Crompton Greaves Consumer Electricals: Research Report By ICICI-Direct

Worthy mix of strong brand, healthy financials…

Crompton Greaves Consumer Electricals (CGCEL) is a compelling long term growth story with a strong brand, leadership position in India’s fan industry and healthy financials. Over the years, CGCEL has leveraged its strong distribution network (of 3500+ dealers) to expand into other product categories like water pump, lightings and small appliances. Post demerger in 2015, CGCEL has focused on margin improvement and asset light strategy to ensure a robust return ratio profile (RoE- 34%, RoCE-38%). Despite revenue loss for almost 40 days due to lockdown, CGCEL’s revenue is likely to register growth in FY21, supported by strong pent up demand of home appliances in semi-urban and rural India. We believe, going forward, business revival in metros (post ease in lockdown) and increased focus of the government on rural housing, infrastructure will drive demand for home appliances. With a strong supply chain and distribution network in place, we believe CGCEL is set to benefit from spike in demand as economy gets back on track. We value CGCEL at 38xFY23E earnings and assign BUY rating with a target price of ~| 440/share, considering its revenue PAT CAGR of 13% each in FY20-23E and robust balance sheet condition.

Focus on premium products to drive revenue, earnings growth

Post demerger, CGCEL has remained focused on increasing the contribution of premium products in its topline. The premium fan category of CGCEL grew at 16% CAGR in FY18-20 while its contribution in total fan revenue has also increased to ~20% now from ~14% in FY17. The company further aims to take this contribution to 30% by FY23E (I-direct estimate: 26%). On the lighting front, CGCEL is focusing on high margin street lights, fixtures and battens business. We believe changing product mix (towards premium category) will not only help drive better margins for the company but will also help it to stay ahead of competition and thereby gain market share. We model electrical consumer durable (ECD) & lighting segment revenue CAGR of 13% & 12%, respectively. We expect EBITDA margin to stay elevated on better product mix and rationalisation of other fixed costs.

One of the best operating matrix in industry

CGCEL has maintained strong EBITDA margin of ~13%, which is one of the best in the industry. In addition, it also has one of the best cash conversion cycle of ~23 days among peers, followed by Havells India (27 days) & Orient Electric (61 days). Low capital requirements along with elevated margin profile have led to better RoE, RoCE of 34%, 38%, respectively, by FY20.

Valuation & Outlook

CGCEL’s revenue, earnings are likely to grow at 13% CAGR each in FY20- 23E supported by elevated margins and saving in interest outgo. The strong brand, quality management and robust free cash flows (~80% of OCF) make CGCEL a strong franchise in the fast moving electrical goods (FMEG) industry. We assign a BUY rating to the stock with a target price of | 440/share, valuing the company at 38x FY23E earnings.