1QFY18 Result Update July 28,2017 CMP* (Rs) 208 Bloomberg Ticker CROMPTON IN Market Cap. (Rs bn) 130.6 Free Float (%) 65.6 Shares O/S (mn) 630 Channel De-stocking Impairs Top-line; Recovery Ahead Crompton Greaves Consumer Electricals (CGCEL) has reported a subdued performance in 1QFY18. Its net sales declined by 4.4% YoY to Rs10.8bn (vs. our expectation of Rs11.9bn) primarily due to channel de-stocking of ~Rs1.25-1.5bn in May & June prior to GST roll-out, which impacted its operating margins as well. EBITDA and reported PAT declined by 17.7% YoY and 14.1% YoY to Rs1573mn and Rs803mn, respectively. However, PAT dipped by 4.0% YoY post adjustment of ESOP cost. Looking ahead, we believe the expected strong double-digit growth in light electrical industry augurs well for CGCEL. Further, post recent correction in stock price, we change our recommendation on the stock to from HOLD with an unrevised Target Price of Rs246. GST-led Inventory De-stocking Drags Revenue Consumer Electrical segment, which contributes ~75% to CGCEL s total revenue, declined by 8.6% YoY owing to inventory de-stocking of Rs 1.25-1.5 bn in May and June prior to GST roll-out. Sales volume of premium fans grew by a strong 25% YoY and contributed 16% to overall fan business in 1QFY18. However, revenue from Lighting business accounting for 25% of CGEL s total top-line grew by 10.3% YoY. Within the Lighting business, LED segment continue to grow which now accounts for ~65% of its total lightning sales. However, some normalcy has restored in the markets post GST roll-out. With a view to striking a right balance between growth and margins to ensure channel de-stocking, the Company rolled back channel incentives, which was implemented during demonetisation. Lower Margin Impairs Bottom-line The Company reported decline in margins by 194bps YoY to 12.0% in 1QFY18 on account of high ESOP cost of Rs113mn and 63bps YoY decline in margin of Electrical Consumer Durable business, which was, however partially off-set by improved margins (+210bps) in lighting products business. Overall segmental EBITDA margins decreased 80bps QoQ in 1QFY18. Revenue from Lighting segment grew by 10.3% YoY with 210bps YoY expansion in margin due to higher sales of CFL and traditional bulbs both in terms of volume and value. However, despite adverse revenue mix CGCEL s cost structure remained stable owing to continued efforts on operational efficiencies. Its net profit declined by 14.1% YoY to Rs803mn in 1QFY18 owing to lower margins, however adjusted for Employee ESOP cost profits declined by 4% YoY. Share price (%) 1 mth 3 mth 12 mth Absolute performance (4.5) (5.8) 28.4 Relative to Nifty (9.8) (13.3) 12.5 Shareholding Pattern (%) Mar 17 Jun'17 Promoter 34.4 34.4 Public 65.6 65.6 1 Year Stock Price Performance 260 240 220 200 180 160 140 120 100 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 Note: * CMP as on July 28, 2017 Outlook & Valuation We expect CGCEL s business to recover in next 2-3 quarters, as normalcy is steadily getting restored post GST roll-out. Thus, we maintain our earnings estimates for FY18E and FY19E. We expect CGCEL s revenue and earnings to witness 16.4% and 23.5% CAGR, respectively over FY17-19E driven by strong product portfolio of established brands, market leadership and strong distribution network. We change our recommendation on the stock to from HOLD with an unrevised Target Price of Rs246 (valuing at 35x P/E to its FY19E EPS). Key Financials (Rs mn) FY16 FY17 FY18E FY19E Sales 35,869 39,759 46,071 53,899 EBITDA 4,328 4,902 5,943 7,061 Net profit 2,285 2,907 3,606 4,430 EPS Rs) 3.6 4.6 5.7 7.0 P/E (x) 57.3 45.0 36.3 29.6 P/B (x) 57.1 24.1 17.6 12.2 EV/EBITDA (x) 31.3 27.9 22.9 19.1 ROE (%) 99.7 53.6 48.5 41.2 Source: Company, RSec Research Research Analyst: Rupesh Sankhe Contact: (022) 3320 1606 Email: rupesh.sankhe@relianceada.com 1
