Crompton Greaves Consumer Electricals - Re-discovering itself Company Report - Prabhudas Lilladher

 
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Crompton Greaves Consumer Electricals - Re-discovering itself Company Report - Prabhudas Lilladher
Company Report
                                                                              Industry: Capital Goods

Crompton Greaves Consumer Electricals
Re-discovering itself

Kunal Sheth (kunalsheth@plindia.com)   Shreyans Jain (shreyansjain@plindia.com)
+91-22-66322257                        +91-22-66322256
Crompton Greaves Consumer Electricals - Re-discovering itself Company Report - Prabhudas Lilladher
Crompton Greaves Consumer Electricals

                     Contents
                                                                                                                                                               Page No.
                       Executive Summary .................................................................................................... 5
                          Company snapshot ............................................................................................................................ 5
                          Key Management Profile ................................................................................................................... 7
                          Unorganized market still large portion of market ............................................................................. 8
                          Key strategy of the new management .............................................................................................. 9
                               Brand Excellence .......................................................................................................................... 9
                               Portfolio Excellence ................................................................................................................... 12
                               Go-To-Market Excellence........................................................................................................... 16
                               Operational Excellence .............................................................................................................. 18
                               Organizational Excellence .......................................................................................................... 18
                       Strong Return Ratios and Cash Flows ....................................................................... 19
                       Industry ..................................................................................................................... 22
                          Light electrical Industry ................................................................................................................... 22
                          Electric Lighting Industry ................................................................................................................. 23
                          Electric Fan Industry ........................................................................................................................ 26
                          Pump industry ................................................................................................................................. 30

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that
the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to important disclosures and disclaimers at the end of the report

October 11, 2017                                                                                                                                                                           2
Crompton Greaves Consumer Electricals - Re-discovering itself Company Report - Prabhudas Lilladher
Company Report
                                                                                                                                            October 11, 2017
                                                                             Crompton Greaves Consumer Electricals

                                                                             Crompton Greaves Consumer Electricals (CGCEL) is in a phase of transformation as
Rating                                                             BUY
                                                                             the new management leverages on a strong brand and leadership in key
Price                                                             Rs213
                                                                             categories by a) investing and increasing brand awareness, b) developing
Target Price                                                      Rs270
                                                                             innovative products in core categories like Fans and Pumps, and c) strengthening
Implied Upside                                                    26.8%
                                                                             the go-to-market in order to increase its reach (100,000 stores and ~3000 dealers)
Sensex                                                           31,834
                                                                             and improve product availability on a Pan-India basis.
Nifty                                                             9,985
(Prices as on October 11, 2017)
                                                                             Early success of strategy implemented by new team led by Mr. Shantanu Khosla
                                                                             (MD) is already visible as Premium fans are ~16% of fans sales (~10% in 1Q17), LED
                                                                             is ~66% of lighting sales (~50% in 1Q17) and Gross margin has increased by
                                                                             ~150bps. We believe with structural tail winds like rising disposable income, low
Trading data                                                                 penetration levels, improved power availability, increasing housing demand along
Market Cap. (Rs m)                                      133,338.0            with management’s focus on implementation of core strategy should help CGCEL
Shares o/s (m)                                              626.0            deliver multi-year profitable growth.
3M Avg. Daily value (Rs m)                                  178.4
                                                                             We believe improved leveraging of the brand and increased reach will help CGCEL
                                                                             grow above the industry average (Industry expected to grow at CAGR of ~11%). We
Major shareholders                                                           expect the sales to grow at a CAGR of 12.7% over FY17-20E led by market share
Promoters                                                        34.38%      gains from unorganised players, focus on growing LED, premium fans and
Foreign                                                          33.23%      agriculture pumps business. We expect 108bps margin improvement over FY17-20E
Domestic Inst.                                                   16.73%      led by premiumisation and cost cutting initiatives. We expect CGCEL to deliver
Public & Other                                                   15.66%      19.5% earnings CAGR over FY17-20E with healthy ROEs (~50%) and strong free cash
                                                                             flow (~100% of PAT).

                                                                              We value the stock at 33.5xFY20 earnings and arrive at target price of Rs270, a
Stock Performance
                                                                             26.8% upside. We initiate with “BUY”. Exit of key managerial personnel and
(%)                                 1M          6M                 12M
                                                                             increased competition are key risks to our call.
Absolute                            0.2        (2.3)               22.8
Relative                            0.4        (9.2)                9.5
                                                                                                                                                        Contd...4

                                                                             Key financials (Y/e March)              2017         2018E        2019E         2020E
How we differ from Consensus
EPS (Rs)              PL    Cons.                                % Diff.     Revenues (Rs m)                        39,759       44,070       50,084        57,008
2019                 6.6      6.8                                   3.0        Growth (%)                            119.5         10.8         13.6          13.8
2020                 8.0      8.1                                   1.6      EBITDA (Rs m)                           4,902        5,513        6,588         7,763
                                                                             PAT (Rs m)                              2,932        3,379        4,131         5,014
                                                                             EPS (Rs)                                   4.7          5.4          6.6           8.0
                                                                               Growth (%)                            146.1         15.2         22.2          21.4
Price Perf. (RIC: CROP.BO, BB: CROMPTON IN)                                  Net DPS (Rs)                               1.5          2.0          3.0           3.5
  (Rs)
 300                                                                         Profitability & Valuation                2017        2018E        2019E        2020E
 250                                                                         EBITDA margin (%)                         12.3        12.5         13.2         13.6
 200                                                                         RoE (%)                                   76.4        53.4         50.7         48.8
 150                                                                         RoCE (%)                                  34.4        29.4         30.8         32.2
 100                                                                         EV / sales (x)                             3.5         3.1          2.7          2.4
  50                                                                         EV / EBITDA (x)                           28.4        25.0         20.7         17.3
   0                                                                         PE (x)                                    45.5        39.5         32.3         26.6
                           Feb-17
                  Dec-16

                                               Jun-17

                                                        Aug-17
         Oct-16

                                                                    Oct-17
                                      Apr-17

                                                                             P / BV (x)                                24.7        18.4         14.8         11.6
                                                                             Net dividend yield (%)                     0.7         0.9          1.4          1.6
Source: Bloomberg                                                            Source: Company Data; PL Research
Crompton Greaves Consumer Electricals - Re-discovering itself Company Report - Prabhudas Lilladher
Crompton Greaves Consumer Electricals

                                                         Market leadership and strong brand to drive growth: CGCEL is present in key
                                                          large and fast growing consumer electrical segments such as Fans, Lighting
                                                          pumps and Appliances. With multiple tailwinds such as shift towards energy-
                                                          efficient products, growth in urban and rural housing, improving power
                                                          availability in rural areas and increasing investments in irrigation, growth for all
                                                          key segments should remain robust over the next few years. Light electrical
                                                          Industry is expected to grow at a CAGR of ~10.7% over FY16-20E. Increasing
                                                          focus towards brand-building and improving distribution reach should also help
                                                          them achieve higher-than-industry growth.

                                                         Industry leading growth and margin improvement: We expect the sales to
                                                          grow at a CAGR of 12.7% over FY17-20E led by 11.5% CAGR in lighting segment
                                                          with strong growth in LED and 12.5% CAGR in Electric consumer durable
                                                          segment. Growth in premium fans/pumps and appliances is expected to lead
                                                          the growth in the electric consumer durables segment. We believe CGCEL can
                                                          significantly increase the retail reach based on mapping of potential touch
                                                          points. We expect 108bps margin improvement over FY17-20E led by
                                                          introduction of premium products in Fans and Lighting. The company strategy is
                                                          already yielding results with premium fans now at 16% of fans sales (10% in
                                                          Q1FY17) and LED now at 66% of lighting sales (50% in Q1FY17). The company is
                                                          focusing on cost control, supply chain optimization, manufacturing foot print
                                                          optimization and design optimization.

