Rating Rationale
March 29, 2019 | Mumbai
Crompton Greaves Consumer Electricals Limited
Long-term rating upgraded to 'CRISIL AA+/Stable'; short-term rating reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.330 Crore
Long Term Rating CRISIL AA+/Stable (Upgraded from 'CRISIL AA/Positive')
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.650 Crore Non Convertible Debentures CRISIL AA+/Stable (Upgraded from 'CRISIL AA/Positive')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its rating on the long-term bank facilities and non-convertible debentures of Crompton Greaves Consumer Electricals Limited (Crompton) to 'CRISIL AA+/Stable' from 'CRISIL AA/Positive' ; while reaffirming short term rating at 'CRISIL A1+'.
 
The upgrade reflects the sustained improvement in business risk profile supported by increase in market share across all product categories supported by regular new launches and expanding distribution reach. This is along with sustained improvement in profitability to about 13% in fiscal 2019 backed by a premium product portfolio and strong operating capabilities. During the first nine months of fiscal 2019, Crompton reported operating income of Rs 3,272 crore and operating margin of 12.8% against Rs 2,978 crore and 12.4%, respectively, for the corresponding period of the previous fiscal.  Crompton has been able to consistently increase its market share in fans and lighting, two key segments that together contribute around 70% to overall revenue. Market share in fans has increased to 27% from 24% in last five fiscals, on the back of rapid growth in premium fans and in lighting, primarily light-emitting diode (LED) bulbs, Crompton's market share has increased to 8% from 2% in the last two fiscals.

Focus on increasing distribution reach supported by go to market strategies, regular new launches and enhanced promotion spend is likely to keep annual revenue growth at 12-13% over the next three fiscals. Further, CRISIL also expects gradual improvement in profitability backed by focus on premium products, cost rationalisation initiatives and better efficiency in Goods and Services Tax regime.

Financial risk profile is expected to remain robust with strong cash accrual (expected at Rs 300 crore per annum), healthy liquidity (over Rs 500 crore as on February 28, 2019) and return on capital employed (RoCE) of over 45%. In the absence of high capital spending and no major increase in dividend payout, liquid surplus is expected to increase to over Rs 500 crore by the end of fiscal 2019 strengthening the balance sheet and liquidity. The healthy cash surplus will be used for debt repayment and fund inorganic opportunity if any, keeping the reliance on external debt low over the medium term.

The ratings reflect Crompton's diversified business risk profile backed by its established brand, pan-India distribution network, and leading position in multiple consumer durable segments; healthy operating capability; and strong growth prospects on account of improved focus on brand building and better consumer sentiments. The ratings also factor-in healthy financial risk profile because of significant cash generation, prudent working capital management, and limited capital spending. These strengths are partially offset by intense competition in the consumer durables sector in India, and evolving impact of government policies on use of energy-efficient products.

Analytical Approach

For arriving at its ratings, CRISIL has amortised goodwill of Rs 782 crore generated at the time of demerger of Crompton from Crompton Greaves Ltd (CGL) over 10 years from the date of demerger.

Key Rating Drivers & Detailed Description
Strengths
* Strong business risk profile supported by revenue diversity and established brand: Crompton's four business segments: fans, lighting, domestic pumps, and appliances, accounted for 43%, 28%, 22.4%, and 6%, respectively, of revenue in fiscal 2018. Diverse value offering in each segment has helped the company register a compound annual growth of 9.4% over the five years ending March 31, 2019.

Strengthening of distribution network, and regular new product launches has led to sustained increase in market share in key product categories over the last two years. For instance, market share for LED bulbs increased from 2% to 8%, pumps from 27 to 28% and overall fans from 24% to 27%. Further, a premium portfolio and cost reduction initiatives undertaken have resulted in sustained margin expansion along with industry leading revenue growth. Strong focus on innovation, ability to come up with regular new product variants and develop new product categories will continue to benefit the business.

* Healthy growth prospects backed by focus on brand strengthening, and pan-India distribution network: The robust distribution network includes 3000 distributors and 100,000 retailers. Distribution reach (% counter share) for fans and lighting increased 47% and 17%, respectively, over the last two years. Established brand, wide product portfolio, and distribution reach has led to leading position in the domestic fans and residential pumps segments. Crompton is now the second largest lighting company in India. Expected increase in distribution reach and roll out of go to market strategy pan India in the medium term will support expansion in market share.

