CG Consumer Electricals: Geared for growth

CG Consumer Electricals

BSE Sensex

26,867

S&P CNX

8,239

CG Consumer Electricals

Initiating Coverage | Sector: Capital Goods

CMP: INR134

TP: INR165 (+23%)

Buy

Geared for growth

Set for strong innings over next few years

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

M.Cap. (INR b)

M.Cap. (USD b)

Avg Val ( INR m)

Free float (%)

CGCEL IN

626.8

150/126

84.0

1.2

429

65.6



Financials Snapshot (INR b)

Y/E Mar

2016 2017E 2018E

Net Sales

18.1

41.2

47.3

EBITDA

2.1

4.7

5.8

Adj PAT

1.1

2.7

3.4

EPS (INR)

1.9

4.3

5.5

EPS Gr. (%)

(70.3) 123.9

29.1

BV/Sh. (INR)

3.6

5.9

8.7

RoE (%)

52.1

89.5

75.4

RoCE (%)

28.1

34.5

39.7

Payout (%)

40.0

Valuations

P/E (x)

70.5

31.5

24.4

P/BV (x)

36.7

22.9

15.4

EV/EBITDA (x)

42.8

18.9

14.9

Div Yield (%)

1.3

1.6

Shareholding pattern (%)

As On

Promoter

Public

Others

May-16

34.4

65.6

8.0

With its experienced management team, strong product portfolio, established

brand and wide distribution network, we believe CROMPTON is well placed to

capture growth opportunities in the light electricals industry.

Strategy in place for sustainable growth in the core business portfolio and

penetrating into new business segments.

Quality growth with robust free cash flow generation of INR3.2/4.5b in FY17/18

annually should ensure valuation premium. We initiate coverage with a BUY

rating with target price of INR165.

Geared for growth

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

Well positioned to take advantage of upcoming opportunities:

The light

electricals industry is poised for robust double-digit growth over the coming

few years, and we believe that CROMPTON is well positioned to take

advantage of the upcoming opportunities. The company has an experienced

management team, a strong product portfolio (market leader in key product

categories), an established brand (leading Fan brand) and a wide distribution

network (150,000+ touch points). This, coupled with the new five-

dimensional strategy (developing a robust and wide product portfolio,

creating brand excellence, an effective go-to-market approach, and

developing robust operational and organizational excellence) devised by new

management, should ensure higher-than-industry growth for the company,

in our view.



Strategy in place for sustainable growth in core business portfolio and

penetrating into new business segments:

CROMPTON aims to sustain and

grow the “core” segments of fans and pumps, while the lighting and

appliances segments should record disproportionate growth over the coming

few years, in our view. It’s strategy for the next few years, which aims at: a)

sales growth to be at levels higher than the industry by gaining market share,

b) profit growth to be in line or higher than sales growth and c) cash flow to

be more than 100% of profit. The new management team has been with the

company for over six months now, and the implementation of this strategy is

already underway.



Quality growth with robust annual free cash flow generation of

INR3.2/4.5b in FY17/18:

According to management, CROMPTON’s intent is

to generate cash flow of at least 100% of profits. This strategy should ensure

quality growth for the company. We expect CROMPTON to record free cash

flow generation of INR3.2/4.5b annually for FY17/18E respectively, led by

strong operational cash flow generation of INR 3.5/4.8b in FY17/FY18E and

muted capex requirement of INR400-500m.



Initiating coverage with BUY:

Given the company’s strong product portfolio,

established brand, market leadership position, wide distribution network and

robust ROCE profile (35%/40% in FY17/18),

expect CROMPTON to

stock with a BUY rating, and value CROMPTON at 30x its FY18E EPS of INR5.5

at a target price of INR165.

20 June 2016

CG Consumer Electricals

Stock Performance (1-year)

CG Consumer Electricals – India’s leading electrical appliances player



Crompton Greaves Consumer Electricals (CGCEL) is among India’s leading

consumer electrical companies with a presence across fans, lighting, pumps and

appliances. In FY15, 45% of the company’s revenue came from fans, 30% from

lighting, 20% from pumps and 6% from appliances.

Exhibit 1: CGCEL’s sales and YoY growth (%)

Sales(INR m)

50,000

40,000

30,000

20,000

10,000

YoY(%)

25%

20%

15%

10%

Source: Company, MOSL

Exhibit 2: CGCEL’s segment-wise revenue

Fans

23%

30%

22%

29%

Lighting

20%

31%

Pumps

20%

30%

Appliances

20%

29%

19%

29%

19%

29%

26%

28%

45%

FY11

41%

FY12

42%

FY13

44%

FY14

45%

FY15

45%

FY16

45%

FY17

45%

FY18

Source: Company, MOSL



CGCEL is the No 1. player in the Indian fans market with a share of 26-28%,

while it is also among the top five players in the domestic lighting and pumps

markets. The company also forayed into the consumer appliances market in

FY12 and the segment already contributes to 6% of its total sales as of FY15.

20 June 2016

CG Consumer Electricals

CROMPTON: Geared for growth

Initial steps post demerger instill confidence in CROMPTON’s growth

strategy



Experienced management team roped in to ensure quality growth.

Five-dimensional strategy to help register potent growth over the medium term.

Inheritance of a robust product portfolio, a wide distribution network and an

established brand should enable new management to prepare for the next leg of

growth.

Quality management instills confidence in CROMPTON’s future growth

The new promoters (Advent and Temasek) of CROMPTON have hired industry

stalwarts to spearhead CROMPTON. Three key management changes have been

made over the past year, with Mr. Shantanu Khosla being appointed as Managing

Director, Mr. Matthew Job as CEO and Mr. Sandeep Batra as CFO.

Mr. Shantanu Khosla (Ex MD P&G):

Mr. Khosla has been roped in from P&G where

he spent 30 years. He worked for 13 years as CEO & MD of Procter & Gamble India,

where he played a crucial role in growing revenues 15-fold to USD 1.8b, making it

one of the fastest growing consumer companies in India. At CROMPTON, Mr. Khosla

has set a three-pronged strategy to drive growth: 1) to register sales growth ahead

of industry growth 2) profit growth in line or ahead of sales growth and 3) cash flow

generation to be at least 100% of profits generated.

Mr. Matthew Job (Ex MD Racold Thermo Ltd):

Mr. Job, who has been appointed as

CEO of CROMPTON, had previously worked with Racold India (India’s largest

manufacturer of water heaters), Phillips and Grohe India. He has vast experience in

the Indian consumer electricals industry and, in our view, should lead CROMPTON’s

push into the consumer appliances segment.

Mr. Sandeep Batra (Ex CFO Pidilite):

Mr. Batra joins from Pidilite where he was the

CFO. Prior to that, he had served as CFO of ICI Industries.

Industry stalwarts to

spearhead CROMPTON

Five-dimensional strategy to ensure potent growth

With an aim to become the fastest-growing consumer electricals company,

CROMPTON has developed a five-dimensional strategy with a focus on developing a

robust and wide product portfolio, creating brand excellence, adopting an effective

go-to-market approach, and developing robust operational as well as organizational

excellence.

Brand excellence

CROMPTON intends to invest in branding to create awareness and preference for its

products by developing and marketing products which are energy efficient and easy

to use. CROMPTON also intends to diversify its product portfolio away from fans and

establish itself as an electricals brand. It recently launched a brand campaign by

participating in ads during the IPL tournament. CROMPTON plans to advertise

competitively over the medium term.

20 June 2016

CG Consumer Electricals

Exhibit 3: CROMPTON’s ad spend likely to remain at competitive levels

Name of company

Bajaj Electricals

CROMPTON Greaves

Havells

V Guard

Surya Roshni

FY10

2.6

1.4

3.4

5.1

2.0

FY11

2.2

1.7

2.5

3.8

1.3

FY12

1.3

2.2

3.1

4.2

0.6

FY13

1.3

2.7

3.1

4.5

1.2

FY14

1.6

2.7

2.5

4.2

0.3

FY15

1.3

2.5

3.4

4.1

0.7

Source: MOSL, Company

CROMPTON has spent on

average ~2-2.5% of its sales

on advertising over the past

six years. Ad spend to be

stepped up to 3-3.5% of

sales over the next few

years



CROMPTON has spent on average ~2-2.5% of its sales on advertising over the

past six years. However, this trend is set to change as new management intends

to aggressively increase advertising spend to gain a higher market share via TVCs

and print media. This is already evident from the number of TVCs being aired by

CROMPTON over the past few months with a focus on lighting, fans and

appliances. In our view, ad spends could be stepped up to 3-3.5% of sales over

the next few years.



