RESULTS REVIEW 3QFY18 25 JAN 2018

Crompton Greaves Consumer Electricals BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Structural story Crompton disappointed on revenue growth while EBITDA margin was inline. Net revenue grew by 6.7% to Rs 9.4bn while like-to-like revenue growth was at 12% (expectation was 15%). The good: lighting growth was at 23%, the bad: ECD segment posted only 7% growth and the ugly: geysers reported volume decline in a seasonally strong quarter! Crompton gained retail market share in Fans and LED lamps. Focus on premiumisation aided in posting >25% growth in premium fans and 57% in LED lamps. Premium fan contributes ~20% in total fans vs. 7% in FY15. Within 2 years of pursuing the LED business, it now contributes >70% of lighting business which is a remarkable achievement. However with Crompton’s caliber we believe it disappointed with weak growth in ECD at a time when its peers (Havells and V-Guard) reported healthy growth. Mgt. stated that they faced intense heat in geysers and domestic pumps. Mgt’s focus area remains the same, i.e. (1) Cost rationalisation (2) Premiumisation and (3) Competitive pricing. We continue to like Crompton

owing to (1) Premiumisation in fans, (2) Healthy growth in LED, (3) Brand leveraging in appliances (4) Focus on efficient distribution (ROI model) and (5) Asset-light business model. We model 27% earnings CAGR over FY18E-20E. We reiterate BUY with a TP of Rs 290, based on 35x Dec-19 EPS.

Highlights for the quarter Lighting saved the day: Fan growth was still not

inspiring, could be because of delay in restocking. The co. lost market share in geyser and pumps. The only bright spark was in lighting which clocked 23% growth, driven by strong demand for LED lamps.

EBITDA (Ex-ESOP) up by 24%: GM was up by 252bps at 33.1%. Employee expenses grew by 17% (Ex-ESOP up by 10% YoY), while other expenses grew by 11%. EBITDA margin (Ex-ESOP) was up by 189bps to 13.9%. APAT was up by 28% to Rs 695mn.

Near-term outlook: With continuous improvement in consumer sentiment and operating performance, we expect a healthy upside in the medium-term as well.

Financial Summary (Rs mn) 3QFY18 3QFY17 YoY (%) 2QFY18 QoQ (%) *FY16 FY17 FY18E FY19E FY20E Net Revenue 9,382 8,792 6.7 9,597 (2.2) 18,117 39,759 41,843 48,275 55,508 EBITDA 1,165 972 19.8 1,207 (3.5) 2,095 4,902 5,354 6,682 8,073 APAT 695 544 27.9 803 (13.4) 1,145 2,924 3,308 4,296 5,356 EPS (Rs) 1.11 0.87 27.9 1.28 (13.4) 1.8 4.7 5.1 6.7 8.3 P/E (x) 68.4 53.5 48.6 37.4 30.0 EV/EBITDA (x) 38.4 32.5 30.1 23.7 19.2 Core RoCE (%) 41.3 40.4 46.1 58.6 71.2 Source: Company, HDFC sec Inst Research *FY16: Financials are for 6 months, ratios are adjusted

INDUSTRY APPLIANCES

CMP (as on 24 Jan 2018) Rs 251

Target Price Rs 290

Nifty 11,086

Sensex 36,162

KEY STOCK DATA

Bloomberg CROMPTON IN

No. of Shares (mn) 627

MCap (Rs bn)/(US$ mn) 157/2,467

6m avg traded value (Rs mn) 234

STOCK PERFORMANCE (%)

52 Week high / low Rs 295 /147

3M 6M 12M

Absolute (%) 14.0 21.6 46.4

Relative (%) 3.1 9.5 14.3

SHAREHOLDING PATTERN (%)

