How do you rekindle the relationship with someone you have taken for granted or ignored for years? You “hangout ghar pe.” At least, that’s what Crompton Consumer is doing in its latest ad campaign after being conspicuous by its absence on television screens. The gap was so visible that even its own MD, Shantanu Khosla, had to call out the same, saying, “Over the previous few years, there has been very limited investment (in brand building). It is very seldom that you see a market leading brand have low awareness.”
The company, on an average, spent just 2.3% of its net sales during FY11-FY15 on advertising and promotions. Competitor Havells, meanwhile, has been a tad more aggressive at 2.9%. Now, under Khosla, who joined the company in July 2015, the company is looking to step up its A&P spends. What’s the mandate? BBDO India, the agency behind its ad campaign, says it is to create a contemporary image of the brand, which has been under the shadow of its parent so far.
Solo journey
Brand building is just one aspect, there have been many changes afoot at the company. For starters, Crompton Greaves Consumer Electricals (CGCEL) got its own identity on the bourses, when it listed on May 13. After years of supporting the balance sheet of B2B-oriented Crompton Greaves with its operating cash flows, the act put CGCEL in league with other listed peers, Bajaj Electricals and Havells.
But why did the solo journey begin? In April 2015, Crompton Greaves informed the exchanges that promoter Avantha Holdings had entered into an agreement with private equity firm Advent International for its 34.73% stake at an consideration of Rs.2,000 crore. Singapore sovereign wealth fund, Temasek would be an independent co-investor alongside Advent.
“CGCEL is the leader in several fast-growing product categories, with strong brand names and extensive distribution capabilities,” Shweta Jalan, MD, Advent International was quoted as saying in the media, explaining its entry. And while Temasek refrained from making any specific comments pertaining to CGCEL, in an email response, it said that it considers the consumer electrical space a good proxy to leverage the demands of the middle-income population, which also happens to be one of its key investment themes.
Strong hold
Considering its theme, Temasek chose right. Despite spending relatively less on promotional activities, CGCEL has a significant foothold in the four segments it operates in — fans (45% of FY15 sales), pumps (20%), lighting (30%) and appliances (6%).
It is the market leader in fans, with a share of 27%. While its Mcap of Rs.8,320 crore is much lower than Havells’ Rs.23,543-crore,during FY11-15, it was able to improve its share in the segment by 400 basis points compared to Havells’ 280 basis points.
In the lighting segment, CGCEL is third, with a market share of 6%. Here, Phillips is the market leader, with a share of 27% while Havells is fifth, with 5% share. In the fast-growing LED market too, Crompton holds the third spot, with a market share of 9% as against Havells’ 6%
Coming to pumps, CGCEL is the market leader in the domestic segment, with 28-29% share. But, overall, it has 7% share, with Kirloskar Brothers dominating the segment at 12%, owing to their prominence in agricultural pumps.
Already a strong player, as CGCEL treads alone now, analysts reckon it has an edge over its peers. “So far, we have seen Havells as the only pure-play in the light consumer electricals space. Its portfolio is a mix of two categories — the electrical space, which comprises of fans, consumer durables, lighting and appliances — and wires, cables and switchgear. Typically, wires and cables are capital intensive, low-margin businesses, dependent on construction activities. Meanwhile, Bajaj Electricals has a lot of exposure to E&P and T&D capex. So, Crompton comes out as a pure-play company, with an established brand and market leadership in key categories,” says Renu Baid, vice president, research, IIFL Institutional Equities.
Premium play
But what’s the plan ahead? Previously, it had been a cash-generating sidekick to a company that was largely focused on its troubled T&D business. Now, though, the management has a clear mandate from the private equity promoters — to drive “shareholder value.”
How does it propose to do this? The management has come up with a two-pronged strategy — premiumisation and energy efficiency, which analysts say should keep the margins healthy. For instance, the company recently launched the Avancer E-Sense ceiling fan, which senses the room temperature and adjusts speed accordingly.
While CGCEL ventured into the premium fans category in FY12, it already accounts for 9% of the segment’s sales as of FY15. The category logged 32% growth in revenue in FY15. In 2HFY16, it was up 35% year-on-year.
Overall, the fans’ business has grown at 14% CAGR over FY10-FY15, as against the industry growth of 9%-10%.
As far as energy efficiency goes, from FY11, CGCEL introduced 5-star rated energy-efficient fans that consume 30% less power. Besides, Khosla says, the company has invested in a lab in Goa to design fans that provide maximum air by consuming less power.
When it comes to specialty pumps, CGCEL entered the segment about three years back, with products such as stainless steel pumps. “The specialty pumps business is at the premium end of the pumps business. So, that is part of driving the bottomline, while we are driving topline by trying to improve the mix,” says Khosla.
