BackMuted growth outlook a snag for Crompton Greaves’ stock
Crompton Greaves’ June quarter results were adversely impacted due to the second wave of covid-19
PremiumCrompton Greaves Consumer Electricals Ltd’s shares have been on an uptrend for the past year, surging as much as 83%. In comparison, the Nifty 100 index gained 50% in the same period.
No doubt, valuations have run up quite a bit. Himanshu Nayyar, analyst at YES Securities Ltd, said, “Indeed, the Crompton stock has seen a re-rating. Current valuations at around 42 times FY23 estimated earnings are higher compared to its own historical valuations."
As such, meaningful upsides could be capped hereon. Nayyar added, “Crompton’s valuations are at a significant discount to Havells India Ltd, which may offer some more room for valuations to further expand. But outlook on that from a near-to-medium term perspective is not bright as Crompton is unlikely to positively surprise on the earnings front in a big way."
Crompton manufactures products such as fans and household appliances such as water heaters, coolers, mixer grinders and irons. In general, there are some risks to earnings growth ahead for the company.
In a 1 September report, analysts at Credit Suisse Securities (India) Pvt. Ltd said, “Growth is likely to be modest due to (1) strong reliance (45% of revenues) on single category, i.e., fans, (2) weaker growth dynamics in categories, such as pumps with FY17-FY21 CAGR of 7%, (3) potential incremental price erosion in lighting and (4) limited opportunity in categories such as air coolers and water heaters." CAGR is compound annual growth rate.
Credit Suisse has assumed coverage on the stock with a ‘Neutral’ rating and a target price of ₹500. Note that the Crompton stock closed at ₹482 per share on the National Stock Exchange on Thursday.
Meanwhile, like most companies, Crompton’s June quarter results (Q1FY22), too, were adversely impacted on a sequential basis owing to the second wave of covid-19. However, a favourable base helped year-on-year growth.
In Q1, Crompton’s market share increased in fans. Further, to cope with commodity cost pressures, Crompton has taken price hikes.
To be sure, whether demand momentum sustains ahead would be crucial in the days to come. Crompton is likely to benefit from market share gains and premiumization in the fans segment.
However, investors would have to watch the extent of incremental benefits from this factor in future.
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