Crompton Greaves Consumer Electricals

INDUSTRY APPLIANCES CMP (as on 27 July 2017) Rs 209 Target Price Rs 252 Nifty 10,021 Sensex 32,383 KEY STOCK DATA Bloomberg CROMPTON IN No. of Shares (mn) 627 MCap (Rs bn)/(us$ mn) 131/2,046 6m avg traded value (Rs mn) 260 STOCK PERFORMANCE (%) 52 Week high / low Rs 246 /135 3M 6M 12M Absolute (%) (6.9) 11.5 39.4 Relative (%) (14.7) (4.7) 23.9 SHAREHOLDING PATTERN (%) Promoters 34.38 FIs & Local MFs 15.00 FPIs 26.50 Public & Others 24.12 Source : BSE Naveen Trivedi naveen.trivedi@hdfcsec.com +91-22-6171-7324 RESULTS REVIEW 1QFY18 28 JUL 2017 Crompton Greaves Consumer Electricals No change in thesis Crompton s net revenue contracted by 3.7% to Rs 10.5bn in 1QFY18, against our expectation of 2% growth. Adj. EBITDA and APAT were down by 11% and 7% respectively. As per mgt, channel destocking impacted revenues worth Rs 1.3 to 1.5bn in 1QFY18. Adjusting for the same, revenue growth was at 7-8%, suggesting healthy underlying demand. The ECD segment (75% of revenues) saw 8.6% decline in revenues, owing to high dependence on the wholesale channel. While, Crompton gained ~1% market share in Fans (especially premium) during the last six -months. Premium fans (16% of fans) grew by a strong 25%. Lighting clocked 10.3% growth, as destocking pressure was less on B-to-B business (50% of lighting business). LED business (~66% of lighting) grew by a robust 66%. Management s focus area remains the same, i.e. (1) Cost rationalisation (2) Premiumisation and (3) Competitive pricing. Our structural thesis is unchanged. BUY Healthy growth in the LED business, (3) Brand leveraging in appliances (4) Focus on efficient distribution (ROI model) and (5) Asset-light business model. Given the healthy earnings growth (21% EPS CAGR over FY17P-20E), asset-light business model and FCF generation of Rs 5-6bn in FY19-20, high valuations are natural. We reiterate BUY with a TP of Rs 252, based on 35x Jun-19 EPS. Highlights for the quarter Pre-GST pressure on revenues: Channel destocking has impacted revenues. Premium fans/led revenues grew by a strong 25/66% respectively in 1Q. Earnings contracted: GM was up by 97bps at 30.6%. Employee expenses grew by 48% (Ex-ESOP 18% YoY), while other expenses increased by 3% YoY. EBITDA margin was down by 113bps to 13.6%. APAT was down by 7% to Rs 899mn (Rs 910mn expectation). Crompton is arguably India s strongest mass premium Near-term outlook: GST implementation could create brand in Consumer Electricals. We continue to like volatility in the stock price in the near-term. We Crompton owing to (1) Premiumisation in fans, (2) advise investors to see the long-term potential. Financial Summary (Rs mn) 1QFY18 1QFY17 YoY (%) 4QFY17 QoQ (%) *FY16 FY17 FY18E FY19E FY20E Net Revenue 10,555 10,962 (3.7) 10,762 (1.9) 18,117 39,759 45,105 51,774 59,105 EBITDA 1,294 1,573 (17.7) 1,386 (6.6) 2,095 4,902 5,860 6,920 8,059 APAT 897 961 (6.7) 879 2.1 1,145 2,947 3,578 4,386 5,403 EPS (Rs) 1.43 1.53 (6.7) 1.40 2.1 1.8 4.7 5.6 6.8 8.4 P/E (x) 56.1 43.6 36.9 30.1 24.4 EV/EBITDA (x) 31.7 26.7 22.5 18.7 15.6 Core RoCE (%) 41.3 40.7 49.9 59.2 69.1 * FY16: Financials are for 6 months, ratios are adjusted HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Channel destocking contracted revenues by 3.7%. Retail demand was healthy during the quarter As per management, exchannel destocking, revenue grew by ~7%. Hence, we expect growth acceleration in the ensuing quarters Higher premium segment growth and several cost control initiatives have helped the company to expand the gross margin by 97bps to 31% EBITDA margin (Ex-ESOP from 1QFY18 and ex-onetime expense in 1QFY17) was down by 113bps to 13.6% vs. expectation of 98bps dip Higher other income with lower taxes (-23bps YoY) translated into APAT decline of 7% to Rs899mn (Rs 910mn expectation) Quarterly Financials Particulars 1QFY18 1QFY17 YoY (%) 4QFY17 QoQ (%) Net Revenue 10,555 10,962 (3.7) 10,762 (1.9) Material Expenses 7,329 7,718 (5.0) 7,411 (1.1) Employee Expenses 686 463 48.1 685 0.1 Other Operating Expenses 1,246 1,208 3.2 1,280 (2.6) EBITDA 1,294 1,573 (17.7) 1,386 (6.6) Adj EBITDA 1,434 1,613 (11.1) 1,646 (12.9) Depreciation 32 28 12.5 29 9.0 EBIT 1,263 1,545 (18.3) 1,357 (6.9) Other Income 97 34 181.7 69 na Interest Cost 161 180 (10.2) 153 5.8 PBT 1,198 1,400 (14.4) 1,252 (4.3) Tax 395 465 (15.0) 388 1.9 RPAT 803 935 (14.1) 864 (7.1) EO Items (Adj For Tax) (96) (27) na (14) na APAT 899 961 (6.5) 879 2.3 EPS 1.43 1.53 (6.5) 1.40 2.3 Margin Analysis MARGIN ANALYSIS 1QFY18 1QFY17 YoY (%) 4QFY17 QoQ (%) Material Expenses 69.4 70.4 (97) 68.9 57 Employee Expenses 6.5 4.2 227 6.4 13 Other Operating Expenses 11.8 11.0 79 11.9 (9) EBITDA Margin 12.3 14.3 (209) 12.9 (62) Adj EBITDA Margin 13.6 14.7 (113) 15.3 (170) Tax Rate 33.0 33.2 (23) 31.0 203 APAT Margin 8.5 8.8 (25) 8.2 35 Page 2

