We believe that investor concerns over both electrical consumer durables (ECD) and lighting segments are receding. While the fan segment continues to perform well with market share gains and ongoing premiumisation, there has been a marked improvement in pump (the launch of Crest Mini and strong growth in agri pumps) and appliances (geyser segment revamp) segments. With the worst of the price erosion behind and ongoing cost cut initiatives, lighting segment margins have rebounded by 250bps in Q3 and mgmt is optimistic of further revival over the next few quarters.
The company’s go-to-market (GTM) strategy could be a game-changer in the medium-to-long-term. The long-term consumer story also remains unchanged with lower penetration, rising income, and changing preference towards brands. We estimate revenue/PAT CAGR of 13/21% over the next two years. After recent underperformance (flat vs. 16% gain for Sensex), the stock is trading at an undemanding valuation (27x FY21F P/E). We upgrade to Buy and raise TP to Rs 300.
Valuation undemanding: We value Crompton at 35x (unchanged) FY21F P/E (c.8% discount to 38x that we assign to Havells). Our TP of Rs 300 implies 30% upside. We believe that Crompton has a strong consumer franchise with strong 40% RoE/free cash generation and a net cash balance sheet. We think the current valuation at 27x FY21F P/E is undemanding. We prefer Crompton> Havells and Voltas.