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Continuity is the broader theme in the AR- continuity of strategy and execution enabled by continuity of key people. Its objectives continue to remain simple- faster growth than market, operating profit growth at least similar to sales and converting it all into cash. CG is using its leadership to play the role of disruptor in products, branding and distribution. It continues to be on a strong wicket with its existing portfolio of low ticket, replacement products.

Continuity of strategy, business and people The AR re-iterates their 5-pillar strategy on product, brand and reach- a continuation of what they said in FY19 and FY18, with the detailing of the progress in each of them. It has maintained its core objective of growing faster than the market, while trying to maintain margins and improve its working capital. It is also maintaining continuity in its people, especially at the uppermost level. It is seeking reappointment of the MD Shantanu Khosla as MD for another 5 years. It is also seeking re-appointment of HM Nerurkar (Chairman of Board) PN Murty and D Sundaram as Independent directors for another 5 years. This cream of FMCG talent - Khosla (ex MD P&G), Murty (ex MD Asian Paints) and D Sundaram (ex-Vice Chairman HUL) gives us confidence on continuity of strategy at CG Consumer.

Innovating in product and distribution to gain market share Being a leader in fans and lights, it is trying to play the role of a disruptor. In fans it is trying disruption with first of its kind warranty for five years. In lights, product is the disruptor with its anti-bacteria bulb launched in FY19, which is getting a good response. Similarly, on the distribution side, this year it is trying inroads in rural markets with own as well as the microfinance network for its core products. It has tied up with a major HVAC player to get early leads on construction to pitch its lighting products, while also developing E-com channels, post covid.

Focus on cost and WC helps improve cash flows The company's focus also remained on cost rationalization through operational excellence programs. Helped by its cost cutting efforts Crompton has been improving margins in lighting segment for last couple of quarters, despite major price erosions. The overall margins for the company stood at 13.8% and lighting margins came at 11.5% in Q4 improved by 80bps QoQ. WC has been well managed with CFO in FY20 improving to Rs5.5bn from Rs 5bn last year. Balance sheet continues to be strong with investment and cash at Rs5.6bn, while debt has gone down with repayment of Rs3bn debt in the year

CMP Rs 240

Target / Upside Rs 260 / 8%

BSE Sensex 35,873

NSE Nifty 10,552

Scrip Details

Equity / FV Rs 1,255mn / Rs 2

Market Cap Rs 151bn

USD 2bn

52-week High/Low Rs 301/Rs 177

Avg. Volume (no) 901,220

NSE Symbol CROMPTON

Bloomberg Code CROMPTON IN

Shareholding Pattern Mar'20(%)

Promoters 26.2

MF/Banks/FIs 34.9

FIIs 30.5

Public / Others 8.4

CG Consumer Relative to Sensex

VP Research: Vinod Chari Tel: +91 22 40969776

E-mail: [email protected]

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CROMPTONSENSEX

CG Consumer Electricals

Buy

July 02, 2020

July 02, 2020 2

Annual Report Macro View

Particulars

Key Management No changes during the year.

Board of Directors No changes during the year.

Auditors No changes. M/s. Sharp & Tannan continue to be the auditors of the company.

Insider Holdings

Number of securities acquired/disposed/pledged during the year:

FY2020 FY2019

943,319 865,386

Credit Ratings CRISIL has upgraded the long-term rating from AA/Positive to AA+/Stable and the short-term rating assigned is A1+.

Pledged Shares No shares were pledged during the year.

Macro-economic factors

India’s GDP growth fell to below 5% level in FY20 along with slowing domestic demand due to low confidence and declining credit growth. The slowdown has affected key Indian sectors such as automobile, aviation, real estate and consumer goods.

Key Holders

Category of Shareholder (%) FY2020 FY2019

A. Promoters & Promoter Group 17.18 22.34

B. Public Shareholding 82.82 77.66

C. Shares held by Employee Trusts 0.00 0.00

Total 100.00 100.00

July 02, 2020 3

Industry Overview India’s GDP growth fell to below 5% level in FY20 and is expected at 1.9% for FY21. Domestic demand slowed more sharply than expected owing to low confidence and stress in NBFCs and declining credit growth. The slowdown has affected key Indian sectors such as automobile, aviation, real estate and consumer goods. Even with decreasing discretionary spend, the appliance sales are rising with the current WFH situation. Increase in disposable income and electrification of rural areas and higher market penetration will drive growth in ECD segment in India. Demand for Electrical Consumer Durable and lighting is expected to pick up in H2Y21, even with increasing competition. Domestic Fan market annual volumes are expected to be around 65mn units. There should be a significant growth in water pump industry. Growth is expected to rebound owing to lagged effect of fiscal and monetary stimulus, subdued oil prices and improvement in health of Banks and NBFC sector. However, the outlook for FY21 remains very uncertain due to the disruption caused by COVID-19 and the nationwide lockdown which has impacted economic activity.

Five-dimensional Growth Strategy Company has defined five-dimensional strategy through which it endeavors to grow faster than the market and become a leading brand.

