Crompton Greaves Consumer Electricals - Initiating Coverage - Rechristened For An Electrifying Future - Nirmal Bang

We remain optimistic about healthy growth in the consumer electricals sector over the next five to seven years because of favourable macro-economic drivers like higher GDP growth, rising rural electrification, increased urbanisation, growth in affordable housing, lower inflation, higher disposable income as well as rising trend of product upgradation by urban consumers. Crompton Greaves Consumer Electricals (CGCEL) is well placed to reap the benefits of upturn in the industry driven by its strong management pedigree, the revitalised Crompton brand, increasing product innovation and augmenting distribution network. With a strong focus on product premiumisation as well as scaling up hitherto untapped categories like premium fans, residential LED luminaires and agricultural pumps, CGCEL is likely to register 13.3% revenue CAGR and 24.6% earnings CAGR over FY17-FY19E. The financial profile remains superlative with healthy profitability, highest fixed-asset turnover and return ratios among peers and a negative working capital cycle. We initiate coverage on CGCEL with a Buy rating and a target price of Rs260 based on 36x FY19E earnings.

Consumer electricals to witness long-term sustainable growth: With rising affordability and growing necessity of basic electrical products like fans and lighting, rural demand is likely to get a strong impetus from healthy improvement in rural electrification and the push for affordable housing. The number of households electrified rose from 55% in 2011 to 70% in 2016 while the government aims to achieve 100% electrification by the end of 2018. Similarly to attain its objective of 'Housing For All' by 2022, 113mn affordable houses have to be constructed, which has potential to double the market size of electrical products even with a 50%-60% achievement rate. In urban areas, replacement demand is the main driver where an increased shift towards premium products is underway driven by rising disposable income and the aspiration for upgrading lifestyle and room décor.

Revitalised Crompton offers bright future prospects: Under the new management, Crompton is rebuilding its brand after years of under-investment. The brand has been revitalised with a new logo and increased advertisements which clearly appeal to the youth. The emphasis on deepening consumer connect by communicating the strength of the brand (as a mark of trust and quality) along with new and improved product range offering better aesthetics, functionality and innovation is aiding growth. Along with renewed brand building, initiatives such as rising product innovation, augmenting distribution network, premiumisation of product portfolio as well as enhancing focus on hitherto untapped opportunities like premium fans, residential LED luminaires and agricultural pumps is likely to drive a healthy 110bps EBITDA margin expansion and 24.6% earnings CAGR over FY17-FY19E.

Outlook and valuation: CGCEL is a strong financial franchise with 24.6% earnings CAGR over FY17-FY19E, strong operating/free cash flow (Rs9bn/Rs8.5bn over FY17-FY19E), highest fixedasset turnover (19.1x in FY19E) and return ratios among peers (RoCE/RoIC of 44.4%/76.2% in FY19E, respectively) and a negative working capital cycle which will aid its valuation. We have valued CGCEL at 36x FY19E earnings with a target price of Rs260, up 20% from the CMP, and assigned Buy rating to it. The target P/E of 36x is in line with that of Havells India and factors in a PEG ratio of 1.5x.

Source : Equity Bulls

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