Crompton Consumer: Cost control, market share gains lend comfort

With products less discretionary and seasonal in nature, company's growth could see faster recovery, say analysts

Crompton Greaves Consumer Electricals' (Crompton Consumer) March 2020 performance, too, showed the impact of Covid-19 led supply disruption. However, profit margin maintained its strong trajectory, improving sequentially due to significant cost control and superior sales-mix. While sustenance of this trend will be eagerly watched, analysts believe Crompton Consumer is better placed compared to peers. The reasons include low discretionary nature of products (fans, lighting and pumps), lesser dependence on seasonal products for revenue, and limited exposure to B2B or wholesale segment.

Crompton Consumer, which saw loss of March-end sales post lockdown, posted 15 per cent year-on-year decline in revenues during January-March quarter. Though operating profit declined in line with fall in revenue, operating profit margin at 13.8 per cent was same as in year-ago period, and in fact was better than December'19 quarter's 12.8 per cent. Analysts at Emkay Research say that the market share gains and stable margin in a tough demand scenario are key positives. Management has also hinted at additional Rs 100 crore cost savings over and above the ongoing cost optimisation program, note analysts, who add that this should continue to aid profit margins even as revenue prospects appear weak.

 

Prior to the lock, volume growth was strong during January-February led by electrical consumer durables (ECD) segment, which had grown 18 per cent year-on-year, driven by fans (up 21 per cent) and domestic pumps (growth of 19 per cent). Appliances, too, grew 60 per cent led by water heaters, which grew 48 per cent in terms of volume and 97 per cent in value. Mixer grinders and air coolers, too, grew by 54-83 per cent in value. Analysts at Motilal Oswal Financial Services said that even amidst the ongoing disruption, we commend Crompton’s efforts to further improve its leadership position in the fans segment and its good start in the new category of water heaters and air coolers.

The lighting segment, where competition continues, still saw 40 per cent volume growth in LED bulbs, batons and panels and 15 per cent in value terms, during January-February. Analysts say, the business-to-consumer lighting segment could see early recovery, while B2B (wholesale) lighting could see recovery from March'21 quarter.

Given the underlying business strength, analysts have maintained 'positive' ratings on Crompton Consumer even as they have cut forward earnings estimates on account of lockdown extensions. The company does not deal in large cooling appliances or project sales, which are likely to see seasonal impact, and thus analysts are more hopeful of a faster recovery for the company. The target price of brokerages such as Anand Rathi, Emkay, Motilal Oswal and Prabhudas Lilladher range from Rs 235-270, for the stock trading at Rs 213. Given near-term challenges, long-term investors could use correction for a better entry point.