Butterfly Integration And Solar Expansion Will Strengthen Future Market Position

Key Takeaways

• Strategic focus on premium products and e-commerce is driving revenue growth and is anticipated to improve margins and market positioning.
  
• Integration with Butterfly and expansion in the solar pumps segment is likely to enhance operational efficiencies and increase market share.
  
• Intense competition, regulatory changes, and high marketing expenses could pressure Crompton's margins, needing strategic adjustments across product segments to sustain growth.

Catalysts

Manufactures and markets consumer electrical products in India.

• The company's strategic initiative to put the lighting business back on a growth trajectory has resulted in improved margins and revenue growth, indicating increased revenue and net margins in the future.
  
• The focus on premium product launches in the fans segment, such as new induction models, is expected to drive both revenue growth and higher net margins due to better pricing strategies and brand positioning.
  
• Expansion in the solar pumps segment, with strong order execution and a robust sales pipeline, is likely to contribute to revenue growth and a potential increase in market share.
  
• Ongoing integration of Butterfly and Crompton, particularly through leveraging Butterfly’s manufacturing for SDA products, is expected to drive efficiencies and improve net margins.
  
• Increased focus on e-commerce and alternative channels, which showed significant growth, could continue to bolster revenue streams and potentially enhance earnings.

Crompton Greaves Consumer Electricals Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Crompton Greaves Consumer Electricals's revenue will grow by 12.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.5% today to 8.4% in 3 years time.
• Analysts expect earnings to reach ₹9.2 billion (and earnings per share of ₹14.31) by about February 2028, up from ₹5.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹7.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 53.6x on those 2028 earnings, up from 46.6x today. This future PE is greater than the current PE for the IN Consumer Durables industry at 47.9x.
• Analysts expect the number of shares outstanding to grow by 1.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.26%, as per the Simply Wall St company report.

Crompton Greaves Consumer Electricals Future Earnings Per Share Growth

Risks

• Increasing competition and delays in competitor price actions could pressure Crompton's pricing power in its fans business, affecting revenue growth and profit margins.
  
• The solar pumps business, while showing potential, could see challenges related to government tenders and the KUSUM scheme, impacting order consistency and revenue flow.
  
• Regulatory changes and BIS transitions across product segments require significant investment and adaptation, which could lead to increased compliance costs impacting net margins.
  
• The Butterfly Gandhimathi Appliances segment needs to stabilize revenue declines, and ongoing realignment could affect short-term financial performance, including earnings.
  
• Elevated A&P spend aimed at brand visibility, which increased by 69% YoY, may put pressure on margins if revenue growth does not keep pace.

Valuation

• The analysts have a consensus price target of ₹486.212 for Crompton Greaves Consumer Electricals based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹600.0, and the most bearish reporting a price target of just ₹393.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹109.3 billion, earnings will come to ₹9.2 billion, and it would be trading on a PE ratio of 53.6x, assuming you use a discount rate of 15.3%.
  
• Given the current share price of ₹362.65, the analyst price target of ₹486.21 is 25.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.