Q2 sales grew 11% y-o-y on 64% y-o-y growth in LED and double-digit growth in fans and pumps dampened by 29% y-o-y decline in non-LED lighting (15% of sales). CGE will incur incremental non-cash ESOP expense of R200 million/R360 million in FY17/18. In addition, it will continue to spend 3% of sales on advertising.
Management believes several margin levers exist including premiumisation of portfolio, cost reduction initiatives, and operating leverage. In our view, business is headed towards the right strategic direction, and we continue to like the company for its market leadership, FCF profile (~90% of PAT) and RoCE. Revise rating to hold and TP to R180 (30x FY18 EPS).
Lighting’s EBIT margin improved ~400 bps q-o-q to 10% given strong focus on cost reduction; management expects lighting margin to sustain at these levels. Consumer appliances’ margin came in at 15%, lower by 300 bps q-o-q on account of seasonality (Q1 strongest quarter for fans). Advertising spend of R120 million at 1.3% of sales was lower than previous quarter’s (2.2% of sales). The company continues to gain share in ceiling fans and LED lights. The branding campaign has contributed to increased awareness of CGE’s various product offerings. Continuing with the strategy of customer centric innovation, CGE launched Avancer, an anti-dust fan, which uses a special coating to reduce the hassle of fan cleaning.