Indian household appliance maker Crompton Greaves Consumer Electricals’s Q2FY23 earnings were soft, as expected, amid a high year-ago base effect and weak consumer demand. Management has acknowledged near-term uncertainty around the timing of recovery in demand, though there are longer-term opportunities to gain market share across categories. Given the challenging macro and intense competition in certain segments (which forced price cuts in certain SKUs in Q2), we would await a more opportune entry point.
Soft Q2FY23 results, as expected
As expected, Crompton reported a decline in consolidated Ebitda q-o-q and y-o-y, weighed down by a high year-ago base (owing to post-Covid pre-buying) and high retail inflation, leading to weak consumer demand. Revenues were almost in line with our estimate, but Ebitda missed by 9%, entirely due to the base business (excluding Butterfly). Fans business’ sales growth was impacted by slow channel-filling and shift in demand, driven by falling prices of commodities and transition to the new Bureau of Energy Efficiency(BEE) norms. In the Lighting segment, the conventional business (-35% y-o-y) continues its secular decline and is now down to 8-9% of segment revenues from 15-18%. In contrast, Butterfly’s revenues and earnings were above our estimates, with segmental margins improving q-o-q.
Near-term outlook is uncertain
On the post-earnings conference call, management said it is somewhat uncertain when volume growth will recover, and the company is focused on keeping material margins under control while awaiting the benefit of operating leverage. Headwinds encountered in some of the company’s key businesses are partly temporary such as the transition to the new BEE norms that has led to de-stocking by the channel and the continued decline in the conventional lighting business, which should end in a few quarters. However, certain other challenges may last longer such as the inflation-driven decline in demand for pumps and “extremely high” competitive intensity in LED bulbs.
Cut FY2023-25E EPS by 3-18%
The FY2023E EPS stands reduced by 18% to `8.9, reflecting the soft first half performance and uncertain outlook. Although we do expect growth to recover in coming quarters as temporary headwinds fade, a lot still hinges on inflation and the health of consumer demand. A slowdown in the construction industry amid rising interest rates could pressurise demand for Crompton’s key product categories, in which case, price competition may potentially intensify. Hence, though we do acknowledge the opportunity for the company to gain market share in fans after the new BEE regulations and see growth potential in the new business of kitchen appliances, we would await a more opportune entry point to turn more constructive.