In lighting, LED business saw >60% growth. LED now contributes 66% to lighting revenues Fans continued to show strong growth, driven by the premium segment. Premium fans grew by a strong 25% and contributed 16% to the fan business in 1QFY18 Pump business remained weak owing to higher dependence on the wholesale channel Lighting EBIT margin expanded by 213bps to 8%. While ECD EBIT margin was down by 63bps to 17.5% Segmental Quarterly Performance (Rs mn) 1QFY18 1QFY17 YoY (%) 4QFY17 QoQ (%) Segmental Revenues Lighting Products 2,748 2,491 10.3 3,068 (10.4) Electric Consumer Durables (ECD) 8,061 8,816 (8.6) 7,693 4.8 Total 10,809 11,307 (4.4) 10,761 0.4 Segmental EBIT Lighting Products 220 147 50.3 231 (4.7) Electric Consumer Durables (ECD) 1,414 1,602 (11.7) 1,485 (4.7) Total 1,634 1,748 (6.5) 1,716 (4.7) Less: (a) Interest Cost & Bank Charges 161 180 (10.2) 153 5.8 (b) Other Un-allocable Expenses 275 169 62.7 311 (11.6) PBT 1,198 1,400 (14.4) 1,252 (4.3) Capital Employed Lighting Products 611 1,057 (42.2) 546 11.9 Electric Consumer Durables (ECD) 127 (702) (118.1) 124 2.3 Total 737 356 107.4 670 10.1 Unallocable Capital Employed 5,332 2,624 103.2 4,722 12.9 Total Capital Employed 6,070 2,980 103.7 5,392 12.6 Segmental EBIT Margin (Rs mn) 1QFY18 1QFY17 YoY (%) 4QFY17 QoQ (%) Lighting Products 8.0 5.9 213.2 7.5 48.1 Electric Consumer Durables (ECD) 17.5 18.2 (62.7) 19.3 (175.5) Total 15.1 15.5 (34.2) 15.9 (82.3) Page 3

Premiumisation, cost control initiatives and distribution expansion delivering healthy operating performance since last many quarters Crompton s Revenue Performance (Rs mn) 12,000 10,962 10,016 10,000 8,101 8,900 8,889 8,000 10,762 10,555 Crompton s Margin Performance EBITDA Margin - RHS Gross Margin 32% 31% 16% 14% 12% 6,000 4,000 2,000 30% 29% 10% 8% - 28% 6% Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Crompton s Lighting Performance Crompton s Electric Consumer Performance LED now contributes 66% to the lighting business. We expect overall lighting revenue growth to accelerate in the ensuring quarters, owing to higher LED mix (Rs mn) 3,200 3,000 2,800 2,600 Revenues EBIT Margin 14.0% 11.5% 9.0% (Rs mn) 10,000 8,000 6,000 4,000 Revenues EBIT Margin - RHS 20.0% 17.5% 15.0% Fans continue to lead the growth in the ECD segment. Greater no of innovative launches and expansion in distribution would accelerate the Appliance business in the coming years 2,400 2,200 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 6.5% 4.0% 2,000 - Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 12.5% 10.0% Page 4

