Consumer Durables

Industry
Industry Electricals
Crompton Greaves Consumer Electricals Ltd
CMP 233
May 07, 2018
Market cap (Rs Cr) 14,604
Face Value 2 Exploring Untapped Potential
Shares Outstanding (Cr) 62.67 Big Opportunity: Premiumization of fans
52-wk High/Low (Rs) 290 - 200 Crompton is the biggest player in fans segment with market share of 27%.
Adjusted Beta 0.51 Crompton’s latest launch of anti-dust fans and air 360 fans during Q2 and
Q4 FY18 respectively is a huge success with its market share in premium
Bloomberg CROMPTON IN fan segment going up to ~20%. This can improve even further as they have
Share Holding Pattern (%) limited competition in premium segment supported by better growth
trends which will drive the overall fan industry. We are expecting ~14%
Category Mar'18 (%) CAGR growth in premium fan segment.
Promoter 34.38
Transition towards LED will drive the Lighting Industry
Institutions 50.24
The industry is expecting high demand for LED lights as the market is slowly
Public 15.38 shifting from CFL towards LED. With just 20% conversion from CFL to LED
Valuation there is a huge scope for higher conversion rates due to efficiency and cost
benefits along with narrow price difference between them. Crompton has
Particulars . emerged as the second largest player in this segment after Philips in a very
short span of time. Also, LED is a major source of revenue for Crompton in
P/E 47.55
lighting segment.
Price to Book Value 17.92
EPS 5.17 Unorganised Cooler market- Huge opportunity for large players
post GST
Relative Stock Performance
Industry fundaments such as low penetration levels, rising middleclass
Crompton population and income levels makes both the cooler and water heater
business attractive. After its failed attempt to acquire second largest player
Nifty 50 in air cooler Kenstar to expand business through inorganic expansion,
Crompton is looking at organic growth in both these segments and
targeting to be among top three players in the industry.

Growth opportunity in Agricultural pumps is ready to take off

The growth opportunities in agricultural pumps post the effects of
Demonetisation and GST has already kicked in with ~14% YoY of Crompton
in pumps segment for FY18. Crompton is the market leader in residential
pumps segment and growing urbanisation and growth in new house
Top 5 Institutional Shareholders construction will drive revenues in this segment. Also shift of market share
from unorganised segment which is ~44% to organised segment due to GST
Mar'18 will provide opportunity for Crompton to capture additional market share.
Name (%)
Financial summary
Aditya Birla Sun Life MF 4.01
LIC of India 3.21 . FY17 FY18 YoY %
Amansa holdings private Revenues (Rs Cr) 4036.2 4135.9 2.5
limited 2.8 EBITDA Margins (%) 12.5 13.6 8.7
Franklin templeton Reported PAT (Rs Cr) 283.2 323.8 14.3
investment funds 2.73 EPS (Rs) 4.5 5.2 14.4
HDFC trustee company PE (x) 46.8 42.9 -8.3
limited 2.51
Long term Debt/Equity (x) 1.3 0.8 -34.4
Short term Debt/Equity (x) 0.0 0.0 0.0
ROE (%) 54.7 49.5
Sagar Nadkarni
sagar.nadkarni99@nmims.edu.in
ROCE (%) 41.7 37.7

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 Consumer Durables
Industry

Industry Overview
Domestic consumption is key driver for Indian Consumer durable Business owing to country’s large
population and disposable income levels and expanding middle class. Also Increasing electrification
and affordable housing will drive the demand for consumer durables products. India is set to
become youngest country by 2020 with almost 64% population in working age group which is likely
to boost spending on discretionary consumer durables and premium products.

Segment wise breakup in Consumer Durables Industry

Source: Crompton Investor Presentation Reports

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 Consumer Durables
Industry

Fans: Focus on premium and innovative products

The fan industry currently stands at approx. INR 70 Billion with unorganised sector comprising 25-
30%. The industry is consistently growing with 5-year CAGR at approx. 11%. The demand for
premium fans has increased and accounts for 7-8% of industry. The industry is likely to post a CAGR
of approx. 13% over FY17-22E with premium fans capturing 15% market share.

The domestic fan industry is divided in to two main categories which include residential fans and
industrial fan. The residential fan further is categorised into ceiling fans, table fan, wall fan, pedestal
fan and exhaust fan. The ceiling fan accounts for 70% of the fan market followed by Table, wall and
pedestal fan occupying 20% whereas the exhaust fans along with other residential category fans and
industrial fans has 10% market.

