Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the debt instruments and bank facilities of Crompton Greaves Consumer Electricals Limited (Crompton). CRISIL Ratings has also withdrawn its rating on the NCDs of Rs 170 crore (see Annexure- 'Details of Rating Withdrawn') on confirmation from the debenture trustee as these are fully redeemed. The rating is withdrawn in line with CRISIL's policy on withdrawal of ratings.

 

After a strong recovery in fiscal 2021, revenue growth is likely to take a hit in fiscal 2022 because of the localised lockdowns across the country to combat the second wave of Covid-19. Although there are no supply side constraints this time, the closure of shops and restrictions on movement could impact company’s revenue.

 

Crompton generated revenues of over Rs 4804 crore with healthy operating margin of 14.2% in fiscal 2021. Regular product launches and innovation and strengthening of distribution reach with focus on new product segments will help maintain healthy revenue growth in double digits in the medium term, despite the impact of the second wave of the pandemic.

 

The cost of raw materials such as steel, copper and aluminium has increased significantly since November 2020. The company’s strong brand equity and market leadership in several product categories will help sustain operating profitability in 13-14% range with price hikes of 5-8% and cost reduction initiatives undertaken.

 

Strong liquidity in the form of cash and equivalents and marketable securities worth around Rs 1370 crore as on March 2021 and unutilised fund based limits should help Crompton withstand the adverse impact on its cash flows in the near term.

 

The financial risk profile is expected to remain comfortable because of low debt of Rs 480 crore and expected healthy cash accruals of around Rs 400-500 crores per annum. Modest capital expenditure (capex) requirement will help sustain the liquid surplus thereby strengthening the balance sheet and liquidity.

 

The ratings reflect Crompton's diversified business risk profile, backed by its established brand, leading position in multiple consumer durable segments; and strong growth prospects, fueled by focus on brand building and consumer sentiments. The ratings also factor in the healthy financial risk profile, aided by significant cash accrual, prudent working capital management, and limited capital spending. These strengths are partially offset by exposure to intense competition in the domestic consumer durables sector, and to risks related to evolving impact of government policies on the use of energy-efficient products.

Analytical Approach

CRISIL Ratings has amortised goodwill of Rs 779 crore generated at the time of the demerger of Crompton from Crompton Greaves Ltd (CGL), over 10 years, from the date of the demerger.

Key Rating Drivers & Detailed Description

Strengths:

• Strong business risk profile, supported by revenue diversity and established brand: The company operates in four key business segments - fans, lighting, pumps, and appliances. The ECD segment, comprising fans, pumps and appliances, accounted for 75% of revenue in fiscal 2020, and lighting constituted the balance 25%. There has been a strong profit improvement in lighting segment with margins being restored to double digits. Diverse value offering in each segment has helped the company register consistent growth over the years.

 

Strong distribution network, and steady product launches have led to sustained increase in market share in key product categories over the past two years. Crompton’s market share in the LED bulbs segment is 9.5%, domestic pumps is 28%, and overall fans is 25%. The premium portfolio and cost-reduction initiatives have helped sustained profitability and revenue growth. Strong focus on innovation and ability to come up with regular new product variants and devise new product categories, will continue to benefit the business. Crompton has also been steadily expanding its appliance segment with products such as mixer grinders and water heaters gaining traction in past two years. The company is now the fourth largest player in the water heater category. Increasing penetration in rural markets, sustained increase in market share in newer product categories, and expansion of product portfolio will be key growth drivers in the next few years.

 

• Healthy growth prospects, backed by focus on brand strengthening, and pan-India distribution network: The company has continued to strengthen its distribution network. Its distribution reach (proportion of  counter presence) for fans and LED Bulbs has increased to 53% and 20%, respectively, from 35% and 9%, respectively, over the past three years. Established brand, wide product portfolio, and a strong distribution reach has helped the company sustain its leading position in the domestic fans and residential pumps segments. Crompton is now the third largest lighting company in India. Expected increase in distribution reach and rollout of a pan-India market strategy should help improve market share. Sharp increase in cash flows and revenue due to sustained growth in new product categories will be a key rating monitorables in the medium term.

 

• Healthy financial risk profile: The financial risk profile should remain comfortable over the medium term, given the expected annual cash accrual of Rs 400-500 crore, prudent working capital management, and moderate capex. Lockdowns to contain the pandemic have constrained operating profit for the company is estimated at Rs 600-700 crore over the three years through fiscal 2021. Return to normalcy with increase in vaccination will support recovery in growth.