With most companies now eyeing market share in new product categories,

advertising campaigns have become even more important.

Portfolio excellence

CROMPTON aims to sustain and grow the “core

portfolio”

segments of fans and

pumps while also aggressively pursuing business opportunities in the lighting and

appliances segments. CROMPTON’s focus would be to develop and introduce

energy-efficient and star-rated products across categories to meet the changing

customer requirements.



CROMPTON intends to take advantage of the “premiumization” trends across

product categories. In the fans segment, its focus is on “premium” fans like

decorative fans, under light and kid fans. In lighting, it intends to focus primarily

on LEDs, where it was among the first few players to penetrate into the Indian

market.



Energy efficiency is the other key theme being targeted by the company. It has

already introduced “5-star” rated fans, which consume 30% less power

compared to normal fans. It is also looking to introduce BLDC motor fans, which

consume 50% less power compared to normal fans. Besides this, it has already

made significant inroads into the LED market. LEDs consume 1/10

of the power

of ICLs and half of that consumed by CFLs.

Crompton has introduced

energy efficient “5-star”

rated fans, which consume

30% less power compared

to normal fans

Go-to-market excellence

CROMPTON has developed an effective go-to-market strategy with a focus on

expanding its distribution reach beyond Tier I and Tier II cities. In our view, this

should help in expanding its market presence and create awareness about its

products in untapped markets. CROMPTON also plans to expand its network in a

cost-effective way by tapping new channels (like e-commerce for its consumer

durable appliances). CROMPTON has a large channel network across India with

more than 3,000 direct channel partners, and has a strong electrical distribution

network (150,000+ touch points). CROMPTON plans to switch to more of an

FMCG/white goods mode of distribution and substantially increase its number of

20 June 2016

CG Consumer Electricals

touch points. The aim is to have the right products available at the right store and at

the right price.

Exhibit 4: Existing distribution network of key light electricals players

CROMPTON has a large

channel network across

India with more than 3,000

direct channel partners, and

has a strong electrical

distribution network

(150,000+ touch points).

Company

Bajaj Electricals

Crompton Greaves

Havells

V Guard

Surya Roshni

Eveready

Distributors by company

FY14

FY15

FY16

1000

4000

5000

4300

4800

5500-6300

407

500

20000

4000

40000

Distribution touch points by products

FY14

FY15

FY16

350,000 400,000

500,000

134,000 134,000

+150,000

100,000 +100,000

+100,000

25,000

25,000 30000-33000

200,000 200,000

200,000

30,000

Source: MOSL, Company

Exhibit 5: Service centers play an important role in efficient after-sales service

Service Centre by players

Bajaj Electricals

Crompton Greaves

Racold India

V Guard

Murphy Richard

Phillips

Havells

FY16 (nos)

400

+500

+100

+150

+180

Source: MOSL, Industry



While having a high number of retail touch points is important, it is equally

important to have a high share of retail store sales. CROMPTON has a share of

~50% at each electrical outlet where its products are sold. This implies that its

per store sales are much higher compared to peers. However, with the

company’s entry into consumer appliances (started this business only recently in

FY11), it needs to get its products into home appliances/hardware stores.

CROMPTON is looking to aggressively expand beyond the Tier 1/2 cities and also

doubling its network over the next 3-5 years.



E-commerce as a channel for following the go-to-market strategy has been

increasing in importance and most companies have opted to have separate SKUs

for the online and offline platforms – this helps to reduce the cannibalization of

sales by aggressive discounting by online stores. Companies such as Bajaj

Electricals, Murphy Richards and Phillips also sell products through their own

websites. On the other hand, companies such as Havells and V Guard push sales

through their authorized distributors and dealers only.



In our view, after-sales service is equally important in case of consumer

electricals since these products typically last for 5-7 years on average. To ensure

customer complaints are addressed in a timely manner, CROMPTON has set up

500 authorized service centers in India, which ensure that both installation and

compliant resolutions are completed within 48 hours.

Operational excellence

CROMPTON has taken various initiatives like focusing on premiumization, improving

the product mix, maintaining an asset light business model and undertaking cost

rationalization measures to improve the company’s operational performance.

Incremental profits and savings through cost-reduction measures will be spent on

20 June 2016

CG Consumer Electricals

improving the brand, increasing distribution reach and adopting the go-to-market

approach.

Organizational excellence

CROMPTON has hired industry stalwarts to spearhead the company, and has also

added 1,500 employees who were transferred after the sale of the consumer

business. CROMPTON intends to build capabilities and develop a high-performance

culture in the organization.

Inheritance of strong product portfolio, established brand and

wide distribution network

Post the demerger with Crompton Greaves, CROMPTON has inherited a very strong

product portfolio with an established brand and a wide distribution network. Across

product categories, CROMPTON is among the top five players in the market. It

already has a strong electricals distribution network (150,000+ touch points) and is

one of the most renowned brands in the consumer electrical fans category. New

management can leverage existing strengths of the company to achieve its target of

higher-than-industry growth by widening the distribution network, establishing

CROMPTON as a consumer electrical appliance brand and widening its product

portfolio.

New management has taken the following steps to revamp its existing product

portfolio.

Fans - focusing on premium range



CROMPTON has been the

undisputed leader in the

Indian fan market with a

share of around 26-28%.



CROMPTON has been the undisputed leader in the Indian fan market with a

share of around 26-28%. Our interaction with dealers and channel partners

indicates that customers prefer the CROMPTON brand for its durability (long

life), reliability (low maintenance) and the trust associated with the brand.

A comparison of the fan models available in the market shows that CROMPTON

has the largest portfolio of ceiling fans with 75 models. More importantly, ~30%

of CROMPTON’s fan models are in the “Standard/Plain” category, while the

balance 70% is in the “Premium” category. In contrast, Havells has only 13% of

its range in the Standard category, as a result of which the company is increasing

its focus on the “Premium” range of the market where margins typically tend to

be higher.

CROMPTON is also looking to aggressively target the “Premium” category of

fans while retaining/growing its market share in the “Standard” category.

Premium fans contributed 10% of CROMPTON’s sales in FY16, and the company

plans to further increase this share in a meaningful manner. The result is evident

from its 4QFY16 results, where premium category fans witnessed growth of 54%

YoY.

20 June 2016

CG Consumer Electricals

Exhibit 6: Ceiling fans market break-up in terms of segments and players

Ceiling fans

Under light fans

Kids fans

Decorative fans

BEE 5 Star rated/ BLDC fans

Standard/Plain fans

Total no. of models

CROMPTON

18%

40%

30%

Havells

17%

61%

13%

Orient

22%

47%

10%

18%

Usha

15%

13%

30%

29%

15%

Bajaj

13%

48%

13%

18%

Source: Company websites, MOSL

Exhibit 7: Market share break-up of the INR60b Indian fans industry

29%

27%

Crompton Greaves

Bajaj Electricals

Havells

Orient fans

Others

11%

17%

16%

Source: Company, MOSL

Exhibit 8: CROMPTON’s fan sales CAGR of 14% over FY11-16 surpasses industry average of

11%

27%

19%

Fans(INRm)

22%

15%

7,650

FY10

9,097

FY11

9,122

FY12

11,138

FY13

12,848

14,782

16,112

18,529

15%

21,309

YoY Growth(%)

FY14

FY15

FY16e

FY17e

FY18e

Source: Company, MOSL

Lighting – industry shifting to LEDs; CROMPTON at the forefront



In January 2015, the Indian government launched the “National Program for

LED-based Home and Street Lighting” with the aim of replacing incandescent

bulbs (ICLs) with LED in residential and street lighting. Recently, Power Minister,

Mr. Piyush Goyal, had stated that the government was aiming to replace 770m

ICLs and 35m street lights with LEDs by FY19 under its Demand Side

Management initiatives. This program has been named as “UJALA” or “Unnat

Jyoti by Affordable LEDs for All”.

As a result of these government initiatives, the LED market, which stood at

INR5b in CY10, is expected to jump to INR115b by CY17 and form ~45-50% of

the overall lighting market, compared to 6% in CY10. We estimate the overall

lighting market to grow to INR253b in CY17 (17% CAGR over CY15-17E).

20 June 2016

CG Consumer Electricals



CROMPTON (currently number 4 in the lighting segment) intends to focus on the

LED segment by providing better technology and innovative products in the

market. CROMPTON intends to offer dimming, color-changing LED to

differentiate its products from competitors. CROMPTON’s efforts have started

to pay off with the LED segment witnessing 129% YoY growth in 4QFY16, much

ahead of industry growth. CROMPTON is also participating in the government’s

EESL orders and contributes ~10% of lighting sales.