Brand excellence: expanding brand reach and recall through aggressive advertising, product innovation and additional innovative product functionality.

Portfolio excellence: Continual focus on premiumization of product range, innovation and value enhancement has enabled Crompton to disrupt the market with innovations like the SilentPro and Energion fans, anti-bacterial bulbs and solar pumps.

Go-to-Market excellence: Company focused on strengthening footprint in rural areas through traditional and microfinance channels. Establishing relationships and exclusive agreements with online and HVAC dealers has proved to be a major advantage.

Operational excellence: Company focused on enhancing information technology to control costs and improve performance. Company developed our in-house capacity and capability through backward integration in fans.

Organizational excellence: The company introduced IoT across multiple levels with automation in customer facing areas and hiring and assessment of employees. Company has a strong leadership structure with succession in place.

FY20 Performance and Developments

Total Income for FY20 was Rs.45.7bn. Profit After Tax was Rs.4.9bn, up by 22.90% YoY along with PBT growth of 4.76% to Rs.5.9bn.

Managed to save Rs.1.4bn in the year through our cost control program, Project Unnati. We are ploughing back these savings into disruptive concepts, designs, and technology.

Employees on rolls of the company have increased to 1,771 as compared to 1,725 in FY19. There was a 6% increase in the median remuneration of employees.

July 02, 2020 4

Company’s applicable tax rate has reduced from 34.94% in FY19 to 25.17% in FY20.

Present in approximately 60% of the electrical goods stores in India during the year. The company undertook multiple initiatives:

o 1500+ new direct channel appointments.

o Tally patch implementation to track secondary sales and have managed to cover 50%.

o Field Assist mobile scheduling application for company.

o Launched Dealer Portal to monitor the status of the orders, settlements and stocks.

R&D for FY20 was Rs.181mn compared to Rs.135.7mn in FY19. Increased R&D spend with focus on efficiency, innovation and premiumization helped company win orders for EESL and Street Lighting project in Orissa.

The Electrical Consumer Durables (ECD) segment displayed a growth of 5.46%. Until the impact of imposed lockdown on demand in March 2020, this segment was delivering strong double-digit growth.

Portfolio refresh of Water Heaters and Air Coolers delivered significant traction in the market.

New product introductions across business segments such as Duratech and SilentPro in Fans and Wide voltage and Ultima series of agricultural pumps in Pumps also contributed to this growth.

LED business registered high single digit volume growth and the Lighting segment witnessed relative price stabilization in the second half of the year.

Inverter lamps that work even during power failure were launched during the year which.

New Product Launches

Silent Pro Enso- Launched plastic blade, remote controlled and minimal operating noise level range of fans.

Energion series- Launched energy-efficient range of fans which operates on Activ BLDCTM (inverter) technology and saves up to 50% on energy bills for end consumer.

Wave Plus- Complete range of table-pedestal-wall fans, created in-house, with a motor design to provide 20% higher air delivery than any similar fans in the market.

Pentaflo- Series of 5 blade table-pedestal-wall fans that offer superior air delivery at a much lower operating noise level.

ULTIMA- Range of Openwell and Borewell pumps with “Ultimate performance and Ultimate reliability”.

Solar pumps for drinking water applications launched with BLDC technology and 5 years warranty.

Mini Everest- Launched 2HP pump with highest head and capacity in industry, to address water requirement of high-rise buildings.

V4 high-performance agro pumps- Launched to address challenging power supply (voltage) conditions.

July 02, 2020 5

Launched electronic control panel with advanced features like under-overvoltage, under-over current, dry run, phase reversal, protections to avoid failure of pumps during abnormal power supply conditions.

Launched series of in-house Battens and Lamps with back- up facility, benefiting locations with power outage challenges.

Brilliance and Radiance Ray plus- series of battens cater to bright light requirements.

Linear and Downlighter solutions- Launched for Commercial office lighting applications.

Water heaters - Solarium Qube, Regalio, Solarium, Rapid Jet, Solarium Vogue, Multifit.

Revamped Air Cooler line-up and launched 13 new models which included Tower, Window and Personal.

Launched a new line- up of Jumbo Window coolers with improved features and performance.

Revamped kitchen and laundry care categories with model launch like Ameo, Apollo, Elle, Brio and Instaglide.

Corona Combat

Supply Chain

The company focused on strengthening its supply chain to ensure timely availability, control over costs and product quality offered, with implementation IoT and launch of Project Delight aimed at reducing defect rate via revamping quality systems and controls and training employees.

Sales and Operational Planning has empowered the sales team with timely and accurate information. The Company has implemented On-Time in Full measure to ensure prompt product SKUs availability across all its sales points.

Project Unnati

The company continued to focus on brand building, capability improvement and superior product delivery via design optimization, in-house manufacturing, backward integration, advertising and product revamp.

The company has retained control over the supply chain and value-add over LED and fans with its backward integration in-house capabilities.

Environment, Health & Safety

The company implemented the ‘Kavach’ program that ensured strict adherence to safety standards and norms. This program is mainly aimed at ensuring health and safety of employees and stakeholders.