Its pump portfolio offers varied products for different regions, keeping in mind the energy disparity. “We are launching pumps for both specialty and local needs. Different parts of the country have different levels of voltage stability, so we are making suitable agriculture pumps,” adds the MD.
Lit up
But LED lighting is where the company’s thrust on energy-efficient products is playing out in a big way. “Consumer LED is a huge area of potential growth,” Khosla told analysts in a recent earnings call. LEDs consume 1/10th the power of incandescent bulbs and half that of compact fluorescent lamps. The segment is already spreading light far and wide for CGCEL, growing 129% in 4QFY16 and 80% in 2HFY16 on a year-on-year basis.
Apart from the LED space, the management sees home appliances as an emerging business. In this universe, CGCEL competes with the likes of Whirpool, Voltas and Symphony. While it currently accounts for only 6% of the company’s topline, Khosla says, “We are strong in one critical channel — the electrical channel. However, new channels are emerging. We are getting into new businesses, such as small appliances. Consumer LED is an area of potential growth. To maximise the opportunities, we need to strengthen our ability to win in other channels.”
Conserve Cash
Besides, it is looking to improve its supply chain, efficiencies and distribution network. Khosla says, “As we move forward, it is savings that will ensure we have sufficiency to invest in our marketing and distribution programs without being margin dilutive.”
But Baid of IIFL says CGCEL is not only looking to improve gross margins, but is also looking to cut down on non-operational expenses. “They can get savings of 100-200 basis points in the next two years because of these initiatives, which will be ploughed back to spend on advertising and marketing.”
Moreover, analysts reckon the management’s plans to refinance the existing debt shows their intention is to conserve cash. “In the next two years, the company will be able to generate Rs.400 crore-Rs.500 crore of free cash. If they are able to grow at 15% CAGR, it will be Rs.400 crore,” says Baid, adding that as the company doesn’t intend to repay the entire debt of Rs.640 crore on the books immediately, they will likely replace it with lower-cost bonds or NCDs. “Considering their asset-light strategy and a Rs.30-40 crore annual capex, CGCEL could use this cash for emerging segments that it has identified — the LED and the appliances segments. It might look at M&A or inorganic growth opportunities, may be joint ventures,” she adds.
When it comes to the appliances segment, the right channel plays a key role, say analysts. For example, Havells has had hiccups in expanding the appliances business because the channel to market is different than the LED and fans business or even the lighting segment. Which is why, in 2011, Phillips acquired Chennai-based mixer grinder brand Preeti to add to its brand and distribution network. On similar lines, “In appliances, CGCEL could buy out certain brand that gives them another channel,” opines Baid.
Capital gains
Whether it opts for inorganic growth to scale up its appliances and LED business remains to be seen, but CGCEL has always been an efficient user of capital. For FY16, it reported RoCE of 75.2% compared to Havells’ 25.4%. While Bajaj Electricals is yet to report its FY16 results, the company’s RoCE stood at 7.8% in FY15.
Crompton’s impressive return ratios can be attributed to its asset-light strategy, which entails 50% in-house manufacturing and 50% outsourcing. Besides, its average operating profit margin from FY12-FY16 has been 12.14% compared to Havells’ 9.4%. In fact, Havells has been trailing CGCEL for the most part. In the last three fiscals (FY13-15), where CGCEL’s operating profit grew 15% on an average, Havells’ EBITDA growth has been mere 3.3%. Over the same period, CGCEL’s topline has expanded 15% on an average compared to Havells’ 9.6%.
Despite these metrics, as of now, CGCEL is trading at a 15% discount to Havells in terms of valuations. Kunal Sheth, research analyst, institutional equities at Prabhudas Lilladher says, “The CGCEL brand was severely under-utilised under the old management. They didn’t utilise the brand much in term of premiumisation. Looking ahead, growth can surprise and it can grow faster than market,” adding that at 25x FY18 earnings, CGCEL is fairly valued and attractive compared to Havells’ 30x.
Putting it plainly, as CGCEL makes its debut as a new player, under a new set of owners, led by a former P&G MD, it may threaten the scarcity premium thus far enjoyed by Havells. But Havells is not feeling threatened. At the recent 4QFY16 earnings call, responding to a question about CGCEL’s new found aggression, Anil Rai Gupta, CMD at Havells India, quipped: “As and when the competition increases, it increases the size for all players. So disciplined competition is always better.”
Havells’ might not be feeling the pressure yet, but Crompton’s strategic moves under Khosla are already ticking the right boxes. As Pankaj Tibrewal, fund manager, Kotak AMC says, “Players that have the distribution, brand and innovation are the winners in the long-term. In this space, innovation is important as technology is changing fast.”
But new-found freedom can be a tricky thing. While CGCEL is hard at work, working on the ‘consumer-centric’ approach, it remains to be seen if its ‘get together’ turns out to be a hit or a miss.