Exhibit 9: Indian lighting industry’s growth over CY08-18E

CROMPTON (currently

number 4 in the lighting

segment) intends to focus

on the LED segment by

providing better technology

and innovative products in

the market.

Lighting market(INRm)

18%

117,190

65,670 71,670 84,500 101,400

190,247

135,040 160,010

20%

16%

15%

18%

YoY(%)

19%

20%

249,299

262,165

228,532

15%

Source: Company, MOSL

Industry growth to be driven by shift from traditional lamps to LEDs



India has ~27m street lights

which the government is

targeting to replace with

LEDs by FY19.



Over the next two years, we expect growth in the Indian lighting industry to be

driven by a sharp increase in LED sales. The LED market, which stood at INR5b in

CY10, is expected to jump to INR113b by CY18, driven by the government’s

initiatives, and form ~45-50% of the overall lighting market, compared to 6% in

CY10. We estimate the overall lighting market to grow to INR262b in CY18E

(17% CAGR over CY15-17E).

Replacing ICLs and CFLs with LEDs makes economic sense as the latter has a

much longer life (50,000 hours compared to 10,000 hours for CFL and 1,500

hours for ICL), is more energy efficient (80-100 lumen/watt compared to 50

lumen/watt for CFL and 13-15 lumen/watt for ICL) and has a lower payback

period of 2-2.5 years than CFLs.

The key driver of increased usage of LEDs over the next few years will be the

government’s push to replace street lighting (via municipalities) and residential

lighting (via state discoms) to achieve greater energy efficiency and savings.

India has ~27m street lights which the government is targeting to replace with

LEDs by FY19. The government intends to ban the sale of 100W, 60W and 40W

ICLs, which coupled with a further decline in prices of LEDs (already down to

INR200 from INR1,000-1,200 earlier), should drive a large-scale shift to LEDs. We

also expect commercial establishments (retail outlets/offices/shops) to

increasingly replace the less-efficient FTLs and CFLs with LED down lights, as the

price gap between LED and CFL down lights has narrowed significantly.

20 June 2016

CG Consumer Electricals

Exhibit 10: LED sales over CY13-18E

LED Sales(INR m)

76%

82%

61,799

33,950

19,250

54%

16%

CY14A

CY15E

CY16E

CY17E

CY18E

Source: MOSL, Company

95,023

YoY (%)

110,150

113,923

CY13A

Exhibit 11: ICL, CFL and LED cost comparison

Description

Life span

Wattage

Power consumed per hour

Cost of usage for one hour @INR6 per kWh

Cost of usage for 50,000 hours

Bulbs needed for 50,000 hours of running

Bulb cost

Cost of replacement

Total 50,000 hours of lighting cost

Ratio of cost

Units

Hours

Watts

Kilowatt-hour (kWh)

INR

No. of bulbs

INR

Ratio

ICL

1,500

0.06

0.36

18000

330

18330

8.7

CFL

10,000

0.014

0.084

4200

120

600

4800

2.3

LED

50,000

0.006

0.036

1800

300

2100

1.0

Source: Company, MOSL

Exhibit 12: Market share break-up of the INR190b Indian lighting industry

Havells, 4%

Crompton, 6%

Bajaj Electricals,

Others, 52%

Philips, 25%

Surya Roshni, 8%

Source: MOSL, Industry

20 June 2016

CG Consumer Electricals

Exhibit 13: CROMPTON’s lighting sales CAGR of 13.5% over FY10-16 surpasses industry

CAGR of 10%

Lighting

16%

17%

15%

17%

YoY growth

15%

10,525

12,103

13,919

15%

4,923

5,703

6,667

7,689

9,010

9,836

Source: Company, MOSL

Pumps – agriculture and residential segments as near-term growth drivers



CROMPTON is the market

leader (+25%) in the

domestic/residential pump

market, and is now aiming

to increase its share in the

agricultural pumps market



The Indian pump industry grew at a CAGR of 6% to INR85b over FY11-15, with

2m pumps being sold each year. Weak monsoons over the past two years have

led to a decline in the sales of agricultural pumps. However, with above-average

monsoon anticipated for FY17, we expect a pick-up in demand for agricultural

pumps (27% of the market).

We expect industry growth to remain subdued at 5-7% over the next 2-3 years

on account of the weak industrial capex environment (46% of end-market),

which should dampen overall demand for pumps.

CROMPTON is the market leader (+25%) in the domestic/residential pump

market, and is now aiming to increase its share in the agricultural pumps market

where it has a relatively weak presence. In order to expand its presence in this

segment, CROMPTON is: a) adapting its pumps to work at different voltage

levels based on state-specific requirements; and b) launching rural reach

programs to connect with farmers.

Exhibit 14: Indian pumps market (INR m) and YoY growth (%)

Indian Pump market(INRm)

91.4

98.2

YoY Growth(%)

66.0

71.6

75.8

80.3

85.1

2011

2012

2013

2014

2015

2016

2017

Source: Company, MOSL



The overall industrial segment constitutes 46% of total pumps sold in the

country, of which power generation, O&G and metals form 24%. Pumps for use

in agriculture form the largest proportion at 27% of total pumps sold.

20 June 2016

CG Consumer Electricals

Exhibit 15: End-market-wise usage of pumps

Metal and

Mining, 4%

O&G, 8%

Power

Generation, 12%

Water and Waste

water, 17%

Others, 13%

Agriculture, 27%

Building Services,

19%

Source: Company, MOSL



EESL plans to replace all its

existing 20m agriculture

pumps with solar pumps to

reduce electricity costs.

Below is our view on each of the key end-markets for pumps and their outlook

for the next few years:

Agriculture:

The segment is currently subdued following two consecutive

years of weak monsoon. Expectations of above-average monsoon in CY16

should provide a boost to demand for agricultural pumps. ABB and KSB

Pumps are now targeting solar powered pump sets (launched by KSB in July

2015). EESL plans to replace all its existing 20m agriculture pumps with solar

pumps to reduce electricity costs.

Oil & gas:

Post subdued demand over the past few years, we expect new

refineries to come up and drive a revival in demand.

Power generation:

Boiler feed pumps are used in power plants, though the

current slump in power generation orders has made the market quite

subdued. Super critical pumps, which are being mainly imported at the

moment, are likely to drive growth in this space.

Fertilizers:

6-7m ton of fertilizers currently being imported will have to be

replaced and new fertilizer plants are being planned, which should boost

demand.

Water/wastewater:

Increased spending on the development of urban

infrastructure, 100 smart cities in India and the Namami Ganga program

should provide a boost to the industry.

Pulp/steel:

We expect both these end-markets to decline, as a result of

which their contribution should be marginal.

Power costs, reliability and service as key differentiating factors



Power costs constitute 70% of a pump’s running cost, thus making it one of the

key factors influencing the purchase of pumps. There is a clear preference for

higher-star-rated pumps which reduce power consumption.

The other key factors influencing the purchase of pumps are reliability, service

and zero downtime.

20 June 2016

CG Consumer Electricals

Exhibit 16: Life-cycle costs for a pump – power costs are the highest

Maintaineince,

15%

Pump, 15%

Power costs, 70%

Source: Company, MOSL

Exhibit 17: Pump usage by type

Description

Residential/ Domestic pumps

Industrial

Pumps used for EPC projects

HP rating

0.25-20

2- 500

500HP and above

End market

Agriculture, Residential and Commercial buildings

Across industries - Cement, Steel, Oil & Gas

Power plants, Irrigation and Municipal projects

Source: Company, MOSL

Market share by player



The Indian pumps market is quite fragmented with only 56% comprising of

organized players. The top five players control about 44% of the overall market.

Kirloskar Brothers is the market leader in this segment due to its strong position

in agricultural pumps. CROMPTON has a share of 7% in the Indian pumps

market.

Exhibit 18: Indian pumps market (player-wise share)

Kirloskar Brothers,

12%

CRI, 11%

Unorganized, 44%

Texmo, 6%

Crompton

Greaves, 7%

Grundfos, 4%

WPIL, 3%

Source: Company, MOSL

KSB Pumps, 8%

Others, 5%

Exhibit 19: CROMPTON’s pumps sales grew at 11% CAGR over FY10-16

38%

Pumps(INRm)

36%

17%

5,019

3,850

FY10

5,217

-4%

FY11

FY12

5,869

FY13

5,790

-1%

FY14

6,585

FY15

YoY growth (%)

14%

7,112

FY16e

12%

7,965

FY17e

12%

8,921

FY18e

Source: MOSL, Company

20 June 2016

CG Consumer Electricals

Consumer appliances

CROMPTON had entered the appliances segment in FY12 and is a relatively small

player in this category (~2% share, as per MOSL estimates). Similar to other players

in the industry, CROMPTON also imports its entire appliances range from China.