Risks to the View ff Increase in cheaper imports from China would dent pricing power and margins. ff Slower-than-expected recovery in consumer demand. Exhibit 1: Result Summary (Rs mn) 1QFY18 1QFY17 YoY % 4QFY17 QoQ % Net Sales 10,809 11,307 (4.4) 10,762 0.4 Operating Costs 9,515 9,734 (2.2) 9,376 1.5 EBIDTA 1,294 1,573 (17.7) 1,386 (6.6) EBIDTA Margin (%) 11.97 13.91-12.88 - Other Income 97 34 181.7 69 40.8 Interest 161 180 (10.2) 153 5.8 Depreciation 32 28 12.5 29 9.0 Profit Before Tax 1,198 1,400 (14.4) 1,252 (4.3) Tax 395 465-388 - Tax Rate (%) 33.0 33.2-31.0 - Reported PAT 803 935 (14.1) 864 (7.1) Source: Company RSec Research Exhibit 2: Segment Revenue (Rs mn) 1QFY18 1QFY17 YoY % 4QFY17 QoQ % Segment Revenue( Net of Excise Duty) Lighting products 2,748 2,491 10.3 3,068 (10.4) Electrical Consumer Durables 8061 8816 (8.6) 7,694 4.8 Total Net Sales 10,809 11,307 (4.4) 10,762 0.4 PBIT Lighting products 220 147 50.3 231 (4.7) Electrical Consumer Durables 1,414 1,602 (11.7) 1,485 (4.7) PBIT % Lighting products 8.0 5.9 7.5 Electrical Consumer Durables 17.5 18.2 19.3 Source: Company RSec Research 2
Profit & Loss Statement Net Sales 35,869 39,759 46,071 53,899 Raw Materials 12,702 27,349 31,651 36,975 Employee Costs 1,005 2,252 2,534 2,911 Other Expenditure 2,315 5,257 5,943 6,953 Total Expenditure 31,541 34,857 40,128 46,838 EBIDTA 4,328 4,902 5,943 7,061 Other Income 4 195 9 10 Depreciation 126 110 140 135 EBIT 4,206 4,987 5,812 6,936 Interest 678 655 586 515 Extraoridanry (105) (25) PBT 3,423 4,306 5,226 6,421 Tax 1,138 1,399 1,620 1,990 PAT 2,285 2,907 3,606 4,430 PAT Margins % 6.4 7.3 7.8 8.2 EPS 3.6 4.6 5.7 7.0 Balance Sheet Share Capital Equity 1,259 1,259 1,259 1,259 Reserves 1,034 4,166 6,169 9,493 Net Worth 2,293 5,425 7,428 10,752 Secured Loans 5,172 6,500 5,800 5,100 Unsecured Loans 146 176 176 176 Total Debt 5,318 6,676 5,976 5,276 Total 7,611 12,101 13,404 16,028 Net Block 8,581 8,640 10,000 11,065 Investments 3,185 3,185 3,185 Current Assets 7,949 9,351 9,790 10,443 Inventory 2,100 2,348 2,498 2,648 Sundry Debtors 4,165 5,434 5,554 5,729 Cash 900 700 827 1,096 Loans & Advances, Prepaid Exp 784 869 910 970 Current Liabilities & Provisions 6,921 7,781 7,575 6,671 Creditors 6,641 7,145 7,295 6,391 Provisions 280 635 280 280 Others 2,004 1,302 2,004 2,004 Net current Assets 1,028 1,570 2,215 3,772 Total 7,611 12,101 13,404 16,028 3
Cash Flow Statement Net Income/(loss) before Tax & EO items 3,423 4,306 5,226 6,421 Depreciation and Amortization 126 110 140 135 Interest Expense 678 655 586 515 Operating profit before WC Changes 4,227 5,072 5,952 7,071 Net Change in Working Capital 24,819 (743) (517) (1,289) Cash generated from Operationing Activi. 29,046 4,329 5,435 5,781 Taxes paid (1,138) (1,399) (1,620) (1,990) CF before Extra - Ordinary items 27,908 2,930 3,815 3,791 Net CF From Operating Activities 27,908 2,930 3,815 3,791 Purchase of Fixed Assets 49,475 (170) (1,500) (1,200) Purchase of Investment 4,414 (3,185) - - Adj. on acquisition of subsidiary/associ. 9,468 249 - - Net CF From Investing Activities 63,356 (3,106) (1,500) (1,200) Increase/(Decrease) of borrowing (20,469) 1,358 (700) (700) Dividend Paid - (727) (901) (1,108) Interest paid (678) (655) (586) (515) Net CF From Financing Activities (21,147) (25) (2,187) (2,323) Increase/(Decrease) in cash 70,117 (200) 128 268 Cash at the beginning of the year 1,291 900 700 827 Cash at the end of the year 900 700 827 1,096 Key Ratios Y/E March FY16 FY17 FY18E FY19E EBITDA margin (%) 12.1 12.3 12.9 13.1 RoE (%) 99.7 53.6 48.5 41.2 RoCE (%) 38.9 29.4 29.9 29.9 EV / sales (x) 3.8 3.4 3.0 2.5 EV / EBITDA (x) 31.3 27.9 22.9 19.1 P/E (x) 57.3 45.0 36.3 29.6 P / BV (x) 57.1 24.1 17.6 12.2 4
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