 * Healthy financial risk profile: Financial risk profile should remain comfortable over the medium term, given the expected annual cash accrual of over Rs 300 crore, healthy working capital management, and moderate capital spending. Though adjusted gearing for fiscal 2019 is expected to remain at 0.9 time, on net debt basis however, it will be minimal. Debt servicing indicators are expected to remain healthy, backed by strong cash accrual and back-ended debt repayment. Expected debt reduction from fiscal 2020 and healthy cash accrual are likely to further strengthen financial risk profile in the absence of any debt-funded acquisition. Liquidity is likely to remain robust with cash and equivalent of Rs 500 crore as of February 2019 and expectation of further build up going forward. Any large debt-funded capex/acquisition impacting credit metrics will remain a key rating sensitivity factor.

 Weaknesses
* Exposure to intense competition in the consumer durables sector in India: Competition has intensified in the consumer durables sector in India in 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 both the organised and unorganised sectors.
 
* Evolving impact of government policies on the use of energy-efficient products: Though the central government's initiative to replace incandescent and compact fluorescent lamp bulbs with energy efficient LEDs over the past years has helped players such as Crompton gain market share, intense bidding for tenders and pricing pressure will limit sizeable improvement in profitability of players in the lighting segment.
Liquidity

Liquidity is likely to remain robust with cash and equivalent of Rs 500 crore as of December2018 and expectation of further build up going forward. The company has unutilized limits and adequate expected cash accruals of around Rs 320 crore and Rs 380 to support debt repayments of Rs 300 crore and Rs 200 crore in fiscal 2020 and fiscal 2021 respectively.Any large debt-funded capex/acquisition impacting credit metrics will remain a key rating sensitivity factor.

Outlook: Stable

CRISIL believes Crompton's credit risk profile will continue to benefit from its strong market position across product categories, established brand, healthy annual cash generation, strengthening unencumbered liquid surplus and healthy financial flexibility.

 Upside scenario
* Significant increase in revenue and profitability
* Improvement in product diversity
* Expansion in market share, along with sustenance of robust financial risk profile.

Downside scenario
* Significantly weaker-than-expected operating performance, impacting cash generation and weakening net debt to earnings before interest, tax, depreciation and amortisation ratio and gearing e.g. net debt/EBITDA ratio increasing beyond 1.5 times
* Sizeable debt-funded capex or acquisition, substantial dividend payout or share buyback.

About the Company

Crompton was demerged from Crompton Greaves Ltd (CGL) with effect from October 1, 2015. Earlier, Crompton 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 brand Crompton & Crompton Greaves.

Post demerger, the shareholding of CGL in Crompton was cancelled, 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 2000 crore. Crompton is listed on the Bombay Stock Exchange and National Stock Exchange.

For the nine months ended December 31, 2018, net profit was Rs 261 crore on sales of Rs 3272 crore as against Rs 221 crore and Rs 2978 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators (CRISIL adjusted)
Particulars Unit 2018 2017
Revenue Rs crore 4135 4036
Adjusted profit after tax Rs crore 246 212
PAT margin % 6 5.3
Adjusted debt/Adjusted networth Times 1.18 2.18
Interest coverage Times 8.8 7.78

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
 
ISIN
Name of instrument Date of allotment Coupon rate (%) Maturity date Issue Size (Rs crore) Rating assigned with outlook
INE299U07015 Non convertible debentures NA 8.95% 24-Jun-2019 300.00 CRISIL AA+/Stable
INE299U07023 Non convertible debentures NA 8.95% 24-Jun-2020 170 CRISIL AA+/Stable
INE299U07031 Non convertible debentures   8.95% 24-Jun-2021 180 CRISIL AA+/Stable
NA Cash Credit# NA NA NA 50.00 CRISIL AA+/Stable
NA Letter of Credit* NA NA NA 280.00 CRISIL A1+
#Interchangeable with non-fund based limits
*Interchangeable with Buyers Credit and Bank Guarantee
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT  650.00
29-03-19 
CRISIL AA+/Stable      29-03-18  CRISIL AA/Positive  30-03-17  CRISIL AA/Stable  02-06-16  CRISIL AA/Stable  -- 
Fund-based Bank Facilities  LT/ST  50.00  CRISIL AA+/Stable      29-03-18  CRISIL AA/Positive  30-03-17  CRISIL AA/Stable    --  -- 
Non Fund-based Bank Facilities  LT/ST  280.00  CRISIL A1+      29-03-18  CRISIL A1+  30-03-17  CRISIL A1+    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit# 50 CRISIL AA+/Stable Cash Credit 50 CRISIL AA/Positive
Letter of Credit* 280 CRISIL A1+ Letter of Credit* 280 CRISIL A1+
Total 330 -- Total 330 --
#Interchangeable with non-fund based limits
*Interchangeable with Buyers Credit and Bank Guarantee
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Consumer Durable Industry

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