Promoters 34.38

FIs & Local MFs 14.18

FPIs 36.30

Public & Others 15.14 Source : BSE

Naveen Trivedi naveen.trivedi@hdfcsec.com +91-22-6171-7324

Siddhant Chhabria Siddhant.chhabria@hdfcsec.com +91-22-6171-7336

CROMPTON CONSUMER : RESULT REVIEW 3QFY18

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Quarterly Financials Particulars 3QFY18 3QFY17 YoY (%) 2QFY18 QoQ (%) 9MFY18 9MFY17 YoY (%) Net Revenue 9,382 8,792 6.7* 9,597 (2.2) 29,534 28,492 3.7 Material Expenses 6,277 6,104 2.8 6,686 (6.1) 20,292 19,974 1.6 Employee Expenses 742 633 17.3 699 6.1 2,127 1,584 34.3 Other Operating Expenses 1,198 1,084 10.6 1,005 19.3 3,449 3,378 2.1 EBITDA 1,165 972 19.8 1,207 (3.5) 3,666 3,557 3.1 Adj EBITDA (Ex-ESOP) 1,306 1,057 23.5 1,348 (3.1) 4,089 3,642 12.3 Depreciation 32 26 22.4 32 1.9 95 82 16.9 EBIT 1,133 946 19.7 1,175 (3.6) 3,570 3,475 2.7 Other Income 66 50 31.3 35 na 198 126 57.2 Interest Cost 158 162 (2.5) 157 0.8 477 503 (5.2) PBT 1,040 834 24.8 1,054 (1.3) 3,292 3,099 6.2 Tax 345 290 18.9 346 (0.1) 1,086 1,042 4.3 RPAT 695 544 27.9 708 (1.8) 2,206 2,052 7.5 EO Items (Adj For Tax) - - na (95) na - 5 na APAT 695 544 27.9 803 (13.4) 2,395 2,082 15.0 EPS 1.11 0.87 27.9 1.28 (13.4) 3.82 3.32 15.0 Source: Company, HDFC sec Inst Research * Like-to-like growth is 12.2% Margin Analysis MARGIN ANALYSIS 3QFY18 3QFY17 YoY (%) 2QFY18 QoQ (%) 9MFY18 9MFY17 YoY (%) Material Expenses 66.9 69.4 (252) 69.7 (276) 68.7 70.1 (140) Employee Expenses 7.9 7.2 71 7.3 62 7.2 5.6 164 Other Operating Expenses 12.8 12.3 45 10.5 230 11.7 11.9 (18) EBITDA Margin 12.4 11.1 136 12.6 (16) 12.4 12.5 (7) Adj EBITDA Margin 13.9 12.0 189 14.0 (13) 13.8 12.8 106 Tax Rate 33.2 34.8 (163) 32.8 39 33.0 33.6 (62) APAT Margin 7.4 6.2 123 8.4 (96) 8.1 7.3 80 Source: Company, HDFC sec Inst Research

Like to like revenue growth of 12.2% vs. expectation of 15% GM expanded by 252bps driven by premiumisation Operational excellence drove strong EBITDA margin expansion

CROMPTON CONSUMER : RESULT REVIEW 3QFY18

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Segmental Quarterly (Rs mn) 3QFY18 3QFY17 YoY (%) 2QFY18 QoQ (%) 9QFY18 9MFY17 YoY(%) Segmental Revenues Lighting Products 3,265 2,844 14.8 3,378 (3.4) 9,391 8,259 13.7 Electric Consumer Durables (ECD) 6,117 6,045 1.2 6,219 (1.6) 20,397 20,935 (2.6) Total 9,382 8,889 5.5 9,597 (2.2) 29,788 29,195 2.0 Segmental EBIT Lighting Products 452 319 41.6 427 6.0 1,099 808 36.0 Electric Consumer Durables (ECD) 1,112 971 14.5 1,110 0.2 3,636 3,446 5.5 Total 1,564 1,291 21.2 1,536 1.8 4,735 4,254 11.3 Less: (a) Interest Cost & Bank Charges 158 162 (2.5) 157 0.8 477 503 (5.2) (b) Other Un-allocable Expenses 365 274 33.6 325 12.3 - 5 (100.0) PBT 1,040 855 21.7 1,054 (1.3) 3,292 3,115 5.7 Capital Employed Lighting Products 413 615 (32.9) 822 (49.7) 413 615 (32.9) Electric Consumer Durables (ECD) 146 118 24.1 122 20.3 146 118 24.1 Total 559 733 (23.7) 943 (40.7) 559 733 (23.7) Unallocable Capital Employed 6,032 3,597 67.7 4,820 25.1 6,032 3,597 67.7 Total Capital Employed 6,591 4,330 52.2 5,763 14.4 6,591 4,330 52.2 Source: Company, HDFC sec Inst Research Segmental EBIT Margin (Rs mn) Q3FY18 Q3FY17 YoY (bps) Q2FY18 QoQ (bps) 9MFY18 9MFY17 YoY (bps) Lighting Products 13.8 11.2 262.3 12.6 122.0 11.7 9.8 192 Electric Consumer Durables (ECD) 18.2 16.1 211.0 17.8 33.8 17.8 16.5 136 Total 16.7 14.5 215.3 16.0 66.6 15.9 14.6 132 Source: Company, HDFC sec Inst Research

