Crompton Greaves Consumer Electricals shares hit upper circuit on debut

Crompton Greaves Consumer Electricals, de-merged from Crompton Greaves, had a decent debut on Friday. The stock opened at ₹129, touched the day’s low of ₹125 and closed at ₹135.45, the 5 per cent upper circuit limit, on the NSE.

The price is much higher than analysts’ expectations. Analysts at Motilal Oswal expected the stock to list at ₹99-125. Religare Institutional Research analysts said they would recommend buying till ₹120. Given the expectations on listing, change in the management and brand building exercise of the company, analysts expect the stock price gains to be capped in the short term.

“We believe the one-year returns are likely to be modest,” said Misal Singh and Prashant Tiwari, analysts at Religare.

Though the market demand for various products offered by the company, namely fans, lighting, pumps and consumer appliances remains robust, competitive intensity also remains high. The management is making efforts to increase brand awareness through higher advertising spends. It is also introducing energy efficient and premium products across categories, and expanding distribution including through e-commerce and multi-brand retail.

Over the last one year, three key management changes were made to spearhead the company to the next level. Shantanu Khosla, ex-CEO & MD of Procter & Gamble India, has been appointed Managing Director.

Matthew Jacob is the company’s Chief Executive Officer and will lead its push into the consumer appliances segment. Sandeep Batra is the company’s Chief Financial Officer; earlier he was CFO at Pidilite Industries.

“We expect the market for various product lines to grow at 8-12 per cent over FY16-18. We estimate a worst-case sales/profit after tax CAGR of 10-15 per cent for the company over FY16-18. Margins are likely to improve slowly but steadily over FY16-18,” said Religare analysts in their note.

Motilal Oswal pointed out that the company is looking to reduce its dependence on the fans business.

It derives 45 per cent of revenues from fans where it is the market leader, followed by lightings (30 per cent), pumps (20 per cent) and appliances (6 per cent). Improved profitability should help the company become debt free in the next two-three years. At today’s price, the stock trades at 27 times FY18 estimated earnings, compared to Havells’ 34 times. Consumer-oriented businesses trade at above 30 times valuation. So, analysts expect the stock to gradually catch up on valuation.

Meanwhile, private equity investors Advent International and Temasek on Friday launched a ₹1,695-crore open offer to acquire 26 per cent stake in the newly-listed Crompton Greaves Consumer Electricals to become majority shareholders. The open offer has been made at ₹104 a share, is at 23 per cent discount to today's closing price of ₹135.45.

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