Re-rating for Crompton Greaves' consumer biz

Focus on brand building, expansion of product basket and channels will aid earnings growth going forward

Come March 16 and the Crompton Greaves stock will trade ex-consumer business - Crompton Greaves Consumer Products (CGCP). Most analysts are positive on the consumer business, which is likely to list sometime in April, and believe it has the potential to re-rate going forward. Consider this: CGCP is expected to list somewhere between Rs 100 to Rs 110 a share. But, some analysts such as Misal Singh of Religare Capital Markets ascribe a fair value of Rs 120 to Rs 140 to the consumer company, whereas Macquarie Capital and MOSL assign a value of Rs 140 and Rs 125, respectively. Crompton Greaves’ shareholders will get one share in CGCP for every share held; the current price of Crompton Greaves is Rs 141, which indicates the potential for value-unlocking.

Meanwhile, the new management is likely to step up focus on brand building, consumer-centric innovation and enhancing its reach to non-electrical channel such as e-commerce, multi-brand retail, among others, to boost the consumer business. Notably, against three per cent (as a per cent of sales) advertising and promotional spends incurred by Havells, CGCP spends only one per cent towards these activities.

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The company plans to improve this going forward and leverage the brand ‘Crompton’ to increase its presence in appliances and switchgear segments. Its core products (fans, lighting, pumps) stand to gain from increasing income in the hands of consumers after the seventh pay commission as well as higher thrust on the rural economy. The company’s pumps business (20 per cent of revenues) also stands to gain from halving of excise duty on pumps from 12.5 per cent to six per cent in the recently announced Budget. In this backdrop, Macquarie Capital believes CGCP should trade at similar valuations to Havells on account of the former’s higher earnings growth expectations going forward. Assuming a listing price band of Rs 100-110, CGCP is valued at 18-19 times FY18 estimated earnings.

Havells, on the other hand, trades at about 25 times FY18 estimated earnings. CGCP’s revenues have grown 15 per cent over FY12-FY15, which is in line with industry. Analysts at MOSL believe the company could post 14 per cent revenue growth in FY17. However, Ebitda margins could come down a bit as CGCP scales up advertising, sales and promotional spends going forward.

Strong brand identity, robust distribution network and healthy financials are some of the key strengths of CGCP, which aims to grow ahead of the industry. On the downside, half of CGCP's revenues are outsourced, which includes imports. Thus, its earnings are vulnerable to any sharp volatility in the rupee, which investors will have to keep an eye on.