Why Jefferies Has Retained A 'Buy' On Crompton Greaves

The brokerage retains 'buy' on the stock with a target price of Rs 430, implying an upside potential of 43%.

Inside a newly opened Crompton Greaves store in Cochin, India (Source: CG Twitter Handle)
Inside a newly opened Crompton Greaves store in Cochin, India (Source: CG Twitter Handle)

Crompton Greaves Consumer Electricals Ltd. volumes are expected to rise due to a strong summer, leading to faster liquidation of inventory, according to Jefferies.

The brokerage has retained the company's rating and set the target price to Rs 430, implying an upside return potential of 43%.

The new Bureau of Energy Efficiency norms have effected fans and air-conditioners from January 2023. Over October-December 2022, the company adopted a conscious strategy of not overloading channel partners with discounted non-BEE compliant models, Jefferies said in a note on Monday. Its competitors, however, likely sold higher volumes of the earlier inventory at lower prices.

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Industry participants indicate that most players had liquated their older inventory by December-January, and trade channels are likely to align to the new BEE compliant inventory by end of the fourth quarter.

As fans are an integral part of Crompton's electrical consumer durables segment (75% of sales), the company is the market leader with 28% market share and a sturdy SKU base. Jefferies said the company's growth in fans could normalise from the first quarter of FY 2024, "supported by a strong summer".

Crompton has gained maximum market share in fans and geysers, the note said. In fans, new brand architecture has helped drive growth in the premium segment, coupled with new launches like the anti dust and Aura 2.0 fans. In geysers and coolers, the company has focused on a strong e-commerce strategy and addressing product gaps.

Apart from this, the key categories of Crompton's equipment (fans, pumps, lighting) have witnessed 20-30% improvement in spontaneous brand recall over the last six years, driven by the company's go-to-market strategy.

<div class="paragraphs"><p>(Source: Crompton Greaves Consumer Electricals Official Website)</p></div>

(Source: Crompton Greaves Consumer Electricals Official Website)

Jefferies is betting a good summers will help aid volume uptick and faster liquidation of inventory, and help digest the price hikes. The India Meteorological Department has forecasted a hot summer (March-May) in the country with “above normal” temperatures in most parts of North-East, East, Central India, and some parts of North-West India.

"We estimate Crompton to post PAT CAGR of +28%, driven by Butterfly synergies (revenue and cost) and margin expansion," the note said.

Traction in alternate channels (rural and e-commerce) could support the next leg of growth. Also, the company's cost-saving program "Unnati" will likely aid operating profit

Shares of Crompton Greaves closed 1.06% lower at Rs 294.50 on Monday, compared with a 1.49% decline in the benchmark Nifty.

Of the 45 analysts tracking the company, 40 maintain 'buy', three suggest 'hold' and two recommend 'sell', according to Bloomberg data. The return potential of the stock is 29.9%.

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