Crompton Greaves Consumer's Q3FY20 results (Outperformer) - Market share gains; lighting margins to improve

Q3FY20 standalone result highlights

• PAT grew 30% yoy to Rs1.04bn: Revenues +4% yoy to Rs10.7bn, OPM +50bp to 12.8% and EBITDA +8.6% yoy to Rs1.37bn. Reported PAT grew 102% yoy at Rs1.61bn led by Rs574mn tax write back of earlier years.
• Stable ECD performance, market share gains: ECD saw +11% yoy revenue growth to Rs7.9bn led by continued efforts on innovation and premium products across categories. Fans saw 8% yoy volume growth with 80bps mkt share gain to 27%, domestic pumps volume grew 8% yoy with agri pump grew at slower pace due to strong monsoons and economic slowdown. Water heater grew at a sharp pace of 66% yoy led by revamp of product portfolio, investment in advtg and marketing, apart from distribution expansion, driving a 11% mkt share in WH space (no 4^th) ECD margins +119bps yoy to 19.8% led by cost optimization strategies, improved product mix and positive operating leverage.
• Lighting – B2C pricing stable over the past 3-4 months: Revenues declined 11% yoy to Rs2.84bn due to decline in EESL revenues (ex-EESL -9% yoy), muted B2B offtake and lower LED prices (prices eroded by 15-20% in Jul-Aug-19; base effect to continue for another 2 quarters). We note B2C LED volumes grew 13% yoy. Lower prices led to drop in lighting margins by 198bps yoy to 6.9% (+60bps qoq; cost efficiencies). 

Conf call highlights: (1) Not seen any material impact of slowdown or de-stocking by dealers (2) Innovative and premium product launch continues – silent pro series fans (silent, more energy efficient with BLDC motors, etc), back up light (1-4 hours), coolers & geyser (new range), etc. This will drive higher market share and revenue growth; (3) Lighting price erosion has stopped over the past 4-5 months and prices are expected to be stable as cost curves are globally comparable. This would slowly drive value to reflect volume growth with margin expansion to double digits; (4) Mkt share gains- Fans: Premium fans (25% mkt share; 20% of fans; no 2 player); Geysers: 11% mkt share (7% earlier; no 4 player); +1% in LED lamps with gains in kitchen appliances & air coolers.

Impact on financials: No change in EPS – FY21/22E at Rs7.5/Rs9

Valuations & view

Crompton’s focus on innovation and premium products continues to drive growth and market share gains. On the other hand, lighting margins are improving on cost efficiencies and as operating leverage kicks in, will improve further. Concurrently, focus on segments such as geysers and appliances would drive growth. At 30x FY21E earnings, we believe valuations are attractive in view of 23% earnings CAGR over FY19-21E and superior return ratios (35%+). Reiterate Outperformer.