Crompton Greaves Consumer Electricals Ltd-CGCEL- Accumulate from long term perspective

CGCEL manufactures consumer durables and markets a wide spectrum of consumer products ranging from fans, light sources and luminaires, pumps and household appliances such as geysers, mixer-grinders, toasters and irons and sells them under the brand name Crompton. Crompton has been the market leader in fans, domestic pumps, and street lighting for over 20 years. The company has manufacturing locations in Goa, Vadodara, Ahmednagar, and Baddi. The company manufactures about 50% of its products are in-house while the remaining 50% are outsourced. The company has retail presence spanning across nearly 100,000 outlets in India.

Currently, fans account for the largest part of CGCEL’s product portfolio with ~45% share a and the company is an industry leader with 25% market share. Lighting is the second-largest segment for CGCEL, accounting for 28% of its FY17 revenues. Crompton has 10% market share in India’s lighting segment and is the third-largest brand while it is a leader in the street lighting segment. Pumps is the third-largest division accounting for 18% of sales where Crompton has industry leader status in the residential pumps category with 28% market share, while in overall pumps industry Crompton has 8% market share. The remaining revenues come from the appliance segment where Crompton sells geysers, mixer-grinders, toasters, and irons and has a very low market share.

The company lost its market share to peers owing to the higher focus on the larger business of power T&D. While other electric peers like Havells India and V-Guard Industries spent around 3%-5% of their annual revenues towards advertisement and promotion, Crompton Greaves lagged behind with advertisement expenses being just 2% of their revenues. Further, lack of focus on premium offerings and product innovations, as well asthe absence of consumer communication owing to negligible TV commercials, posed the risk of the Crompton brand losing its appeal among the youth. The new management of CGCEL has clearly identified deepening consumer connect of the Crompton brand as a key priority. The brand has been revitalized with a new logo and increased TV advertisements which clearly appeal to the youth.

CGCEL’s management has intensified its focus on product innovation as well as research and development (R&D) so as to stay ahead of peers and keep providing the consumers with aesthetically appealing and performance-wise superior products. In particular, a strong focus is laid on three core growth drivers – premium fans, LED lights and agricultural pumps. The management has identified core parameters like energy efficiency, better functionality and smart products as the key features to be imbibed in its product portfolio. CGCEL incorporated state-of-the-art design tools and techniques covering thermal, optical and electronic aspects to develop high performance, aesthetic and highly energy efficient products along with focusing on value engineering in order to be cost-competitive.  Some of the key innovative product launches includes the Hawk series of streetlights, Pluto/Neptune/Jupiter series of industrial lights, India’s first intelligent ceiling fan which can adjust its speed by sensing the room temperature, India’s first anti-dust fan and two stage monobloc pumps with an 80m ‘head’. New product sales contributed 18% to total lighting sales and 4% to fan sales last year.

CGCEL is placing a lot of importance on building ‘go-to-market’ reach as having a strong distribution network is one of the critical factors for success in the consumer electricals industry. CGCEL currently has more than 3,500 distributors and a retail presence of 1,00,000 outlets which it aims to enhance further to ensure the right product at the right price and at the right place. With a focus on increasing distribution to new geographies and expanding retail reach in smaller towns, CGCEL increased its presence in channels like modern retail to cover 850 stores across formats and e-commerce via exclusive online brand outlets on Flipkart, Paytm and Snapdeal.

The stock at the CMP of Rs.230/- trades at about 46.83x its FY17 EPS. Though we expect the consumer durable business to do well in the long term we believe that the near term positives are priced in the stock. We recommend Investors to Accumulate the stock from a long term perspective.