Crompton Consumer (Crompton) has corrected 20% since January 2018 driven by two successive quarters of lower than expectations results. We believe that the stock correction is overdone considering the transient nature of hurdles faced by the company in FY18 which also witnessed overall tepid demand conditions in the construction segment.
From an FY19-FY20 perspective, there are multiple positive levers available to the company. Some of them include the longer term structural benefits of Go to Market (GTM) programme which should yield results from FY20, the strong margin outlook of FY19/20 as already achieved in FY18, the business potential from new product categories of air cooler/water heater and overall possibility of demand scenario improvement.
The stock is trading at the 29x FY20E EPS, lowest multiple among consumer electrical diversified plays and as such offers favorable risk reward. Maintain BUY with a target price of R260 based on 35x FY20E EPS (unchanged). The FCF yield for Crompton at our target price is 3% based on FY20 estimates. FY18 was a tough year for Crompton considering the impact of GST in Q1FY18, increase in raw material prices, engaging with the GTM programme for fans in North India, competitive disruptions in pumps and no major new product launches. The overall weak market conditions made business conditions even more challenging.
As such, the GST adjusted growth of ~7% in ECD segment and 18% growth in lighting segment remains commendable. Going ahead, the earnings outlook is better as the company is set to normalize GTM disruptions by Q4FY19, continue with product innovations in fan segment, maintain robust margin performance and start generating revenue from the new product categories of window air cooler and water heaters.