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Photo: iStock
Photo: iStock

Crompton Greaves Consumer’s valuations need more fire from the lightning products segment

  • Shares of Crompton Greaves Consumer Electricals Ltd advanced as much as 7% on Monday, narrowing the gap in valuations with larger peer, Havells India Ltd, which increased over 1%

Mid-cap and small-cap stocks jumped in early trade on NSE on Monday. The rally was driven by Securities and Exchange Board of India’s new rules entailing multi-cap funds to increase their holdings in mid and small caps while simultaneously reducing their large cap allocation to that extent.

Shares of Crompton Greaves Consumer Electricals Ltd were no exception. The stock increased as much as 7% on Monday, narrowing the gap in valuations with larger peer, Havells India Ltd, which increased over 1%. Based on Bloomberg data, the Crompton stock currently trades at about 34 times financial year 2022 estimated earnings whereas Havells shares trade at 49 times.

On Friday, analysts from Motilal Oswal Financial Securities Ltd said in a report, “While we expect Havells to command premium valuations due to its robust business footing, we expect the valuation gap between the two companies to narrow down." The broking firm added, “This is due to Crompton’s strong earnings growth trajectory along with superior free cash flow generation."

Even so, note that Havells’ valuations itself are pricey. Much of the optimism for shares of Indian consumer durables companies stems from higher demand owing to people spending more time at home. While this is encouraging, it’s also difficult to gauge whether this demand is sustainable after the initial few months.

For now though, Crompton Greaves appears to be in a sweet spot. Its strong balance sheet helps. Sonali Salgaonkar, analyst at Jefferies India Pvt. Ltd wrote in a note on 8 September, "Crompton exhibits a robust balance sheet, with nil leverage (net debt to equity at 0.09 times as of March 20), optimum working capital (< 30 days) and high return ratios (RoCE at +30% and RoE at +24% over FY21-23e). RoCE and RoE refer to return on capital employed and return on equity." Salgaonkar also points out average free cash flow to the firm stands at 450 crore per annum over FY21-23.

While that augurs well, earnings for this financial year would be suppressed owing to the covid-19 disruptions. For the June quarter, Crompton’s Ebitda margin declined slightly year-on-year to about 14% even as Ebitda declined by 47%.

Ebitda is earnings before interest, tax, depreciation and amortisation, a key measure of profitability.

Going ahead, an improvement in Crompton’s lightning products segment’s profitability would aid valuations. In FY20, while lightning revenues contributed about 25% of total revenues, the share in profits was much lower at 9%. The electric consumer durables segment accounts for the remaining share.

“Competitive intensity has bottomed out in the lighting industry, though not completely over. This can be gauged by the price hikes over the past six months," said Motilal Oswal analysts. The broking firm expects value growth in the lighting segment to follow volume growth while margins should be on an uptrend 2QFY21 onward (full quarter impact expected to reflect in 3QFY21 only).

Meanwhile, the sharp outperformance in the Crompton stock in recent months could mean limited scope for handsome gains from these levels. Crompton shares are now just about 7% away from their pre-covid highs seen in February.

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