Crompton Gr. Con
BSE SENSEX
38,855
S&P CNX
11,464
n
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
CROMPTON IN
627
159.6 / 2.1
301 / 178
-4/-9/6
292
73.8
n
Financials & Valuations (INR b)
Y/E Mar
2020 2021E
Sales
45.1
40.6
EBITDA
6.0
5.6
PAT
4.4
4.2
EBITDA (%)
13.2
13.7
EPS (INR)
7.0
6.7
EPS Gr. (%)
16.9
(3.6)
BV/Sh. (INR)
23.4
27.3
Ratios
Net D/E
(0.2)
(0.3)
RoE (%)
29.8
24.6
RoCE (%)
28.9
23.9
Payout (%)
34.4
42.0
Valuations
P/E (x)
36.4
37.8
P/BV (x)
10.8
9.3
EV/EBITDA (x)
26.3
27.8
Div Yield (%)
0.8
0.9
FCF Yield (%)
2.3
2.5
2022E
51.0
7.1
5.5
14.0
8.8
31.6
32.4
(0.4)
27.3
28.0
42.0
28.7
7.8
21.1
1.2
3.2
n
11 September 2020
Company Update | Sector: Capital Goods
CMP: INR254
TP: INR310 (+22%)
Buy
Catalysts emerging; Valuation comfort immense
Bottoming out of Lighting price erosion to reflect in financials:
Competitive
intensity has bottomed out in the Lighting industry, though not completely
over. This can be gauged by the price hikes over the past six months. The
last round of price cuts occurred in Aug’19 and will form part of the base
Sep’20 onwards. Thus, we expect value growth in the Lighting segment to
follow volume growth while margins should be on an uptrend 2QFY21
onwards (full quarter impact expected to reflect in 3QFY21 only).
Lighting segment to drive incremental profits:
The Lighting segment has
been under stress for the past two years now owing to price erosion at the
industry level. Thus, despite the double-digit volume growth, Lighting
revenues have dropped by 5% CAGR over FY18-20. The impact on
profitability has been even more severe with PBIT margins declining to ~5-
6% from 10-11% earlier. Thus, though the Lighting segment formed 25% of
Crompton’s turnover in FY20, the segmental PBIT contribution was limited
to just 9%. We expect PBIT contribution from the Lighting segment to start
increasing hereon, driving 25% incremental segmental PBIT over FY20-22E.
ECD segment on strong footing:
Crompton’s ECD segment has been
performing well with double-digit growth for eight consecutive quarters
prior to the COVID-19 outbreak in Mar’20. The ECD segment growth was
largely supported by water heaters and air coolers. The margin performance
is commendable and is the best in the industry.
In fact, like-to-like ECD
category margin for Crompton is materially higher than Havells.
The best play in crisis times:
Crompton’s business model is most resilient in
times of a crisis. The company showcased best performance in 1QFY21 with
EBITDA decline of ~49% (v/s decline of ~80% for our aggregate universe).
Since Crompton’s categories have higher replacement demand, we see
higher probability of steady performance in the coming quarters and in
FY22E (v/s negative impact for peers from weak consumer demand).
Opening up of Western India to aid growth:
Crompton’s earnings beat in
1QFY21 was despite one of its largest markets (West India, especially
Maharashtra) being under severe lockdown. Its peers in similar categories
such as Havells, Orient and Polycab have relatively lower exposure to the
state. As Maharashtra has gradually opened up in 2QFY21, Crompton is set
to benefit the most in the coming quarters due to pent-up demand.
Sub-optimal channel inventory to help:
The channel inventory across key
categories of Crompton is sub-optimal/adequate, and hence, there is scope
of channel refilling to play out in case demand surprises on the upside going
into the festive season next month. Moreover, the peak season for water
heaters is around the corner and the category could support ECD growth to
some extent over the next few months. Note that Crompton has been
clocking strong growth over the past few quarters in water heaters and has
been gaining market share as well.
n
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Jun-20 Mar-20 Jun-19
26.2
26.2
34.4
25.7
26.7
21.3
29.9
30.5
28.3
18.2
16.6
16.1
n
FII Includes depository receipts
n
Nilesh Bhaiya – Research Analyst
(Nilesh.Bhaiya@MotilalOswal.com)
Pratik Singh – Research Analyst
(Pratik.Singh@MotilalOswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.