The company has revisited its employee health ensure coverage policy along with implementing health checkups and preventive screening due to onset of corona.

July 02, 2020 6

Business Segment Analysis

Electrical Consumer Durables Business

The ECD segment registered a strong double-digit growth till the month of February 2020, which tapered to 6% for FY20 owing to COVID-19’s impact. The segment contributed to 75% of total revenues and to 90% of profits for FY20.

The Electrical Consumer Durables (ECD) segment in India is poised for growth owing to rising income levels, increasing urbanization and improved reach.

Rural electrification programs of Government will drive growth in rural sector.

Premium fan business will grow with increasing demand for improved aesthetics and superior technology.

Fans

The domestic fan market is estimated at 65 million units per year. Factors which will drive fan growth are:

o Government schemes like Integrated Power Development Scheme & Deen Dayal Upadhyaya Gram Jyoti Yojna.

o New energy norms in mandated by BEE in FY20 will require upgradation of fan portfolio.

o Government initiatives such as ‘Pradhan Mantri Awas Yojana’ and ‘Smart City’ projects will collectively add up to 15 million new houses over the next 2-4 years; with an outlay of Rs.250bn for the completion of stalled housing projects.

Company focuses on maintaining its leadership position and growing market share in premium fan segment along with increasing brand recall and cross-country availability of products.

Pumps

The water pump industry is estimated to be at Rs.75bn. Rising urbanization, increasing agriculture activities, depleting groundwater levels and need for sanitation will drive growth.

Company focuses on expanding Tier 2 and 3 city networks; witnessing traction in the Mini Crest models from the smaller towns.

Company entered into solar pumps business to leverage government’s pro-solar initiatives such as the PM Kusum scheme.

Consumer Appliances

The consumer appliances industry is expected to grow rapidly owing to increasing purchasing power of the growing middle class, urbanization in the country, rural electrification and rural market penetration.

Water Heaters

Water heater portfolio was entirely revamped in line with the innovation and premiumization strategy. This resulted in market share gains and increased volumes in FY20.

July 02, 2020 7

Launched new products such as Regallio, Qube, Rapid Jet and Solarium Vogue.

The revival of the housing sector in terms of new constructions along with rising income levels will drive growth in Water Heaters industry.

Air Coolers

The Indian air coolers industry is well positioned to grow on account of rising temperature levels and a growing middle- class.

Launched the desert cooler range Optimus with easy cleaning and drainage facility. Other launches included the Genie Neo and Marvel Neo.

Other Appliances

Company launched Ameo mixer grinder with a higher grinding efficiency and lesser mixer body temperature. Brio and Instaglide were launched in the category of irons.

Lighting Business

Lighting business reported revenue for FY20 at Rs.11.3bn declined by 10.6%, EBIT margins declined 221bps to 6.2%.

This segment contributed to 25% of the total turnover, with 10% contribution to profits.

Company’s consumer lighting segment delivered low double-digit growth in volume terms which was offset by price erosion. The Lighting business thus delivered marginal decline in value terms for the full year.

The B2B segment was impacted by the economic slowdown and witnessed delays in execution of Government and institutional orders.

The Indian lighting industry continues to be competitive but exhibited a relative stabilization of prices in second half of FY20 specifically in the consumer lighting space.

Major growth drivers of the industry are rural electrification, infrastructure development, construction of new homes, and consumer trends towards better light.

Government schemes such as Deen Dayal Upadhyay Gram Jyoti and UJALA (LED lighting) schemes are a major impetus to the industry’s growth.

Non-Convertible Debentures

Crompton has redeemed Non-Convertible Debentures, Series A amounting to Rs.3bn on 24th June, 2019.

The company has NCDs aggregating Rs.3.5bn listed on the National Stock Exchange of India Ltd. Out of these NCDs, Series B amounting to Rs.1.7bn are due for redemption on 24th June, 2020.

The company has been facing a lengthened working capital cycle due to onset of corona, but expects to witness demand pickup in H2FY21. Crompton is seeking to raise NCDs worth Rs.3bn on Private Placement basis to fulfil its WC needs.

Crompton has maintained Debenture Redemption Reserve at Rs.750mn created in FY 18-19. The DRR maintained is adequate for the NCD redemptions due for redemption on 24th June, 2020.

July 02, 2020 8

Subsidiary Financials

Pinnacles Lighting Project Private Limited, a subsidiary incorporated to implement Green field Street Lighting Project for 19 Urban Local Bodies in Odisha, booked revenue of Rs.76.7mn and a PAT of Rs.10.1mn.

Nexustar Lighting Project Private Limited, a subsidiary incorporated to implement Green field Street Lighting Project for 36 Urban Local Bodies in Odisha, booked revenue of Rs.60.6mn and a PAT of Rs.6.7mn.

This contract received from the Government of Odisha, Housing & Urban Development Department is on Public-Private Partnership (PPP) basis.

Crompton CSR Foundation was incorporated on 1st May, 2019 to undertake CSR activities of the Company.