Fans Industry

Residentail Industrial
fans fans

Exhaust fan
Ceiling fan Table fan Wall fan Pedestal fan
and Others

70% 20% 10%

The Key players in this segment from organised sector are Crompton, Orient electric, Havells, Bajaj
electricals, Khaitan with Crompton leading the market with 27% market share.

Fan Industry Market Share

Others
Bajaj Electricals
30%
7%

Khaitan
2%

Havells Crompton
14%
Orient 27%
Electric
20%

Growth Drivers

Rising penetration in rural areas due to increased electrification

The penetration of electric fan in rural areas is just 65% which is due to unavailability of electricity in
many areas. In order to improve supply of electricity in both urban as well as rural areas government
has introduced DDUGJY (Deen Dayal Upadhyaya Gram Jyoti Yojana) for rural areas and Integrated
Power Development Scheme (IPDS) for urban areas. Higher power availability is likely to drive new
fan demand and it is expected that penetration will be more than 70% in 2019-20.

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 Consumer Durables
Industry

Replacement cycle getting shorter in Urban areas driving premiumisation

The market penetration of electric fans in urban and semi urban areas in around 90-95% and two
thirds of that will be driven by replacement demand with bulk demand coming from urban and semi
urban areas. The repeat transaction of customers will involve adding value to fan in terms of
warranty and aesthetic designs along with new innovations which will drive the premium market.

Lighting: Focus on LED

The lighting industry is approximately INR 120 billion market with unorganised sector comprising of
30-40%. The industry has been growing at 16% CAGR over last 5 years. The FY17 was a major shift
towards LED which grew by 15% in the same period. There has been focus on energy efficiency and
cost benefit as compared to traditional lighting. This will enable LED to register a growth of CAGR
20% over FY17-22E. With GST implementation there will a major shift from unorganised to organised
sector which can result 16% growth in lighting segment. The lighting segment accounts for 20%
power consumption of India.

The LED industry may double to INR240 billion by 2022 following government’s decision to switch to
LED for all street lamps and public spacing lighting under Street Lighting National program (SLNP)
and largest LED distribution program under Unnat Jyoti by Affordable LED for All (UJALA) program.
The segmentation of lighting industry is as follows which shows the LED leading the market.

Lighting Industry

Florescent
General
Tubular CFL LED
Light Service
Lamps

45 - 50% 50 - 55%

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 Consumer Durables
Industry

The Key players in this segment are Philips, Bajaj Electricals, Havells, Crompton, Surya Roshni, Syska,
HPL Electric with Philips being the market leader with market share of 23%.

Lighting Industry Market Share

HPL Electric Others
5% 33%

Syska Bajaj
10% electricals
8%
Havells
Philips 8%
23%
Surya Roshni Crompton
6% 7%

Growth Drivers:

Rise of LED and decline of CFL markets

LED’s are replacing the CFL segment due to high efficiency along with lower costs of LED. Energy
Efficiency Services Limited (EESL) have given orders to Philips, Surya Roshni, Bajaj Electricals and
others in order to increase supply and speedup the UJALA program.

Rural Electrification for All

With government’s focus on rural electrification with a goal of 100 % rural electrification by 2019
they have launched IPDS Scheme. Uninterrupted availability of power in Urban and rural areas will
also drive demand for lighting products.

Pumps: Pickup in agricultural pumps will increase market share

The pumps Industry is approx. INR 110 billion market with unorganised players accounting for 44%
market share. Pumps are expected to grow at 14% CAGR over 2017-2022E. Rise of real estate market
will drive the residential pump segment. The demonetisation and GST rollout has affected the
agricultural market in FY17 but the future outlook is that good monsoon is expected to lead recovery
of pump industry.
The Pumps Industry is divided into three main segments residential pumps, agricultural pumps and
commercial/industrial pumps. The share of agricultural pump is highest with 45% market share.

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 Consumer Durables
Industry

Pumps Industry

Commercial/
Residential Agricultural
Industrial
pumps pumps
pumps

35% 20% 45%

The Key players in pumps Industry are Kirloskar brothers, CRI, KSB pumps, Crompton. Kirloskar is
market leader in overall pump industry with 12% market share. In residential pump segment,
Crompton is market leader with 28% market share.