However, over the next few years, the company plans to increase the share of in-

sourced components in order to enjoy the benefits of better quality control and

lower costs.

The consumer appliances segment has seen a number of new entrants over the past

few years. These players intend to use their existing brand strength to increase

presence into this segment. Since most companies outsource the manufacturing of

appliances to Chinese vendors, it is relatively easy to enter into this category.

With no or little R&D requirement and low capital investment, it offers an attractive

market for light electricals manufacturers.

Exhibit 20: Consumer appliances market growth FY11-16

Consumr Appliace (INR b)

YoY change (%)

18%

10%

Source: Company, MOSLe

Exhibit 21: Recently entered product categories by player

Company

Orient Electric

Finolex Cables

Anchor

Eveready

Surya Roshni

V-Guard

Crompton Greaves

Havells

Luminous

Polycab

Core Product

New product categories

Fans

Consumer Appliances, Switchgear, Lighting

Cables

Lighting. Fans, Switches

Switches

Cables, Lighting, Fans

Appliances

Consumer Appliances

Lighting

Fans, Consumer Durables

Voltage Stabilisers

Fans, Switchgears, Cookers

Fans, Lighting, Pumps

Consumer Appliances

Switchgear, Lighting, Fans

Consumer appliances, Coolers, Pumps

Invertors

Fans,Switches, CFL, Switchgears

Electrical wires

Fans, Lighting, Switches

Source: MOSL, Industry, Company

Building distribution network a key challenge for new entrants

For most companies that have recently entered the consumer appliances business,

the challenge is to develop an appliance network since the existing electricals dealer

network is not suited for the same.

20 June 2016

CG Consumer Electricals

Exhibit 22: Dealer-wise sale of products

Name of company

Fans

Lighting

Switches

Pumps

Cable and Wires

Iron

Mixer/Grinder

Cookware

Water Heater

Electricals

Store

Appliance

Store

Multi Brand retail

Commerce

Source: MOSL, Industry

Competitive intensity remains high

Bajaj Electricals is the clear market leader in the appliances segment, given its

presence in this market for the past 75 years and its extensive distribution reach

across the country.

We highlight that this is an extremely competitive market with a large number of

players (presence of both Indian and MNC brands) competing for market share.

Exhibit 23: Market share of players in the consumer appliances segment

Orient

Bajaj

Havells

Murphy

Others

Source: Industry, MOSL

Exhibit 24: Company-wise presence across key consumer appliances

Name of company

Havells

CROMPTON Greaves

Bajaj Electricals

Khaitan

Usha

TTK Prestige

Philips

Racold

Panasonic

Water Heaters

Irons

Mixer Grinders

Toasters

Source: Industry, MOSLe

20 June 2016

CG Consumer Electricals

Best-in-class return ratios

Expect cash flow generation of INR3/4b annually in FY17/18



CROMPTON has best-in-class return ratios, led by its asset light business model.

Free cash flow generation to be higher than profit generation, indicating quality

earnings growth.

Higher ad-spend to keep operating margins in check over the near-to-medium term.

Expect revenue CAGR of 15% over FY17-18

We expect CROMPTON to register 15% revenue CAGR growth over FY17-18E, ahead

of industry growth. We expect the consumer durable division to contribute 71% of

revenue and lighting to contribute 29%. We expect the appliances division to grow

at a 20% CAGR over FY16-18E on account of a lower base effect.

Exhibit 25: CROMPTON’s revenue growth to be ahead of

industry growth

Total Ind size(INR b)

YoY Ind growth(%)

22%

488

519

558

636

14%

13%

33.2

685

35.9

CGCEL Revenue (INR b)

CGCEL YoY growth (%)

769

15%

12%

41.2

841

15%

47.3

26%

28%

45%

Exhibit 26: Revenue mix to remain stable

Fans

23%

30%

41%

Lighting

22%

29%

42%

20%

31%

44%

Pumps

20%

30%

45%

Appliances

20%

29%

45%

19%

29%

45%

19%

29%

45%

10%

11%

10%

29.5

22.0

26.8

Source: MOSL, Company

Asset light business model to ensure robust return ratios

CROMPTON follows a business strategy that ensures capital efficiency by focusing

investments only on those assets where the company has expertise on. CROMPTON

has in-house manufacturing facilities for fans, pumps and lighting, whereas the

appliances business is completely outsourced. CROMPTON has a very lean capex

plan of INR300-400m over the next two years. The asset light business model will

ensure optimal utilization of assets and robust return ratios. We expect CROMPTON

to register RoE/RoCE of 89.5%/35% in FY17 and 75%/40% in FY18.

20 June 2016

CG Consumer Electricals

Exhibit 27: Asset turnover remains high for industry

Bajaj

25.9

14.5

4.1

6.7

4.0

Havells

V Guard

24.2

16.0

11.0

3.9

7.3

11.2

4.3

28.1

34.5

39.7

52.1

Surya Roshni

Average

Exhibit 28: Return ratios to remain robust for CROMPTON

RoE (%)

89.5

RoCE (%)

75.4

66.9

43.7

FY14

FY15

Source: MOSL, Company

Exhibit 29: Well-balanced outsourcing strategy for CROMPTON

Name of company

Bajaj Electricals

CROMPTON Greaves

Havells

V Guard

FY15

50%

90%

40%

FY16

50%

>90%

40%

Source: MOSL, Company

Higher ad spend to keep operating margins in check in near term

CROMPTON has a clear strategy to establish itself as a leading electrical appliance

brand from its existing positioning of a leading fans brand. New management

believes that CROMPTON as a brand is under-invested and thus there is a strong

need to invest competitively in the brand over the medium term. This strategy will

require higher ad spend in the near-to-medium term. Higher ad spend will reap

dividends in the medium term, but would prove to be a drag on operating margins

in the near term. Thus, we believe that operating margins in the near-to-medium

term would remain in the 11.5-12% range.

Exhibit 30: CROMPTON to accelerate ad spend to establish itself as leading electrical

appliance brand

Ad spend (INR m)

2.9%

1.3%

244

FY16

1,200

FY17e

1,440

FY18e

1,728

FY19e

Source: MOSL, Company

as a % to sales

3.0%

3.2%

Strong cash flow generation likely to be paid out as dividend

CROMPTON’s intent is to generate cash flow of at least 100% of profits. This strategy

will ensure strong cash flow generation for the company. We expect CROMPTON to

record free cash flow generation of INR3-4b annually, led by strong operational cash

flow generation of INR 3.5-4.5b and muted capex requirement of INR400-500m. We

expect the company to pay back the excess cash as dividends to its shareholders.

20 June 2016

CG Consumer Electricals

CROMPTON’s gross debt stood at INR6.5b in Q416, and the company intends to

refinance this debt at a lower rate to reduce its interest costs. The new debt raised

will be in the form of debentures to be repaid over the next 3-4 years.

Exhibit 31: Robust free cash flow generation of INR3.2/4.5b annually

Free Cash Flow (INR m)

128%

122%

112%

Net Profit (INR m)

130%

FCF as a % to Net profit

1,342

1,052

3,242

2,668

4,460

3,444

4,727

4,220

FY16

FY17E

FY18E

FY19E

Source: MOSL, Company

20 June 2016

CG Consumer Electricals

Valuation and View



Given its strong product portfolio, established brand, market leadership

position, wide distribution reach and robust ROCE profile (35%/40% in FY17/18),

we believe that CROMPTON deserves to trade at around the same multiples as

Havells. Incrementally, Havells derives ~20% of revenue from the B2B segment,

whereas majority of CROMPTON’s revenue is from the B2C segment.



In our view, new management would focus on expanding product portfolio,

distribution network and establish CROMPTON as an electricals brand rather

than a fans manufacturing brand. These initiatives should help CROMPTON to

maintain its market share and enhance footprint in new product categories, in

our view.



We believe given the clear-cut strategy laid out by management, CROMPTON is

poised for strong earnings growth in the long term. We expect CROMPTON to

29%

over FY17-18E. We initiate coverage on the

stock with a BUY rating and value CROMPTON at 30x its FY18E EPS of INR5.5 at a

target price of INR165.

