This consumer durable stock has 44% upside potential according to BOB Capital Markets

Crompton Greaves Consumer Electricals Ltd, a leading manufacturer of consumer products, has the potential to reach ₹500/share from its current market price of ₹349.85, implying a 43.26 per cent potential upside, BOB Capital Markets said in a research report dated June 01, 2022.

"Crompton was able to navigate FY22 well due to its cost-saving program, product mix improvement, and calibrated pricing," it said, adding, "As a part of building its adjacent products, it acquired Butterfly Gandhimati (BGAL) in FY22. Its leadership position continued in the fans segment, while lighting saw subdued demand in B2B lighting, partly offsetting double-digit growth in the B2C segment."

Project Unnati, aimed at aggressive cost-cutting, led to a savings of Rs2 bn (3.8% of FY22 revenue). "Efforts toward the brand building, R&D, and expanding distribution network should strengthen its market position in the fans and pumps division," said BOB capital markets.

The company has acquired Butterfly Gandhimati (Butterfly is amongst the top three kitchen and small domestic appliances players in India) with plans to strengthen its position in the southern market. Meanwhile, the company's other initiatives, such as the "Hot Water Campaign," "Star-Lord 3-in-1," and "SAATHI," have received immense recognition. Going forward, management believes that consumer preferences are shifting toward smart, intelligent, and connected products, and pertinently, the company has made appropriate efforts towards R & D. Overall, Crompton remains on solid ground, with continued leadership in the fan segment, an encouraging response in the lighting segment, and a recent foray into kitchen appliances through BGAL, the report said.

The company’s net debt increased to ₹6.9 billion from net cash of Rs1.3 billion in FY21, primarily due to the acquisition of Butterfly. Net Debt/equity stood at 0.3x. Pertinently, return ratios were impacted, but "We believe that it should mean revert by FY24 as BGAL becomes earnings accretive," said BOB. 

Since the beginning of 2022, there have been lots of challenges for the consumer durables sector, starting from the war, high commodity prices, the COVID situation and lockdown in China, and the rupee falling to an all-time low. Due to high commodity price pressure (steel/aluminium/copper), companies have taken multiple price hikes since the start of the year. And now, with the rupee hitting an all-time low, the imported components will become more expensive as the industry is more dependent on imports for key components.

Meanwhile, shares of Crompton Greaves have fallen 30.80% from its 52-week high. Over the last six months, the stock returned a negative of 18.95%. In the last one year, the stock fell by 17.45%.

The company reported a 29.11 per cent decline in its consolidated net profit at ₹176.55 crore for the fourth quarter ended March 2022. Revenue from operations increased 1.69 percent to ₹1,547.92 crore during the quarter, compared to ₹1,522.05 crore in the previous fiscal period.

For the full fiscal ended March 2022, CGCEL's net profit dropped 6.2 per cent to ₹578.38 crore, compared to a net profit of ₹616.65 crore in the previous fiscal.

The company's ROE has consistently declined in the last 5 years. In the March quarter, the ROE fell to 23.57 per cent, against 31.92% in the March 2021 quarter.

The company spends most of its earnings on dividend payments. The payout ratio stands at 27%. The dividend yield of 0.8%, which is above the industry average.

Foreign investors held a large stake in the company at 38% in March 2022. Mutual funds hold 32.08 per cent of the shares in the company. Promoters have decreased holdings from 5.99% to 5.94% in the Mar 2022 quarter.

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