                                                         Strong management team with thrust on growth and cash profits: A team of
                                                          experienced senior management led by Mr. Shantanu Khosla has been put in
                                                          place to steer growth and profitability. The key focus areas for the new team
                                                          will be to increase brand awareness, improve penetration, customer-centric
                                                          innovations, Premiumisation, operational efficiencies and scaling-up of
                                                          capabilities for long-term sustainability. Management is focusing on growing
                                                          sales faster than the market and operating profits in line with sales with
                                                          stronger cashflows

                                                         Outlook and Valuation: The stock is trading at 26.6x FY20E earnings, given the
                                                          strong return ratios and cash flows we have valued the stock at 33.5xFY20E
                                                          earnings.

Exhibit 1:   Peer Comparison (INR million)
                                SALES             EBITDA Margin (%)              PAT                    ROE                    P/E
Companies
                       FY18E     FY19E     FY20E FY18E FY19E FY20E        FY18E FY19E       FY20E FY18E FY19E      FY20E FY18E FY19E    FY20E
Havells               87,710   103,245   118,391 11.8   12.3   12.6       6,725 8,269       9,962 19.7  21.7       23.3  47.2  38.3     33.9
V-Guard               24,439   28,234    31,388 9.9     10.6   10.8       1,790 2,250       2,611 25.1  25.9       24.3  45.2  35.7     32.5
BAJAJ                 46,829   52,530    60,118 6.1      6.7    7.1       1,391 1,864       2,398 14.8  17.4       19.4  26.7  19.9     15.5
Crompton Consumer     44,235   50,952    58,315 12.6    13.0   13.2       3,478 4,283       5,132 50.6  44.8       42.6  39.0  31.4     25.8

Asian Paints         178,748   207,527   237,717   18.6    19.0    19.4   21,576   25,672   29,702   26.7   27.8   28.2   51.6   43.4   37.4
Berger Paints        54,135    62,939    72,409    15.2    15.5    15.4   4,973    6,001    6,940    24.3   25.5   26.3   50.6   41.9   36.2
Kansai Nerolac       48,353    55,344    62,812    18.2    18.5    19.3   5,812    6,696    7,742    18.5   18.5   20.0   45.5   39.6   34.2
Kajaria Ceramics     28,751    33,238    38,288    18.7    19.3    20.0   2,887    3,597    4,449    22.4   23.3   23.7   40.1   32.2   25.9
Somany Ceramics      19,279    22,753    26,093    10.5    11.5    11.1    990     1,411    1,677    17.4   20.9   21.6   35.6   25.1   21.1
Hindustan Sanitary   23,296    26,995    30,224    14.2    14.9    15.1   1,162    1,561    1,754    8.1    10.3   10.8   24.4   18.2   16.2

Source: Bloomberg, PL Research

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Crompton Greaves Consumer Electricals - Re-discovering itself Company Report - Prabhudas Lilladher
Crompton Greaves Consumer Electricals

                                                   Executive Summary

                                                   Company snapshot

                                                   CGCEL is one of India’s leading consumer electrical companies present in consumer
                                                   electrical segment with focus on quality, innovation and smart design across a range
                                                   of different product categories. CGCEL was formed in Feb 2015 with the demerger of
                                                   the consumer product business of Crompton Greaves. The demerger, which became
                                                   effective from Oct 2015, resulted in CGCEL emerging as a pure-play light electrical
                                                   products company with leading market share across the product categories it
                                                   operates in. The company manufactures and markets a wide spectrum of consumer
                                                   products ranging from Fans, Light Sources and Luminaries, Pumps and Household
                                                   Appliances, such as Geysers, Mixer Grinders, Toasters and Irons. It has been the
                                                   market leader in fans, domestic pumps and street lighting for over 20 years. CGCEL
                                                   has manufacturing locations in Goa, Vadodara, Ahmednagar and Baddi and its
                                                   products are available in nearly 100,000 retail points across the country.

Exhibit 2:   Diverse portfolio in growing market with strong brand
Category                     Fans                             Lighting                             Pumps                     Appliances
Revenue
                             15%                                11%                                  9%                          15%
CAGR(FY12-17)
                                              General Lighting service and Fluorescent
                         Ceiling fans                                                        Residential Pumps             Water Heaters
                                                          Tubular Lamps
                          Table Fans           High Intensity Discharge lamps (HID)         Agricultural Pumps             Small Appliances
                                                                                         Commercial and Industrial      Air Coolers and Room
                        Pedestal Fans            Compact Fluorescent lamps (CFL)
                                                                                                  Pumps                        Heaters
                                                                                                                        Power Solutions : UPS
                     Wall-mounted Fans           Light- Emitting diode lamps (LED)
Products                                                                                                                     and Batteries
                       Ventilating Fans              Conventional Luminaires
                   Heavy duty exhaust fans                LED Luminaires
                        Air circulator            High Mast/Street lightning Poles
                        Industrial Fans         Interior and Architectural lightning
                                                           Home Lighting
Market Share               25-26%                               10%                                 7-9%                         NA
                    Havells,Orient, Usha,
                                                Philips, Surya, Bajaj, Havells, Wipro,   Kirloskar, CRI, Texmo, Aqua,
Competitors       Luminous, PolyCab, Surya,                                                                             Bajaj, Philips, Havells
                                                          PolyCab, HPL, GE                      M&P, Grundfo
                           Anchor
Source: Company Data, PL Research

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Crompton Greaves Consumer Electricals - Re-discovering itself Company Report - Prabhudas Lilladher
Crompton Greaves Consumer Electricals

Exhibit 3:   Segmental Revenue break-up (Rs m)
                                                                       FY12          FY13           FY14         FY15       FY16          FY17
Fans, Ventilation and Pollution Control Systems                       9,122        11,138          12,848      14,140      15,995       18,288
Electric Lamps                                                        6,667         7,689           9,010       9,677      10,427       11,252
Power-driven pumps                                                    5,019         5,869           5,790       6,560       7,012        7,823
Appliances                                                            1,211         1,210           1,817       2,030       2,250        2,388
Total                                                                22,018        26,816          29,465      32,330      35,684       39,751

Source: Company Data, PL Research

                                                  Exhibit 4: Segmental Revenue break up - 2017
                                                                                   Appliances
                                                                                      6%
                                                              Power driven
                                                                pumps
                                                                 20%                                                        Fans, Ventilation
                                                                                                                              and Pollution
                                                                                                                            Control Systems
                                                                                                                                  46%

                                                                Electric Lamps
                                                                     28%

                                                  Source: Company Data, PL Research

                                                  Exhibit 5: Current Manufacturing facilities
                                                  Location                                                                             Product
                                                  GIDC Industrial Estate: Goa                                                             Fans
                                                  Kundaim Industrial Estate: Goa                                                          Fans
                                                  HPSIDC Industrial Area, Baddi, Dist: Solan, HP                                          Fans
                                                  HPSIDC Industrial Area, Baddi, Dist: Solan, HP                                          Fans
                                                  Kural Village, Padra Taluka, Dist: Baroda, Gujarat                                   Lighting
                                                  Village Thane, Tehsil Baddi, Dist: Solan, Himachal Pradesh                           Lighting
                                                  A-28, MIDC Area, Ahmednagar, Maharashtra,                                             Pumps
                                                  C-19, MIDC Area, Ahmednagar, Maharashtra                                              Pumps

                                                  Source: Company Data, PL Research

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Crompton Greaves Consumer Electricals - Re-discovering itself Company Report - Prabhudas Lilladher
Crompton Greaves Consumer Electricals

                   Key Management Profile
                      Shantanu Khosla, Managing Director: Mr. Khosla joined CGCEL in January 2016.
                       Prior to CGCEL, he served as MD & CEO of Procter & Gamble, India from July
                       2002 to June 2015. He holds Bachelor of Technology in Mechanical Engineering
                       from Indian Institute of Technology, Mumbai. Mr. Shantanu Khosla has also
                       completed his Masters in Business Administration from Indian Institute of
                       Management, Calcutta.

                      Mathew Job, CEO: Mr. Job joined CGCEL in January 2016. Previously, he worked
                       with Philips Electronics, India from June 1994 to October 2009, where he held
                       several key positions. From November 2009 till January 2012, Mr. Job worked
                       with Grohe India as VP and Managing Director. He then moved on to Racold
                       (Ariston) Thermo as Managing Director where he worked till September 2015.
                       He has studied Bachelor in Technology (Electrical & Electronics). He is an
                       alumnus of Indian Institute of Management, Calcutta.

