Rating Rationale
May 08, 2020 | Mumbai
Crompton Greaves Consumer Electricals Limited
'CRISIL AA+/Stable' assigned to NCD
 
Rating Action
Total Bank Loan Facilities Rated Rs.330 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.300 Crore Non Convertible Debentures CRISIL AA+/Stable (Assigned)
Rs.350 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AA+/Stable' rating to the Rs.300 crore non-convertible debentures (NCDs) of Crompton Greaves Consumer Electricals Limited (Crompton) and reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the company's existing debt instruments and bank facilities.
 
Crompton's operating performance in fiscal 2021, is likely to be impacted by the outbreak of the Covid-19. Measures taken by various state governments involve temporary closure of non-critical establishments, or inter-state transportation, along with advisory against travel and visiting areas of mass gatherings. These measures could impact Crompton's business risk profile, given the possible disruption in supply chains, and restricted discretionary spending.
 
Strong liquidity in the form of cash and cash equivalents and marketable securities worth around Rs 584 crore as on March 2020, should help Crompton withstand the adverse impact on its cash flows in the near term.
 
Financial risk profile is expected to remain comfortable despite higher debt than estimated earlier. As a result Debt to EBITDA to increase to 1.9 times in fiscal 2021. In the absence of any major capital expenditure, liquid surplus is expected to remain over Rs 500 crore by the end of fiscal 2020, thereby strengthening the balance sheet and liquidity.
 
The reaffirmation also reflects the healthy business risk profile, supported by increase in market share across all product categories, steady pace of launches and wider reach of distribution. Operating margin is expected to remain at 9-10% in fiscal 2020, backed by a premium product portfolio and strong operating capabilities. During fiscal 2021, revenue and EBITDA are expected to decline as April reported almost nil sales and demand is expected to recover gradually due to decline in income levels. Recovery in revenue post COVID will remain key monitorable.
 
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 two fiscals, on the back of rapid growth in premium fans and that in lighting rose to 8%, primarily led by light-emitting diode (LED) bulbs.
 
The ratings also 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 better 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 evolving impact of government policies on use of energy-efficient products.

Analytical Approach

For arriving at its ratings, CRISIL has amortised goodwill of Rs 779 crore generated at the time of 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, domestic pumps, and appliances. The ECD segment, comprising fans, pumps and appliances, accounted for 72% of revenue in fiscal 2019, and lighting constituted the balance 28%. Diverse value offering in each segment has helped the company register a compound annual growth rate of 9.4% (estimated) over the five years ending March 31, 2020.
 
A stronger distribution network, and steady pace of product launches have led to sustained increase in market share in key product categories during the last two years. For instance, Crompton's market share in the LED bulbs segment of 8%, pumps is 28%, and overall fans is 27%. Further, the premium portfolio and cost-reduction initiatives have helped Crompton report sustained profitability and revenue growth leading the industry. Strong focus on innovation, ability to come up with regular new product variants and devise new product categories, will continue to benefit the business. Sustained increase in market share in newer product categories, and expansion of product portfolio will be key rating monitorables.

* Healthy growth prospects, backed by focus on brand strengthening, and pan-India distribution network: The robust network includes 3,500 distributors and 100,000 retailers. Distribution reach (% counter presence) for fans and lighting increased to 47% and 17%, respectively, from 35% and 9%, respectively, over the last two years. Established brand, wide product portfolio, and strong distribution reach has helped Crompton bag the 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 market strategy pan India, should support further expansion in market share. However, CRISIL believes demand for Crompton products may see a material decline at least over the medium term, on account of the economic fallout of the spread of COVID-19.

* Healthy financial risk profile: Financial risk profile should remain comfortable over the medium term, given the expected annual cash accrual of over Rs 200-300 crore, prudent working capital management, and moderate capital spending. Though adjusted gearing to remain low at 0.4 time as on March 31, 2020, on net debt basis it will be minimal. Debt servicing indicators should remain healthy, backed by strong cash accrual, expected reduction in debt from fiscal 2020, and absence of any large acquisition. Liquidity should also remain robust, with cash and cash equivalent of Rs 584 crore as on March 2020 and expectation of further build-up, going forward. Any large debt-funded capex/acquisition, impacting credit metrics, will be a key rating sensitivity factor. Slower revenue growth in fiscal 2021, may lead to slower ramp up in cash surplus, compared to earlier expectations.

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 over the past years. Nevertheless, intense bidding for tenders and pricing pressure will restrict improvement in profitability of players in the lighting segment.
Liquidity Strong

Liquidity is likely to remain robust with cash and equivalent of Rs 584 crore as on March 2020, and expectation of further build-up, going forward. Unutilised bank limit and expected cash accrual of Rs 200-300 crore, should comfortably cover the maturing debt of Rs 170 crore and Rs 180 crore in fiscals 2021 and 2022, 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 and unencumbered liquid surplus, and adequate financial flexibility.

Rating Sensitivity factors
Upward factors
* Revenue growth in double-digit, market leadership across multiple large product segments, enhanced product diversity and expansion of market share, strengthening the business risk profile
* Sustenance of robust financial risk profile and further build-up of cash surplus

Downward factors
* Significant drop in operating margin to below 7%, marked by lower market shares in key product segments, impacting cash generation and net debt to earnings before interest, tax, depreciation and amortisation ratio, and gearing (net debt/EBITDA ratio exceeding one time)
* 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. 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 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. Crompton is listed on the Bombay Stock Exchange and National Stock Exchange.

For the nine months ended December 31, 2019, net profit was Rs 394 crore on sales of Rs 3494 crore, as against Rs 261 crore and Rs 3272 crore, respectively, for the corresponding period of the previous fiscal.

Key financial indicators (CRISIL adjusted)
Particulars Unit 2019 2018
Revenue Rs.Crore 4,480 4,080
Adjusted Profit After Tax Rs.Crore 324 246
PAT Margin % 7.2 6.0
Adjusted debt/Adjusted networth Times 0.83 1.18
Interest coverage Times 10.63 8.81

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.Cr) Rating assigned with outlook
INE299U07023 Non-convertible debentures NA 8.95% 24-Jun-2020 170 CRISIL AA+/Stable
INE299U07031 Non-convertible debentures NA  8.95% 24-Jun-2021 180 CRISIL AA+/Stable
NA Non-convertible debentures@ NA NA NA 300 CRISIL AA+/Stable
NA Cash Credit# NA NA NA 50 CRISIL AA+/Stable
NA Letter of credit* NA NA NA 280 CRISIL A1+
#Interchangeable with non-fund-based limits
*Interchangeable with Buyers Credit and Bank Guarantee

@Yet to be placed
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT  350.00
08-05-20 
CRISIL AA+/Stable  30-03-20  CRISIL AA+/Stable  29-03-19  CRISIL AA+/Stable  29-03-18  CRISIL AA/Positive  30-03-17  CRISIL AA/Stable  CRISIL AA/Stable 
Fund-based Bank Facilities  LT/ST  50.00  CRISIL AA+/Stable  30-03-20  CRISIL AA+/Stable  29-03-19  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+  30-03-20  CRISIL A1+  29-03-19  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+/Stable
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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