Crompton Greaves Consumer Electricals (CGCEL), the demerged consumer business of Crompton Greaves Ltd (CRG), has potential to create value for investors by leveraging its leadership stature and brand in the light consumer electrical market. As operations scale up over FY16-18, we estimate 23% earnings CAGR with healthy cash flows and strong return ratios. We initiate coverage with buy and target price of R142 based on 25x FY18ii EPS, at 20% discount to Havells (implied EV/Ebit of 15.4x).
Despite modest advertising and promotion spend, Crompton had leveraged its strong brand equity in fast-growing segments of fans, lighting, pumps, and water heaters, to deliver faster-than-industry growth.
An experienced and senior management team from the FMCG and consumer electrical space with a focused approach will steer growth. Operations should stabilize by FY17. Improvement in product mix, cost rationalization, absence of one-offs, and deleveraging would support margins and bounceback in earnings in FY18. We expect CGCEL to turn net cash positive by FY18. RoE should normalise at 41%.