HDFC Securities says Crompton Consumer saw healthy market share gains across segments. Lighting margin recovery was strong with a price hike, product mix and cost control. HDFC Sec increases their EPS estimate on Crompton Consumer by 20/18/14% for FY21/22/23. Expecting a faster Recovery, Anand Rathi now forecasts 9% / 11% revenue / PAT CAGRs over FY20-22, with a record high EBITDA margin and healthy return ratios.
 
HDFC Securities maintains Add rating on Crompton Consumer with a target of Rs 350. Crompton Consumer posted a robust Q2 FY21, beating street’s expectations. ECD (Electrical Consumer Durable) growth of 18% was primarily driven by volume growth (not led by channel filling and pent up demand). It was heartening to know that order frequency by trade partner has increased and reflects healthy retail demand. Crompton Consumer saw healthy market share gains across segments. Lighting margin recovery was strong with a price hike, product mix and cost control. Owing to quicker recovery in business to consumer segment, market share gain, success on non-fan portfolio and margin recovery in lighting, HDFC Sec increases their EPS estimate on Crompton Consumer by 20/18/14% for FY21/22/23.
 
ECD led revenue: 
 
Revenue grew by 11% YoY (+4% in Q2 FY20 and – 47% in Q1 FY21) vs expectation of 5% YoY growth. In 18% growth in ECD, fan, pump and geysers clocked 23/18/43% growth. E-comm gained salience for the company with 72% YoY growth and Crompton expanded its presence in the channel. The company gained market share across ECD.
 
Robust margins: 
 
GM was healthy with an expansion of 101 bps YoY (+330 bps in Q2 FY20 and -13 bps in Q1 FY21) vs an expectation of +25 bps YoY expansion. Lighting / ECD saw EBIT margin expansion of 512 / 182 bps YoY. Employee / Other expenses decline by 2/3% YoY. EBITDA margin saw an expansion of 347 bps YoY to 15.5% (+10 bps in Q2 FY20 and -39 bps in Q1 FY21). EBITDA grew by 44% YoY. PBT clocked 45% YoY growth while PAT grew by 23% YoY due to lower tax in the base quarter.
 
Concall takeaways: 
 
(1)   Distribution network normalised and all factories are now fully operational
(2)   Channel inventory has remained stable, but company level inventory is lower
(3)   Residential pumps saw 24% YoY volume growth
(4)   Super-premium fans saw 300% YoY growth
(5)   The company believes double-digit lighting margins are sustainable.
 
Anand Rathi continues to be upbeat about Crompton Consumer and maintain their Buy rating, with a higher target price of Rs 352 from Rs281. Crompton’s all round performance in Q2 (revenue / EBITDA / PAT are up 11% / 44% / 23% YoY) stemmed from its strong distribution network, supply chain and lean cost structure. Other positives were its strong FCF and company’s market share gains in key categories. Expecting a faster Recovery, Anand Rathi now forecasts 9% / 11% revenue / PAT CAGRs over FY20-22, with a record high EBITDA margin and healthy return ratios. Strong cash position (FCF, NCD issue) will be used to re-invest in future growth, including inorganic expansion and greater localisation. Thus, Anand Rathi expects its strong operating performance to allay investor concerns regarding high product concentration and the exit of PE investors and thus narrow the valuation gap with industry leaders.
 
Outperformance continues:
 
Despite slow recovery in the industry, Crompton Consumer’s 11% YoY growth (in all key categories) surprised positively, aided by a slow return of smaller brands facing liquidity and supply chain related issues. The record 15.5% EBITDA margin (up 347 bps YoY) was the result of a superior product mix and cost-optimisation efforts, which should continue. Launches continued in Q2 and channel inventory is at a normal level.
 
ECD / lighting surprised positively; focus on appliances continues:
 
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An 18% YoY rise in ECD revenues was aided by 23% / 32% / 13% growth in fans / appliances / domestic pumps. Agro pumps saw slower recovery due to good rains in the East. Despite 10% YoY growth in B2C LED, overall lighting revenue was down 7% as B2B/B2G saw slower recovery. However, a 10%+ EBIT margin surprised owing to stable prices, a superior mix and cost-optimisation efforts. Crompton is now No.2 in geysers and aims at a similar
status in mixer-grinders in the next two years.
 
Maintain a Buy Rating:
 
Crompton Consumer for its healthy long-term prospects, lean cost structure, balance sheet, strong return ratios and FCFs.
 
Key risks:
 
Keener competition and slow economic recovery will be important to monitor going forward.

 





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