Exhibit 32: Valuation multiples for peers in consumer electricals space

Name of Company

Havells

Crompton Consumer

V Guard

Bajaj Electricals

Average

FY16

47.0

70.5

36.8

22.0

44.1

P/E

FY17E

35.0

31.5

27.1

15.0

27.6

FY18E

28.3

24.4

22.6

12.5

22.4

EV/EBIDTA

FY16

FY17E

26.5

23.3

42.8

18.9

22.9

17.7

10.2

7.7

25.5

17.2

FY18E

18.2

14.9

14.5

6.7

13.8

FY16

8.9

37.0

8.7

3.0

14.4

P/BV

FY17E

8.0

22.9

7.0

2.6

10.2

FY18E

7.1

15.4

5.6

2.2

7.7

FY16

2.9

4.6

2.2

0.5

2.6

P/Sales

FY17E

3.6

2.0

1.9

0.4

2.0

FY18E

3.1

1.8

1.6

0.4

1.7

Source: Company, MOSL

Exhibit 33: CROMPTON’s return ratios are superior to comparable peers

Name of Company

Havells

Crompton Consumer

V Guard

Bajaj Electricals

FY16

19%

52%

26%

15%

ROE

FY17E

23%

90%

29%

19%

FY18E

25%

75%

27%

19%

FY16

20%

28%

25%

15%

ROCE

FY17E

23%

35%

29%

18%

FY18E

26%

40%

27%

19%

Exhibit 34: Sales growth and EBITDA margins for companies in electricals sector

Name of Company

FY16

Havells

Crompton Consumer

V Guard

Bajaj Electricals

Industry average

3.8%

11%

6.7%

12.0%

8.4%

Revenue Growth (%)

FY16-18

FY17E FY18E

CAGR

13.7% 18.1%

16.0%

14.7% 14.8%

14.8%

17.1% 16%

17.0%

15.0% 15.0%

15.0%

15.1% 16.0%

15.7%

FY16E

13.6%

11.6%

9.6%

5.5%

10.1%

EBITDA margin (%)

FY16-18

FY17E FY18E

average

14.6% 15.5%

14.5%

11.3% 12.2%

11.5%

10.3% 10.5%

10.1%

6.3%

6.0%

10.6% 11.1%

10.5%

EPS Growth (%)

FY16

6.5%

8.4%

57.3%

0.0%

18.1%

FY17E

27.3%

10.5%

24.3%

59.1%

30.3%

FY18E

23.5%

29.1%

20.7%

22.4%

23.9%

FY16-18

CAGR

25.4%

19.8%

22.5%

40.8%

27.1%

Source: MOSL, Company

20 June 2016

CG Consumer Electricals

Risks and concerns

Threat of imports from China in LED segment

With the boom in the global LED market, Chinese companies had set up huge

capacities in the past to cater to mounting demand. However, capacity utilization

took a beating with a slowdown in the Chinese economy. Consequently, many

Chinese importers have been offering aggressive discounts to push sales. Although

Indian players that import have benefited, the threat of Chinese importers seeking

to enter the Indian market through tie-ups can impact sales of domestic players.

Competitive landscape remains fierce in electrical appliances segment

In India, there are many electric lighting players: regional and national, organized

and unorganized. Almost two-thirds of lighting product imports into India are from

China. Despite the top six players accounting for ~70% of the overall organized

market, competition in the segment remains high due to the commoditized nature

of products. The market continues to be very price sensitive and, although strong

brands perform better than others, pricing power remains limited due to high

competition from organized as well as unorganized segments.

Growth of substitute goods such as air coolers and air conditioners

Offices in metro and tier 1-3 cities have been increasingly opting for air conditioners

as against ceiling fans. Even in manufacturing units with sophisticated machines, air

conditioners are used to maintain stable temperatures. On the residential side, with

an increase in disposable income, sales of air coolers and air conditioners have

increased. The rise in sales of substitute products can hamper sales of fans and

impact earnings of the company.

Availability of low-cost power for irrigation can impact agri-pump sales

Cheap local pumps sold by unorganized players are energy inefficient and consume

a lot of power. However, as farmers get low-cost power due to government

subsidies, they prefer to use cheap pumps from unorganized players. This too can

have an adverse impact on the company’s sales.

20 June 2016

CG Consumer Electricals

Company background

Crompton Greaves Consumer Electricals Ltd. manufactures and markets a wide

spectrum of consumer products, ranging from fans, light sources and luminaires,

pumps, and household appliances such as geysers, mixer grinders, toasters and

irons. CROMPTON has been the market leader in fans, domestic pumps and street

lighting for over 20 years. It has manufacturing facilities in Goa, Vadodara,

Ahmednagar and Baddi. The company’s products are available in nearly 150,000

retail points across the country.

CROMPTON's portfolio of energy-efficient products includes 5-star-rated durable

lights, fans, pumps and appliances for home and offices. It has the largest number of

'5-star' rated energy-efficient products. It was the first company to cross sales of a

million fans in 1989, and sales crossed 10 million fans, the highest in the world.

Exhibit 35: Key manufacturing facilities of CROMPTON

Location

GIDC Industrial Estate: Goa

Kundaim Industrial Estate: Goa

HPSIDC Industrial Area, Baddi, Dist: Solan, HP

Kural Village, Padra Taluka, Dist: Baroda, Gujarat

Village Thane, Tehsil Baddi, Dist: Solan, Himachal Pradesh

A-28, MIDC Area, Ahmednagar, Maharashtra,

C-19, MIDC Area, Ahmednagar, Maharashtra

Product

Fans

Lighting

Pumps

Source: MOSL, Company

20 June 2016

CG Consumer Electricals

SWOT Analysis



Renowned and

established brand



Market leadership in key

product categories



High-quality

management team



Robust distribution

network in Tier I and tier

II cities

Strengths

Weaknesses



Limited product portfolio



Limited presence beyond

tier II cities



Perceived as a fans brand



“Housing for All by 2020”

should create robust

demand for the company’s

product portfolio



Huge untapped

opportunities in the LED

segment led by the

government’s initiative to

replace 770m GLS and CFL

bulbs

Opportunities

Threats



Competitive intensity

from the unorganized as

well as organized players

continues to remain high



Weak macroeconomic

outlook could weaken

demand for the

company’s key products

20 June 2016

CG Consumer Electricals

Brief about management

Shantanu Khosla – Managing Director

Mr. Khosla joined the company in January 2016. Prior to this, he served as MD &

CEO of Procter & Gamble India from July 2002 to June 2015.

He holds Bachelor of Technology in Mechanical Engineering from Indian Institute of

Technology, Mumbai. Mr. Shantanu Khosla has also completed his Master’s in

Business Administration from Indian Institute of Management, Calcutta.

Mathew Job – CEO

Mr. Job joined CROMPTON in January 2016. Previously, he worked with Philips

Electronics India Ltd from June 1994 to October 2009, where he held several key

positions. From November 2009 till January 2012, Mr. Job worked with Grohe India

Pvt. Ltd as vice president and managing director. He then moved on to Racold

(Ariston) Thermo Ltd as managing director where he worked till September 2015.

He has studied Bachelor in Technology (Electrical & Electronics). He is an alumnus of

Indian Institute of Management, Calcutta.

Mr. Sandeep Batra – CFO

Mr. Sandeep Batra joined CROMPTON in January 2016. Prior to joining CROMPTON,

he was with ICI Limited from January 1988 to January 2009, where he held various

important responsibilities and eventually assumed the role of chief financial officer.

He then joined Pidilite Industries Limited as its chief financial officer in January 2009.

He is an alumnus from St. Xavier’s College, Kolkata, a chartered accountant and a

company secretary by profession. He also serves as company secretary and

compliance officer of CROMPTON.

Mr. D Sundaram – Independent Director

Mr. Sundaram is vice chairman and managing director of TVS Capital Funds. He was

associated with HUL for more than 34 years, where he served under various roles

before becoming the vice chairman in 2008. He is also on the Board of Governors of

Institute of Financial Management and Research, Chennai. He is Post Graduate in

Management Studies (MMS), Chennai, Fellow of the Institute of Cost and

Management Accountants, and has attended the Harvard Business School’s

Advanced Management Programme.

Mr. P M Murty – Independent Director

Mr. P M Murty was a graduate from Indian Institute of Management, Calcutta. Mr.

Murty had more than 42 years of experience with Asian Paints Limited (APL), where

he held various senior positions including that of managing director of APL from

2009–2012

Mr. Hemant Madhusudan Nerurkar – Additional Independent Director

Mr. Nerurkar has experience of over 35 years in Tata Steel in various positions. He

joined Tata Steel in 1972 and rose to the level of managing director in-charge of

India and South East Asia operations. He is chairman of board of directors in TRL

Krosaki Refractories Limited (formerly Tata Refractories Limited - a JV company of

Tata Steel and Krosaki Harima Corporation, Japan) and NCC Ltd (formerly Nagarjuna

20 June 2016

CG Consumer Electricals

Construction Company Limited) and Independent Director of several other listed

entities.

