MOSL: CROMPTON GR. CON (Buy)-In-line operational performance; gross margin at new high

Crompton Gr. Con: In-line operational performance; gross margin at new high

(CROMPTON IN, Mkt Cap USD2.5b, CMP INR250, TP INR305, 23% Upside, Buy)

• In-line results: CG Consumer Electricals’ (CROMPTON) 3QFY18 results were broadly in line with estimates. Sales grew 6.7% YoY (12.2% YoY adjusted for excise duty on sourced products) to INR9.4b, driven by healthy growth in the lighting division (+14% YoY, +23% YoY LTL). However, the electrical consumer durables (ECD) segment reported a subdued 7.4% LTL growth, as: (a) water heater segment registered decline of 3% YoY, and (b) domestic pumps segment witnessed pricing pressure on increased competitive intensity in East/North India. Within ECD, strong traction was witnessed in the premium fans category (+28% YoY, 20% of overall fans sales). EBITDA improved 19.8% YoY to INR1.2b, with EBIDTA margin improving 130bp YoY to 12.4%, led by better revenue mix. Net profit of INR0.7b was in line with our estimate.
• Gross margin at all-time high on account of better revenue mix: Gross margin expanded 250bp YoY to 33.1%, led by (a) revenue mix improvement, (b) continued cost reduction exercise, and (c) price hike of around 1.5% in the fans category to mitigate the raw material price increase. EBITDA of INR1.2b (+20% YoY) was marginally ahead of our estimate. Operating margin was 12.4% v/s 11.1% in 3QFY17 and rose 130bp YoY despite (a) increase in employee cost, led by ESOP provisioning of INR140m during the quarter (INR85m in 3QFY17) and lateral hiring done by the company, and (b) higher ad spend (INR160m v/s INR90m in 3QFY17). Lighting business, which contributed 35% of revenue (v/s 32% in 3QFY17), registered 290bp margin improvement YoY to 13.8%. ECD, which accounted for 65% of revenue (v/s 68% in 3QFY17), registered 210bp margin improvement YoY to 18.2%.