Crompton Greaves’ Remarkable Turnaround Story

Introduction:

Crompton Greaves Consumer Electricals Ltd. (CGCEL) is a prominent name in the consumer electrical industry in India. Established in 2015 after demerging from Crompton Greaves, the company has carved a niche for itself in various segments of consumer electrical products. CGCEL operates through several business verticals, including fans, lighting, appliances, and pumps. The company’s portfolio boasts a wide range of products, from ceiling fans to LED lighting solutions and home appliances like water heaters, mixer grinders, and irons. Over the years, Crompton Greaves has established itself as a leader in the fans and lighting segments, leveraging its strong brand equity, extensive distribution network, and focus on innovation and quality.

Fundamentals:

Crompton Greaves Consumer Electricals boasts strong fundamentals, underpinned by its leading market position and robust financial metrics. The company has consistently demonstrated healthy revenue growth, driven by its diverse product offerings and strong brand recognition. Its revenue streams are well-diversified across its key segments – 

• Fans: CGCEL is a market leader in the fans segment, known for its innovative and energy-efficient products. The company’s focus on premiumization and introduction of technologically advanced products has helped maintain its leadership position.

• Lighting: The lighting segment, particularly LED lighting, has been a significant growth driver for CGCEL. The transition from traditional lighting solutions to energy-efficient LED lighting has provided a boost to this segment.

• Appliances: The appliances segment includes products like water heaters, air coolers, and kitchen appliances. This segment has shown steady growth, contributing significantly to the company’s overall revenue.

• Pumps: The pump segment caters to both residential and agricultural needs, offering a wide range of products known for their durability and efficiency.

Broadly, ~81% of revenue contribution comes from the Electrical Consumer Durables segment which includes fans and appliances, ~11% from lighting, and the rest from Butterfly. 

The fundamental performance of the company can be succinctly summarized with these two data points – Quality Score is Q1 (best), Growth Score is Q4 (worst). The company has quality components like ROE, D/E working in its favor, however on the growth aspect earnings and revenue growth a weak points for the company. Therefore, this quality company has very little underlying growth momentum as of now. While FY23 saw ~27% growth in topline, this was because of the acquisition of the Butterfly Gandhimathi which was doing roughly ₹900 to ₹1000 crores of revenues at the time of acquisition. In addition to the tepid topline growth, the bottom line is also declining. The main culprits for this are advertisement and sales promotion. To boost the sluggish market demand, the company has invested a massive amount of money in promotions. To provide perspective, the sales promotion expenditure which was ₹29 crores in FY22 has gone up to 161 crores in FY24, a jump of 452% and similarly advertising cost has risen by 126%. 

Price Erosion (September 2021 – March 2024)

Between September 2021 and March 2024, CGCEL’s stock experienced a significant price erosion of close to 50%. Several factors contributed to this decline:

• Butterfly Gandhimathi Acquisition: In a bid to diversify its product portfolio and strengthen its presence in the kitchen appliances segment, CGCEL acquired Butterfly Gandhimathi. However, the synergies expected from this acquisition did not materialize as planned. Integration challenges, cultural differences, and operational inefficiencies hampered the performance of Butterfly Gandhimathi, leading to investor concerns and negatively impacting CGCEL’s stock price.

• Transition to BEE Standards for Fans: The transition to the Bureau of Energy Efficiency (BEE) standards for fans was underway from the latter half of 2022 and required significant changes in product specifications and manufacturing processes. This led to a period of channel destocking as distributors and retailers cleared out old inventory to make way for the new ones. The disruption in the supply chain and the additional costs associated with the transition hurt CGCEL’s sales and profitability during this period. It was a double whammy as fans constitute the lion’s share of revenues in the ECD segment.

• Lackluster Demand: The overall demand in the consumer electrical segment remained subdued due to various macroeconomic factors. The prolonged impact of the COVID-19 pandemic, inflationary pressures, and weak consumer sentiment contributed to the lackluster demand. This, coupled with increased competition, put pressure on CGCEL’s market share and pricing power.

• Operational Challenges: The company faced several operational challenges, including rising raw material costs and supply chain disruptions. These challenges impacted the company’s margins and added to the negative sentiment around the stock.

Rise of the Stock Price (Post March 2024)

Despite the challenges faced during the period between September 2021 and March 2024, CGCEL’s stock witnessed a remarkable recovery from March 2024 onwards and has run up ~64% since then. While there hasn’t been a dramatic shift of fate for the company from a fundamental standpoint, a lot of unwinding has happened when it comes to the previous problems. For instance, the raw material inflationary pressures experienced in the last two years have subsided to a large extent. Second, the BEE transition is now complete, and hence no continuing effect is seen. Third, The demand has improved albeit not entirely, but has gotten better. Lastly, the acquisition synergies between Crompton and Butterfly finally seem to kick in. 

Crompton is currently a part of our Quality Smallcap – Smart Beta smallcase. As the name suggests, for Quality Smallcap – Smart Beta one of the primary factors that we make use of is the Quality factor to drive stock selection for the smallcase. Additionally, the smallcase only selects those quality smallcap companies whose prices are experiencing a positive momentum trend. 

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_{Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.}