Crompton Greaves Consumer's Q2FY19 results (Outperformer) - Taking steps to abate lighting pain

Q2FY19 standalone result highlights

• PAT +9% yoy to Rs769mn: as strong ECD performance was offset by weak lighting segment. Revenues +8% yoy to Rs10.4bn and EBITDA margins -60bps to 11.9% and EBITDA +3% yoy to Rs1.24bn.
• Lighting pains: with 4% revenue decline and 630bps yoy margin drop to 6.3%. Ex-EESL, revenue growth was 14% led by sustained growth in LEDs. However, intense competition across categories (battens, panels, fixtures, street lighting, etc) and rupee depreciation has driven sharp erosion in pricing vs cost curve, impacting margins. 
• ECD performance strong: with revenues +15% yoy to Rs7.1bn and margins +110bps yoy to 18.9%. Growth was driven by fans, wherein mass premium segment grew ~35% and economy segment ~20% on back of traction in new products. Pumps, too, saw a strong volume growth of 25% led by traction in mini crest and agri pumps (+70% yoy). However, pumps saw a slower value growth on mix change, while water heater (WH) saw traction towards the end of the quarter.

Conf call highlights: (1) Aim to increase lighting margins by 400-500bps over the next 2-3 quarters led by design optimisation, direct sourcing from china vs aggregators, in-house production (80% outsourced), use of technology in sourcing, etc (2) 3% price hikes in lighting taken in Oct-18, price erosion in bulbs has stabilized while other products to witness pricing pressure (3) Replacing current CFL capacity to LED to drive limited capex, (4) Launched new range of WH, plugging critical gaps in product portfolio (entry level 5-star geysers); (5) Fans mkt share gains sustain at 25-26%, albeit pace of gain slowing down (mkt growth at 6-8%)

Impact on financials: FY19/FY20 EPS cut by 5%/1% to Rs5.8/7.4 

Valuations & view

Crompton Consumer (CGCEL) is undertaking several cost programs to retrace lighting margins to 10-11% over the next 2-3 quarters. On the other hand, CGCEL’s revamp of ‘go to market’ (GTM) strategy is causing short-term disruptions. We expect these initiatives as also focus on products (innovation, complementary new product categories, premium products) to aid CGCEL’s competitiveness and drive market share gains over the long term. We thereby estimate 20% earnings CAGR over FY19-21E, which coupled with an asset-light model and FCF generation should drive superior return ratios (35%+ over FY18-21E). At 26.6x FY20E earnings, the stock looks attractive. Maintain Outperformer