                      Sandeep Batra, CFO: Mr. Sandeep Batra joined CGCEL in January 2016. Prior to
                       this, he was with ICI Limited from January 1988 to January 2009, where he held
                       various important responsibilities and eventually assumed the role of CFO. He
                       then joined Pidilite Industries as its CFO in January 2009. He is an alumnus from
                       St. Xavier’s College, Kolkata, a Chartered Accountant and a Company Secretary
                       by profession. He also serves as Company Secretary and Compliance Officer of
                       CGCEL.

                      D Sundaram, Independent Director: Mr. Sundaram is the Vice Chairman and
                       Managing Director of TVS Capital Funds. He was associated with HUL for more
                       than 34 years, where he served under various roles before becoming the Vice
                       Chairman in 2008. He is also on the Board of Governors of Institute of Financial
                       Management and Research, Chennai. He is Post Graduate in Management
                       Studies (MMS), Chennai, Fellow of the Institute of Cost and Management
                       Accountants, and has attended the Harvard Business School’s Advanced
                       Management Programme.

                      P M Murty, Independent Director: Mr. P M Murty was a graduate from Indian
                       Institute of Management, Calcutta. Mr. Murty had more than 42 years of
                       experience with Asian Paints, where he held various senior positions including
                       that of Managing Director of Asian Paints from 2009–2012.

                      Hemant Madhusudan Nerurkar, Additional Independent Director: Mr.
                       Nerurkar has experience of over 35 years in Tata Steel in various positions. He
                       joined Tata Steel in 1972 and rose to the level of Managing Director in-charge of
                       India and South East Asia operations. He is the Chairman of Board of Directors in
                       TRL Krosaki Refractories (formerly Tata Refractories - a JV company of Tata Steel
                       and Krosaki Harima Corporation, Japan) and NCC (formerly Nagarjuna).

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Crompton Greaves Consumer Electricals

                                                       Diverse product portfolio and strong brand in growing market

                                                       CGCEL is present in all the key large and fast growing consumer electrical segments
                                                       such as Fans (45% of revenues), Lighting (29% of revenues) and Pumps (20% of
                                                       revenues). With multiple tailwinds such as growth in housing, shift towards energy-
                                                       efficient products, improving power availability will help company deliver robust
                                                       growth across segments over the next few years.

Exhibit 6:     Lighting, Fans and Pumps projections (Rs bn)

 350                  Lighting                       100                Fan                         100             Pump
 300
                                                      80                                             80
 250
 200                                                  60                                             60

 150                                                  40                                             40
 100
                                                      20                                             20
  50
   0                                                   0                                              0
              2011          2016         2020                    2011     2016        2020                   2011      2016        2020

Source: Company Data, PL Research

                                                       Unorganized market still large portion of market

             Unorganised players still account for     Unorganised players still account for significant share of market (40% in Lighting,
              significant share of market (40% in      25% in Fans and 30% in Pumps). There has been a steady shift in demand towards
     Lighting, 25% in Fans and 30% in Pumps).          larger organised players with established brands. Increase in focus on energy-
                                                       efficient products due to increase in power cost, increasing regulation, better after-
                                                       sales support and favourable warranty terms are likely to help the shift towards
                                                       organised market. This is likely to benefit players such as CGCEL which is a well-
                                                       established brand.

                                                       Exhibit 7: Market share of Unorganised players in %

                                                                                        Organised     Unorganised

                                                           120

                                                           100
                                                                                                     25                       30
                                                            80            40

                                                            60

                                                            40                                       75                       70
                                                                          60
                                                            20

                                                             0
                                                                        Lighting                    Fans                   Pumps

                                                       Source: Company Data, PL Research

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Crompton Greaves Consumer Electricals - Re-discovering itself Company Report - Prabhudas Lilladher
Crompton Greaves Consumer Electricals

                                                   Key strategy of the new management

                                                   Exhibit 8: Key Focus Area

                                                                                            Brand
                                                                                          Excellence

                                                          Organization                                                 Portfolio
                                                          al Excellence                                               Excellence
                                                                                           Key
                                                                                          focus
                                                                                           area

                                                                                                               Go-To-
                                                                       Operational
                                                                                                              Market
                                                                       Excellence
                                                                                                             Excellence

                                                   Source: Company Data, PL Research

                                                   Brand Excellence

    We believe CG ad spend will step up close      CGCEL’s new management believes that the CG brand has significant potential and
          to industry average of 3-4% of sales     wants to focus on stepping up the brand awareness efforts significantly. The
   against run rate of ~ 2.5% sales in the past.   company had put out TV commercials during the recent IPL season and is now
                                                   planning to extend the campaign to General entertainment channels and regional
                                                   channels. The company also specifically wants to target young buyers (25-35 age
                                                   brackets). It believes awareness about the CG brand is low among the youth, given
                                                   the relatively low awareness effort in the past. We believe CG ad spend will step up
                                                   close to industry average of 3-4% of sales against run rate of ~ 2.5% sales in the
                                                   past.

                                                   Exhibit 9: Advertisement spend as percent of Sales (%)
                                                   Name of company       FY10     FY11     FY12      FY13     FY14    FY15    FY16   FY17
                                                   Bajaj Electricals       2.2      1.9      1.8       1.7      2.2     1.9    1.8    1.8
                                                   Crompton Greaves        1.4      0.9      1.2       1.7      2.0     2.2    1.9    2.9
                                                   Havells                 3.5      2.5      3.1       3.4      2.4     3.0    3.2    3.1
                                                   V Guard                 5.1      4.0      4.2       4.3      3.9     4.0    4.3    4.4

                                                   Source: Company Data, PL Research

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Crompton Greaves Consumer Electricals - Re-discovering itself Company Report - Prabhudas Lilladher
Crompton Greaves Consumer Electricals

                                    Two key pillars of brand excellence strategy are:

                                       To be established as the brand of choice for home improvement electrical
                                        durables: CGCEL intends to develop and market products that are energy-
                                        efficient and user friendly. The company intend to design products to provide
                                        consumer relevant solutions for overall home improvement. It intends to
                                        enhance the quality of products and sustain as a reliable brand of choice for
                                        home improvement electrical durables.

                                       Improve brand visibility: CGCEL intends to invest in branding to create
                                        awareness and preference for their products in the market. The company
                                        believes that these investments will help scale-up pace of growth in the coming
                                        years

Exhibit 10: Commercial snapshot

Source: Company Data, PL Research

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Crompton Greaves Consumer Electricals

                   Exhibit 11: Print media Ad for pumps

                   Source: Company Data, PL Research

                   Exhibit 12: Print media Ad for appliance

                   Source: Company Data, PL Research

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Crompton Greaves Consumer Electricals

                                                  Portfolio Excellence

                                                  CGCEL has devised a strategy of focusing on meaningful innovation in core
                                                  categories of fans and pumps, while growing the lighting and appliance business.

                                                      Focus on energy-efficient products across all product lines: CGCEL intends to
                                                       develop and introduce energy-efficient products to cater to the changing
                                                       requirements of consumers. For this purpose, it will focus on energy-efficient
                                                       fans, LED Lighting, solar powered products and star-rated products. It has
                                                       introduced 5-star rated fans recently which consume 20-30% less power than
                                                       normal fans; it is also planning to launch BLDC fans which consumes 50% less
                                                       power.

    The efforts have started bearing fruits and       Aggressively pursue business opportunities in the LED lighting product
    CG saw LED business grow by ~41% YoY in            category: LED technology has caused a major disruption in the lighting market.
          Q1FY18 and now stands at ~66% of             Traditional lighting is now being replaced by LED lighting in all market segments.
                       lighting business sales.        LED Lighting being more durable and energy efficient is the technology for the
                                                       future. CGCEL has made channel correction/pricing correction in market and
                                                       also introduced innovative products to ensure fast growth and increased sales
                                                       of LED in overall lighting business. It has also participated in the government
                                                       EESL programme to ensure high volumes. The efforts have started bearing
                                                       fruits and CG saw LED business grow by ~41% YoY in Q1FY18 and now stands
                                                       at ~66% of lighting business sales.