Key Assumptions Segments Revenue (Rs mn) Revenue Growth (%) Revenue Mix (%) FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E Fans 18,792 21,329 24,315 27,719 12.5% 13.5% 14.0% 14.0% 45.9% 45.8% 45.7% 45.6% Lighting 11,312 13,009 14,961 17,205 8.5% 15.0% 15.0% 15.0% 27.6% 27.9% 28.1% 28.3% Pumps 8,260 9,251 10,361 11,604 11.0% 12.0% 12.0% 12.0% 20.2% 19.8% 19.5% 19.1% Appliances 2,555 3,015 3,558 4,198 12.0% 18.0% 18.0% 18.0% 6.2% 6.5% 6.7% 6.9% Total 40,920 46,604 53,195 60,727 11.0% 13.9% 14.1% 14.2% 100.0% 100.0% 100.0% 100.0% P&L Breakup - % of revenue FY17 FY18E FY19E FY20E Raw Material 69.8 69.6 69.2 69.0 Employee expenses 5.7 5.7 5.7 5.7 After sales services incl. warranty 1.0 1.0 1.0 1.0 Sales promotion 1.5 1.5 1.5 1.5 Advertising 1.4 1.4 1.4 1.4 Freight and forwarding 2.3 2.3 2.3 2.3 Others 6.0 5.6 5.6 5.5 EBITDA Margin 12.3 13.0 13.4 13.6 Depreciation and amortization 0.3 0.5 0.5 0.5 Interest 1.6 1.3 1.1 0.8 Other income 0.5 0.5 0.8 1.1 PBT 10.9 11.7 12.5 13.4 Tax 3.5 3.8 4.0 4.3 NPM 7.4 7.9 8.5 9.1 Source: HDFC sec Inst Research Page 5

Income Statement Year End March (Rs mn) FY16 FY17 FY18E FY19E FY20E Net Revenues 18,117 39,759 45,105 51,774 59,105 Growth (%)* 9.7 13.4 14.8 14.2 Material Expenses 12,889 27,753 31,378 35,843 40,782 Employee Expense 1,005 2,252 2,822 3,219 3,652 ASP Expense 348 1,159 1,314 1,509 1,722 Freight and forwarding 462 895 1,015 1,165 1,330 Other expenses 1,319 2,799 3,175 3,645 4,161 EBITDA 2,095 4,902 5,860 6,920 8,059 EBITDA Growth (%)* 17.0 19.5 18.1 16.4 EBITDA Margin (%) 11.6 12.3 13.0 13.4 13.6 Depreciation 63 110 211 284 314 EBIT 2,032 4,815 5,649 6,636 7,744 Other Income (Including EO Items) 178 220 215 398 651 Interest 355 655 585 585 450 PBT 1,577 4,329 5,279 6,449 7,945 Tax 525 1,399 1,701 2,064 2,542 RPAT 1,052 2,930 3,578 4,386 5,403 Adjustment 93 17 - - - APAT 1,145 2,947 3,578 4,386 5,403 APAT Growth (%)* 28.7 21.4 22.6 23.2 Adjusted EPS (Rs) 1.8 4.7 5.6 6.8 8.4 EPS Growth (%)* 28.7 18.2 22.6 23.2 * FY16: Financials are for 6 months, growth is adjusted for FY16 annualised numbers Balance Sheet Year End March (Rs mn) FY16 FY17 FY18E FY19E FY20E SOURCES OF FUNDS Share Capital - Equity 1,254 1,254 1,288 1,288 1,288 Reserves 1,034 4,138 6,351 9,065 12,407 Total Shareholders Funds 2,288 5,392 7,639 10,352 13,695 Long Term Debt 5,072 6,500 6,500 6,500 3,500 Short Term Debt 100 - - - - Total Debt 5,172 6,500 6,500 6,500 3,500 Net Deferred Taxes (43) (182) (182) (182) (182) Other Non-Current Liabilities 146 176 220 251 285 TOTAL SOURCES OF FUNDS 7,562 11,886 14,178 16,922 17,298 APPLICATION OF FUNDS Tangible Assets 786 821 910 1,026 1,157 CWIP 1 - - - - Goodwill 7,794 7,794 7,794 7,794 7,794 Other Non-Current Assets 178 186 213 245 284 Total Non-current Assets 8,759 8,801 8,917 9,065 9,235 Inventories 2,100 2,348 2,616 2,951 3,369 Debtors 4,165 5,434 5,864 6,731 7,684 Other Current Assets 563 500 567 651 743 Cash & Equivalents 900 3,885 6,470 9,233 9,580 Total Current Assets 7,728 12,167 15,517 19,565 21,375 Creditors 6,641 7,145 8,106 9,305 10,622 Other Current Liabilities 2,285 1,938 2,151 2,404 2,690 Total Current Liabilities 8,926 9,083 10,257 11,709 13,312 Net Current Assets (1,197) 3,084 5,260 7,857 8,063 TOTAL APPLICATION OF FUNDS 7,562 11,885 14,178 16,922 17,298 Page 6

