Stock Recommendation | Crompton Greaves Consumer - SELL - Target price : 190

We expect the company to underperform Havells in terms of revenue growth over the next three years (expect 12% CAGR for Crompton over FY2018-21E versus 17% for Havells). Key reasons for relatively slower medium-term revenue growth potential for Crompton are: (1) already high market share in relatively mature industry segments such as fans and pumps (accounts for 65% of the company’s revenues) and (2) lack of meaningful revenue contribution from new segments (air coolers and water heaters) over the next 2-3 years.

We have cut our FY2019-21E EPS estimates by around 3% led largely by revenue growth assumptions. Maintain SELL; DCF-based TP revised to ₹190 (from ₹215). Valuations are still not attractive at 28X FY2020E EPS.

▶ In the ECD segment, revenue growth (+14% yoy) was driven by strong performance in both fans (aided by premiumization and market share gains as industry revenues are growing at only 6-7% yoy) and pumps segments. Within fans category, newly launched Air 360 fans have been successful leading to 35% yoy growth in the mass premium segment (priced at ₹2,000-2,500). Volumes in the pumps segment grew in healthy double digits on a yoy basis in 2QFY19 led by success of lower-end brand Crest mini and strong growth in agriculture pumps (revenues up 60% yoy) on a low base. The company has revamped its entire range of products in the water heater segment and has launched products to fill portfolio gaps (such as five-star entry-level range). There was strong growth in water heaters in this segment due to dispatches to dealers ahead of the winter season.
▶ In the lighting segment, industry conditions were challenging due to further price erosion across segments driven by aggressive pricing strategy of new entrants. Further, there were cost pressures due to rupee depreciation as dollar cost accounts for almost 35-40% of overall cost in this segment. Consequently, Crompton’s lighting segment revenues declined by 4% yoy (within the segment, EESL revenues were down more than 20% yoy) and EBIT declined by 52% yoy due to steep yoy decline in margins. The company is targeting to improve segmental margins by 400 bps through cost-reduction initiatives— (1) optimizing design of key components, (2) source components directly from China compared to sourcing from aggregators, (3) purchases through e-auction and (4) increase in-house LED production (majority of bulbs produced in-house currently versus only 10% a year back, target to increase production of street lights and panels also). As per our checks, the company along with major peers has taken around 3% price increase in LED bulbs in October 2018, which should help improve margins over the next few quarters.

Definitions of ratings

BUY	-	We expect this stock to deliver more than 15% returns over the next 12 months.
ADD	-	We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE	-	We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL	-	We expect this stock to deliver

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR	=	Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
CS	=	Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC	=	Not Covered. Kotak Securities does not cover this company.
RS	=	Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
NA	=	Not Available or Not Applicable. The information is not available for display or is not applicable.
NM	=	Not Meaningful. The information is not meaningful and is therefore excluded.

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