                                                  Exhibit 13: LED growing fast and becoming large part of lighting segment

                                                                            LED Growth - YoY           % to total LED sales

                                                      160%                                                                             70%
                                                      140%                                                                             60%
                                                      120%                                                                             50%
                                                      100%
                                                                                                                                       40%
                                                      80%
                                                                                                                                       30%
                                                      60%
                                                      40%                                                                              20%

                                                      20%                                                                              10%
                                                       0%                                                                              0%
                                                              Q1-FY17        Q2-FY17        Q3-FY17        Q4-FY17            Q1FY18

                                                  Source: Company Data, PL Research

   The focus and strategy is working well with        Focus on premiumization in fans: CGCEL is the number 1 player in the Fan
   premium segment of fans registering >23%            market with ~25% market share. Premium fans are ~20% of the overall market;
           volume growth in Q1FY18 and now             and were 10% of fan segment sales in Q1FY17. CG wants to focus on increasing
              contributes 16% of fan segment.          contributing of premium fans in the sales. It has already few innovative products
                                                       in the market like temperature sensing fans, high-end decorative fans, Kids
                                                       range of fans etc. The focus and strategy is working well with premium
                                                       segment of fans registering >23% volume growth in Q1FY18 and now
                                                       contributes 16% of fan segment. With limited competition in the premium fans
                                                       segment, CGCEL see huge opportunity for growth in premium fans segment.

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Crompton Greaves Consumer Electricals

                   Exhibit 14: Fan Commercial snapshot

                   Source: Company Data, PL Research

                   Exhibit 15: New Anti -dust fans

                   Source: Company Data, PL Research

October 11, 2017                                                                           13
Crompton Greaves Consumer Electricals

                                                Exhibit 16: Premium fans growing fast and increasing contribution is overall fans sales

                                                                       Growth of premium fans              % to total fan sales

                                                  70%                                                                                     18%
                                                  60%                                                                                     16%
                                                                                                                                          14%
                                                  50%
                                                                                                                                          12%
                                                  40%                                                                                     10%
                                                  30%                                                                                     8%
                                                                                                                                          6%
                                                  20%
                                                                                                                                          4%
                                                  10%                                                                                     2%
                                                   0%                                                                                     0%
                                                             Q1-FY17       Q2-FY17          Q3-FY17        Q4-FY17         Q1FY18

                                                Source: Company Data, PL Research

                                                Exhibit 17: Division of Fan Segment (Nos)
                                                Types of Fans           Crompton Greaves        Havells     V-guard         Orient        Usha
                                                Premium Fans                            21            17          16              28            4
                                                Standard Fans                           38            15          11              13        18
                                                Kids Fans                                   3         2              0            2             0
                                                Total Ceiling Fans                      62            34          27              43        22
                                                Others                                  30            15          37              37        41
                                                Total Fans                              92            49          64              80        63

                                                Source: Company Data, PL Research

        While CGCEL has 8% market share in      Focus on Agri pumps: While CGCEL has 8% market share in overall pump market, it
    overall pump market, it has ~28% market     has ~28% market share in domestic market which means a very low share in
     share in domestic market which means a     Agriculture pumps. It is introducing customised portfolio for the agri market keeping
         very low share in Agriculture pumps.   in mind the operating conditions, given the poor quality of power available to run
                                                the pumps. It is also working on various local promotional activities to get increased
   Growth in Agriculture pumps was 25% YoY      visibility. Growth in Agriculture pumps was 25% YoY in Q1FY18.
                                  in Q1FY18.

October 11, 2017                                                                                                                           14
Crompton Greaves Consumer Electricals

                                                Exhibit 18: Agri Pumps Commercial snapshot

                                                Source: Company Data, PL Research

                                                     Scale up appliance business: While the appliances business has posted robust
                                                     15% revenue CAGR over FY12-17, it is still the smallest segment for CGCEL
                                                     contributing just 6% to FY17 revenues (Rs2.3bn). The company is among top 4
                                                     players in the water heater category. In the kitchen appliances category, CGCEL
                                                     is a relatively late entrant (Bajaj electrical is the leader). CGCEL is initially looking
                                                     to scale up its presence across key categories like water heater/Air
                                                     cooler/Mixer-Grinder/Iron. It will limit its focus to top 10-12 cities in initial
                                                     phase of ramp up to ensure focussed approach. The consumer appliances
                                                     segment has seen a number of new entrants over the past few years. New
                                                     players plan to use existing established brand in other products to increase
                                                     presence in this segment. However, given the presence of many regional players
                                                     across diverse product categories, competition is likely to be high. Need for a
                                                     different channel to sell appliance make it a challenge to scale up for lot of
                                                     players.

Exhibit 19: Various players and segments
Companies                   Water heaters      Mixer Grinders       Induction             Oven              Toaster              Iron
V Guard                                                               
Crompton Greaves                                                                                                                
Havells                                                                                                                        
Philips                                                                                                                          
Racold                              

Source: Company Data, PL Research

October 11, 2017                                                                                                                          15
Crompton Greaves Consumer Electricals

Exhibit 20: Portfolio Excellence – Latest launches

                                                  Higher Wattage
                                                                                                                                          100mm SS
                                                  LED Floodlight                 Power Ray –          Single pump      Pressure
 Bliss Instant       Cozie Air                                   LSTP Range LED                                                            Borewell
                                    Anti-dust fan    with High                  18w dimmable           booster –     washing pump
 Water Heater        Coolers                                       Streetlight                                                           Submersible
                                                     Efficacy –                    batten                IPCHM          – CPW
                                                                                                                                        pump – 4VOSS
                                                  250/300/350W
Source: Company Data, PL Research

                                                     Go-To-Market Excellence

                                                     CGCEL currently has ~3000 dealers/distributors and more than 100,000+ touch
                                                     points. It aspires to significantly increase its touch points across the country with
                                                     special focus on increasing beyond tier I/II cities. The company scheme and
                                                     incentives are also likely to be more secondary driven to ensure increased incentive
                                                     for retail push. The clear focus is to improve availability of its product.

                                                     Exhibit 21: Existing distribution network of key light electrical players (FY17)
                                                     Company                      Distributors by company Distribution touch points by products
                                                     Bajaj Electricals                                 1000                                  500,000
                                                     Crompton Greaves                                3000+                                   100,000
                                                     Havells                                     5500-6300                                   100,000
                                                     V Guard                                            500                              30000-33000
                                                     Surya Roshni                                    20000                                   200,000
                                                     Eveready                                        40000                                    30,000

                                                     Source: Company, PL Research

   CGCEL is continuously focusing on network         Strengthen overall reach with focus beyond Tier I &Tier II cities: CGCEL is
   expansion and market penetration beyond           continuously focusing on network expansion and market penetration beyond Tier I
    Tier I and Tier II cities, for each of product   and Tier II cities, for each of product categories. In order to expand market
                                      categories     presence, it intends to create awareness of its products in the untapped markets. In
                                                     order to further strengthen markets and increase geographical presence, the
                                                     company proposes to enhance presence in retail markets in Tier I and Tier II cities.

October 11, 2017                                                                                                                                 16
Crompton Greaves Consumer Electricals

                   Exhibit 22: Exclusive Crompton pumps showroom displaying the entire range of pumps
                   under one roof.

                   Source: Company Data, PL Research

                   Expand rural reach for agricultural pumps and other products: Due to climatic
                   conditions in India, demand for agricultural water pumps and allied products has
                   increased significantly in rural areas. In order to tap this demand, CGCEL intends to
                   expand distribution network in rural areas.

                   Exhibit 23: Mobile vans for promotion of Crompton agricultural pumps in the rural markets

                   Source: Company Data, PL Research

                   Focus on new channels of distribution like modern trade and e-commerce: CGCEL
                   intends to explore new channels of reaching out to our customers. With the advent
                   of e-commerce, it proposes to focus on sales through modern retail outlets and e-
                   retail for consumer durable appliances. The company believes that these new
                   channels shall help to expand reach at low cost.

October 11, 2017                                                                                          17
Crompton Greaves Consumer Electricals

                   Operational Excellence

                   Improve overall costs and supply chain optimization: CGCEL intends to improve
                   their supply chain capabilities to ensure availability of the right product mix at the
                   right place at the right time at optimum cost. This will enable the company to
                   achieve a marked improvement in their customer service levels.