Outlook Covid-19 has hindered global economic growth along with disrupting supply chain and leaving companies scrambling for liquidity to cover increasing costs by the day. This might pose as a challenge in FY21, but continual government investment in rural electrification and affordable housing will drive growth in India. The rise in disposable incomes, aspirational consumers and brand loyalty can be leverage point for Crompton. Company remains focused on three key objectives – growing sales faster than the market, operating profit growth at least in line with sales growth and converting all of the profits to cash. Crompton with its innovative and premium product range along with its strong balance sheet and liquidity reserve can emerge as an industry leader ECD and Lighting.

Opportunities

Government’s renewed focus to push solar power in agriculture sector under KUSUM scheme is a positive and opens new opportunity in solar pumps business. Government’s thrust on “Affordable Housing” and “Housing for All” is good for the long-term growth of consumer electricals segment.

Government focus to improve electrification in rural areas through initiatives like ‘Deendayal Upadhyaya Gram Jyoti Yojana’ is creating new markets for electrical products.

Rise is consumer income coupled with a cultural shift towards nuclear families are prospects for ECD and Lighting business.

Onset of covid-19 in FY20 has led to structural changes like change in consumer behavior. E-Commerce will be an economic driver for both domestic growth and international trade.

Implementation of smart and IoT-connected solutions, process automation coupled with the product portfolio expansion are expected to drive business growth.

Threats

Disruption in supply chain and avoidance of discretionary consumer spend in India could pose as a big risk. Slowdown in Indian economy and global uncertainties would have an adverse short-term impact, which would spill over to channel-partners and suppliers.

July 02, 2020 9

Global economic stability has been deeply impacted due to covid-19 outbreak. FY21 is expected to be a washout for multiple players across various sectors.

Increase in Copper, Aluminum and Steel prices and strengthening of Dollar could enhance the overall product cost and put pressure on margins.

Profit and Loss Analysis Revenue for FY20 was flat at Rs.45.2bn vs. Rs.44.8bn in FY19. Consolidated

revenue of ECD segment stood at Rs.33.9bn in FY20 delivering growth of 5% over previous year; it forms over 75% of company’s sales. Lighting segments’ consolidated revenue dipped by 10.6% to Rs.11.3bn in FY20 compared to previous year.

Material margins expanded 110 bps on account of cost optimization and improved mix to 32.10% for FY20.

Employee cost for FY20 stood at Rs.3.1bn as compared to Rs.2.9bn in FY19. Increase was mainly on account of increments and headcount addition. ESOP expenses have reduced from Rs.340mn in FY9 to Rs.230mn in FY20.

A&P spends to sales ratio during the year was 2.2%. A&P expenses despite flat revenue growth increased from Rs.910mn in FY19 to Rs.990mn in FY20 with focus on brand development.

Improved mix and continued focus on cost optimization programs led to expansion in EBIDTA margins by 30 bps versus previous year and the same stood at 13.3% in FY20.

Depreciation and Amortization expense were higher mainly on account of adoption of Ind AS 116, wherein rent has been reclassified into Depreciation and Amortization expense.

Finance charges reduced from Rs.600mn in FY19 to Rs.410mn in FY20, mainly on account of repayment of debentures worth Rs.3bn in Q1FY20.

PBT margins as a result of operational performance improvement and cost initiatives improved by 60 bps over FY19 margins of 12.5%.

Company’s applicable tax rate has reduced from 34.94% in 2018-19 to 25.17% in 2019-20. Consolidated profits during the year under review stood at ~Rs.5bn registering 24% growth over FY19.

Balance Sheet Analysis There are no major changes in net block of the company and no impairment

has been provided for the goodwill which stands at Rs.7.8bn.

The Total Debt of the Company fell by approximately Rs.3.0bn, with the redemption of NCDs, Series A at Rs.3.0bn in Q1FY20.

Particulars FY20 FY19

Gross Debt Rs.3.5bn Rs.6.5bn

Net Debt (Rs.2.4bn) (Rs.330mn)

Total Equity Rs.14.7bn Rs.11.0bn

Gross Debt to Equity 0.24 0.59

Net Debt to Equity (0.16) (0.03)

July 02, 2020 10

CWIP has increased 20x from Rs10.0mn to Rs.200.0mn. Current Investments were maintained at Rs.5.4bn in FY20, with a shift to investing in liquid mutual funds.

Inventories rose by 31.5% to Rs.4.6 billion in FY20 on account of inventories in channel at Rs.2.7bn due to covid-19 induced lockdown impact. Other Current Assets rose by 79.6%, to Rs.2.3bn on account of an advance paid to suppliers, current tax assets and other factors.

Cash and bank balances fell from Rs.1.4bn in FY19 to 480mn in FY20. The total current assets rose from Rs.17.5bn in FY19 to Rs.17.7bn in FY20.

Trade Payables decreased by 4.5% from Rs.6.7bn in FY19 to Rs.6.4bn in FY20. Trade receivables down from Rs.5.7bn to Rs.4.6bn during the year.

For FY20, capex for the ECD segment was Rs.373.6mn vs. Rs.106.1mn and Lighting Products was Rs.149.5mn vs. Rs.43.4mn.

