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

Event

Crompton Greaves Consumer Electricals (CGCEL) reported 3QFY18 earnings with Rs9.4bn revenues (+7% yoy; +12% on like to like basis), Rs1.1bn EBIT (12.1% margin; +131bps yoy) with PAT at Rs695m (+28% yoy).

Conference call highlights

• Strong lighting performance drive earnings: Revenues grew 7% yoy in Q3FY18. On a like to like basis (LTL; net of taxes) revenues were up 12% yoy. The revenue growth was led by lighting (+23% yoy LTL) on strong growth in LED (+57% yoy). Growth in ECD was muted (+7.4% yoy LTL) due to lacklustre performance in water heaters and domestic pumps. Margins improved by 136bps yoy due to continued focus on efficiency improvement and cost cutting measures. The improvement was despite higher ad spend (Rs160mn vs Rs90mn in Q3FY18) as well as non-cash ESOP charges of Rs140m during the quarter
• Strong growth in LED drives growth in Lighting (~35% of revenues): Revenues were at Rs3.3bn (+23% yoy LTL) led by strong growth in LED (+57% yoy). Share of LED (incl. lamps & fixtures) is now >70% of segment revenues (~57% in FY17). EESL revenues stood at Rs420m (~13% of lighting). B2C revenues showed robust growth led by street lighting. CGCEL continued to gain market share in lighting and is now 2^nd largest player in India. Margins improved to 13.8% on better mix and positive operating leverage.
• Steady performance in fans segment led by premium fans (~40-45% of revenues): Fans segment saw steady growth led by premium fans (+28% yoy). Share of premium fans in sales now stands at 20% (vs ~7% two years ago). CGCEL is now the 2^nd largest player in premium fans. CGCEL had increased prices of fans by 1.5-2% in mid-Nov due to rise in input costs. Overall industry saw pick-up in sales in Q3FY18 after witnessing decline over past few quarters due to multiple disruptions (demonetization, GST).
• High competitive intensity in domestic pumps: at lower end of value spectrum impacted growth momentum. CGCEL has addressed the same by introducing models (“mini crest”) in this category and growth is likely to improve going forward. However, agri pumps saw a growth of 19% yoy in revenues.
• Market share loss in water heaters due to high competitive intensity: Water heater revenues declined due to drop in volumes on account of high competitive intensity. CGCEL plans to arrest this decline by focusing on innovation and development of new products as well as stepping up its marketing and distribution efforts. Accordingly, it aims to be amongst the top 3 players (currently at number 6-7)
• Aim to be among top 2 players in water heaters, Air coolers: in line with CGCEL’s strategy of being among top players in categories it operates in. Accordingly, CGCEL plans to step up its efforts on innovation, marketing and brand building as also increased distribution reach.
• ESOP charge increases costs: There was a non-cash charge of Rs140mn for the ESOP scheme in 3QFY18 (Rs85mn in Q3FY17). This is likely to continue at the similar run rate in Q4FY18 and taper down in FY19.
• Ad spend increased in 3QFY18: to Rs160mn (+78% yoy; 1.7% of sales) as CGCEL stepped up brand building effort and promotion of new products.

·      Partnered with Future Supply Chain (FSC) for supply chain efficiency: CGCEL has partnered with FSC to improve its supply chain, leveraging FSC’s higher scale & technology to improve efficiency & reduce costs.