                   Organizational Excellence

                   Focus on building capabilities and high performance culture: CGCEL intends to build
                   capabilities across the length, breadth and depth of their organization. Focus will be
                   on optimizing the use and effectiveness of all their resources and build a high
                   performance culture.

October 11, 2017                                                                                      18
Crompton Greaves Consumer Electricals

                                               Strong Return Ratios and Cash Flows

    We expect the sales to grow at a CAGR of   We expect the sales to grow at a CAGR of 12.7% over FY17-20E led by 11.5% CAGR in
                       12.7% over FY17-20E     lighting segment led by strong growth in LED and 12.5% CAGR in Electric consumer
                                               durable segment led by growth in premium fans/pumps and appliances increasing
                                               reach and availability, CGCEL expects to grow faster than the market.

                                               Exhibit 24: Sales to grow by 12.4% CAGR

                                                                               Sales (Rs m)     YoY gr. (%) (RHS)

                                                60,000                                                                        140.0%

                                                50,000                                                                        120.0%
                                                                                                                              100.0%
                                                40,000
                                                                                                                              80.0%
                                                30,000
                                                                                                                              60.0%
                                                20,000
                                                                                                                              40.0%
                                                10,000                                                                        20.0%
                                                      0                                                                       0.0%
                                                             FY15       FY16          FY17    FY18E     FY19E       FY20E

                                               Source: Company Data, PL Research

     We expect 108bps margin improvement       We expect 108bps margin improvement over FY17-20E led by introduction of
                              over FY17-20E    premium products in Fans and improvement in Lighting. While the increased focus
                                               on reach and brand awareness is likely to put pressure on margins in the near term,
                                               the company is focusing on cost control, supply chain optimization, manufacturing
                                               foot print optimization and design optimization to cushion the impact of increased
                                               S&D cost.

                                               Exhibit 25: Margins to remain stable

                                                9,000                       EBITDA (Rs m)        Margin (%) (RHS)               14.0
                                                8,000                                                                           13.5
                                                7,000
                                                                                                                                13.0
                                                6,000
                                                5,000                                                                           12.5
                                                4,000                                                                           12.0
                                                3,000
                                                                                                                                11.5
                                                2,000
                                                1,000                                                                           11.0

                                                    0                                                                           10.5
                                                            FY15        FY16          FY17     FY18E       FY19E      FY20E

                                               Source: Company Data, PL Research

October 11, 2017                                                                                                                      19
Crompton Greaves Consumer Electricals

                                                 Exhibit 26: Net Debt to equity to decline to 0.09 by FY20

       We expect the company to be net cash             2.00      1.89
                             positive by FY19           1.80
                                                        1.60
                                                        1.40
                                                        1.20                      1.11

                                                  (x)
                                                        1.00
                                                        0.80                                      0.63
                                                        0.60
                                                                                                               0.36
                                                        0.40
                                                        0.20                                                                0.09
                                                          --
                                                                  FY16            FY17           FY18E        FY19E        FY20E

                                                 Source: Company Data, PL Research

                                                 Asset-light model to ensure healthy return ratio

                                                 CGCEL has a focused strategy to remain asset light company. It currently has a mix of
                                                 50:50 in house manufacturing and outsourcing and it would like to maintain the
                                                 ratio at similar levels going ahead as well. CGCEL believes that the right mix of
                                                 outsourcing also helps in reacting to market changes quickly.

   We expect ROE to stabiles at healthy levels   Exhibit 27: ROE to stabiles at healthy levels of 40%+
                              of 45%+ in FY18            60.0                      54.4
                                                                   52.1
                                                         50.0                                      46.5         45.2
                                                                                                                             43.2
                                                         40.0
                                                   (%)

                                                         30.0

                                                         20.0

                                                         10.0

                                                          0.0
                                                                   FY16            FY17           FY18E        FY19E         FY20E

                                                 Source: Company Data, PL Research

                                                 Crompton should also generate significant free cash flow annually given very low
                                                 working capital and capex requirements. Annual free cash flow could be close to
                                                 ~100% of PAT.

October 11, 2017                                                                                                                     20
Crompton Greaves Consumer Electricals

                   Key risks
                      Competitive landscape remains high: Competition in most segments in which
                       CGCEL operates remains high with new players entering the space. In Fans, we
                       have seen entry of new players like Polycab, Finolex etc. In Consumer durables
                       also, there are various regional brands aspiring to become national brands
                       which could keep the competition high.

                      Growth of substitute for fans: On the residential side, due to increasing
                       disposable income, up trending to air coolers & air conditioners could increase.
                       Rise in sales of substitute products can hamper sales of fans and impact
                       earnings of the company.

                      Availability of low-cost power for irrigation can impact agri-pump sales: Cheap
                       local pumps sold by unorganized players are energy-inefficient and consume
                       high power. However, as farmers get low-cost power due to government
                       subsidies, they prefer to use cheap pumps from unorganized players. This too
                       can have an adverse impact on the company’s sales.

October 11, 2017                                                                                    21
Crompton Greaves Consumer Electricals

                   Industry

                   Light electrical Industry

                   Rising disposable income, low penetration levels, improved power availability,
                   increasing housing demand are the key long-term demand drivers for the light
                   electrical industry. Seventh Pay commission and GST could be other near-term
                   triggers. We expect the market size of segments in which CGCEL operates to grow at
                   CAGR of 10.7% over FY16-20E.

                   Exhibit 28: Light electrical industry market size
                   (Rs bn)                                                        FY16       FY20      CAGR
                   Lighting                                                        182        305      15.2%
                   Fan                                                              55         78       9.1%
                   pump                                                             52         80      11.4%
                   Consumer Appliances                                             650       1050      12.7%
                   Domestic Switchgear(MCB)                                        200        255       6.3%
                   LV Industrial Switchgear                                        220        275       5.7%
                   Modular Switches                                                 20         38      17.4%
                   Domestic Wires and Cables(LT)                                    80        115       9.5%
                   Total                                                          1459       2196      10.8%

                   Source: Company Data, PL Research

                   Exhibit 29: Market Penetration product wise
                   Description                                                                  % penetration
                   Fans                                                                                  80%
                   Water Heaters                                                                         10%
                   Mixer - Grinder                                                                       35%
                   Induction cook top
Crompton Greaves Consumer Electricals

                                                   Electric Lighting Industry

                                                   Overview

                                                   Electric lighting devices are classified on the basis of technology used for producing
                                                   light. Based on technology, light can be classified as general lighting service (GLS
                                                   which includes incandescent lamp), HID lights, fluorescent tubular lights (FTL),
                                                   compact fluorescent lights (CFL) and light emitting diodes (LED). The lighting industry
                                                   can also be classified on the basis of end use such as residential, commercial,
                                                   industrial and outdoor (street, flood and infrastructure) lighting. In India, commercial
                                                   lighting dominates overall lighting market with 45-50% share, followed by residential
                                                   lighting at 25-30%. In contrast, globally, the residential segment commands a higher
                                                   share of 40-45%. The reason for lower residential share in India’s case is on account
                                                   of relatively lower level of electrification as well as unavailability of continuous
                                                   power supply throughout the country. ELCOM estimate market size of lighting
                                                   industry to be ~Rs180bn in FY16.

Exhibit 30: Market segmentation of electric lighting in India

                                                                   Electrical
                                                                    Lighting

    General lighting           Fluorescent tubular              Compact fluorescent     Light emitting diode
                                                                                                                           Others
     services (GLS)                lamps (FTL)                     lamps (CFL)                 (LED)

                                       45%                                                       40%                       10-15%

Source: Company Data, PL Research

                                                   Demand for electric lighting in India is largely met by domestic players. Imports (10-
                                                   11% of market share) primarily include LED (35-37% of imports). India imports
                                                   largely from China (66%) and Malaysia (9%). In the domestic market, there are
                                                   innumerable small, unorganised players who meet close to 40% of the total demand.
                                                   Organised segment is fairly consolidated with top six players accounting for about
                                                   70% of the organised market. In recent times, share of the unorganised market has
                                                   been rising, primarily in the LED segment as there were no quality standards on the
                                                   sales of LEDs in the domestic market. However, going forward, share of unorganised
                                                   market is likely to fall with announcement and implementation of norms for LED
                                                   bulbs by Bureau of Indian Standards (BIS). This is expected to help control quality
                                                   and restrict sales of uncertified LED bulbs. The standards are also likely to be
                                                   implemented for LED lighting fixtures (Luminaires) in the near future.

