JMFL
Crompton Greaves (Buy)
CMP: ₹222.15
Target: ₹275
We initiate coverage on Crompton Greaves Consumer (Crompton) with a March 2020 target price of ₹275, 32xFY21E (20 per cent discount to Havells) and a potential upside of 19 per cent. Contrary to popular perception, we believe Crompton has had a great track record in the past and is likely to deliver steady growth in future.
It continues to work judiciously on a) innovative products and premiumisation in existing categories (anti-dust Fans, Air 360, Mini Crest pumps, Anti-bacterial LED bulb); b) revival/ new launches of categories (water heaters, air cooler); c) brand building (A&P spend stepped up to 2.6 per cent of revenues in FY17; 1 per cent in FY17); and d) distribution (go to market-expected to cover 70-75 per cent of target regions over the next 18 months).
While we appreciate product concentration risks, we believe Crompton is attractively priced given its excellent return profile, free cash flow conversion and stronger bottom-line growth (lower ESOP/consultant fees and incremental supplier discounting).
Key risks include slower than expected macro recovery.