/F from Financing (154) (1,946) (2,894) (3,270) Inc. / Dec. in Cash (641) 1,087 1,299 1,688 Opening Cash 900 259 1,345 2,644 Closing Cash 259 1,345 2,644 4,331 FCFF 3,303 3,522 4,860 FCFE 3,310 3,522 4,860 Key Financial Metrics Growth Revenue (%) 115.3 4.6 17.7 15.3 EBITDA (%) 131.4 9.6 24.1 16.1 PAT (%) 139.8 13.3 29.2 17.9 EPS (%) 139.8 13.3 29.2 17.9 Profitability EBITDA Margin (%) 12.4 13.0 13.7 13.8 PAT Margin (%) 7.3 7.9 8.7 8.9 RoCE (%) 33.5 29.7 35.3 35.8 RoE (%) 71.1 55.4 63.5 58.1 Balance Sheet Net Debt : Equity 1.0 1.0 0.7 0.3 Net Wrkng Cap. (days) Valuation PER (x) 50.1 44.2 34.2 29.0 P / B (x) 24.9 24.1 19.8 14.7 EV / EBITDA (x) 30.7 28.0 22.5 19.1 EV / Sales (x) 3.8 3.6 3.1 2.6 Earnings Quality Eff. Tax Rate 33.2 33.3 32.0 31.5 Other Inc / PBT 4.6 6.3 5.4 4.6 Eff. Depr. Rate (%) 1.2 1.4 1.4 1.5 FCFE / PAT 102.2 84.2 98.5 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 5,746 5,941 7,234 9,750 Total Debt 6,478 6,486 6,486 6,486 Other Liabilities Total Liabilities 12,224 12,427 13,719 16,236 Net Fixed Assets 8,910 9,170 9,661 9,911 Goodwill Investments Net Current Assets 3,313 3,257 4,059 6,325 Cash & Equivalents 656 798 1,296 3,595 Other Current Assets 11,401 11,289 13,157 15,015 Current Liabilities 8,744 8,830 10,394 12,285 Other Assets Total Assets 12,224 12,426 13,719 16,236 Quarterly Financials (Rs m) Y/e March Q1FY18 Q2FY18 Q3FY18 Q4FY18 Net Revenue 10,555 9,597 9,382 11,263 EBITDA 1,294 1,207 1,165 1,645 % of revenue 12.3 12.6 12.4 14.6 Depr. & Amortization 32 32 32 31 Net Interest 161 157 158 161 Other Income 97 35 66 109 Profit before Tax 1,198 1,054 1,040 1,562 Total Tax 395 346 345 530 Profit after Tax 803 708 695 1,032 Adj. PAT 803 708 695 1,032 Source: Company Data, PL Research. May 16, 2018 4
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