Outlook positive for CG Consumer despite home appliance firm's Q1 miss

Market share gains in key categories and entry into premium kitchen appliances are positives

The June quarter results of Crompton Greaves Consumer fell short of street estimates. Revenues for the company, which makes home and kitchen appliances, were broadly in line with analyst estimates, but the operational performance was disappointing.

Despite the Q1 miss most brokerages are bullish on the stock, given its entry into the premium kitchen appliance segment, market share gains in core categories of fans, pumps and LED lights. It has expanded its presence by acquiring Butterfly Gandhimathi Appliances.

The near-term trigger for the stock, which has remained flat since its results, would be demand trends, raw material prices and margin trajectory. The operating profit margin in Q1 came in at 11.8 cent, down 300 basis points on a sequential basis and below the street estimates of over 13 per cent.

The drop in profitability (operating profit at Rs 220 crore) was on account of increased investments in brands and initial costs related to new-category launches. Advertising and promotion expenditure of Rs 45 crore was at an all-time high level, which coupled with higher-than-expected variable pay dented margins.

The company is looking at tackling raw material inflation and maintaining profitability by increasing prices, improving its business mix and by saving cost. There could, however, be some impact on demand trends given the higher input costs.

“The near-term demand appears sombre amid the inflationary scenario. Crompton expects to pass on the impact of softening commodity prices to its channel partners from Q2 FY23. Channel partners are now loaded with high-cost stocks,” said Nirav Vasa, of Anand Rathi Research. This could be felt more in the pump category, which has seen a 20-25 per cent hike and for which the GST rate was recently increased from 12 per cent to 18 per cent.

The street will track the traction the company gets in the built-in kitchen appliance segment it entered a couple of months ago. The segment, which includes chimneys and hobs, has a market size of Rs 2,200 crore and the company is eyeing the top position in the next three years with a share of 10 per cent.

Siddhartha Bera and Kapil Singh, of Nomura Research, said growth for the company would come from Butterfly’s focus on non-South markets and retail channels and steady growth/market share gains in fans which should help the company drive annual growth of 13 per cent over the FY23-25 period. Commodity tailwinds and better margins in Butterfly should help improve overall operating profit margins to 14.3 per cent in FY24 and 14.8 per cent in FY25, they said.

At the current price, the stock is trading at 28.4 times its FY24 earnings estimates. With target prices around the Rs 500 mark, there is a substantial 32 per cent upside from the current levels. Investors can consider the stock for the long term on dips.