He is a Bachelor of Technology in metallurgical engineering from the College of

Engineering, Pune University. He has attended several management courses in India

and overseas, including CEDEP in France.

Ms. Sonia Niranjan Das – Non-Executive Additional Director

Ms. Sonia Niranjan Das is qualified company secretary with over 15 years’ of

experience in the profession in different industries, including in listed companies, in

secretarial, law and compliance. She also holds a degree in law. At present, she is

working with Avantha and leading secretarial and law function.

20 June 2016

CG Consumer Electricals

Light Electricals to grow at 10% CAGR over FY16-19

Multiple drivers falling into place



Over FY16-19, we expect Light Electricals to grow at 10% CAGR, with faster growth in

Appliances (15% CAGR), Lighting (12% CAGR), Fans (12% CAGR) and Switches (11%

CAGR).



The key growth drivers are (a) rising disposable income, (b) improved power

availability and increased reach through the government’s rural electrification

program, (c) implementation of the 7

Pay Commission wage hikes for central

government employees, followed by hikes for state government and PSU employees,

(d) government impetus on low cost housing and (e) shift of sales towards the

organized segment post GST implementation.

Slowdown behind; expect growth to revive



The Indian Light Electricals market stood at INR685b as at the end of FY16,

having grown at a CAGR of 9% over FY11-16. Slowdown in construction activity

had led to a slowdown in the sale of Light Electricals as well during this period.

Over FY16-19, we expect Light Electricals to grow at 10% CAGR, with faster

growth in Appliances (15% CAGR), Lighting (12% CAGR), Fans (12% CAGR) and

Switches (11% CAGR).

Exhibit 36: Segment-wise size of Indian Light Electricals market (INR b)

Description

Domestic Switchgear

LV Industrial Switchgear

Modular Switches

Domestic Wires and Cables(LT)

Industrial cables(HT)

Pumps

Lighting (incl. LED)

Luminaires

Consumer Appliances (Home/ Kitchen)

Fans

Total light electricals market size

FY11

100

439

FY12

100

488

FY13

100

519

FY14

100

558

FY15

120

636

FY16

120

122

685

FY17E FY18E FY19E

132

149

769

145

107

158

841

160

116

157

105

915

% of

total

13%

19%

13%

15%

10%

CAGR CAGR

(FY11- (FY16-

16E)

19)

11%

10%

16%

24%

15%

11%

12%

10%

Source: Industry, MOSL

Rising disposable income levels imply greater affordability



Rising income levels across urban and rural India imply greater affordability for

Electrical Products. With growing disposable income, the Indian consumer has

become more discerning in his choice and taste. Low penetration of Light

Electrical Products, especially in rural areas, should drive growth. The household

penetration of Fans, for instance, is 90% in urban areas and 65% in rural areas.

The penetration of home and kitchen appliances is much lower (see table

below).

20 June 2016

CG Consumer Electricals

Exhibit 37: Low household penetration of home/kitchen appliances to drive growth

Description

Fans

Water Heaters

Mixer - Grinder

Induction cooktop

Fridge

Air Cooler

Washing machine

Air Conditioner

% penetration

80%

10%

35%

<2-3%

77%

33%

8-10%

13%

3-4%

Source: MOSL, Industry

Exhibit 38: Rising disposable income to drive growth in Light Electricals (per capita; INR)

Per capital income(Rs)

YoY Growth(%)

70,345

2012

72,868

2013

76,438

2014

78,627

2015

81,821

2016

86,975

2017

93,064

2018

Source: RBI, MOSL

Exhibit 39: Rural incomes have been rising helped by MNREGA implementation and MSP

increase

Rural wages/day

YoY growth(%)

18%

11%

100

20%

17%

140

120

161

14%

173

183

10%

FY06

FY07

FY08

FY04

FY05

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Source: GOI, MOSL



A Light Electrical Product lasts for 3-15 years. There is an increasing tendency to

trade up, as these products are typically bought only once or twice over a

decade and are much cheaper relative to the cost of the house. This, along with

increasing consumer focus on aesthetics and energy efficiency, has also resulted

in a falling share of the unorganized segment (local players, Chinese imports)

and a shift to the organized segment over the last few years.

20 June 2016

CG Consumer Electricals

Exhibit 40: Value of electrical equipment used in a typical 1,000sf house

Description

Building Wires

Units

1 sq. mm

2.5 sq. mm

4 sq. mm

6 sq. mm

40A

4 way

40 A

Modular

1HP Equivalent

1200mm sweep

250mm sweep

With fittings

No. of units

7 coils

4 coils

2 coils

1 coil

14 nos.

1 nos.

70 nos.

1 nos.

5 nos.

1 nos.

10 nos.

INR/pc

1,355

3,205

4,730

7,115

410

3,500

2,835

12,000

1,600

1,750

450

INR

9,485

12,820

9,460

7,115

5,740

3,500

2,835

5,575

12,000

8,000

1,750

4,500

82,880

Source: Industry, MOSL

MCB

Distribution Box

Phase Selector

Switches, Sockets, Regulator

Motor

Fans

Ventilating Fan

Lights

Total

Exhibit 41: Average life of key Light Electrical Products

Description

Building Wires

Distribution Boards

Miniature Circuit Breakers(MCB’s)

Switches

Fans

GLS / CFL

Fluorescent Tube Lamps

Consumer Appliances

Average life

15+ years

10+ years

5-7 years

2-3 years

2 years

5-7 years

Source: MOSL, Industry



Customers also take into account the safety features associated with the

product while making the purchase decision. A case in point is the market for

Miniature Circuit Breakers, which is largely with the organized players. This is

primarily because of the

safety aspect.

Real Estate – mixed trends



The Light Electricals industry is closely linked to the fortunes of the Real Estate

sector. We see a mixed picture here – the Urban Commercial (Office) and Retail

Real Estate market has bottomed out and is on track for strong recovery.

However, the Residential market remains subdued due to low affordability,

developers’ reluctance to cut prices and constrained supply – this is especially

true for tier-1 cities (we define these as the top-7 cities). Low Cost Housing

would be driven by the government’s thrust towards “Housing for All by 2022”

via the Pradhan Mantri Awas Yojna.



The Commercial Real Estate market was in a deep slump in CY12 (sales down

27%) and was flat in CY13. Recovery in absorption set in from CY14 and picked

up pace from CY15, with office absorption at 38.1msf, higher than the previous

peak of 37msf in CY11.

20 June 2016

CG Consumer Electricals

Exhibit 42: Office space absorption and completion

Office Space - Absorption

43 41 41 44

23 23

22 23

32 33

Office Space - Completion

17.0

32 33

8.0

38 36

27 27 30

6.0 5.0

9.0

Exhibit 43: Vacancy rates declining, with higher absorption

Vacancy (%)

18.0 18.0 17.2 18.5

16.9 16.0

15.0 14.0

12.0

Source: Industry, MOSL

* we take top-7 cities in India

Source: Industry, MOSL

* we take top-7 cities in India



Even within Retail Real Estate, CY14 was the bottom, with absorption declining

69% to 1.6msf. However, CY15 has seen a sharp bounce, with 3.3msf sold; the

strong growth should continue over the next few years.

Exhibit 44: Retail space absorption and completion

Absorption(mn sq ft)

13.8

9.4

4.1

8.5

6.3 6.9

4.1

5.7

3.6

7.5 7.5

5.4

Completion(mn sq ft)

Exhibit 45: Vacancy rates have peaked out

Vacancy (%)

1.3

3.8 3.7 9.6 6.6 4.0 4.0 10.7 4.5 5.1 1.6 3.3 4.9 6.0 4.6

2.8

Source: Industry, MOSL

* we take top-7 cities in India

Source: Industry, MOSL

* we take top-7 cities in India



The Residential Real Estate market remains subdued. CY15 was another year of

decline – 0.16m units were sold against the peak of 0.2m units in FY12. We also

highlight that 0.45m units are lying unsold and at the current pace of sales

would take 3-4 years to be cleared out. New launches also declined to 0.2m

units in CY15 against the peak of 0.26m units in CY12.



Given the builders’ reluctance to cut prices, reduced affordability, high inventory

of unsold flats (0.56m as of December 2015) and the new clauses introduced by

the recent Real Estate Regulatory Act, there could be a lull in new launches over

the next 6-9months. However, CY16 should be the bottom for the market – we

expect a recovery in CY17 in both new launches and unit absorption. This would

be driven by continued rate cuts by the RBI, a recovery in the general economy

and quicker completion of ongoing projects as required under the new Real

Estate Act.