Number of equities share during the year got up by 298,052 on account of shares issued for ESOP.

Cash Flow and Ratio Analysis The cash flow from operating activities has gone up by 37.6% YoY to

Rs.4.1bn. Company has paid taxes of Rs.1.4bnn during the year.

Net cash flow from investing activities turned positive to Rs.89mn in FY20 vs. negative Rs.1.7bn in FY19.

Capital expenditure increased 6x from Rs.149mn in FY19 to Rs.915mn in FY20.

The company has paid dividend of Rs.1.5bn during the year.

D/E ratio has come down to 0.1 v/s 0.3 due to redemption of NCDs. Although the average cost of debt has gone up to 15.4% from 11.9%.

The cash conversion cycle for FY20 increased slightly to 23 days compared to 21 days in FY19. The company paid creditors early to avail cash discounts.

The RoE has come down to 39% from 43% with a decline in RoCE to 42% from 45% compared to previous year.

EBITDA/OCF has gone up to 2.9x from 1.1x and EBITDA to FCF quadrupled to 5.2x from 1.2x during the year.

July 02, 2020 11

Financial Metrics and Charts

Sales & Growth (%) EBITDA and margin (%)

Source: Company, DART Source: Company, DART

PAT and YoY growth (%) GP Margin (%)


LED’s increasing shares (%) LED in B2C business


(20)

(15)

(10)

(5)

0

5

10

15

20

30,000

32,000

34,000

36,000

38,000

40,000

42,000

44,000

46,000

FY16 FY17 FY18 FY19 FY20 FY21E FY22E

Sales (Rs Mn) YoY Growth % (RHS)

(40)

(20)

0

20

40

4,000

4,500

5,000

5,500

6,000

6,500

FY17 FY18 FY19 FY20 FY21E FY22EEBITDA (Rs Mn) YoY Growth % (RHS)Margins % (RHS)

(40)

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1,0001,5002,0002,5003,0003,5004,0004,5005,0005,500


PAT (Rs in Mn) YoY Growth % (RHS)

29.9

31.4

31.0

32.1

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32.0

29

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33

FY17 FY18 FY19 FY20 FY21E FY22E

LED85

Others15 Lamps

70Fixtures30

July 02, 2020 12

ESOP changes (Rs mn) RoE and RoCE (%)


Segment performance

Source: Company, DART

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Electrical Consumer Durables Sales (Rs Mn)Lighting Sales (Rs Mn)Electrical Consumer Durables margins (%) - RHSLighting margins % (RHS)

July 02, 2020 13

DuPont Analysis

Source: Company, DART

6.3

7.37.9

9.0

11.0

8.7

5

6

7

8

9

10

11

12


PAT/Sales

4.8

3.5

3.03.2

2.8

2.0

2

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4

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6


Asset TO

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2.2

1.8

1.31.1

1.3

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3.5


Asset to Equity

July 02, 2020 14

4- Quarter Concall Trend Analysis Particulars Q1FY20 Q2FY20 Q3FY20 Q4FY20

Financial Performance

• Total revenue for Q2FY20 was up 4%, and our total profit after tax was up 44% after making necessary adjustments for the new tax rates. • PBT margins were up by about 70- basis points this quarter versus the previous year. • EESL Q2FY20 revenue was Rs.490mn vs. Rs.190mn in Q2FY19.

• In Q4FY20 the tax rate will normalize to 25%. • Cash and equivalents are accumulating over the period due to retained profits and over the last couple of years company ramped up, and started a program where pay off vendors ahead of their credits terms and that payment is at a cash discount of anywhere between 13 and 15% offered.

• Total income for Q4FY20 was Rs.10.2bn, Appliances segment grew even with decline in ECD segment. • Sales in Jan and Feb were up by 14% led by fans and appliances. • Sales worth Rs.3bn was lost due to inventory not moving through shutdown. Inventory levels do not seem to be a worry. • Gross margins for the company also improved in spite of the lower volume base by 30 basis points. • Cash in books was Rs.5.9bn for FY20. Company approved raising additional Rs.3bn for WC needs due to covid-19 impact.

Segments

• LED grew by 4.0% in value terms and 12.0% in volume terms • Conventional business declined by 21.0% • On Lighting business, gross margin increased by 100bps QoQ while EBIT margin declined due to (a) 300bps higher investment in advertising (b) investment in B2B business and (c) adjustment in provisioning (impact of 250bps) • 3 ECD segments; Fans, Pumps and Appliances, have delivered strong double-digit growth. Geyser business grew by 44.0%. Cooler business grew by 138.0% in value terms • Pumps and Fans grew plus/minus 1 point on the average ECD growth; Appliances in total grew 40%, but its impact on the total ECD business was only about 1 point or so because of its relatively smaller size • Market share in fans business up by plus 1 market share point. Premium fans business grew 24.0% • EESL revenue for the quarter was Rs.410.0mn

• ECD segment has continued its strong momentum, registering double-digit growth. • Double-digit volume growth on fans, agricultural pumps continue to deliver steady volume growth at 17%. • Appliances, which has been a new key focus area for growth has continued accelerated growth for really the fourth consecutive quarter, led by geysers with a 38% value growth. • Gross margins on our ECD business versus previous year went up by 240-basis points essentially behind our ongoing long-term strategy of driving down cost, building mix and some amount of price increase. • In lighting, top line declined in double digits, and has been challenging for a while. Decline was about 3%, on netting out EESL business. • Lighting saw 20% plus gross margin and close to double-digit top line growth expected to boost profits. • Volume growth in our batten and panel segments of this LED business was about 35% in the current quarter.

