CG Consumer Electricals: Recovery in margins is keeping analysts hopeful

Lighting margins seen recovering; consumer durables remain strong

The Crompton Greaves (CG) Consumer Electricals stock is up 8 per cent after touching its 52-week low after results last month. While the Street’s disappointment — which led the stock down — was due to decline in lighting segment’s profit that impacted Crompton’s September quarter (Q2) performance, the expected recovery in its margins and the strong outlook for consumer durables business is keeping analysts hopeful.

The lighting segment (about a third of sales) saw profits fall by half, on a 4 per cent growth in revenues. This was the second consecutive quarter of decline in its profits. Rising competition in the light emitting diode (LED) bulbs segment resulted in pricing pressure and has impacted profit margins. 

LED (80 per cent of lighting sales) revenues grew 14 per cent year-on-year (YoY), led by 20 per cent rise in volumes, while prices fell 8 per cent on the back of new competition. Non-LED revenues continue to be under pressure, having dropped 36 per cent in Q2. 

However, analysts at Elara Capital say the degree of price erosion may reduce in the second half of FY19. The management, too, indicated that margins may pick up substantially by the March 2019 quarter. Crompton is taking measures (including in-house manufacturing) to improve margins. The Street, however, will be watching this closely given competition remains high. Positively, only 35-40 per cent of the lighting market has been converted to LED, leaving scope for robust growth. 

Electric consumer durables (ECD; over two-third of revenues) grew 15 per cent with profits jumping 21 per cent YoY. Growth has been broad-based with its wide range of products such as fans, pumps and appliances doing well. Pumps, earlier faced with competition, are now seeing a rebound. 

Volumes grew 25 per cent YoY for Crest Mini (0.5-1.0 HP) pumps, while agri pump sales surged 60 per cent helped by a low base and deeper penetration. Crompton is also focusing on geysers and heaters.

With these factors and valuations being reasonable, analysts are positive on the stock. Kunal Sheth at Prabhudas Lilladher — while reducing his FY19 and FY20 EPS estimates by 4.7 per cent on the back of increased cost pressures — has maintained target price of Rs 279. Those at Elara, Religare and Edelweiss have target prices ranging from Rs 259-283, for the stock trading at Rs 215.