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    Stock pick of the week: Why analysts think Crompton Greaves is a promising deal

    Synopsis

    Crompton was able to increase its leadership in 2nd quarter. Also, its efforts towards capacity addition in b2b lighting segment, cost rationalisation & changes in marketing strategy to stay competitive has made the company a favourite of analysts.

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    The company’s growth is expected to accelerate once its lighting division gets back on track.
    Crompton Greaves Consumer Electricals, one of the leading consumer electrical manufacturers in India, has been reporting solid numbers for the past few years. Its revenue and net profit grew by 10% and 24% respectively during the financial year 2018-19. According to consensus estimate, its revenue and net profit are expected to grow by 13% and 20% respectively till 2020-21.

    Though Crompton’s revenue for the second quarter of 2019-20 reduced to 4% as a result of the lighting division’s weak performance, the consumer durables segment continued to do well and reported a revenue growth of 11%. Its net profit for the quarter also zoomed by 44%, mostly because of the tax reversal triggered by the reduction in corporate tax.

    Crompton being in the industry for over 75 years, is a well-known brand and has a strong dealer network across the country. A market leader in fans, Crompton was able to increase its leadership in the second quarter. Leveraging on its leadership on residential water pumps, Crompton has been increasing its revenues from agricultural pumps, which grew by 17% y-o-y in the second quarter.

    After achieving a high growth in geyser, which grew by 38% y-o-y in the second quarter, Crompton is now focusing on mixer and grinder and the same is expected to show good growth in the coming quarters.

    Analysts’ views

    Sell 1
    Hold 3
    Buy 34

    Though Crompton’s lighting division is still a drag, analysts believe that worst is over, due to several reasons. First, the recent capacity addition in b2b lighting segment should start yielding fruit soon. Second, its lighting division is expecting pick up in EESL orders. Third, its cost rationalisation efforts have started yielding fruits.

    Lighting division margin improved by 330 bps, despite the 15% fall in LED product prices. To counter the competitive intensity here, Crompton is also changing its marketing strategy, ie aiming at market share even at the cost of a bit reduction in margin.

    Analysts are getting bullish on this counter because the valuation premium of Crompton came down during the last one year due to its lighting division woes. Recent stake sale by some long-term investors is another reason for it. For instance, Advent International and Temasek, which were holding around 34.36% stake together, sold their 8.15% stake to other institutional investors at an average price of Rs 249.2 for Rs 1,275 crore and brought down their stake to around 26%.

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    Crompton Greaves compared with ET Consumer Durable and Sensex. Stock price and index values normalised to a base of 100. Source: ETIG and Bloomberg.

    Selection Methodology
    We pick up the stock that has shown maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.

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