October 11, 2017                                                                                                                        23
Crompton Greaves Consumer Electricals

                   Exhibit 31: Estimated market share for electrical lightning

                                                                                              Unorganised
                                                                                                market
                                                                                                 40%

                            Organised
                             market
                              60%

                   Source: Industry, PL Research

                   Exhibit 32: Market size of Indian lighting industry

                   Source: Company Data, ELCOMA, PL Research

                   Exhibit 33: Estimated market share of organised players in FY15

                                                                                   Philips
                                                                                    20%
                                        Others
                                         30%

                                                                                                Crompton
                                                                                                 Greaves
                                                                                                   10%

                                                                                             Bajaj Electricals
                               Surya Roshni                                                        10%
                                   14%
                                                         Havells                 Wipro
                                                          8%                      8%

                   Source: Company Data, PL Research

October 11, 2017                                                                                                 24
Crompton Greaves Consumer Electricals

                   As per industry estimates, share of the LED segment is expected to increase to ~50%
                   in 2016-17 of the total lighting market from 15-20% in 2014-15. While a portion of
                   GLS source is expected to be substituted by LED, new demand for lighting is
                   expected to increase with electrification and increased availability of power in rural
                   areas. In case of urban areas, increase in housing demand and urbanisation is
                   expected to steer demand. As per 2011 census, close to 31% of Indian households
                   use kerosene for lighting purposes whereas 0.5% or 1.2m households do not have
                   access to fuel lighting sources. Increase in average realisation will largely drive
                   overall growth in the lighting industry with volume growth likely to remain flat-to-
                   marginally positive. This is because incandescent bulbs - average life of six to eight
                   months - will be substituted by LED bulbs with average life of eight to nine years

                   Market growth drivers

                   Rise in rural penetration with increased electrification
                      In order to improve electric supply and reach in rural areas, GoI announced
                       Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) for the rural segment in
                       December 2014. Under electrification programmes, GoI has sanctioned around
                       Rs236bn for 273 projects across 15 states for 2012-2017. Increase in rural
                       electrification is likely to drive the demand for lighting products.

                   Availability of power in urban areas 24 X 7
                      To improve the electricity supply and availability, improve reach in urban areas,
                       GoI launched Integrated Power Development Scheme (IPDS) in 2014-15. The
                       programme seeks to establish 24 X 7 power supply in areas which are currently
                       deprived of long duration power supply. Currently, only metros and some large
                       cities get continuous power supply. Reduction of power outages with the
                       implementation of IPDS will give a demand boost for lighting products in urban
                       areas.

                   Government initiatives to replace GLS lamps with LED lights

                   Domestic Efficient Lighting Programme (DELP)
                      Domestic consumers account for 25-27% of the total electricity demand in India.
                       GoI wishes to promote efficient lighting in the household sector in order to
                       reduce electricity consumption by around 50bn kWh every year at the national
                       level. For this, GoI plans to replace incandescent lamps, which are mostly used
                       in households, with LED lamps.

                      According to GoI, around 770m units would have to be replaced and it targets to
                       do so by March 2019.

                      Going forward, with an increase in procurement by the government, LED prices
                       are likely to fall further, boosting demand. Fall in LED prices under DELP has
                       hammered down retail prices from over Rs300 per unit in 2014 to Rs100-150
                       per unit currently for 9W LED bulb.

October 11, 2017                                                                                      25
Crompton Greaves Consumer Electricals

                   Street Light National Programme (SLNP)

                      SLNP was launched to replace street lights with energy-efficient lighting options.
                       For this purpose, 100 cities have been selected and GoI aims to replace 35m
                       units of street lighting points with LEDs by March 2019. This will push LED sales,
                       further brightening the lighting industry’s prospects.

                   Increasing awareness drives for LED lighting

                      In order to fight the power deficit crisis, India aims to save energy by
                       implementing energy-efficient technologies and adopting renewable energy
                       sources. For instance, LED lighting leads to huge energy saving. Many LED
                       conclaves have been conducted in cities such as New Delhi, Hyderabad and
                       Mumbai. Also, the Ministry of Power has appropriately used media to increase
                       awareness on energy-efficient lighting solutions.

                   Growth in urban and rural housing

                      Growth in urban and rural housing is likely to drive demand for electric lighting
                       over the next five years. Semi-urban and rural housing projects are expected to
                       get a boost due to increase in investments by the government in the medium
                       term. Apart from government assistance under Ministry of Housing and Urban
                       Poverty Alleviation (MHUPA), urban housing will be driven by a change in
                       demographic patterns, increase in the number of nuclear families and investor
                       demand. Smart cities mission, a separate government initiative, aims to provide
                       funds for affordable housing in 98 cities across the country. Improved standard
                       of living will also boost demand for decorative lightings in urban areas.

                   Electric Fan Industry

                   Overview

                   Electric fans are categorised under the brown goods (small appliances) segment of
                   the consumer durable industry. Apart from usage in houses and commercial spaces
                   for cooling and ventilation, electric fans are used in industries for sucking away gases
                   through the exhaust variants. Broadly, the electric fans industry can be classified
                   based on the type (mobility, size, etc.) and end use. Table, pedestal and wall fans
                   (TPW) are mobile and used mostly in places which require localised cooling, i.e.
                   place with high ceilings. Domestic exhausts are increasingly being used in kitchens
                   and washrooms for ventilation. Industrial fans, on the other hand, are used to
                   provide flow of air for industrial processes. As per CRISIL Research estimates, market
                   size of the domestic fan industry was Rs55-60bn in 2016-17.

October 11, 2017                                                                                        26
Crompton Greaves Consumer Electricals

Exhibit 34: Market segmentation of electric fans in India

                                                            Electrical fans
                                                             (Rs50-60bn)

                                         Table, pedestal and wall
              Ceiling Fans                                                   Domstic exhaust                       Industrial
                                                (TPW Fans)

               72-77%                            15-20%                                              5-10%

Source: Company Data, PL Research

                                                  Exhibit 35: Estimated break-up of market share

                                                                                                                 Unorganised
                                                                                                                   market
                                                                                                                    25%

                                                                Organised
                                                                 market
                                                                  75%

                                                  Source: Company Data, PL Research

                                                  Exhibit 36: Estimated market share in 2014-15

                                                                                            Usha
                                                                                          (19-20%

                                                                        Crompton      Market share            Orient
                                                                         Greaves      of organised            Electric
                                                                        (25-26%)        segment              (22-23%)

                                                                                           Havells
                                                                                          (13-14%)

                                                  Source: Company Data, PL Research

October 11, 2017                                                                                                                     27
Crompton Greaves Consumer Electricals

                      Demand for electric fans in India is largely met locally. Imports account for 8-
                       10% of the total share. In the domestic market, there are many small players in
                       the unorganised segment that meet close to 25% of the fan demand. The
                       organised segment is fairly consolidated with the top four players accounting for
                       about 80% of the organised market share.

                   Market growth drivers

                   Rise in rural penetration with increased electrification to drive new demand

                      Electric fan penetration in rural areas is estimated at 65%, which is lower than
                       urban areas. In order to improve electric supply and reach in urban and rural
                       areas, GoI introduced DDUGJY for rural areas and IPDS for urban areas in
                       December 2014. Higher power availability is likely to drive new fan demand in
                       rural households. As a result, CRISIL Research estimates rural penetration of
                       fans to reach 76-78% in 2019-20.

                   Urban areas to drive replacement demand

                      Bulk of the replacement demand is likely to arise from the highly-penetrated
                       urban and semi-urban markets. Urban penetration for electric fans was 90-95%
                       in 2014-15. Of the overall market size of close to 47m units in 2014-15,
                       replacement demand accounted for two-thirds. Features such as warranty,
                       aesthetic design will play a key role to capture replacement demand and ensure
                       repeat transaction with customers.