• A total volume growth in a company excluding B2B, ECD and B2C lighting was in double digits at 13% and both segments delivered double digit volume growth. • ECD business, in quarter continued strong momentum registering double digit growth. Growth was driven by fans, domestic pumps and appliances. • Growth in fans was just under 10% and year to date market shares in fans is up year on year by 80 basis points. In fans the market share is roughly 27%, in ceiling fans. • Pumps segment, margins have improved and they have improved this quarter by 100 basis points. • Value growth was 64% in geysers and mixer grinder business was up 40% and air cooler business though off season more than doubled. • In terms of the margin’s light parts, at the appropriate cost levels which has brought margins up from about 5% to 7%. • B2C LED lighting was 13 to 14% up in volume.

• Seen traction in May for fans and pumps in South and East India, while demand in North and West remains low due to covid-19 shutdown. • ECD saw an 18% value growth in Jan and Feb. ECD overall volume growth was 22%. • Lighting business saw a value growth of 4% in Jan and Feb. B2C LED Lighting growth was 33% and B2C Lighting growth was 37%. • The appliance business continued its exponential value growth growing at 60% driven by 97% growth in geysers, 54% in mixer grinder and 83% in Air Coolers.

July 02, 2020 15

Particulars Q1FY20 Q2FY20 Q3FY20 Q4FY20

Tailwinds / Headwinds

• Price erosion in LED bulbs have stabilized while other categories in B2C which is panels and battens are witnessing price erosion at an average for the market of close to 10%•For B2B especially in the street lighting and outdoor segments about 5.0-7.0% price erosion is seen sequentially compared to the previous quarter for the market as a whole

• Floods in Eastern India had an impact on sale of domestic pumps. Lost business because of closures in September due to heavy rains.• Significant price erosion in B2C Lighting segment was around 15%, which has led to cost restructuring and exerting pressure on margins.• Price erosion is a major near and midterm challenge, largely being caused by the intense competitive intensity from both large and small players.

• No further erosion over Q2FY20, the prices have begun to stabilize, continue to face the base impact because prices dropped about 15 to 20% last year around July-August.

• Demand constraints remain even with improving supply chain and resumption of operations mainly due to red zones remaining shut due to covid-19.• Agri-pumps performing poorly due to extended monsoon in rural India. Residential pumps continue to provide stable growth.• Despite price erosion in FY19, LED prices stabilized over FY20.

New Products and Innovations

• Introduced antibacterial bulb, which kills up to 85% of bacteria • Optimus was introduced this summer, having superior air delivery

• Geysers will continue to be focus area providing growth of 30% on a QoQ basis, with new launches like Neo, Solarium, Qube and Amica. • The company launched a new range of anti-dust fans in Q2FY20.

• Introduced a new series of silent pro fans. Comprises of both superior performance, lower energy consumption with BLDC motors and more silent performance due to its plastic construction. • Expanding the extremely successful optimum series and window cooler. • In mixer grinder, big opportunity for appliance portfolio, Brio, Ameo and Elle are three new initiatives going in.

• Continued to expand the optimus series in coolers and rapid jet and rapid jet plus series in geysers. • In lighting, introduced new table lamps, super lumen high voltage bulbs, linear luminaires, downlighters, weatherproof luminaires and high efficiency LED tubes. • Launched anti-bacterial LED bulbs in FY19, continue to gain traction.

Market factors

• B2B business performance was little soft due to delay in some projects and government and institutional orders because of the elections

• On the B2B business, beginning to see the initial signs of response of new investment and program and in Q2FY20, B2B business grew around 9%.

• Ran advertisement campaign on geysers complemented by radio and print. This was one of the key drivers behind the continued strong growth of geysers. • Reach in fans has gone up by 1.6 points. Currently had about low fifty distribution and over the year this has moved up close to 54-55%.

• The company resumed operations from the third week of April with all its factories operating currently at 40% to 50% capacity. • 95% of warehouses are running along with 60 out of 86 dealers commencing operations. • As red zones are opening up to 25% levels. Green and amber zones are seeing 50% to 70% demand. • 40% to 50% touchpoints have opened and are operating at 50% to 70% capacity.