Pumps Industry Market Share

Texmo Others Unorganised
6% 5% 44%
WPIL
3%
Kirloskar
Grundfos brothers
4% 12%
Crompton CRI
Greaves KSB Pumps 11%
7% 8%

Growth Drivers:

Strong demand for agricultural pumps through irrigation and efficiency programs

Half the land in India under agriculture is lacking proper irrigation facility. This will be strong driver
for agricultural pumps. The government has announced energy efficiency programs in agricultural
pumps through National Energy Efficiency Agriculture Program for Smart BEE star rated energy
efficient pumps to be distributed to farmers. The programme will help farmers in replacing energy
guzzlers age-old agricultural pumps across the country with the new-age energy efficient agricultural
pumps, with a 5-Star Rating. These pumps will come enabled with smart control panel and a SIM
card, giving farmers the flexibility to switch-on and switch-off these pumps from their mobile phones
and from the comfort of their homes.

Growing Housing Market to boost residential pumps

The government had set a target of constructing 50 million new housing units by 2022 through the
Pradhan Mantri Awas Yojana (PMAY). The construction of new houses will boost residential pump
segment.

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 Consumer Durables
Industry

Air Cooler: Opportunity to explore due to low market penetration

The market size for air cooler stands at approx. INR 30-35 billion comprising of 65% share of
unorganised players. The growth was 20% for past 3 years and it is expected that it will have 27%
growth from FY17-22E.In India around out of around 247 million households, 27 million own air
cooling which means the market penetration is just 11%.
The organised market share is highly concentrated with top 5 players accounting for 90% market
share. In fact, Symphony is the market leader this segment with 50% market share in organised
segment.

Air Coolers Organised Industry Market Share

Bajaj Electric
15% Others
7%
Orient
Electric
Voltas
5%
7%
Kenstar
16%
Symphony
50%

Growth drivers:

Rising overall temperature

Rising temperature in hot and dry regions account for 54% of India’s population which means out of
total 247 million households around 132 million which could act as a potential market for air cooler.
Hence the air cooler industry is still at nascent age and showing good signs of growing at 20% CAGR
over past years.

Rising air cooler penetration

The air cooler penetration is set to rise from 11% in 2017 to 25% in 2025 mainly due to shift from
unorganised to organised segment, rising temperature and increasing disposable income. Air cooler
market is providing an alternate cost-effective cooling solution between fans and air conditioners
and are more affordable.

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 Consumer Durables
Industry

Company Snapshot: Crompton Greaves Consumer Electricals Ltd

Crompton Greaves Consumer Electricals is consumer products division of Crompton Greaves

involved in manufacture of household electrical products and appliances. For over 20 years it has
been market leader in fans and residential pumps. Jn order to capture the growing market share, the
company is trying to expand in appliances segment as well. The company has broadly 4 business
segments- fans, lighting, pumps and electrical appliances.

Investment Rationale

Product Portfolio

Electrical Consumer
Durables Lighting

Fans Pumps Appliances

1) Electrical Consumer Durables:

a) Fans
Crompton is the market leader in fans with the only player in the industry who sold over 1
crore fans for 5 consecutive years. The company is striving for innovation and was successful
with the launch of anti-dust coating fans and air 360 fans along with various energy
efficiency model saving up to 50% of energy and also giving the option of automatic
temperature control in various models. Crompton has achieved double digit growth in fans
when the market growth is flat signifying the growth trajectory that Crompton has achieved
in fan industry. South India happens to be strongest geographical arear for Crompton
leading to 25% (YoY) growth in Q3FY18 and again 25% (YoY) growth in Q4FY18 followed by
East region with 25% (YoY) growth in Q3FY18 and ~16% (YoY) growth in Q4FY18. Crompton
is a leading player in premium segment as well due to its continuous innovation and the
current market share is 20%. The main geographical areas for growth drivers for premium
segment are south and west India.

b) Pumps:
Crompton is market leader in residential pumps with a strong presence in the overall pumps
industry. It is recently trying to gain market share in agricultural pumps which has seen
strong growth post effects of GST and demonetisation. The recently launched Mini Crest
pump has provided a volume growth of 25% (YoY). Overall Crompton’s pump segment is
growing at ~14% (YoY).