Lighting continued its great run with like-to-like growth of 23/30% in value/volume driven by robust LED demand LED continued to witness price erosion ECD like-to-like growth was 7% with fans growing faster than market however domestic pumps and geyser faced intense competition Higher LED mix in lighting resulted into 262bps expansion in EBIT margin Premiumisation of fans (>Rs 2,000 MRP) drove EBIT expansion for ECD

CROMPTON CONSUMER : RESULT REVIEW 3QFY18

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Segmental Analysis (like-to-like) Particulars (Rs mn) 3QFY18 3QFY17 YoY (%) 9MFY18 9MFY17 YoY (%) Revenue Lighting Products 3,498 2,844 23.0% 9,901 8,259 19.9% Electric Consumer Durables (ECD) 6,493 6,045 7.4% 21,296 20,935 1.7% Total 9,991 8,889 12.4% 31,198 29,195 6.9%

EBIT Lighting Products 452 319 41.6% 1,099 808 36.0% Electric Consumer Durables (ECD) 1,112 971 14.5% 3,636 3,446 5.5% Total 1,564 1,291 21.2% 4,735 4,254 11.3%

EBIT Margin (%) 3QFY18 3QFY17 YoY (bps) 9MFY18 9MFY17 YoY (bps) Lighting Products 12.9% 11.2% 170 11.1% 9.8% 132 Electric Consumer Durables (ECD) 17.1% 16.1% 106 17.1% 16.5% 61 Total 15.7% 14.5% 114 15.2% 14.6% 60 Source: Company, HDFC sec Inst Research

Growth in retail fan market was flat YTD, however Crompton grew faster than the market and continued to take share Mgt. expects the fan market to recover in the next few quarters to 6-8% growth rate In lighting, LED now contributes >70% to lighting revenues as compared to 66% in Q1FY18 On a YTD basis lighting growth has been impressive inspite in a turbulent environment EESL orders in lighting were at Rs 420mn in 3QFY18. ~ Rs 500mn of order pipeline remaining in B2B lighting segment

CROMPTON CONSUMER : RESULT REVIEW 3QFY18

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Net Revenue Gross Margin

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Lighting Performance ECD Performance

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Premiumisation, cost control initiatives and distribution expansion delivering healthy operating performance since last few quarters Ceiling fans market share is at 27% while premium fans share stands at 8-8.5% share of total market fans

-5%

0%

5%

10%

15%

20%

-

2,000

4,000

6,000

8,000

10,000

12,000

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Net Sales YoY Gr.(%)- RHS(Rs mn)

8%

10%

12%

14%

16%

28%

30%

32%

34%

Q3F

Y16

Q4F

Y16

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Gross Margin EBITDA Margin - RHS

4.0%

6.5%

9.0%

11.5%

14.0%

16.5%

-

900

1,800

2,700

3,600

Q3F

Y16

Q4F

Y16

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Revenues EBIT Margin - RHS(Rs mn)

10.0%

12.5%

15.0%

17.5%

20.0%

-

2,000

4,000

6,000

8,000

10,000

Q3F

Y16

Q4F

Y16

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Revenues EBIT Margin - RHS(Rs mn)

CROMPTON CONSUMER : RESULT REVIEW 3QFY18

Page | 6

Crompton’s Lighting Performance Crompton’s Electric Consumer Performance

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Better product mix i.e. LED/premium fans driving strong EBIT growth for lighting/ECD segment respectively

5% 5%10%

25% 23%

4%

24%

50%

25%

42%

0%

10%

20%

30%

40%

50%

60%

Q3F

Y17

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Revenue Gr. (%) EBIT Gr. (%)

12%8%

-9%

11%7%

41%

15%

-12%

27%

14%

-15%

0%

15%

30%

45%

Q3F

Y17

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Revenue Gr. (%) EBIT Gr. (%)

CROMPTON CONSUMER : RESULT REVIEW 3QFY18

Page | 7

Key Assumptions

Segments Revenue (Rs mn) Revenue Growth (%) Revenue Mix (%)

FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E Fans 18,792 19,074 21,744 24,789 12.5% 1.5% 14.0% 14.0% 45.9% 44.5% 44.2% 43.8% Lighting 11,312 12,896 15,089 17,654 8.5% 14.0% 17.0% 17.0% 27.6% 30.1% 30.7% 31.2% Pumps 8,260 8,425 9,436 10,663 11.0% 2.0% 12.0% 13.0% 20.2% 19.6% 19.2% 18.9% Appliances 2,555 2,504 2,917 3,442 12.0% -2.0% 16.5% 18.0% 6.2% 5.8% 5.9% 6.1% Total 40,920 42,899 49,186 56,547 11.0% 4.8% 14.7% 15.0% 100.0% 100.0% 100.0% 100.0% Note: FY18 revenue growth is based on reported numbers (not adjusted to GST) P&L Breakup - % of revenue FY17 FY18E FY19E FY20E Raw Material 69.8 69.0 68.7 68.3 Employee expenses 5.7 5.7 5.7 5.7 After sales services incl. warranty 1.0 1.0 1.0 1.0 Sales promotion 1.5 1.5 1.5 1.5 Advertising 1.4 1.4 1.4 1.4 Freight and forwarding 2.3 2.3 2.3 2.3 Others 6.0 6.3 5.6 5.3 EBITDA Margin 12.3 12.8 13.8 14.5 Depreciation and amortization 0.3 0.3 0.4 0.4 Interest 1.6 1.4 1.2 0.8 Other income 0.5 0.7 0.8 0.8 PBT 10.9 11.7 13.1 14.2 Tax 3.5 3.8 4.2 4.5 NPM 7.4 7.9 8.9 9.6 Source: HDFC sec Inst Research

CROMPTON CONSUMER : RESULT REVIEW 3QFY18

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Income Statement Year End March (Rs mn) FY16 FY17 FY18E FY19E FY20E Net Revenues 18,117 39,759 41,843 48,275 55,508 Growth (%)* 9.7 5.2 15.4 15.0 Material Expenses 12,889 27,753 28,880 33,165 37,899 Employee Expense 1,005 2,252 2,928 3,028 3,326 ASP Expense 348 1,159 1,219 1,407 1,618 Freight and forwarding 462 895 941 1,086 1,249 Other expenses 1,319 2,799 2,946 3,398 3,907 EBITDA 2,095 4,902 5,354 6,682 8,073 EBITDA Growth (%)* 17.0 9.2 24.8 20.8 EBITDA Margin (%) 11.6 12.3 12.8 13.8 14.5 Depreciation 63 110 137 174 204 EBIT 2,032 4,792 5,217 6,508 7,869 Other Income (Including EO Items) 178 220 281 381 432

Interest 355 655 585 572 425 PBT 1,577 4,306 4,913 6,317 7,876 Tax 525 1,399 1,605 2,021 2,520 RPAT 1,052 2,907 3,308 4,296 5,356 Adjustment 93 17 - - - APAT 1,145 2,924 3,308 4,296 5,356 APAT Growth (%)* 27.7 13.1 29.9 24.7 Adjusted EPS (Rs) 1.8 4.7 5.1 6.7 8.3 EPS Growth (%)* 27.7 10.1 29.9 24.7

Source: Company, HDFC sec Inst Research * FY16: Financials are for 6 months, growth is adjusted for FY16 annualised numbers Note: FY18 revenue growth is based on reported numbers (not adjusted to GST)

Balance Sheet Year End March (Rs mn) FY16 FY17 FY18E FY19E FY20E SOURCES OF FUNDS Share Capital - Equity 1,254 1,254 1,288 1,288 1,288 Reserves 1,034 4,138 6,175 8,819 12,116 Total Shareholders Funds 2,288 5,392 7,462 10,107 13,404 Long Term Debt 5,072 6,500 6,500 6,500 3,500 Short Term Debt 100 - - - - Total Debt 5,172 6,500 6,500 6,500 3,500 Net Deferred Taxes (43) (182) (182) (182) (182) Other Non-Current Liabilities 146 176 228 236 259 TOTAL SOURCES OF FUNDS 7,562 11,886 14,009 16,661 16,982 APPLICATION OF FUNDS Tangible Assets 786 821 884 960 1,051 CWIP 1 - - - - Goodwill 7,794 7,794 7,794 7,794 7,794 Other Non-Current Assets 178 186 207 242 283 Total Non-current Assets 8,759 8,801 8,886 8,997 9,128 Inventories 2,100 2,348 2,427 2,752 3,164 Debtors 4,165 5,434 5,440 6,276 7,216 Other Current Assets 563 500 526 607 698 Cash & Equivalents 900 3,885 6,349 9,054 9,384 Total Current Assets 7,728 12,167 14,742 18,689 20,462 Creditors 6,641 7,145 7,520 8,676 9,976 Other Current Liabilities 2,285 1,938 2,099 2,348 2,633 Total Current Liabilities 8,926 9,083 9,619 11,024 12,608 Net Current Assets (1,197) 3,084 5,123 7,665 7,853 TOTAL APPLICATION OF FUNDS 7,562 11,885 14,009 16,661 16,982

