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    This bulb & fans maker aims to power a different growth story

    Synopsis

    Agricultural pumps, the other key segment the company deals in, has shown mixed performance thus far, but the company expects to double revenues from that segment in three years.

    iStock
    Anand Rathi values the stock at 29 times FY22 P/E compared with 35 times the five-year average of the one-year forward P/E.

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    NEW DELHI: Covid-19 has come as a blessing in disguise for this bulb and fan maker; it has brought down competition substantially over the past six months. Lighting prices are rising while expectations are also building up that the company might gain further market share as stricter energy efficiency norms for fans come into play in January 2022 (against July 2020 planned earlier).

    Agricultural pumps, the other key segment the company deals in, has shown mixed performance thus far, but the company expects to double revenues from that segment in three years.

    Analysts said if the FMEG (fast moving electrical goods) company’s focus on premiumisation and inorganic growth opportunities goes as per the plan, it could lead to a rerating of the stock. For now, it is the lighting segment which is expected to anchor incremental revenue growth.

    The stock is Crompton Greaves Electricals.

    The company derived 44 per cent from its revenues from fans segment in FY20, 25 per cent from the lighting segment, 23 per cent from pump segment and the rest 9 per cent from the appliances segment.

    Analysts see 15-25 per cent upside for the stock and say while the valuation gap with its peer Havells will stay, the same would narrow down going ahead from the current 40 per cent on FY22 basis.

    As of Friday, September 25, the stock had 14 ‘buy’ and 17 ‘outperform’ calls on the publicly available Reuters Eikon database. The scrip, which is up 9 per cent this year against Sensex’s 11 per cent fall, has two ‘hold’ and just one ‘sell’ ratings.

    "Overall, we expect 7 per cent revenue and 8 per cent EPS growth for the company over FY20-23. The stock is currently trading at 31.5 times FY22 and 26.6 times FY23 EPS, which we believe is attractive given superior ROICs of 40 per cent in FY23. Success in newer segments can be a catalyst for re-rating,” Nomura India said in a note on Friday. ROIC stands for return on invested capital.

    Q1 results
    The company reported a 38.90 per cent drop in consolidated profit at Rs 74.80 crore for June quarter compared with Rs 122.44 crore net reported for the same quarter last year.

    Total income plunged 45.85 per cent to Rs 738.68 crore from Rs 1,364.14 crore a year ago. EBIT margin for the electrical consumer durables (ECD) segment rose 20 basis points to 20.5 per cent, but dropped 40 basis points to 4.7 per cent for the lighting segment. The company's volumes were significantly impacted due to lockdowns.

    But things have improved ever since.

    Anand Rathi in a recent note said after reporting zero sales for April, Crompton achieved 70 per cent and 90 per cent of normal sales in May and June, while July was nearly normal.

    "The B2B segment remained under pressure due to deferment of purchases by institutions and muted government orders. Crompton wants to be one of the top three players in geysers, air-coolers and mixer grinders in coming years," it said.

    What does the management say?
    The management said demand is improving progressively across electric consumer durables (ECD) businesses and in the B2C (business to consumer) lighting segment. It, however, believes the B2B lighting area is still a concern as government orders have not picked up significantly and a revival will take time.

    The appliances business, the company said, has been the fastest growing one in last six-seven quarters, with mixer grinder being the biggest contributor from the segment. In case of fans, the company is well-prepared for stricter energy efficiency norms and would now produce products ahead of the 2022 deadline.

    While the agri pump business has been hit in last two years, the company is aiming to double the business in next three years. At a virtual conference on September 24, the company said it has maintained profitability despite lower volume. Cash position of the company improved to Rs 970 crore in June quarter from Rs 580 crore FY20, Crompton said.

    "Inventory is stable and is in good shape for meeting festive demand. The channels are not overstocked at all. Primary and secondary sales channels are trending well and secondary sale is similar to primary,” Nomura, which hosted the conference, said.

    Analysts' take
    Analysts expect value growth in the lighting segment to follow improvement in volume and believe margins should be on an uptrend from September quarter. They noted that Crompton’s ECD segment had been performing well with double-digit growth for eight consecutive quarters prior to March 2020.

    Motilal Oswal said competitive intensity has bottomed out in the lighting industry, which can be gauged from the price hikes in last six months. The last round of price cuts, it said, occurred in August 2019 and will form a part of the base September quarter onwards.

    Besides, 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, Motilal Oswal said.

    Anand Rathi said the company has one of the best operating margins, high return ratios and free-cash-flow-generation capability. “Its lean and flexible cost structure will help it sail comfortably through FY21 amid poor sales outlook," it said.

    Valuations
    Anand Rathi values the stock at 29 times FY22 P/E compared with 35 times the five-year average of the one-year forward P/E.

    "Product portfolio expansion through organic and inorganic routes will help in accelerating growth and re-rating in coming years," it said. Nomura has the price target of Rs 320 for the stock, which at Friday's trading price of Rs 256.50 suggested a 25 per cent potential upside.

    "Crompton is a steady performer amongst consumer electrical companies and has a strong balance sheet," said Prabhudas Lilladher, which has added the stock in its top midcap picks, with a price target of Rs 295, which suggests a 15 per cent potential upside.

    Motilal's target of Rs 310 suggests a 21 per cent upside.

    “The valuation gap between Crompton and Havells has expanded to 40 per cent on FY22E basis. While we expect Havells to command premium valuations due to its robust business footing, we expect the valuation gap between the two companies to narrow down. This is due to Crompton’s strong earnings growth trajectory along with superior FCF generation. In fact, we find no reason for Crompton to trade at a discount to Orient Electric," Motilal said.

    The brokerage said any inorganic growth opportunity or higher dividend payout or buyback may lead to a rerating of the stock.
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