July 02, 2020 16

Particulars Q1FY20 Q2FY20 Q3FY20 Q4FY20

Management Guidance

• Company will continue to strongly support its Lighting business with advertising to drive the B2C Lighting business • Company will continue to work to achieve double-digit growing sustainable EBIT margin for Lighting business • For B2C part, Company will continue to spend on advertising on an average between 2.0-3.0% • Going ahead management expects B2B business to be growing ahead of the market in revenue terms. • Management guided for 10.0% margin in Lighting business • On the back of innovation program, investment in branding and go-to-market strategy, Fan business is expected to grow in the teens

• Investing in automation and alliance for LED and importantly, continuing to invest in advertising to drive brand awareness. • EBITDA number not main focus, cost reduction main priority. This will be achieved through increased margins in Lighting led by B2B growth. • Beginning a program on mixers, starting this Diwali, began the program on geysers last winter. • In last year, EESL revenues in H1FY19 was Rs.620mn, and H2FY19 was Rs.750mn and is expected to be at similar levels for FY20.

• Will continue to invest in these activities to build our brands and build our market share. • See lighting as a key strategic long-term growth and a profitable growth business to be in. Continued to deliver double-digit volume growth which means more people are using Crompton lighting. double-digit rate and volume growth should be sustainable in the short, mid and long term. • Seen that over the last three to four months there has been no more price erosion, price stabilization expected for FY20. • Geysers, Coolers and mixer grinders key focuses is to become a number 2 at least in each of these categories.

• Shift to e-commerce and direct consumer channels is expected, especially for appliances segment. Although, traditional channel is expected to be the largest. • Price erosion for LED business is likely at least for the next six to nine months for the B2B segment. This will lead to an industry wide price hike of 5% to 7%.

Others

• Additional Rs.450.0mn being spent on advertising and sales in the quarter compared to previous quarter. Ad spent was Rs.290.0mn • Employee cost increased to Rs.820.0mn in Q1FY20 compared to Rs.770.0mn in Q4FY19 due to reduction in ESOP charge and annual increments • Out of Rs6.5bn worth of bonds, Rs.3.0bn have been paid • Project UNNATI results in cost savings of Rs.250.0mn-300.0mn per quarter and this is mainly used for investment purpose • Company aims to be in the No.2 position in the market in coming 3 years

• In Q2FY20, total spending on advertising and sales promotion was Rs.23 Crores, with a focus on driving the awareness of new products. • For H1FY20, A&P spend was Rs.680mn, close to 3% of revenues, which is 35% higher than the comparable period last year.

• In the current quarter on the advertising and sales promotion spent Rs.210mn towards brand development. In the previous nine months of this fiscal year, AMP spend has been Rs.890mn close to 2.5% of revenue, which is 14% higher than the comparable period last year.

• Managed to save Rs.1bn, while maintaining sufficient liquidity. • Advertising over the fiscal year has gone up by close to 10% to almost Rs.1bn.

July 02, 2020 17

Profit and Loss Account

(Rs Mn) FY19A FY20A FY21E FY22E

Revenue 44,789 45,203 38,988 45,022

Total Expense 38,946 39,212 34,309 38,674

COGS 30,918 30,703 26,902 30,615

Employees Cost 2,919 3,110 3,119 3,152

Other expenses 5,109 5,399 4,289 4,907

EBIDTA 5,843 5,991 4,679 6,348

Depreciation 129 268 131 136

EBIT 5,714 5,723 4,548 6,213

Interest 596 407 507 407

Other Income 480 591 468 585

Exc. / E.O. items 0 0 0 0

EBT 5,598 5,907 4,509 6,391

Tax 1,585 943 1,127 1,598

RPAT 4,014 4,964 3,381 4,793

Minority Interest 0 0 0 0

Profit/Loss share of associates 0 0 0 0

APAT 3,730 4,964 3,381 4,793

Balance Sheet


Sources of Funds

Equity Capital 1,254 1,255 1,255 1,255

Minority Interest 0 0 0 0

Reserves & Surplus 9,719 13,429 13,724 16,979

Net Worth 10,973 14,683 14,978 18,233

Total Debt 3,493 1,797 4,797 4,797

Net Deferred Tax Liability (603) (507) (507) (507)

Total Capital Employed 13,863 15,974 19,269 22,524

Applications of Funds

Net Block 8,632 9,090 9,285 9,499

CWIP 10 199 199 199

Investments 0 0 0 0

Current Assets, Loans & Advances 17,451 17,722 19,272 22,124

Inventories 3,524 4,636 3,306 3,070

Receivables 5,660 4,635 5,536 5,754

Cash and Bank Balances 1,429 480 3,860 6,549

Loans and Advances 0 0 0 0

Other Current Assets 1,427 2,563 1,170 1,351

Less: Current Liabilities & Provisions 12,231 11,036 9,487 9,299

Payables 6,650 6,436 5,828 5,298

Other Current Liabilities 5,580 4,601 3,659 4,001

sub total

Net Current Assets 5,221 6,685 9,785 12,825

Total Assets 13,863 15,974 19,269 22,524

E – Estimates

July 02, 2020 18

Important Ratios

Particulars FY19A FY20A FY21E FY22E

(A) Margins (%)

Gross Profit Margin 31.0 32.1 31.0 32.0

EBIDTA Margin 13.0 13.3 12.0 14.1

EBIT Margin 12.8 12.7 11.7 13.8

Tax rate 28.3 16.0 25.0 25.0

Net Profit Margin 9.0 11.0 8.7 10.6

(B) As Percentage of Net Sales (%)