Cash Flow Statement Year ending March (Rs mn) FY16 FY17 FY18E FY19E FY20E Reported PBT 1,577 4,306 5,279 6,449 7,945 Interest Expenses 351 655 585 585 450 Depreciation 63 110 211 284 314 Working Capital Change 357 (516) 409 166 140 Tax Paid (540) (1,466) (1,701) (2,064) (2,542) OPERATING CASH FLOW ( a ) 1,757 3,105 4,783 5,421 6,308 Capex (15) (150) (300) (400) (445) Free Cash Flow (FCF) 1,742 2,955 4,483 5,021 5,863 Investments - (3,191) - - - Non-operating Income 40 190 (27) (32) (39) INVESTING CASH FLOW ( b ) 24 (3,151) (327) (432) (484) Debt Issuance/(Repaid) (533) 56 - - (3,000) Interest Expenses (351) (209) (585) (585) (450) FCFE 898 (200) 3,870 4,404 2,373 Share Capital Issuance - - 34 - - Dividend - - (1,364) (1,672) (2,060) Others - 44 31 34 FINANCING CASH FLOW ( c ) (883) (154) (1,871) (2,226) (5,477) NET CASH FLOW (a+b+c) 898 (200) 2,585 2,763 347 EO Items, Others - - - - - Closing Cash & Equivalents 900 700 3,285 6,047 6,394 Key Ratios FY16 FY17 FY18E FY19E FY20E PROFITABILITY (%) GPM 28.9 30.2 30.4 30.8 31.0 EBITDA Margin 11.6 12.3 13.0 13.4 13.6 EBIT Margin 11.2 12.1 12.5 12.8 13.1 APAT Margin 6.3 7.4 7.9 8.5 9.1 RoE 100.1 54.7 46.8 42.4 39.5 RoIC (or Core RoCE) 41.3 40.7 49.9 59.2 69.1 RoCE 37.0 28.5 28.1 28.4 33.2 EFFICIENCY Tax Rate (%) 33.3 32.3 32.2 32.0 32.0 Fixed Asset Turnover (x) 3.7 4.0 4.4 4.9 5.3 Inventory (days) 21.2 21.6 21.2 20.8 20.8 Debtors (days) 42.0 49.9 47.5 47.5 47.5 Other Current Assets (days) 5.7 4.6 4.6 4.6 4.6 Payables (days) 66.9 65.6 65.6 65.6 65.6 Other Current Liab & Provns (days) 23.0 17.8 17.4 16.9 16.6 Cash Conversion Cycle (days) (21.1) (7.4) (9.8) (9.7) (9.4) Net D/E (x) 1.9 0.5 0.0 (0.3) (0.4) Interest Coverage (x) 0.2 0.1 0.1 0.1 0.1 PER SHARE DATA (Rs) EPS 1.8 4.7 5.6 6.8 8.4 CEPS 1.9 4.9 5.9 7.3 8.9 Dividend - 1.6 1.9 2.3 2.8 Book Value 3.7 8.6 11.9 16.1 21.3 VALUATION P/E (x) 56.1 43.6 36.9 30.1 24.4 P/BV (x) 28.1 23.8 17.3 12.7 9.6 EV/EBITDA (x) 31.7 26.7 22.5 18.7 15.6 EV/Revenues (x) 3.7 3.3 2.9 2.5 2.1 OCF/EV (%) 1.3 2.4 3.6 4.2 5.0 FCF/EV (%) 1.3 2.3 3.4 3.9 4.7 FCFE/Mkt Cap (%) 0.7 (0.2) 2.9 3.3 1.8 Dividend Yield (%) - 0.8 0.9 1.1 1.4 * FY16: Financials are for 6 months, ratios are adjusted for FY16 annualised numbers Page 7

RECOMMENDATION HISTORY Crompton Consumer 260 240 220 200 TP Date CMP Reco Target 30-Jan-17 188 BUY 228 14-Apr-17 215 BUY 245 29-May-17 224 BUY 248 28-Jul-17 209 BUY 252 180 160 140 120 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 8

Disclosure: I, Naveen Trivedi, MBA, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HSL. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report. HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: complianceofficer@hdfcsec.com Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Research Analyst Reg. No.: INH000002475, CIN - U67120MH2000PLC152193 Mutual Funds Investments are subject to market risk. Please read the offer and scheme related documents carefully before investing. Page 9

HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel,Mumbai - 400 013 Board : +91-22-6171 7330www.hdfcsec.com Page 10