Crompton Greaves Consumer's Q4FY19 results (Outperformer) - Innovation and premium products to drive growth

Q4FY19 standalone result highlights

• Adj. PAT +10% yoy to Rs1.13bn: as weak revenue growth was offset by higher than expected other income. Revenues +7% yoy to Rs12.1bn, EBITDA margins -60bps to 14% and EBITDA +2.5% yoy to Rs1.69bn.
• Lighting margins rebound: Revenues muted at 1% yoy to Rs3.24bn as strong volumes and EESL revenues (+18% yoy to Rs470m) were offset by price erosion and sustained decline in CFL. LED revenues grew 11% yoy (+25% volumes; 85% share vs 80% in 3Q19). Margins rebounded to 11.5% (+40bp yoy; +260bp qoq), led by design optimisation, sourcing efficiency, in-house manufacturing, premium products, etc).
• ECD performance muted: with +10% yoy revenues to Rs8.7bn led by continued efforts on innovation and premiumization across categories. However, fans was slightly impacted by late onset of summers, while pumps saw strong growth led by Crest Mini & agricultural pumps. Geysers grew 19% yoy. However, margins declined 221bps yoy to 19.5% led by higher commodity prices, adverse product mix and inability to pass on prices on weak demand (extended winters) and high competitive intensity.
• FY19 PAT +16% to Rs3.74bn: was led by strong other income (57% yoy). Revenues grew revenue (+14% in ECD), while OPM were stable (13%) as weak lighting margins were offset by lower fixed costs (+30bp in ECD).

Conf call highlights: (1) New innovations – ‘Aura Fluidics’ (5yr warranty vs industry avg. of 1-2 years), ‘Air Buddy’ (kitchen fan) and anti-bacteria lamp (kills 80% of bacteria; priced at 15% premium) are seeing positive  feedback (2) Sustained mkt share across segments with fans mkt share at ~25.1% for 4Q & 23.8% for FY19 (3) Orissa street lighting project was delayed due to elections and will resume next month (4) EESL backlog of Rs900m (5) GTM disruption limited to 1HFY19, post which company now reaping benefit of extended reach (6) New nationwide B2B management framework and sales force to ramp up B2B lighting segment. (7) Mgmt will increase focus on small domestic appliances and continue to scout for inorganic growth opportunities to enter new segments.

Impact on financials: No change in FY20E and FY21E EPS of Rs7.6 and 9.2

Valuations & view

Crompton’s cost programs to retrace lighting margins to 10-11% fructified in the quarter. Further, innovation and premium products are likely to drive market share gains over the long term. We thereby estimate 24% earnings CAGR over FY19-21E, which coupled with an asset-light model should drive superior return ratios (35%+ over FY18-21E). At 24x FY21E earnings, the stock looks attractive. Outperformer.