Crompton Geaves Consumer Electricals: In the limelight

This young company should gain from the potential in lighting and electrical products

Crompton Greaves Consumer Electricals (Crompton Consumer) seems a good buy for investors looking for bets in the consumer space. The company was demerged from Crompton Greaves in October 2015.

The promoters — Gautam Thapar and family — sold their entire 34.7 per cent stake in the company to private equity investors. The demerged business, which listed in the bourses at ₹126 a share in May last year, now trades at ₹218 at a valuation of 40 times the likely earnings for 2017-18.

Despite the sharp rally, the valuation does not seem very expensive. Peers V-Guard Industries and Havells too trade at 40-45 times the one-year forward earnings.

Crompton Consumer’s new management’s is focussed on growing market share by increasing retail distribution and cutting costs to improve margins. In the December 2016 quarter, the company tided over the demonetisation blues by registering 10 per cent sales growth y-o-y (to ₹888 crore). Net profits were higher by 40 per cent.

Promising business

Crompton has seen revenues from fans, lights and pumps grow at a compounded annual rate of 12-15 per over the last seven years.

It is a market leader in fans and residential pumps. In lights, it has been largely a business-to-business (B2B) player, supplying lighting products to institutions.

Post de-merger, the business of Crompton Consumer got organised in two segments — lighting products (30 per cent of revenue) and electrical consumer durables (includes fans, pumps and consumer appliances).

Over the last two years, the government’s push to LED based lighting from incandescent bulbs has been benefiting many players including Crompton.

In 2015-16, Crompton, for instance, won orders for 14 million LED lamps and street lights from EESL (Energy Efficiency Services Limited, a government company). Over the next one/two years too, as the government continues the LED drive, players will stand to benefit. If Crompton Consumer is able to penetrate in the retail LED market too at a fast pace, then market share gains would aid revenue growth.

In fans, Crompton is the market leader. This segment contributes 45 per cent of revenue. Not just the standard category, Crompton’s premium fans (15 per cent of revenues of fans business) too have been doing well in the market. In the December 2016 quarter, premium fans saw volume growth of 40 per cent y-o-y. In fans too, there has been government orders for energy efficient models which are manufactured as per BEE specifications. However, the company’s management has indicated that it may not take up government orders unless it makes financial sense.

Pumps contribute 20 per cent of sales for the company. In the December 2016 quarter, revenue from agricultural pumps was flat. However, given that the company is among the top few players in the market for pumps, any revival in demand should benefit it. Also, as the EESL procurement in pumps has started (is replacing old pumpsets with energy efficient ones) under the National Energy Efficient Agriculture Pumps Programme, sales should go up.

Crompton’s consumer appliances business is small (contributes 5 per cent to sales). It sells water heaters, mixers, grinders and air coolers among others. Given that the competition in this category is high and the company’s retail presence is lower compared to peers, it may take some time for the company to break into this category.

In the December quarter, while the electrical consumer durables segment saw 12.3 per cent revenue growth, the lighting segment saw growth of 5 per cent due to drop in orders from EESL.

Cost efficiencies

The company’s operating margin stood at 11.17 per cent in the December 2016 quarter, up from 10.2 per cent last year, thanks to focus on cost-cutting measures.

Going ahead, the increased focus on premium-end products may help margins. However, if marketing spends go up, margin expansion may be under check.

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