 

Debt protection metrics should remain healthy, backed by strong cash accrual, low gearing and expected reduction in debt. Liquidity should remain robust, backed by cash and equivalent of around 1370 crore as on March 2021. Any large debt-funded capex/acquisition, impacting credit metrics, will be a key rating sensitivity factor.

 

Weaknesses:

• Exposure to intense competition in the domestic consumer durables sector: Competition has intensified in the consumer durables sector in India, over the past few years, with players such as Havells India Ltd establishing a strong consumer connect and brand recall. Crompton faces competition from players in the organised and unorganised segments.

 

• Evolving impact of government policies on the use of energy-efficient products: The central government's initiative to replace incandescent and compact fluorescent lamp bulbs with energy-efficient LEDs, has helped players such as Crompton gain market share Nevertheless, intense bidding for tenders and pricing pressure will restrict improvement in profitability of players in the lighting segment. The impact of new BEE norms coming into effect in July 2022 will be a key monitorables.

Liquidity: Strong

Liquidity is likely to remain robust with cash and equivalents of Rs 1370 crore as on March 2021, and expect to increase over medium term. Unutilised bank limit and expected cash accrual of Rs 400-500 crore, should comfortably cover the debt of Rs 180 crore and Rs 300 crore in fiscals 2022 and 2024, respectively. Any large debt-funded capex/acquisition impacting credit metrics, will remain a key rating sensitivity factor.

Outlook: Stable

Crompton will continue to benefit from its strong market position across product categories, established brand, healthy cash generation and unencumbered liquid surplus, and adequate financial flexibility.

Rating Sensitivity factors

Upward factors

• Substantial increase in revenue and net profits of 700-800 crore driven by market leadership across multiple large product segments, increase in product diversity and expansion of market share.
• Sustenance of robust financial risk profile and further build-up of cash surplus

 

Downward factors

• Operating margin declining below 10%, with lower market shares in key product segments, impacting cash generation and net debt to earnings before interest, tax, depreciation and amortisation ratio, and gearing exceeding 1time.
• Sizeable debt-funded capex or acquisition, substantial dividend payout or share buyback, weakening liquidity to less than Rs 200 crores

About the Company

Crompton was demerged from Crompton Greaves Ltd (CGL) with effect from October 1, 2015. The company earlier operated as the consumer products business unit of CGL. Crompton manufactures and trades in products such as fans, lighting systems, domestic pumps, and appliances, primarily in India. It also exports to South Asia, the Middle East, and Africa on a small scale. Its manufacturing facilities are at Bethora and Kundaim in Goa; Baddi in Himachal Pradesh; Ahmednagar in Maharashtra; and Vadodara in Gujarat.

 

The company is the absolute owner of the brands, Crompton and Crompton Greaves. Post demerger, CGL’s shareholding in Crompton was nullified, and the shareholding pattern of Crompton mirrored that of CGL (34.4% held by promoters; 65.6% by the public). Subsequently, erstwhile promoter Avantha Holdings Ltd exited the consumer business through stake sale to two private equity firms, Advent International and Temasek Holdings (Pvt) Ltd for Rs 2,000 crore. Later, the two private equity firms, Advent International and Temasek Holdings partially exited from Crompton by selling shares to other institutional investors. Crompton is listed on the Bombay Stock Exchange and National Stock Exchange.

 

For the year ended March 31, 2021, net profit was Rs 616 crore on sales of Rs 4804 crore, as against Rs 496 crore and Rs 4520 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators (CRISIL Ratings adjusted)

Particulars	Unit	2021	2020
Revenue	Rs crore	4804	4520
Adjusted profit after tax	Rs crore	617	496
PAT margin	%	12.8	11.0
Adjusted debt/Adjusted networth	Times	0.25	0.20
Interest coverage	Times	18.60	16.2

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue Size (Rs Cr)	Complexity level	Rating assigned with outlook
Series A INE299U07049	Non-convertible debentures	NA	7.25%	29-May-23	300	Simple	CRISIL AA+/Stable
Series B INE299U07056
INE299U07031	Non-convertible debentures	NA	8.95%	24-Jun-21	180	Simple	CRISIL AA+/Stable
NA	Cash Credit#	NA	NA	NA	50.00	NA	CRISIL AA+/Stable
NA	Letter of Credit*	NA	NA	NA	280.00	NA	CRISIL A1+

#Interchangeable with non-fund-based limits
*Interchangeable with Buyers Credit and Bank Guarantee

 

Annexure – Details of instruments withdrawn

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue Size (Rs Cr)	Complexity level
INE299U07023	Non-convertible debentures	NA	8.95%	24-Jun-20	170	Simple