Crompton Consumer: A stitch in time saves nine

28 Mar 2023 , 10:27 AM

Recommendation: Buy

Target Price: Rs 411

While non-South reach expansion for the Kitchen Appliances portfolio will take two to four years to fully play out, immediate synergies should reflect for Crompton’s Large Kitchen Appliances portfolio (organic foray into in-built products, in mid-FY23) in South and BGAL’s Small Appliances portfolio in the West and North regions. Management reiterates the BGAL acquisition to be EPS-accretive from FY24, and remains confident of driving a higher-than-market growth (double-digit) over three to four years. Analysts at IIFL Capital Services believe concerns on growth and profitability in the company are overdone, making the stock attractive at 28x FY24 estimated and 22x FY25 estimated EPS.

Merger transition to imply 3% equity issuance

The proposed swap ratio for BGAL’s merger in Crompton implies ~8% discount to the acquisition price and is vetted by top independent agencies with fairness opinions, given contraction in the market in FY23. The price is reflective closer to prevailing prices at the end of 24 March 2023 and seems fair, believe analysts at IIFL Capital Services. The merger is proposed to be closed by Q4FY24 (12-14 months).

Phase 2 of synergies to unlock from FY24

Integration of GTM, sourcing synergies, cross-sell opportunities and multi-brand positioning are expected to kick-off from FY24. While cost synergies of Rs180-200 million accrued in YTD’ FY23, FY24 should broad base such savings — part of which will be reinvested for higher growth and building brand and capabilities, just like Crompton did in 2016-18. BGAL’s outperformance in recent quarters versus TTK and other peers, reflects its growth strategy.

Concerns overdone, time to Buy

Analysts at IIFL Capital Services believe Crompton’s stock price has been excessively penalized versus peers, amid growth concerns in the consumer offtake. Corrective actions in the channel and preparedness with the new BEE-compliant portfolio should help the company rebound swiftly with the market. Valuations are compelling with the downside capped.