COGS 69.0 67.9 69.0 68.0

Employee 6.5 6.9 8.0 7.0

Other 11.4 11.9 11.0 10.9

(C) Measure of Financial Status

Gross Debt / Equity 0.3 0.1 0.3 0.3

Interest Coverage 9.6 14.1 9.0 15.3

Inventory days 29 37 31 25

Debtors days 46 37 52 47

Average Cost of Debt 11.9 15.4 15.4 8.5

Payable days 54 52 55 43

Working Capital days 43 54 92 104

FA T/O 5.2 5.0 4.2 4.7

(D) Measures of Investment

AEPS (Rs) 6.0 7.9 5.4 7.6

CEPS (Rs) 6.2 8.3 5.6 7.9

DPS (Rs) 2.1 0.0 2.5 2.5

Dividend Payout (%) 35.1 0.0 45.5 32.1

BVPS (Rs) 17.5 23.4 23.9 29.1

RoANW (%) 42.5 38.7 22.8 28.9

RoACE (%) 33.2 36.0 22.1 24.9

RoAIC (%) 46.5 41.0 29.4 39.6

(E) Valuation Ratios

CMP (Rs) 240 240 240 240

P/E 40.3 30.3 44.5 31.4

Mcap (Rs Mn) 150,511 150,511 150,511 150,511

MCap/ Sales 3.4 3.3 3.9 3.3

EV 147,163 146,420 146,048 143,360

EV/Sales 3.3 3.2 3.7 3.2

EV/EBITDA 25.2 24.4 31.2 22.6

P/BV 13.7 10.2 10.0 8.3

Dividend Yield (%) 0.9 0.0 1.0 1.0

(F) Growth Rate (%)

Revenue 9.8 0.9 (13.7) 15.5

EBITDA 10.0 2.5 (21.9) 35.7

EBIT 10.2 0.2 (20.5) 36.6

PBT 15.3 5.5 (23.7) 41.8

APAT 15.2 33.1 (31.9) 41.8

EPS 15.2 33.1 (31.9) 41.8

Cash Flow


CFO 5,130 2,062 1,205 3,445

CFI (1,885) (911) (318) (350)

CFF (3,589) (2,101) 2,493 (407)

FCFF 4,981 1,148 879 3,095

Opening Cash 1,774 1,429 480 3,860

Closing Cash 1,429 509 3,860 6,549

E – Estimates

DART RATING MATRIX

Total Return Expectation (12 Months)

Buy > 20%

Accumulate 10 to 20%

Reduce 0 to 10%

Sell < 0%

Rating and Target Price History

Month Rating TP (Rs.) Price (Rs.)

Feb-19 Buy 275 210

May-19 Buy 275 219

Jun-19 Buy 275 241

Jul-19 Buy 275 232

Jul-19 Buy 275 225

Oct-19 Accumulate 300 255

Jan-20 Accumulate 300 267

Mar-20 Accumulate 300 190

Mar-20 Buy 300 209

May-20 Buy 260 200 *Price as on recommendation date

DART Team

Purvag Shah Managing Director [email protected] +9122 4096 9747

Amit Khurana, CFA Head of Equities [email protected] +9122 4096 9745

CONTACT DETAILS

Equity Sales Designation E-mail Direct Lines

Dinesh Bajaj VP - Equity Sales [email protected] +9122 4096 9709

Kapil Yadav VP - Equity Sales [email protected] +9122 4096 9735

Yomika Agarwal VP - Equity Sales [email protected] +9122 4096 9772

Jubbin Shah VP - Derivatives Sales [email protected] +9122 4096 9779

Ashwani Kandoi AVP - Equity Sales [email protected] +9122 4096 9725

Lekha Nahar Manager - Equity Sales [email protected] +9122 4096 9740

Equity Trading Designation E-mail

P. Sridhar SVP and Head of Sales Trading [email protected] +9122 4096 9728

Chandrakant Ware VP - Sales Trading [email protected] +9122 4096 9707

Shirish Thakkar VP - Head Domestic Derivatives Sales Trading [email protected] +9122 4096 9702

Kartik Mehta Asia Head Derivatives [email protected] +9122 4096 9715

Dinesh Mehta Co- Head Asia Derivatives [email protected] +9122 4096 9765

Bhavin Mehta VP - Derivatives Strategist [email protected] +9122 4096 9705

170

200

230

260

290

320

Jan-1

9

Fe

b-1

9

Mar-

19

Apr-

19

May-1

9

Jun-1

9

Jul-19

Aug-1

9

Sep-1

9

Oct-

19

Nov-1

9

Dec-1

9

Jan-2

0

Fe

b-2

0

Mar-

20

Apr-

20

May-2

0

Jun-2

0

Jul-20

(Rs) CROMPTON Target Price

Dolat Capital Market Private Limited. Sunshine Tower, 28th Floor, Senapati Bapat Marg, Dadar (West), Mumbai 400013

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