Crompton Greaves - Well Placed To Reap The Benefits Of Upturn In The Industry: HDFC Securities

HDFC Securities Retail Research

Crompton Greaves Consumer Electricals Ltd. is one of India's leading consumer electrical companies, having a rich legacy of more than nine decades in the electrical consumer durable and lighting segments.

In addition, the acquisition of Butterfly Gandhimathi Appliances Ltd. will accelerate the long-term strategic goal of becoming a key pan India player in small domestic appliances. It will provide greater exposure to the South Indian market, since Butterfly is the leading brand in key categories like LPG stoves and table-top wet grinders.

Valuations and recommendations-

Profitability for Crompton Greaves' FY23 was hit by:

1. weak margin performance in the electrical consumer durable and lighting segments;

2. continued investment in innovation, brand building, etc; and

3. higher interest payment due to the Butterfly-acquisition funding.

While maintaining its fans market share in the mass segment, Crompton has gained market share in premium fans (number two in BLDC). Lighting remained weak due to subdued B2B performance.

The company is focusing on fixing white spaces by taking various corrective steps like-

1. higher brand investments;

2. innovation and research and development;

3. expanding go-to-market reach;

4. new brand architecture in pumps; and

5. dedicated sales team in lighting, costs incurred on branding, distribution and R&D expenses are upfront in nature, thereby impacting operating margin.

We believe revenue acceleration will be visible gradually but in the interim cost increase may impact margin in the near term.

In our opinion, if management executes this strategy well, then investors’ confidence on valuation multiple will improve. Deficient rainfall may impact rural consumption to some extent, but the recovery should also be fast with a lag of a few quarters.

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