Anand Rathi maintains a BUY recommendation for Crompton Greaves Consumer, citing robust medium-term growth drivers despite expectations of a softer Q2. The company’s strategic focus on portfolio premiumization, cost optimization, and scaling alternative channels is projected to lead to margin expansion over the next few years. The transformation of its subsidiary, Butterfly Gandhimati, is expected to yield significant benefits in H2 FY24. Anand Rathi’s price target for the stock is Rs 552, reflecting a favorable outlook driven by strong fundamentals and improving margins.

Muted Q2, but Strong Long-Term Demand Drivers

Soft Q2 Expected:
Management expects Q2 sales to be impacted by sluggish demand and a weak Onam season. While low channel stocks and a strong Q1 fueled by high demand for summer products had initially set a positive tone, sales have slowed. Nonetheless, the company remains optimistic about the medium-term demand, driven by premiumization, household additions, and growth in alternative and modern-trade channels.

Resilient Growth in the Medium Term:
Crompton’s ongoing focus on cost optimization and strategic pricing initiatives is expected to result in margin expansion in the coming quarters. Sales momentum is anticipated to pick up in January 2025, driven by primary channel refilling of summer products.

Transformation of Butterfly Gandhimati to Deliver Long-Term Benefits

Transformation in Progress:
Crompton's acquisition, Butterfly Gandhimati, is undergoing a transformation aimed at improving brand positioning and operational efficiency. The institutional business contribution has been reduced to 5%, minimizing risk, and e-commerce parity has been restored. Two price hikes have been well-received, improving the unit economics of the business. Butterfly is targeting 7-8% margins by FY26, with H2 FY24 expected to show an uptrend in profitability as demand recovers, particularly in the kitchen appliance segment.

Strategic Integration with Crompton:
The integration of Crompton and Butterfly is expected to boost the company's market position in the kitchen appliance space, making it the second-largest player in India. Crompton's strength in general trade will complement Butterfly's presence in e-commerce, creating synergies across channels.

Strong Pipeline of Product and Channel Expansion

Expanding Product Portfolio and Channels:
Crompton is focusing on expanding its presence in key categories, such as BLDC fans, solar pumps, and lighting. The company’s innovative products, like the Regmote series in the BLDC fan category, are expected to drive growth. Crompton is also planning to capture market share in residential surface pumps and increase its penetration in the agricultural pump segment, which is currently in single digits.

Alternative Channels and E-Commerce Growth:
Crompton and Butterfly's combined strength in e-commerce has made them the largest player in the consumer durables segment. With a focus on direct-to-consumer (D2C) channels and the quick commerce market, the company is set to explore further growth opportunities. The management sees large-format retail (LFR) and rural markets as promising areas for expansion, further boosting its revenue streams.

Valuation and Outlook: Attractive Entry Point

Valuation Metrics and Price Target:
At the current market price of Rs 419, Crompton Greaves Consumer trades at a P/E ratio of 46.3x FY25E and 35.6x FY26E, making it an attractive investment for medium-term gains. Anand Rathi maintains its BUY rating, with a price target of Rs 552, which represents a 31.7% upside from current levels. The company’s projected revenue and net income CAGRs of 12.7% and 31.1%, respectively, over FY24-26, underpin the strong outlook.

Key Risks to Growth Projections

Potential Risks:
The primary risks to Crompton’s growth trajectory include persistent demand slowdown and failure to capitalize on Butterfly’s transformation. A slower-than-expected recovery in consumer demand or delays in expanding Butterfly’s margins could lead to downward revisions of earnings estimates for FY25 and FY26.

Conclusion: Strong Buy with Focus on Long-Term Growth

Strategic Positioning for Long-Term Success:
Crompton Greaves Consumer’s focus on premiumization, alternative channels, and cost optimization, along with its strategic integration with Butterfly, positions it for sustainable long-term growth. With a clear path to margin expansion and strong demand drivers in place, the stock remains a strong buy for investors looking for exposure to India’s consumer durables sector.