Crompton Greaves Consumer Electricals - Externalities challenging, execution on track - ICICI Securities

We downgrade Crompton from Buy to ADD to factor-in the limited upside based on our FY22 estimates after ~25% stock price rally since Q4FY20 result. We estimate 12%/23% decline in FY21E revenue/PAT with subsequent growth of 27%/35% in FY22E. We estimate FY22E EBITDA margins at 13.3%, similar to FY20. Intermittent lockdowns in various states pose headwinds to complete recovery. Crompton has a robust cash balance of Rs9.7bn (net cash of Rs4.55bn). Any inorganic growth can rerate the stock. The multiples can improve depending upon outperformance of appliance category (in a good momentum over the last 12 months along with demand tailwinds) and/or any inorganic growth. Crompton has traditionally preferred organic growth.

- Covid impact leads to ~47% revenue drop in Q1FY21, margins remain resilient through lower ad/cost savings. From 23rd March till April-end, operations were severely impacted. All factories, depots, distributors, wholesalers and retailers were closed due to lockdown. Business picked up in May and improved in June. EBITDA margin was almost flat at 14.1% in Q1FY21 driven by 12% reduction in employee costs, no ads and sales promotion (3.3% of sales in Q1FY20) and 51% lower other expenses (due to lower activity and cost control programs).

- Recovery remains a work in progress with positive delta in June; difficult to recoup lost sales of April/May. In June, activity in the fans category scaled back to 85% while appliance business witnessed 6% volume growth (appliances should remain an outperformer for all companies). Agro pumps achieved 25% value growth in June, domestic pumps scaled back to 100% activity, B2C LED volumes grew 9% while B2B business remained under pressure due to deferment by institutions and muted government orders. As such, there is a continuing lag in fans segment (15%), B2B lighting (~50% of the erstwhile mix), and somewhat lower growth in B2C lighting (usually a >15% growth category).

- Balance sheet carries big cash chest; will drag return ratios without inorganic growth. Crompton raised Rs3bn via NCDs, which led to a robust cash balance of Rs9.7bn at Q1FY21-end, also aided by prudent working capital management. Net cash as at Q1FY21 remains at Rs4.55bn. With several players raising funds (Bajaj Electricals, Havells, Bluestar), balance sheet may contain more business triggers than P&L in FY21.

- Our valuation is based on 32xFY22E EPS of Rs8.3. The expectation remains that of a fast recovery in FY22 (27% revenue growth) after a dip (-11.6% revenue decline) in FY21. Trailing 4 quarter top line of Crompton has been Rs39bn versus our expected FY21 revenue of Rs40bn. Hence, we are building some growth in 9MFY21 despite overhang of intermittent lockdowns.

Shares of Crompton Greaves Consumer Electricals Ltd was last trading in BSE at Rs.244.35 as compared to the previous close of Rs. 251.05. The total number of shares traded during the day was 23768 in over 926 trades.

The stock hit an intraday high of Rs. 251.45 and intraday low of 239.05. The net turnover during the day was Rs. 5821839.

Source : Equity Bulls

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