Event update: Crompton Greaves Consumer Electricals (Unrated) - Revenue weakness offset by margin expansion

Event

Crompton Greaves Consumer Electricals (CGCEL) reported 4QFY18 earnings with Rs11.3bn revenues (+8% yoy; +13% like to like), Rs1.6bn EBIT (14.3% margin; +228bps yoy) with PAT at Rs1.03bn (+29% yoy).

Conference call highlights

• Strong lighting performance drive earnings: Revenues grew 8% yoy in Q4FY18. On a like to like basis (LTL; net of taxes) revenues were up 13% yoy. The revenue growth was led by lighting (+20% yoy LTL) on strong growth in LED and pick up in B2B. ECD grew double digits on LTL basis led by growth in fans as also pick in pump sales led by launch of new model. Margins improved by 228bps yoy due to continued focus on efficiency improvement and higher sales of premium products.
• Growth in LED, B2B drives Lighting growth (~30% of revenues): Revenues were at Rs3.4bn (+21% yoy LTL) led by strong growth in LED as also pick in B2B. EESL revenues stood at Rs400m (~12% of lighting). B2B revenues showed robust growth led by street lighting as EESL tenders are gradually shifting from B2C to B2B. Margins declined to 11.1% due to high competitive intensity and warranty provision.
• Steady performance in fans segment…: Fans segment saw double digit growth led by premium fans (~27% of revenues). This was despite industry being flat yoy, indicating continued gains in market share. CGCEL market share in fans currently stands at 27% (vs 23% two years back). In 4Q18, CGCEL introduced a premium fan Air360 offering more breeze coverage.
• … Implementation of go to market strategy impact sales on North: CGCEL has been in the process of revamping its go to market strategy in order to improve visibility and availability of products at stores, improve reach and strengthen relationship with distribution partners as also leverage data and analytics to improve understanding of market. The revamp is currently being implemented in North which is leading to short term disruptions resulting in decline in sales. However, over the longer run, this strategy is expected to provide significant benefits as has been CGCEL’s experience in South where the model has already been implemented (fan sales grew 25% each in Q3FY18/Q4FY18) and East (+15-16%).
• Domestic pumps pick up: led by launch of new product at low end of the value spectrum (“mini crest”) wherein CGCEL was facing intense competition. As a result pumps saw volume growth of >25% in Q4FY18 (+13-14% value growth).
• Focus on innovation sustains: CGCEL has launched an innovative window based air cooler on a pilot basis in some markets which has been received positively by the market. CGCEL plans to continue to scale up this segment and targeting to be among top 3 players in next 2-3 years. In water heater too, CGCEL plans to launch a new product which would help arrest market share decline going forward. Overall, management plans to launch atleast one new innovative product every season across product categories to continue gaining market share.
• ESOP charge increases costs: There was a non-cash charge of ~Rs140mn for the ESOP scheme in 4QFY18. For FY19, this cost will reduce to ~Rs310-320mn (vs Rs570mn in FY18)

Our view

CGCEL is investing to be a formidable player in the electrical space with focus on its products (new products and innovation, complementary new product categories, premium products), brand (create a pull factor) and enhanced distribution reach (go to market strategy). Accordingly, while 4Q18 has seen areas of market share loss, we expect market share gains to sustain over the longer term. CGCEL trades at 30x FY20E earnings, which we believe are likely to remain rich considering its strong earnings growth, free cash flow generation and superior return ratios. Unrated.