As expected, earnings at Indian appliance maker Crompton Greaves Consumer Electricals were weak, as expected, amid a high base effect a year ago and weak consumer demand. Management acknowledged the short-term uncertainty regarding the timing of demand recovery, although there are longer-term opportunities to gain market share across all categories. Given the tough macro and intense competition in some segments (which forced price cuts on some SKUs in Q2), we would expect a more timely entry point.
Weak T2FY23 results, as expected
As expected, Crompton recorded lower consolidated Ebitda year-on-year and year-on-year, weighed down by a high base a year ago (due to post-Covid pre-purchases) and high retail price inflation, leading to low consumer demand. Revenues were nearly in line with our estimate, but Ebitda was down 9%, entirely due to core business (excluding Butterfly). Sales growth in the Fans business was impacted by slow channel fill and changing demand, driven by falling raw material prices and the transition to new Bureau of Energy Efficiency (BEE) standards. ). In the lighting segment, conventional business (-35% YoY) continues its secular decline and is now down to 8-9% of segment revenue, from 15-18%. In contrast, Butterfly’s revenue and earnings were above our estimates, with industry margins improving quarter-on-quarter.
The short-term outlook is uncertain
On the post-earnings conference call, management said it was somewhat uncertain when volume growth would resume, and the company is focused on controlling material margins while awaiting earnings from operating leverage. The headwinds encountered in certain key businesses of the company are partly temporary, such as the transition to the new BEE standards which has led to destocking of the chain and the continued decline in the conventional lighting activity which should be completed. in a few quarters. However, some other challenges may last longer, such as the decline in demand for pumps due to inflation and the “extremely high” competitive intensity of LED bulbs.
Reduce BPA FY2023-25E by 3-18%
EPS for the full year 2023E was reduced by 18% to `8.9, reflecting weak first half performance and an uncertain outlook. While we expect growth to pick up in the coming quarters as temporary headwinds subside, much still hinges on inflation and the health of consumer demand. A slowdown in the construction industry amid rising interest rates could put pressure on demand for Crompton’s key product categories, in which case price competition could potentially intensify. Therefore, although we recognize the opportunity for the company to gain market share in fans after the new BEE regulations and see potential for growth in the new kitchen appliances sector, we would expect an entry point more opportune to become more constructive.