                   Growth in urban and rural housing to drive overall demand

                      As discussed in the electric lighting section, development in urban and rural
                       housing is expected to be strong over the next five years. This will help the fan
                       industry demand positively.

                      Urban and semi-urban areas typically account for replacement demand for
                       electric fans, whereas rural areas are characterised by new sales. For the
                       replacement market, CRISIL Research estimates average life of a fan in Indian
                       market conditions to be around 10 years. Share of the replacement market is
                       estimated at around 65% in 2014-15.Fresh demand, on the other hand, depends
                       on increase in real estate activities, urbanisation and rural penetration.

                      Demand for ceiling and exhaust fans increased due to increase in housing
                       construction activities, improvement in electric fan penetration rates, rural
                       electrification and replacement demand in urban areas.

October 11, 2017                                                                                     28
Crompton Greaves Consumer Electricals

Exhibit 37: Industry size to reach Rs75bn by 2019-20                     Exhibit 38: Organised share to increase to 84% by 2019-20

   100                         Fan                                                         Unorganised Segment    Organised Segment

    80                                                                                70
                                                                                                                         58-60
                                                                                      60
    60                                                                                            46.5
                                                                                      50

                                                                          (m units)
                                                                                      40
    40
                                                                                      30
    20                                                                                20
                                                                                      10
     0                                                                                 0
               2011               2016                 2020                                      2014-15                2019-20

Source: Company Data, PL Research                                        Source: Company Data, PL Research

                                                       Over the next five years, the electric fan industry is expected to register a
                                                        growth of 7-9% CAGR, to reach Rs85bn by 2019-20, led by improved rural
                                                        penetration, new housing demand and improved realisation due to increased
                                                        raw material prices and increased contribution of premium fans. However,
                                                        growth will be different for organised and unorganised players with the former
                                                        registering a healthy CAGR of 6-8% during 2014-15 to 2019-20, while the latter’s
                                                        growth is estimated to decline 3-4%. Consequently, the organised segment’s
                                                        share is expected to increase to 84% in 2019-20 from 75% in 2014-15. Share of
                                                        the unorganised segment is likely to reduce over the next five years as large
                                                        players are increasingly outsourcing their manufacturing activities to smaller
                                                        players rather than expanding capacity. Industrial demand for electrical fans is
                                                        also expected to increase with the government’s focus on manufacturing sector
                                                        with schemes like “Make in India”.

                                                       In India, there are many electrical fans players; Regional and National,
                                                        Organised and Unorganised. Going forward, we expect consolidation as small
                                                        players are unable to innovate and large players are looking to outsource to
                                                        small players. Branding and positioning of products are important factors driving
                                                        demand in this segment. Players with brand recall manage to get a good price
                                                        for premium and mid-range products.

October 11, 2017                                                                                                                        29
Crompton Greaves Consumer Electricals

                   Pump industry

                   Overview

                   Pumps are service equipments used across sectors and are vital elements for fluid
                   handling applications. The Indian pump industry can be broadly classified based on
                   its end use into industrial, agricultural and domestic pumps. Pumps can also be
                   categorised in terms of size and capacity. Small pumps cater to agriculture, domestic
                   housing and village water supply; medium-size pumps cater to irrigation projects and
                   urban water supply and sanitation. Large pumps serve industrial purposes. For
                   example, in power plants, pumps are used in cooling water generation. In industries
                   such as chemicals, fertilisers, oil and gas, petroleum and petrochemicals, pumps are
                   required to handle process fluids for a host of applications. As per CRISIL Research
                   estimates, the market size of the Indian pump industry was Rs85-90bn in 2014-15,
                   with non-water application pumps for industrial usage accounting for 35-40% of the
                   market. The pump market for water application is valued at ~Rs50bn, with the
                   agriculture sector accounting for ~45%, followed by pumps for domestic use and
                   industrial pumps.

                   Exhibit 39: Market segmentation for pumps used in water application

                                                       Water Pumps

                        Agriculture Pumps              Domestic Pumps              Industrial Pumps
                              (45%)                        (35%)                        (20%)

                   Source: Company Data, PL Research

                   Demand for water pumps in India is largely met by domestic manufacturers; only 5%
                   requirement is imported. In the domestic market, there are many small players in
                   the unorganised segment that meet close to 30% of the total pump demand. The
                   organised segment is fairly consolidated with top five players accounting for 40-45%
                   of the share. The unorganised segment’s share has been reducing gradually as larger
                   players are creating strong distribution network and increasing brand-building
                   efforts in this highly competitive industry. Water pumps manufactured in India are
                   largely sold locally. Exports account for 3-5% of the domestic market at Rs150-300
                   crore.

October 11, 2017                                                                                      30
Crompton Greaves Consumer Electricals

                   Exhibit 40: Estimated Market Share Break-up

                               Unorganised
                                 market
                                  30%

                                                                                     Organised
                                                                                      market
                                                                                       70%

                   Source: Company Data, PL Research

                   Key demand drivers

                   Increase in irrigation investment leading to higher penetration

                      Irrigation projects include dams, canals and lift irrigation. Agricultural pumps are
                       used to pump water from the irrigation water sources (ground water, surface
                       water or storage tank and wells) to the sprinklers which sprinkle water in the
                       fields. Demand for agricultural pumps is directly proportional to investments in
                       irrigation and increase in its penetration.

                      While significant investments have been made in irrigation projects over the
                       past few decades, which have increased penetration from 33-35% in 1990s to
                       about 50% in 2014-15, still half of the farm land in India lacks proper irrigation
                       systems and farmers rely primarily on rain water.

                      At the Central level, investments have been driven by programmes such as the
                       Accelerated Irrigation Benefits Programme (AIBP) and Command Area
                       Development (CAD), which have helped expedite the implementation of
                       ongoing projects. As per CRISIL Research estimates, cumulative investments
                       close to Rs2.3trn have been made over the past five years ended 2014-15.

                      During 2014-15 to 2019-20, CRISIL Research expects cumulative investments in
                       irrigation to increase by 1.6 times to Rs3.6trn. Apart from the existing
                       programmes, GoI has announced an investment plan of Rs500bn over the next
                       five years under Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) aimed at
                       providing irrigation to all. For the current fiscal, the government has allocated
                       Rs53bn which is expected to bring an additional 6 lakh hectares under irrigation,
                       while 5 lakh hectares will benefit from drip irrigation.

October 11, 2017                                                                                        31
Crompton Greaves Consumer Electricals

                   Expected growth in housing to boost pump demand

                      Domestic pumps are mostly used in the housing segment to pump up the water
                       to the water storage tanks to be further distributed to households. Individual
                       pumps of small-to-medium capacity are installed in bungalows and row houses.

                      Growth in urban housing is expected to be healthy over the next five-six years
                       (as already discussed in the lighting segment). In this backdrop, the pump
                       industry should be benefitted.

                   Growth in industrial activities to benefit industrial water pumps

                      Industrial activities are expected to grow over the next five years. India
                       performing better than other BRICS nation and registering a stable economic
                       outlook is a positive sign for overall business growth. Government programmes
                       like “Make in India” will only increase the production activities. Demand for
                       industrial process equipment is expected to rise and this will impact the water
                       application pumps demand for the good.

                   Decreasing ground water levels to boost high pressure water pumps demand

                      Deep-water pumps are primarily used to extract water from wells with depth
                       greater than 10 metres below ground levels. Over the years, ground water levels
                       across India have reduced on account of increasing dependence on ground
                       water as against surface water due to erratic rainfall as well as efforts to
                       increase food production. As on 2014, close to 17% of the ~14,000 wells
                       surveyed by the Ministry of water resources had depth greater than 10 metres
                       below ground levels. Increasing dependence on ground water as well as fall in
                       its level is likely to boost demand for high pressure water pumps in the future.

