Crompton Greaves Consumer Electricals: In the spotlight

Investors willing to bet on the country’s growing consumption theme can consider buying the stock of Crompton Greaves Consumer Electricals. All segments of the company — fans, lighting and pumps — have shown strong growth in the June quarter and, as a result, the company has had market share gains.

At the current trading price of ₹265 a share, the stock trades at a reasonable price-earnings multiple of 35 times its estimated earnings of 2019-20. V-Guard Industries and Havells India trade at about 35-39 times.

Crompton Consumer is a market leader in fans and residential pumps. In lighting, it has been largely a business-to-business player. The company’s two key segments are lighting products (30 per cent of revenue) and electrical consumer durables (including fans, pumps and consumer appliances).

The Centre’s thrust on affordable housing and push to electrification of all households by 2018 should benefit players in the space such as Crompton Consumer.

For Crompton, the success of its new product range — that is driving market share gains — and its focus on cost-control are highlights.

Strong footing

While 2017-18 was not great (revenue growth was 8 per cent — lighting segment registered 20 per cent growth and electric consumer durables 5 per cent), with muted performance in the electronics consumer durable segment, there has been a strong pick-up in the June quarter, thanks to revival in consumer sentiment.

In the June 2018 quarter, electric consumer durables recorded 23 per cent growth and lighting products saw 15 per cent growth (excluding the business from Energy Efficiency Services Ltd — EESL — a government company for LED bulbs; EESL business is lumpy with some quarters seeing more orders than others). The overall revenue growth in the quarter was 20 per cent Y-o-Y. Profits jumped 30 per cent, helped by expansion in operating margins.

The growth in the electric consumer durables segment was driven by mass premium fans, which grew 31 per cent, thanks to the launch of Air 360 and Anti Dust models. In pumps, the growth was 30 per cent in volume terms, helped by a new product, Mini Crest, which targeted the value segment.

The company’s LED business (contributes 80 per cent to the lighting business) recorded 40 per cent jump in sales.

However, with LED prices dropping market-wide, there has been pressure on the company’s margins.

The price erosion in LEDs has been prevalent for over 15-18 months. Prices started to fall, first in bulbs, then in battens and panels, and now in the B2B segment as well, reports the management of Crompton Consumer. However, LEDs will continue to be the focus in the lighting business; this will help check costs and bring in innovations to hold its margins from contracting.

Over the next few years, the company intends to build on its product portfolio and reach new geographies to grow market share.

Crompton’s new marketing strategy, which resulted in some disruption in sales in the markets where it was introduced in 2017-18, is now reaping benefits. The company has a network of 3,000-plus distributors and one lakh-plus retailers; it plans to expand this over the next few years. The company expects to cover 75-80 per cent of its existing business through its new marketing strategy over the next 12-18 months.

On the product front, the company wants to strengthen its presence in air coolers and geysers by bringing in new innovative products. In the June 2018 quarter, the company’s air cooler business recorded a growth of 21 per cent, Y-o-Y.

Margin improvement

Despite pricing pressure in the lighting segment, the business’ overall operating profit margins improved in the June quarter.

This is thanks to the improved product mix, with higher revenues from the sale of premium fans. The electrical consumer durables segment reported operating margins of 19.4 per cent in the June 2018 quarter versus 17.5 per cent in the same quarter the previous year. The company’s efforts to reduce costs and improve operational efficiency too, helped.

The overall operating profit margins were at 13.9 per cent, higher by 160 basis points over the same period last year.

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