20 June 2016

CG Consumer Electricals

Exhibit 46: Residential Real Estate to bottom out in CY16 (units)

Units launched

247,000

203,000

130,000

90,000

102,000

2008

101,000

2009

2010

2011

2012

2013

2014

184,000

167,000

198,000

193,386

165,840

157,798

Units sold

237,621

225,821

256,000

200,334

2015

Source: Industry, MOSL

* we take top-7 cities in India



Another key indicator of Housing growth is home loans by housing finance

companies, NBFCs and banks. These have grown at a CAGR of 19% over FY05-16.

The slowdown in Residential Real Estate is more specific to the top-7 cities;

smaller cities and towns have remained largely insulated.

Exhibit 47: Housing loans have grown at 19% CAGR over FY05-16

Housing loan O/S

6.2

7.2

YoY Growth(%)

9.9

8.4

11.5

1.7

2.4

3.0

3.4

3.8

2009

4.3

2010

5.1

2005

2006

2007

2008

2011

2012

2013

2014

2015

2016

Source: MOSL, Industry

“Pradhan Mantri Awas Yojna” aims to add 30m houses by FY19



In June 2015, the Union Cabinet approved the “Pradhan Mantri Awas Yojna” to

provide “Housing for All” by 2022. The aim was to construct 20m houses in

urban areas. The highlights of the scheme are:



On an average, central grant of INR0.1m/house would be available under the

slum rehabilitation program. The state government would have flexibility in

deploying this slum rehabilitation grant to any slum rehabilitation project taken

for development using land as a resource for providing houses to slum dwellers.



Under the credit-linked interest subsidy component, interest subsidy of 6.5% on

housing loans availed up to tenure of 15 years would be provided to

economically weaker section (EWS) / low income group categories, wherein the

subsidy payout on NPV basis would be ~INR0.23m/house.



Central assistance at the rate of INR0.15m/house for EWS category would be

provided under affordable housing in partnership and beneficiary-led individual

house construction or enhancement. State governments or housing boards can

take up affordable housing projects to avail the central government grant.

20 June 2016

CG Consumer Electricals



The scheme would cover the entire urban area consisting of 4,041 statutory

towns with initial focus on 500 class-I cities and it will be implemented in three

phases till April 2019.



Phase-I (April 2015 - March 2017) to cover 100 cities to be selected from

states/UTs as per their willingness



Phase-II (April 2017 - March 2019) to cover additional 200 cities



Phase-III (April 2019 - March 2022) to cover other remaining cities

As seen in the table below, ~0.7m EWS houses have been taken up for funding

across states with a total budgeted spend of INR100b as of May 2016.

Exhibit 48: Progress of Pradhan Mantri Awas Yojna as of May 2016 (INR in Crore)

Sr.

No.

Name of the State

No of Cities

considered

for funding

175

108

671

Project

Proposals

Considered

110

197

144

108

923

EWS

Houses

1,93,147

30,216

12,670

66,983

1,077

224

20,239

16,522

43,393

71,701

10,286

11,548

1,280

12,307

34,013

80,481

2,757

74,880

6,83,724

Central

Assistance

involved

2,897.21

453.24

190.05

853.62

16.16

3.36

303.59

247.83

644.12

1,063.74

154.29

143.22

12.80

184.61

510.20

1,207.22

41.36

1,123.20

10,049.77

Central

Assistance

Released

(projects)

334.95

79.89

76.02

318.05

6.46

121.43

208.44

8.18

33.29

37.53

40.50

261.76

13.76

88.85

1,629.11

A&N Island (UT)

Andhra Pradesh

Arunanchal Pradesh

Assam

Bihar

Chandigarh (UT)

Chhattisgarh

D&N Haveli (UT)

Daman & Diu (UT)

Delhi (UT)

Goa

Gujarat

Haryana

Himachal Pradesh

Jammu & Kashmir

Jharkhand

Karnataka

Kerala

Lakshdweep (UT)

Madhya Pradesh

Maharashtra

Manipur

Meghalaya

Mizoram

Nagaland

Orissa

Puducherry (UT)

Punjab

Rajasthan

Sikkim

TamilNadu

Telangana

Tripura

Uttar Pradesh

Uttrakhand

West Bengal

Grand Total

Source: Ministry of Housing and Urban Development



In March 2016, the Union Cabinet approved the “Pradhan Mantri Awas Yojna”

for rural areas. All the existing rural housing programs have devolved into this.

Highlights of the scheme:

20 June 2016

CG Consumer Electricals



Subsidy provided by the state and central governments under this scheme has

increased by more than 70%; from INR70,000, the allocation has now gone up to

INR120,000. In hilly and difficult areas, it has increased from INR75,000 to

INR130,000. Additionally, taking into account benefits of labor under MNREGA

(90 days) and INR12,000 under Swach Bharat Mission, the total benefit adds up

to INR150,000 for house construction. Bringing transparency in the selection of

beneficiaries, the data from the census conducted in 2011 will be used.



In the years from 1985 to 2015, around 35m houses have been constructed;

under the new program,

the government targets to construct 10m houses in

three years till FY19.



The central government will spend INR820b on rural housing till FY19; in

addition, the states will be spending over INR500b as their share. The annual

allocation from the central government will go up from INR100b to over

INR270b.

In our view, the infusion of resources of this magnitude will be a

game changer in the rural housing scene and the rural economy.

Our view:

If the government is able to construct 30m new houses under this

program, it would alone generate demand for ~60m new fans (assuming two fans

used in one house) or 20m fans per year over a three-year period to FY19. To put

this in perspective, the Indian Fan industry sells ~47m fans per year.

GST implementation to drive faster shift to organized segment



The Goods and Services Tax (GST) legislation was passed in the Lok Sabha (lower

house of Parliament) on May 6, 2015. The Government of India seems

committed to replace all indirect taxes levied on goods and services by the

center and the states with a common GST by April 2017. With GST

implementation, it is anticipated that the tax base will be comprehensive, as all

goods and services will be taxable, with minimum exemptions.

In India, there is significant presence of the unorganized segment in Light

Electricals. We estimate that in FY15, the unorganized segment constituted

~25% of overall industry sales, though down from ~40% in FY10.

GST implementation is expected to narrow the large indirect tax differential

between the organized and unorganized players. This would be achieved by

ensuring better compliance and enforcement by (a) reducing the threshold limit

for exemption from indirect taxes to INR2.5m under GST from INR15m under

the current excise duty regime, (b) tracking the flow of GST credit in the entire

value chain using technology platforms, (c) ensuring availability of seamless

input credit, and (d) reducing the overall effective tax rates.

20 June 2016

CG Consumer Electricals

Exhibit 49: Measures that will lead to shift of trade from unorganized to organized

segment

Source: Havells, Frost, Industry, MOSLe

Exhibit 50: Unorganized players as a % of overall category sales for Light Electricals

Description

Fans

Lighting

Pumps

Domestic Switchgear

Industrial Switchgear

Switches

FY10

40%

60%

45%

20%

30%

50%

FY15

25%

40%

30%

<5%

20-25%

30%

Source: Havells, Frost, Industry, MOSLe

7th Pay Commission wage hike implementation to accelerate demand

growth over next two years



The central government constitutes the Pay Commission every 10 years to

recommend revisions in pay scales for central government employees. Very

often, these recommendations are also adopted by the states after some

modifications. Recommendations of the 7

Pay Commission, which came into

effect from January 2016, are expected to impact 4.8m central government

employees and 5.5m pensioners.



The 7

Pay Commission has recommended a 24% increase in pay and

allowances for government employees. Pay would go up by 16%, allowances by

63% and pensions by 24%. It has also recommended an annual increment of 3%

for central government employees.



The government estimates the impact of the Pay Commission recommendations

at INR1.02t for FY17. Moreover, the state governments would also be revising

the salaries of their employees (~10m), followed by similar revisions by public

sector undertakings (PSUs).



The impact of the 6

Pay Commission was much bigger, as (a) it had

recommended a 36% pay hike, and (b) the hike was paid with arrears of two

years. The 6

Pay Commission was set up in July 2006 and its recommendations

were submitted in March 2008. 40% of the arrears were paid in 2009 and 60% in

2010 instead of the originally scheduled 2006.

20 June 2016

CG Consumer Electricals

Exhibit 51: 6 Pay Commission impact on pay and

allowances of central government employees

Pay and Allowances(INRb)

966

737

460

-4

928

993

YoY (%)

1,116

1,252

1,392

8.34

6.45

Exhibit 52: Pay and allowances as a percentage of the

government’s total expenditure

% of total expenditure

9.43

7.75

7.61

7.91

7.87

7.76

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: MOSL, GOI



We expect the wage hikes recommended by the 7

Pay Commission to be paid

on current basis. Unlike the previous occasion, there wouldn’t be a significant

arrears portion. We believe the limited bounty would result in a

disproportionate benefit for smaller ticket items like Light Electricals and also

lead to increased premiumization of the same product.

