Shares of Crompton Greaves Consumer Electricals (CG Consumer) are up by over 8 per cent from their lows in May despite the company’s March quarter results being a mixed bag. The Street’s confidence on company’s growth prospects stem from the momentum in its consumer durables segment despite challenges faced by many of its peers during March quarter. CG Consumer’s product mix is what helped it overcome the challenges. While extended winters restricted growth in fans, it was water geysers and pumps that delivered healthy growth in value terms, say analysts. The consumer durables segment reported 9.6 per cent growth compared to 13 per cent in the year-ago quarter and 9.8 per cent in the previous quarter.
With the focus remaining on product innovation, and the company having launched three new fans at the end of the March quarter, analysts expect better performance in June quarter as the strong summer season remains supportive too. While there has been some pressure on margins on account of higher commodity inflation and delay in price hike (extended winter impacted trade sentiments) earlier, analysts expect profit margins to improve in FY20 led by favourable product mix, cost rationalisation and price hike.
Consequently, analysts at HDFC Securities say, “We expect a re-rating in the stock in FY20 led by outperformance versus peers.”
While the lighting business continues to face challenges, it has also been seeing improved performance quarter by quarter. This business grew by 1.4 per cent year-on-year despite price erosion and estimated 30 per cent decline in conventional lighting sales. However, it saw a 200 basis points improvement in operating profit margins helped by the company’s concentration on retail segment and cost controls. The management now expects margins to sustain and analysts at Emkay Global say, “Anti-bacterial bulb is also expected to support better revenue mix in lighting.” Their earnings growth estimates of 19 per cent (annually) over FY19-21 remain unchanged for CG Consumer, which is similar to 20 per cent annual growth expected by HDFC Securities.
Analysts also expect the company to benefit from continued focus on distribution. They feel that strengthening leadership in fans through new products for wider price points, offering 5-year warranty versus 1-2 year by peers, brand leveraging via foray into newer categories, cost reduction and product mix will drive margins.