CoValue Markets

CG Electrical: Glowing on double-digit segment growth

Long-term story intact through a five-dimensional growth strategy with best operating margins. Expect impact on Growth for Q1 & Know its Value.

A perfect blend of premiumisation, innovation and cost reduction has led the Crompton Greaves Consumer Electricals Ltd (CGCEL) to be one of the India’s top market leader in fans, and No. 1 player in residential pumps and lighting. The company has significantly established itself in the consumer electrical space by manufacturing a wide range of consumer products including fans, lamps, household appliances like water heaters, grinders, irons etc. Earlier the CGCEL was a part of consumer business of transmission and distribution-led Crompton Greaves (CGL) and later on demerged itself since October 1, 2015 and got listed on the bourses on 13th May 2016, thereby creating its independent identity.

The Market Cap of Crompton Greaves Consumer Electricals Limited is INR 127.53 billion. The company’s sale for FY2019 stood at INR 45.2 billion with a YoY growth of 1% and an OPM of 12.65% in FY2020.  Sales for Q3FY20 were at INR 10.26 billion with an OPM of 12.65%.

Shining on Improved leadership position in fan segment

The demand for Electrical Consumer Durables (ECDs) is witnessing an augmented growth on the back of the rising disposable incomes and higher market penetration. This has also led to premiumisation in the consumer durables with the rise in premium products category.

As per the company’s management, the domestic fan market is estimated at 50 million fans per year with volumes growth of 6-7% per year. Further the rising electrification of rural areas is going to boost the demand for domestic fan market in India. This bodes well for the company like Crompton Greaves Consumer Electricals. The company’s market share in fans has grown in two years from 24% to 27% which improved by 80 basis points Y-o-Y in Q3 FY2020. CGL is the number 2 in premium category of fans and the pan-India market share for the company is 20%.

Will company’s competitive position continue to remain strong in the downturn?

CGL’s revenue comes from two categories of businesses i.e Electric Consumer Durables (ECD) and Lighting products. The ECD comprises of categories Fans, Pumps and Appliances such as water heaters and Air coolers, geysers and so on. The ECD revenues contributed 74% of total sales and remaining 26% by the lightening revenue in Q3 FY2020.

The lighting segment is undergoing some challenging times led by pricing pressure and macro factors. The company is working aggressively on the strategic cost reduction that will lead a margin expansion going ahead. Further their distribution reach has continued to expand in fans and B2C lighting business. The company has started commercialising the innovation pipeline, by introducing a series of innovative products such as silent pro fans with superior performance and backup bulb in lighting segment.

Company’s geyser portfolio, air-coolers as well as mixer-grinders in last two years has expanded with continuous addition of products. Company’s management cited that the market share in geysers stood at 11% and with this the company has attained No. 4 position in water heaters. The market share for air-coolers is around 3-4%. The company remains optimistic of increasing its market share backed by higher advertisement spends and investments toward branding.

Company’s new management growth strategy is working out well as company prides best operating margins and free-cash-flow generation which bodes well for the investors. Further the company’s five-dimensional growth strategy with focus on brand, portfolio, market strategy, cost optimisation and organisational transparency is working out well too.  One of the best operating margins, high return ratios and free-cash-flow-generation capability are other positives which can overcome a economic downturn.

Coronavirus Impact

With the worldwide war against coronavirus and extending lockdowns, the market has come to a halt impacting sales since quite some time now. Sales for Q1 FY2021 is assumed to be zero undertaking the worst-case scenario and sales for Q2 is expected to remain flat.

Based on the above Narrative, the following inputs for Business Valuation of Crompton Greaves Consumer Electricals Ltd. have been considered. The last trading price was INR 203.40 on 8th May 2020, when this Valuation was undertaken.

Business Valuation Inputs for Crompton Greaves Consumer Electricals Ltd

  • Forecast Period is taken at 30 years owing to healthy prospects, lean balance sheet and strong return ratios.
  • Sales de-Growth of 25% for the 1st year ending March 2021. During 2022, the company will come to normalcy and hence a growth of 33% over previous year considered (base effect), then a CAGR of Sales for 3rd to 30th Year. (Real Terms Growth is 6%, close the real GDP Growth)
  • Inflation is taken at 5% during the forecast period and the residual period.
  • Target Operating Profit Margin is assumed to improve to 14% in the Long Term.
  • Incremental Fixed Assets Investment Rate is assumed at 20% for the Forecast Period.
  • Incremental Net Working Capital Investment is assumed at 4% of Incremental Sales.
  • Income Tax is taken at 25.17% during the Forecast Period and Residual Period.
  • Long Term Debt Ratio assumed at 1.4% during Forecast Period and Residual Period.
  • The cost of debt is assumed at 8%.
  • Cost of Equity is taken as 9.76% over the Forecast Period &Residual Period. (Risk Free Rate – 6.04%, Expected Market Returns – 12.24%, Beta – 0.60)

Import Valuation to know its Worth

Intrinsic Valuation

The Intrinsic Value of Crompton Greaves Consumer Electricals Limited has been computed based on the above assumptions. For detailed reports, assumptions and in-depth valuation, import the valuation from Covalue App. You must view the Free Cash Flow Report, Valuation Report and Shareholder Value Augmented Report to get a better insight and perspective. The estimated Future Value per Share is also mentioned in the Valuation Report.

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About the author

Abhilasha Shah

Abhilasha Shah

Abhilasha Shah is a Certified Financial Planner (FPSB India), a Post-Graduate Diploma in Banking (IIBF). She has keen interest in Banking Systems, and is also Certified in Equity Research and Financial Modelling from NSE.

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