Exhibit 53: CY09 and CY10 see increased lighting sales post

6 Pay commission pay out

1,305

1,218

1,317

Lighting(Units m)

1,384

-5%

1,492 1,418

18.0

FY07

20.8

FY08

YoY (%)

23.8

16.1

8.3

1,057

968

1,126

1,140

2.6

(3.1)

20.9

FY09

29.1

FY10

37.4

FY11

36.2

FY12

39.2

FY13

40.3

FY14

44.8

FY15

2.7

Exhibit 54: FY10 fan volumes see a spurt post the 6 Pay

Commission payout

Fans (mn units)

29.9

28.6

YoY Growth(%)

CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14

Source: MOSL, Industry

Exhibit 55: Breakdown of employees by rank

Supervisory

and clerical

tasks, 89%

Senior

Management

position, 3%

Middle

management,

Exhibit 56: Employee break up by age

29%

22%

20-30 years

30-40 years

40-50 years

50-60 years

Others

22%

26%

Source: 7 Pay Commission, MOSL

20 June 2016

CG Consumer Electricals

Exhibit 57: Break up of Central Government employees by area of residence

Metros, 18%

Others, 53%

Top 67 cities

(ex metros), 29%

Source: 7 Pay Commission , 2011 Census, MOSL

Increased pace of village electrification and improved power availability to

drive rural demand for Electricals



Rural electrification has been a challenge for successive central governments.

Given India’s federal structure, the states provide last-mile connectivity and

maintain infrastructure; the center provides policy and financial support.



With its aim of “Power for All”, the Government of India has put village

electrification at the top of its agenda. The Modi government launched the

“Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY)” to ensure rapid

electrification, feeder separation, and strengthening of rural distribution

infrastructure. The aim is to electrify the remaining 18,452 villages across India

by May 2018. (Note: A village is considered electrified if all the public places and

10% of households have electricity).

Exhibit 58: Villages electrified in India – 7,008 villages electrified in FY16

Villages electrified

572,414

577,629

584,637

556,633

512,513

482,864

560,552

FY02

FY07

FY12

FY13

FY14

FY15

FY16

Source: CEA, MOSL



In FY16, a record 7,008 villages were electrified (target: 7,000 villages), higher

than the total villages electrified in the preceding three years. A total 580k

villages (~98% of total villages) have been electrified and the aim is to complete

the electrification of all villages in FY17 itself, much before the deadline of May

2018 that the government has set for itself.



An increase in grid connected villages, and in turn, higher availability of power

for households would lead to higher demand for Light Electrical Products such

as Fans, Lights, Switches, etc.

20 June 2016

CG Consumer Electricals

Operating Matrix

Exhibit 59: Operating martix

Description

Segmental Rev. (INR m)

Fans

Lighting

Pumps

Appliances

YoY Growth (%)

Fans

Lighting

Pumps

Appliances

Net Sales

Growth (%)

RM Costs (%)

Contribution Margins (%)

EBITDA margin (%)

Net Working Capital (Days)

Net Cash / (Debt), INR M

FY12

9,122

6,667

5,019

1,211

17%

-4%

22,018

10%

FY13

11,138

7,689

5,869

2,120

22%

15%

17%

75%

26,816

22%

FY14

12,848

9,010

5,790

1,817

15%

17%

-1%

-14%

29,465

10%

FY15

14,782

9,836

6,585

2,010

15%

14%

11%

32,327

10%

FY16

16,112

10,525

7,112

2,171

10%

18,117

-44%

70.1%

29.9%

11.6%

FY17E

18,529

12,103

7,965

2,605

15%

12%

20%

41,203

15%

69.7%

30.3%

11.3%

FY18E

21,309

13,919

8,921

3,126

15%

12%

20%

47,274

15%

69.5%

30.5%

12.2%

FY19E

24,505

16,006

9,992

3,751

15%

12%

20%

54,254

15%

69.5%

30.5%

12.6%

100.0% 100.0% 100.0% 100.0%

12.3% 10.7% 11.8% 12.8%

0.0

81.0

0.0

-7.5

-11.5

- (5,600) (4,269) (1,987)

(212)

E: MOSL Estimates

20 June 2016

CG Consumer Electricals

Financials and Valuations

Income Statement

Y/E March

Total Revenues

Change (%)

Raw Materials

Staff Cost

Other Expenses

EBITDA

% of Total Revenues

Depreciation

Other Income

Interest

PBT

Tax

Rate (%)

Adjusted PAT

Extra-ordinary Income (net)

Reported PAT

Change (%)

Adj. Consolidated PAT

Change (%)

FY16

18,117

12,702

1,005

2,315

2,095

11.6

318

1,716

525

30.6

1,191

-139

1,052

-96.7

1,052

-96.7

FY17E

41,203

127.4

28,724

2,432

5,377

4,670

11.3

136

630

3,923

1,255

32.0

2,668

153.6

2,668

153.6

FY18E

47,274

14.7

32,862

2,727

5,897

5,788

12.2

149

525

5,140

1,696

33.0

3,444

29.1

3,444

29.1

(INR Million)

FY19E

54,254

14.8

37,714

3,190

6,516

6,834

12.6

167

420

6,299

2,079

33.0

4,220

22.5

4,220

22.5

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Loans

Deferred Tax Liability

Capital Employed

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Goodwill

Curr. Assets

Inventory

Debtors

Cash & Bank Balance

Loans & Advances

Other Assets

Current Liab. & Prov.

Current Liabilities

Provisions

Net Current Assets

Application of Funds

E: MOSL Estimates

FY16

1,254

1,034

2,287

6,500

-43

8,744

2,030

1,244

787

7,794

7,907

2,100

4,165

900

734

7,742

7,317

425

164

8,745

FY17E

1,254

2,421

3,674

5,500

-43

9,131

2,330

1,380

951

7,794

9,280

2,412

4,784

1,231

844

8,894

8,405

488

386

9,131

FY18E

1,254

4,211

5,465

4,500

-43

9,922

2,630

1,528

1,102

7,794

11,230

2,767

4,971

2,514

968

10,204

9,644

560

1,026

9,922

(INR Million)

FY19E

1,254

5,900

7,153

3,500

-43

10,610

2,930

1,695

1,235

7,794

13,291

3,176

5,705

3,288

1,111

11,711

11,068

643

1,580

10,610

20 June 2016

CG Consumer Electricals

Financials and Valuations

Ratios

Y/E March

Basic (INR)

Adj EPS

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation (x)

P/E

Cash P/E

EV/EBITDA

EV/Sales

Price/Book Value

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors. (Days)

Asset Turnover (x)

Leverage Ratio

Debt/Equity (x)

FY16

1.9

2.0

3.6

0.0

FY17E

4.3

4.5

5.9

1.7

40.0

FY18E

5.5

5.7

8.7

2.2

40.0

(INR Million)

FY19E

6.7

7.0

11.4

3.4

50.0

70.5

67.0

42.8

4.9

36.7

31.5

30.0

18.9

2.1

22.9

1.3

24.4

23.4

14.9

1.8

15.4

1.6

19.9

19.1

12.3

1.6

11.7

2.5

52.1

28.1

89.5

34.5

75.4

39.7

66.9

43.7

2.1

4.5

4.8

5.1

2.8

1.5

0.8

0.5

Cash Flow Statement

Y/E March

PBT before EO Items

Depreciation

Interest

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

EO Income

CF from Oper. Incl. EO Items

(Inc)/Dec in FA

Free Cash Flow

Investment & Others

CF from Investments

(Inc)/Dec in Networth

(Inc)/Dec in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

E: MOSL Estimates

FY16

1,716

318

-525

(229)

1,342

(1)

1,342

-1

(18)

-316

-318

210

(442)

900

FY17E

3,923

136

630

-1,255

108

3,542

(300)

3,242

-300

-1,000

-630

-1,280

(2,910)

331

900

1,231

FY18E

5,140

149

525

-1,696

643

4,760

(300)

4,460

-300

-1,000

-525

-1,653

(3,178)

1,282

1,231

2,514

(INR Million)

FY19E

6,299

167

420

-2,079

220

5,027

(300)

4,727

-300

-1,000

-420

-2,532

(3,952)

775

2,514

3,288

20 June 2016

REPORT GALLERY

RECENT INITIATING COVERAGE REPORTS

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CG Consumer Electricals

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