Investors in Crompton Greaves Consumer Electricals Ltd are losing their cool as the company faces a tepid September quarter (Q2FY25). Management cautioned analysts of near-term softness in demand for consumer products. Onam sales in Kerala, often seen as an indicator of demand trends, fell year-on-year this time. A hot summer and heat waves this year led to some pre-buying of cooling products in Q1, which could also weigh on Q2 earnings. Plus, inflationary pressures continue to hurt rural demand. Crompton’s shares fell about 6% on Thursday.
Management expects demand to rebound in the second half of FY25 as the festive season kicks in. With the strong summer season demand behind it, Nomura Global Markets Research expects Crompton’s revenue growth momentum to normalise to 10-12% year-on-year. In Q1FY25, revenue grew 14%. But stable commodity costs and lower advertisement spends could support margin in a non-seasonal quarter, Nomura said in a report dated 25 September.
Crompton 2.0 strategy
Short-term pain aside, the company’s long-term strategy of premiumisation, distribution expansion and product innovation (Crompton 2.0), is on track. The company aims to boost its market share by becoming more customer-centric. Secondly, stricter manufacturing standards (Bureau of Energy Efficiency rating) will keep manufacturing costs high for fans, but is also expected to drive consolidation in the sector, thus benefiting organised companies such as Crompton, management said. The company has decided to strategically increase its in-house manufacturing of fans and kitchen appliances.
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Further, with restructuring at Butterfly Gandhimathi Appliances largely over, its earnings performance is slated to turn around from H2FY25. Butterfly’s operating margin could improve to a high single digit (7-8%) or low double digits in the medium-term. In the meantime, Crompton has started leveraging Butterfly’s manufacturing facilities for mixers & grinders, and is expected to do so for cooktops as well. Since acquiring Butterfly, Crompton has aimed for a market share of about 10% in kitchen appliances in the long term.
Nuvama trims estimates
Nonetheless, the stock is down about 11% in the past month owing to the prevailing softness in demand. Nuvama Research has trimmed its FY25-27 estimates by 1-3% and is factoring in a compound annual growth rate (CAGR) of 13% for revenue, 22% for Ebitda, and 27% for profit after tax over FY24-27E.
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From a slightly longer-term perspective, investors are sitting on good returns with the stock up 35% so far in 2024, though the bleak earnings outlook could cap significant near-term gains. The stock trades at 36 times estimated FY26 earnings, showed Bloomberg data. A key risk is that the company’s growth plan may not play out as expected.
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