Reading the market right; consistent in returns/cash translation: While Crompton’s TAM vis-a-vis peers such as Havells is strikingly low (ex-white goods, wires, switches, etc), it has been far better on return/cash translation driven by its combination of business model (asset light), higher share of consumer and greater competitive moat. During FY20–21, while Havells clearly outshone on margin expansion, the bulk of it came from sharper ASP cuts; Crompton chose not to. Apart from the latter’s improved working capital, evident in cash flows and healthy OPMs, we see greater consistency—be it employee remuneration, greater market penetration (tier II/III coverage) with compatible product launches over FY20-21 in target categories—both leadership and other segments.
Performance versus visibility: Investor perception and ask matters. Even as Crompton lagged many peers on growth (5Y) given majority matured segments, low B2B exposure and low TAM, translation (PAT, cash) has been better. In our view, the company’s professional management has gained investor trust based on how they tapped into brand potential in recent years. What lies ahead is the long-term path the company takes in allocating capital to compatible new segments, which would be the biggest wealth creation opportunity for investors in our view.
Outlook and valuation: Crompton’s FY21 performance spotlights its brand resilience and execution capabilities, showing up in superior return/cash and bottom-line translation. In our view, the company’s expanding distribution footprint – to Tier-II and -III – augur well for incremental return/cash flows with robust cost structure.
Retain ‘buy/so’ with a target price of Rs 477 (valued at 45x PE).