                   Market assessment

                   Water pump market to cross Rs80bn by FY20

                   The Indian Water pump industry grew at a mere 3-5% CAGR during 2009-10 to 2014-
                   15, to cross Rs50bn, because of a fall in demand from end-user sectors. In the
                   agriculture segment, pump demand depends on the average level of rainfall in a
                   particular year. Agricultural pump sales usually increase when rainfall is below long
                   period average (LPA) as farmers increase the use of ground water for crop
                   cultivation. On the other hand, in case of a good monsoon, demand gets impacted as
                   farmers largely utilise rainwater for cultivation (as was the case in 2013-14). Good
                   monsoon in three of the last five years impacted demand for pumps in the
                   agriculture segment. In case of the housing segment, pump sales were subdued as
                   the urban housing demand grew at just 1% CAGR during 2009-10 to 2014-15, mainly
                   influenced by slowdown in 2013-14. Consequently, better monsoon and slowdown
                   in housing demand impacted pump demand during the previous five-year period.

October 11, 2017                                                                                     32
Crompton Greaves Consumer Electricals

                                             Exhibit 41: Estimated market size of water pump Industry

                                                         90
                                                                                                                               80
                                                         80
                                                         70
                                                         60                                       53
                                                         50

                                               (Rs bn)
                                                                         43
                                                         40
                                                         30
                                                         20
                                                         10
                                                          0
                                                                       2009-10                 2014-15                      2019-20E

                                             Source: Company Data, PL Research

                                             Going forward, sales of water pumps is expected to pick up, driven by improvement
                                             in housing demand and government initiatives towards increasing irrigation
                                             penetration. Growth will be largely driven by volume as realisation growth will be
                                             muted, given continued weak metal prices over the next five years. Industrial
                                             demand for water pumps is also expected to increase with the government’s focus
                                             on developing urban infrastructure.

                                             CRISIL Research expects the Indian water pump market to grow at a CAGR of 8-10%
                                             over the next five years to reach Rs78-83bn by 2019-20.

                                             In India, there are many pump manufacturers - Regional and National, Organised
                                             and Unorganised. Consolidation is expected in this industry with small players
                                             unable to expand their market reach beyond a certain limit. For agricultural and
                                             domestic purposes, pumps are sold via a distributor network. Price is the most
                                             important driver in this segment although the energy-efficient variant is becoming
                                             popular.

Exhibit 42: Break-up of water and non-water application pumps in          Exhibit 43: Estimated market share of players in total pump market in
total pump market of Rs85-90bn                                            FY15
                                                                                                                Kirloskar
                                                                                                                brothers
                                                                                                                  12%
                                                                                                                             CRI pumps
                                                         Non water                                                              11%
                                                         application
                                                            41%                  Others                                         KSB pumps
                                                                                  52%                                              8%
   Water
 application                                                                                                                Crompton
    59%                                                                                                                      Greaves
                                                                                                                               8%
                                                                                                                        Texmo
                                                                                                                 V-Guard
                                                                                                       Shakti Pumps      6%
                                                                                                           1%       2%

Source: Company Data, PL Research                                         Source: Company Data, PL Research

October 11, 2017                                                                                                                            33
Crompton Greaves Consumer Electricals

Income Statement (Rs m)                                                   Balance Sheet Abstract (Rs m)
Y/e March                        2017      2018E      2019E     2020E     Y/e March                         2017      2018E     2019E     2020E
Net Revenue                     39,759     44,070     50,084    57,008    Shareholder's Funds               5,392      7,259     9,028    11,522
Raw Material Expenses           27,349     30,232     34,258    38,880    Total Debt                        6,676      6,676     6,676     6,676
Gross Profit                    12,411     13,838     15,827    18,129    Other Liabilities                    —          —         —         —
Employee Cost                    2,252      3,037      3,341     3,675    Total Liabilities                12,067     13,935    15,704    18,198
Other Expenses                   5,257      5,288      5,898     6,691    Net Fixed Assets                  8,797      9,170     9,661     9,911
EBITDA                           4,902      5,513      6,588     7,763    Goodwill                             —          —         —         —
Depr. & Amortization               110        120        129       135    Investments                          —          —         —         —
Net Interest                       655        655        655       655    Net Current Assets                3,270      4,765     6,269     8,536
Other Income                       195        232        271       401       Cash & Equivalents               700      2,109     3,387     5,724
Profit before Tax                4,331      4,969      6,075     7,373       Other Current Assets          11,653     12,195    13,722    15,462
Total Tax                        1,399      1,590      1,944     2,359       Current Liabilities            9,083      9,538    10,840    12,651
Profit after Tax                 2,932      3,379      4,131     5,014    Other Assets                         —          —         —         —
Ex-Od items / Min. Int.             —          —          —         —     Total Assets                     12,067     13,935    15,704    18,198
Adj. PAT                         2,932      3,379      4,131     5,014
Avg. Shares O/S (m)              626.8      626.8      626.8     626.8
EPS (Rs.)                          4.7        5.4        6.6       8.0

Cash Flow Abstract (Rs m)                                                 Quarterly Financials (Rs m)
Y/e March                         2017      2018E     2019E     2020E     Y/e March                       Q2FY17     Q3FY17    Q4FY17    Q1FY18
C/F from Operations                3,105      4,068     4,690     5,874   Net Revenue                        8,900     8,889    10,762    10,555
C/F from Investing               (3,151)      (500)     (500)     (250)   EBITDA                               974       993     1,386     1,294
C/F from Financing                 (154)    (2,159)   (2,911)   (3,287)   % of revenue                        10.9      11.2      12.9      12.3
Inc. / Dec. in Cash                (200)      1,409     1,279     2,337   Depr. & Amortization                  27        26        29        32
Opening Cash                         900        700     2,109     3,387   Net Interest                         161       162       153       161
Closing Cash                         700      2,109     3,387     5,724   Other Income                          —         —         —         —
FCFF                             (1,720)      3,041     3,544     4,969   Profit before Tax                    781       804     1,183     1,101
FCFE                               (262)      3,041     3,544     4,969   Total Tax                            273       281       388       395
                                                                          Profit after Tax                     508       523       796       706
                                                                          Adj. PAT                             513       523       816       706
                                                                          Source: Company Data, PL Research.
Key Financial Metrics
Y/e March                         2017      2018E     2019E     2020E
Growth
Revenue (%)                       119.5       10.8      13.6      13.8
EBITDA (%)                        134.0       12.5      19.5      17.8
PAT (%)                           146.1       15.2      22.2      21.4
EPS (%)                           146.1       15.2      22.2      21.4
Profitability
EBITDA Margin (%)                  12.3       12.5      13.2      13.6
PAT Margin (%)                      7.4        7.7       8.2       8.8
RoCE (%)                           34.4       29.4      30.8      32.2
RoE (%)                            76.4       53.4      50.7      48.8
Balance Sheet
Net Debt : Equity                    1.1       0.6        0.4      0.1
Net Wrkng Cap. (days)                 —         —          —        —
Valuation
PER (x)                            45.5       39.5      32.3      26.6
P / B (x)                          24.7       18.4      14.8      11.6
EV / EBITDA (x)                    28.4       25.0      20.7      17.3
EV / Sales (x)                      3.5        3.1       2.7       2.4
Earnings Quality
Eff. Tax Rate                      32.3       32.0      32.0      32.0
Other Inc / PBT                      4.5       4.7       4.5       5.4
Eff. Depr. Rate (%)                  1.3       1.3       1.3       1.4
FCFE / PAT                         (8.9)      90.0      85.8      99.1
Source: Company Data, PL Research.

October 11, 2017                                                                                                                             34
Crompton Greaves Consumer Electricals

Notes

October 11, 2017                                     35
Crompton Greaves Consumer Electricals

Prabhudas Lilladher Pvt. Ltd.
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 Rating Distribution of Research Coverage                                                                             PL’s Recommendation Nomenclature

                         50%                                                                                          BUY                           :     Over 15% Outperformance to Sensex over 12-months
                                               43.8%
                               39.8%                                                                                  Accumulate                    :     Outperformance to Sensex over 12-months
                         40%
   % of Total Coverage

                                                                                                                      Reduce                        :     Underperformance to Sensex over 12-months
                         30%                                                                                          Sell                          :     Over 15% underperformance to Sensex over 12-months
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                         0%
                               BUY         Accumulate               Reduce                   Sell                     Under Review (UR)             :     Rating likely to change shortly

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