Event update: Crompton Greaves Consumer Electricals (Unrated) - Sharp margin expansion

Event

Crompton Greaves Consumer Electricals (CGCEL) reported 1QFY19 earnings with Rs12.03bn revenues (+14.1% yoy; +20% like to like), Rs1.6bn EBIT (13.6% margin; +167bps yoy) with PAT at Rs1.04bn (+30% yoy).

Conference call highlights

• Strong ECD performance drive earnings: Revenues grew 14.1% yoy in Q1FY19. On a like to like basis (LTL; net of taxes) revenues were up 20% yoy. The revenue growth was led by ECD (+23% yoy LTL; 14% reported) due to strong growth in fans (led by growth in new products) as well as pumps. Lighting revenue growth was lower at 9% yoy (LTL; 1.6% reported) due to lower EESL revenues (ex EESL revenues +15% yoy). Margins improved by 163bps yoy to 13.9% due to continued focus on efficiency improvement, pass through of higher commodity prices and higher sales of premium products.
• Growth in LED: Lighting revenues were at Rs2.8bn (+9% yoy LTL) led by strong growth in LED (+40% yoy value growth, volume growth higher). However, this was partly offset by weak EESL revenues (negligible in Q1FY19) as well as sharp decline in CFL (-39% yoy; likely to sustain for another year). With the share of LED increasing to 80% of business, the overall revenue growth should start reflecting improved growth. However, margins declined 130bps yoy to 6.7% due to ASP decline and mix change. Mgmt noted that while there is a price erosion in LED, the costs are also falling on optimisation and scale.
• Robust performance in fans segment: led by mass premium segment (+31% yoy) on the back of strong traction in new products. This was despite muted growth for industry, resulting in further market share gains for CGCEL (+1% gain). Share of premium fans stood at ~20% as its Air360 model gained traction.
• 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 30% volume growth in Q1FY19 with both domestic and agri pumps growing.
• Initial signs in air coolers encouraging: Air coolers sales increased 21% (on a low base; share of revenues insignificant presently) despite a very weak season (adverse weather conditions) helped by traction in newly introduced products. Management plans to increase focus on this segment going forward.
• Water heaters – new products to arrest market share loss: In water heaters, CGCEL has been developing new products which are expected to be launched in upcoming season would help arrest market share decline in this category.
• ‘Go to market’ (GTM) strategy stabilizing in North: While the GTM strategy revamp is still in early stages of implementation in North, decline in sales has been arrested and growth has resumed albeit at a slower pace. In West, where the revamp is at an advance stage, sales have improved and growing in line with other regions. Overall, mgmt. expects the revamp to last further 12-18 months across regions. Over the long run, GTM is expected to provide significant benefits in terms of mkt share gains and lower price distortions as has been CGCEL’s experience in South & East where the model has been implemented.
• Ad spend muted in 1Q19: at Rs240mn (-27% yoy; 2% of sales). For FY19E, spend is expected to be at Rs1bn (flat yoy; ~2% of sales) as mgmt. will undertake more specific sales promotion programs.

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, market share gains are likely to sustain over the longer term. Concurrently, its digitisation efforts to improve reach and connectivity should yield positive benefits once implemented over the long 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.