Source: Company, HDFC sec Inst Research

CROMPTON CONSUMER : RESULT REVIEW 3QFY18

Page | 9

Cash Flow Statement Year ending March (Rs mn) FY16 FY17 FY18E FY19E FY20E Reported PBT 1,577 4,306 4,913 6,317 7,876 Interest Expenses 351 655 585 572 425 Depreciation 63 110 137 174 204 Working Capital Change 357 (516) 425 164 141 Tax Paid (540) (1,466) (1,605) (2,021) (2,520) OPERATING CASH FLOW ( a ) 1,757 3,105 4,455 5,205 6,125 Capex (15) (150) (200) (250) (295) Free Cash Flow (FCF) 1,742 2,955 4,255 4,955 5,830 Investments - (3,191) - - - Non-operating Income 40 190 (22) (35) (41) INVESTING CASH FLOW ( b ) 24 (3,151) (222) (285) (336) Debt Issuance/(Repaid) (533) 56 - - (3,000) Interest Expenses (351) (209) (585) (572) (425) FCFE 898 (200) 3,648 4,348 2,365 Share Capital Issuance - - 34 - - Dividend - - (1,271) (1,651) (2,058) Others - 53 8 23 FINANCING CASH FLOW ( c ) (883) (154) (1,770) (2,215) (5,460) NET CASH FLOW (a+b+c) 898 (200) 2,464 2,705 330 EO Items, Others - - - - - Closing Cash & Equivalents 900 700 3,164 5,869 6,199

Source: Company, HDFC sec Inst Research

Key Ratios FY16 FY17 FY18E FY19E FY20E PROFITABILITY (%) GPM 28.9 30.2 31.0 31.3 31.7 EBITDA Margin 11.6 12.3 12.8 13.8 14.5 EBIT Margin 11.2 12.1 12.5 13.5 14.2 APAT Margin 6.3 7.4 7.9 8.9 9.6 RoE 100.1 54.2 44.3 42.5 40.0 RoIC (or Core RoCE) 41.3 40.4 46.1 58.6 71.2 RoCE 37.0 28.3 26.5 28.2 33.4 EFFICIENCY Tax Rate (%) 33.3 32.5 32.7 32.0 32.0 Fixed Asset Turnover (x) 3.7 4.0 4.1 4.6 5.2 Inventory (days) 21.2 21.6 21.2 20.8 20.8 Debtors (days) 42.0 49.9 47.5 47.5 47.5 Other Current Assets (days) 5.7 4.6 4.6 4.6 4.6 Payables (days) 66.9 65.6 65.6 65.6 65.6 Other Current Liab & Provns (days) 23.0 17.8 18.3 17.8 17.3

Cash Conversion Cycle (days) (21.1) (7.4) (10.7) (10.5) (10.1) Net D/E (x) 1.9 0.5 0.0 (0.3) (0.4) Interest Coverage (x) 0.2 0.1 0.1 0.1 0.1 PER SHARE DATA (Rs) EPS 1.8 4.7 5.1 6.7 8.3 CEPS 1.9 4.8 5.4 6.9 8.6 Dividend - 1.6 1.7 2.2 2.8 Book Value 3.7 8.6 11.6 15.7 20.8 VALUATION P/E (x) 68.4 53.5 48.6 37.4 30.0 P/BV (x) 34.2 29.0 21.5 15.9 12.0 EV/EBITDA (x) 38.4 32.5 30.1 23.7 19.2 EV/Revenues (x) 4.4 4.0 3.8 3.3 2.8 OCF/EV (%) 1.1 2.0 2.8 3.3 4.0 FCF/EV (%) 1.1 1.9 2.6 3.1 3.8 FCFE/Mkt Cap (%) 0.6 (0.1) 2.3 2.7 1.5 Dividend Yield (%) - 0.6 0.7 0.9 1.1

Source: Company, HDFC sec Inst Research * FY16: Financials are for 6 months, ratios are adjusted for FY16 annualised numbers

CROMPTON CONSUMER : RESULT REVIEW 3QFY18

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RECOMMENDATION HISTORY

Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 30-Jan-17 188 BUY 228 14-Apr-17 215 BUY 245 29-May-17 224 BUY 248 28-Jul-17 209 BUY 252 10-Oct-17 217 BUY 252 27-Oct-17 219 BUY 268 13-Nov-17 250 BUY 276 12-Jan-18 270 BUY 300 25-Jan-18 251 BUY 290

120

140

160

180

200

220

240

260

280

300

Jan-

17

Feb-

17

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov

-17

Dec-

17

Jan-

18

Crompton Consumer TP

CROMPTON CONSUMER : RESULT REVIEW 3QFY18

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Disclosure: We, Naveen Trivedi, MBA & Siddhant Chhabria, PGDBM, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. 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CROMPTON CONSUMER : RESULT REVIEW 3QFY18

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