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 Consumer Durables
Industry
c) Appliances:
The appliances business is focussed on 4 major product categories – water heaters, air
coolers, small appliances and power solutions. Crompton is trying to be among the top 3
players in air cooler industry by means of innovation. Currently the company is running a
pilot window air cooler project in regions of Goa and Gujarat which on success will then be
expanded into other geographical areas. The new window cooler model is expected to
provide 60% better cooling experience as compared to traditional air coolers and will be
priced at low levels so that it is affordable to public at large.

Electric Consumer Durables

171
2500 180
160 160
2000 148 140
141 111 111
Sales (Rs Cr)

EBIT (Rs Cr)

120
1500
100 100
87 80
882 806
1000 774 788
607 622 619 612 60
500 40
20
0 0
Q1 Q2 Q3 Q4
Quarter

FY17 FY18 FY17 FY18

2) Lighting
The major part of lighting segment comprises of revenues from LED sales. The price of LED
lamps is falling due to low input cost thereby narrowing the gap between LED and CFL which
is boosting LED sales. Also, there has been only 20% conversion from conventional lighting
into LED hence there is a huge scope for higher rates of conversion in future. With CFL there
was no scope for innovation which is the main strength of Crompton but with arrival of LED
the company is venturing into new innovative products such as smart lighting and coloured
lighting.

Lighting Segment
2500 43 45 50
37
2000 40
Sales (Rs Cr)

EBIT (Rs Cr)

34
1500 22 31 30
1000 19 20
15 292 338 302 338
500 249 275 286 327 10
0 0
Q1 Q2 Q3 Q4
Quarter

FY17 FY18 FY17 FY18

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 Consumer Durables
Industry

Key Management Personnel

Source: Company Presentation

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 Consumer Durables
Industry

Financial Summary
Income Statement (Rs Cr)

. FY17 FY18 YoY (%)

Net Sales 3900.89 4079.66 4.6
EBITDA growing
Other income 19.49 30.75 57.8
at 11.4% YoY
EBITDA 504.13 561.79 11.4
and PAT at
Depreciation and Amortisation
14.3%
Expense 11.04 12.61 14.2
EBIT 493.09 549.18 11.4
Interest Expense 65.53 63.74 -2.7
Exceptional items -2.52 0 -100.0
Profit before tax 425.04 485.44 14.2
Tax expense 141.87 161.65 13.9
PAT 283.17 323.79 14.3

Balance Sheet (Rs Cr)

. FY17 FY18 YoY (%)

Share capital 125 125 0.0
Reserves and surplus 392 664 69.4
Long-term borrowings 648 649 0.2
Crompton is relying Long-term provisions 18 17 -5.6
on long term Short-term borrowings 0 0 0.0
borrowings whereas
Trade payables 713 768 7.7
there is no short
Other current liabilities 140 104 -25.7
term borrowing for
Short-term provisions 78 98 25.6
working capital
Total Liabilities and equity 2113 2425 14.8
operations
Fixed assets 76 77 1.3
Intangible assets 786 786 0.0
Other non-current assets 48 75 56.3
Investments 319 368 15.4
Inventories 273 303 11.0
Trade receivables 473 554 17.1
Cash and cash balances 70 177 152.9
Other current assets 69 86 24.6
Total Assets 2113 2425 14.8

Cashflow Statement

. FY17
Company has been
generating positive Operating Cashflow 310.45
operational cash flow and Financing Cashflow -15.36
there is increase in investing Investing Cashflow -315.12
cashflow due to purchase of Net cashflow -20.03
investments Capex -14.98

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 Consumer Durables
Industry

Common size Income Statement (% of net Sales)

. FY17 FY18
Product Mix remains Sale of products
same and hence Lighting products 29.0 31.5
company is expanding Electrical consumer durables 74.0 69.8
on both Lighting and
Other income 0.5 0.8
consumer durables
Total Revenue 103.5 102.0
segment
Cost of raw materials 21.2 21.6
Purchases of stock-in- 49.5 47.8
Changes in inventories and stock-in-trade -0.6 -0.4
Employee benefits expense 6.0 7.0
Excise duty 3.0 0.6
Other expenses 11.6 11.5
Total Expenses 90.5 88.2
EBITDA 12.9 13.9
Depreciation and Amortisation Expense 0.3 0.3
EBIT 12.6 13.5
Interest Expense 1.7 1.6
Exceptional items -0.1 0.0
Profit before tax 10.9 12.0
Tax expense 3.6 4.0
PAT 7.3 8.0

