Management Speak: Crompton Greaves Consumer (Outperformer) - Innovation andpremium products to drive growth

We met Crompton Consumer’s (CGCEL) management. Below are key takeaways:

• ECD demand impacted in Aug-19: due to floods and intense rain in certain states. While there is no slowdown, management would closely monitor demand. CGCEL’s focus on premium segment with new product launches such as Anti-dust, Aura Fluidics, etc (>Rs1600/unit; including decorative), has aided ahead of industry growth and market share gains for the company over last 3-4 years (~3% gain to achieve 25-26% market share). Pumps continue to see steady growth, led by Crest mini in the agri segment (20% of segment) and diminishing water tables and quality, driving residential pumps. Overall, CGCEL will continue to focus on innovations, premium products, enhanced distribution and ad spend to drive market share.
• New product segments to accelerate ECD growth: Apart from fans and pumps, CGCEL has seen strong traction in water heaters and air coolers, driven by increased focus and revamp in its product portfolio (innovations and plugging gaps), distribution, branding, etc. Accordingly, the company expects the strong traction in these segments to sustain. CGCEL is extending similar efforts in the kitchen appliances segment (currently miniscule presence) by launching new products and improving distribution. CGCEL is of the view that these segments will help it drive sustainable growth in the ECD segment over next few years.
• Lighting - higher focus on B2B segment: which accounts for 50% of lighting revenues. B2B business is an Rs70-80bn market which is growing at a much faster pace than B2C. While 1Q20 was weak on back of elections, management expects gradual recovery, boosted by a new organisational structure, in addition to a focussed sales force and improved supply chain, etc. Accordingly, the company expects the lighting segment to see improved growth with sustained market share gains. However, price erosion continues across segments with sharper erosion in fixtures (battens, panels, etc; 70% of lighting revenues). Management noted that while  higher ad spend, provisioning, etc, impacted Q1FY20 margins, core margins improved despite price erosion, due to higher value-added products (anti bacteria, 5 star, etc) and initiatives that drove lower-cost curve such as design optimisation, component sourcing, scale benefits, etc. Accordingly, while quarterly margins are expected to be volatile on ad spend and provisions, the segment would see sustainable annual margin of 10-11%.

Valuations and view

CGCEL’s focus on innovation and premium products continues to drive growth and market share gains in the ECD segment. Concurrently, focus on new segments such as coolers, geysers and kitchen appliances should drive medium-to-long-term growth (15% ECD revenue CAGR over FY19-21E). Lighting is likely to see improved growth, on the back of focus on the B2B segment, while margins are expected to gradually improve, driven by the company’s initiatives to reduce costs, drive premium products and scale benefits. The stock looks attractive at 25.6x FY21E earnings, in view of 22% earnings CAGR over FY19-21E and superior return ratios (35%+). Reiterate Outperformer.