Other Important metrics

. FY17 FY18 YoY %
Revenues (Rs Cr) 4036.16 4135.87 2.47
Reported PAT (Rs Cr) 283.17 323.79 14.34
Increase in EBITDA
margin by more than EBITDA Margins (%) 12.49 13.58 8.73
100 bps PAT Margin (%) 7.02 7.83 11.59
EPS (Rs) 4.52 5.17 14.38
ROE and ROCE are PE (x) 46.81 42.93 -8.29
very high compared Long term Debt/Equity (x) 1.25 0.82 -34.40
to industry average Short term Debt/Equity (x) 0 0 0.00
and generating high ROE (%) 54.69 49.53 -9.43
returns for investors ROCE (%) 41.67 37.73 -9.46

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 Consumer Durables
Industry

YoY Growth Analysis

Mar- Mar- Dec- Dec- YoY Sep- Sep- YoY
. YoY (%) Jun-17 Jun-16 YoY (%)
18 17 17 16 (%) 17 16 (%)

Gross Sales 1,126 938 20.1% 938 905 3.7% 960 900 6.6% 1,081 1,131 -4.4%

Excise Duty 0 0 0 25 0 26 25 34

Net Sales 1,126 938 20.1% 938 879 6.7% 960 874 9.8% 1,055 1,096 -3.7%

Other Income 11 7 7 5 4 4 10 3

Total Income 1,137 945 945 884 963 878 1,065 1,100

Total
981 841 822 782 839 773 926 939
Expenditure

PBIDT 175 123 42.5% 123 102 20.4% 124 105 18.5% 139 161 -13.5%
Interest 16 16 1.5% 16 16 -2.5% 16 16 -2.2% 16 18 -10.2%
PBDT 159 107 48.5% 107 86 24.7% 109 89 22.2% 123 143 -13.9%

Depreciation 3 3 3 3 3 3 3 3

Tax 53 35 38 35 39 27 45 46
Reported
Profit After 103 70 48.5% 70 54 27.9% 71 57 23.3% 80 93 -14.1%
Tax

Extra-ordinary
0 0 0 0 0 0 0 0
Items

Adjusted
Profit After
103 70 48.5% 70 54 27.9% 71 58 22.3% 80 93 -14.1%
Extra-ordinary
item

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 Consumer Durables
Industry

Peer Comparison

Revenue Breakup across segments Income Statement Comparison (Rs Cr)

FY18 Figures Crompton Havells

Revenue from operations 4105.12 8260.27
Crompton
Raw Material Cost 2799.55 4980.77
Crompton's Segment Revenue Depreciation 12.61 139.52
Breakup Interest Expense 63.74 23.97
EBITDA 561.79 1166.28
Electric Consumer EBIT 549.18 1026.76
Lighting
durables
28% PBT 485.44 1014.7
72%
PAT 323.79 712.52

Ratios

FY18 Figures Crompton Havells

Havells EBITDA Margin (%) 13.58 13.92
PAT Margin (%) 7.83 8.51
ROE (%) 49.53 19.06
Havell's Segment Revenue Breakup
ROCE (%) 37.73 25.20
Switchgears Electric Long Term Debt to Equity 0.82 0.02
22% Consumer Short Term Debt to Equity 0.00 0.01
durables
22% Valuation
Cables
42% Lighting and
. Crompton Havells
Fixtures
14% EPS 5.17 11.4
PE 47.71 46.49123
Price to book 17.92 8.39
Dividend Yield (%) 0 0.66

Share Holding Pattern (%) CashFlow Comparison (Rs Cr)

Ending Bajaj
Bajaj
Mar 18 Crompton Electricals Havells
FY17 Figures Crompton Electricals Havells
Promoters
Operating Cashflow 310 437 767
Holdings 34.38 62.94 59.58
Investing Cashflow -315 -90 -216
Institutional
Financing Cashflow -15 -368 -98
Holding 50.24 15.32 29.98
Net cashflow -20 -21 454
Public
CFO-CFI -5 346 551
Holdings 15.38 21.75 10.43
Capex -15 -55 -242

Only cash flows represent FY17 figures

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