CG Consumer Electricals - Motilal Oswal · 2016-05-23 · CG Consumer Electricals. 12 May 2016 2 . CG Consumer Electricals – leading electrical appliances player in India Crompton

12 May 2016Listing Note | Sector: Capital Goods

CG Consumer Electricals

BSE SENSEX S&P CNX Price Band: INR99-INR125 25,597 7,849

Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E

Net Sales 18.1 40.9 46.0

EBITDA 1.9 4.3 5.0

Adj PAT 1.0 2.5 3.1

EPS (INR) 1.7 3.9 4.9

EPS Gr. (%) 130.8 25.3

BV/Sh. (INR) 3.6 6.6 10.3

RoE (%) 47.3 77.2 58.2

RoCE (%) 28.0 32.7 38.7

Payout (%) 20.0 20.0 20.0

Growth levers falling in place Set for a strong innings over the next few years

Crompton Greaves Consumer Electricals (CGCEL) to be listed tomorrow: CGCEL is India’s leading consumer electricals company with a presence in fans, lighting, pumps and appliances. The business was operationally demerged from Crompton Greaves in Oct-15 and will be listed on the stock exchanges from 13th May 2016. It must be noted that the Avantha Group has proposed to divest their 34.3% stake to Advent and Temasek for INR20b (INR93/share) and an open offer would be made to the existing shareholders. This price should serve as the floor price, in our view.

Two-fold strategy for profitable growth: We believe that the company has atwo-fold strategy in place a) retaining its existing share in the fans segment (at 26%-28% currently) while increasingly target the premium and decorative segment which earn higher margins, b) increase its market share in other product categories (lighting, pumps and appliances) in order to reduce its dependence on the fans segment (45% of FY15 sales) and become a more diversified player in the Indian consumer electricals space.

Focused on brand building, premiumisation, energy efficient products and distribution: In order to establish itself as the brand of choice in the electricals segment, CGCEL intends to increase its brand awareness and visibility through higher advertising spends. In our view, the “Crompton” brand has been under invested over the past few years and the new management intends to correct this. The other focus areas area will be introducing energy efficient and premium products across categories which will aid margin improvement. Lastly, distribution holds the key to retaining/gaining market share and CGCEL is focusing on new avenues, such as e commerce and multi-brand retail to expand its reach. More importantly, the company also intends to aggressively expand its existing retail touch points of 150,000 dealers and widen its presence beyond the Tier 1 and 2 cities.

New management team brings in the right mix of knowledge and experience: Three key management changes have been made over the past one year. Mr Shantanu Khosla has been appointed as the Managing Director and is the ex CEO & MD of Procter & Gamble India where he achieved a 15-fold revenue growth to USD1.8b. Mr Matthew Jacob, the company’s CEO, has done stints in Racold India, Phillips and Grohe India and will lead CGCEL’s push into the consumer appliances segment. Mr Sandeep Batra, the company’s CFO, joined CGCEL from Pidilite where he was the CFO.

Valuation and view: Given CGCEL’s strong RoCE profile (33%/39% in FY17/18) and operating cash flow (INR3.3b in FY17), we believe that the stock deserves to trade at similar multiples as those enjoyed by Havells India. In our view, CGCEL should be listed at a fair price band of INR99-125 (20-25x FY18E EPS).

Ankur Sharma ([email protected]);+91 22 3982 5449 Amit Shah ([email protected]);+91 22 3029 5126 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.


12 May 2016 2

CG Consumer Electricals – leading electrical appliances player in India Crompton Greaves Consumer Electricals (CGCEL) is amongst India’s leading

consumer electrical companies with a presence across fans, lighting, pumps andappliances. 45% of its revenues in FY15 were from fans, 30% from lighting, 20%from pumps and 6% from appliances.

Exhibit 1: CGCEL Sales and YoY growth (%)

Source: Company, MOSL

Exhibit 2: CGCEL revenue split by segment


Crompton Greaves is the No 1. Player in the fans market with a 26-28% marketshare while it is amongst the top five players in the lighting and pumps marketin India. It has forayed into the consumer appliances category from FY12onwards and has already grown this segment to 6% of sales in FY15.

The Board of Director of CGL and CGCEL had approved the scheme ofarrangement whereby the Consumer Product business was separated from theparent and demerged into a new company called CGCEL. CGCEL would achievelisting and all the existing shareholders of CGL would be allotted shares in CGCELin thesame proportion (share entitlement ratio being 1:1) in which they holdshares in existing CGL.

The appointed date for the demerger of the Consumer products business is fromOctober, 2015 while the honorable High Court of Mumbai approved the schemevia order dated 20th November, 2015 and the scheme has come into effect fromJan 1st, 2016.

2,002 2,202

2,682

2,946 3,321 22%

10%

22%

10% 13%

FY11 FY12 FY13 FY14 FY15

Sales (INR m) Growth (%) YoY

45% 41% 42% 44% 45%

28% 30% 29% 31% 30%

26% 23% 22% 20% 20% 5% 8% 6% 6%

FY11 FY12 FY13 FY14 FY15

Fans Lighting Pumps Appliances


12 May 2016 3

Two fold strategy to increase market share across product categories Retain share in Fans while focusing on the premium range Crompton has been the undisputed market leader in the Indian fan market with

market share in the region of 26-28%. Our interaction with dealers and channelpartners indicates that customers prefer the Crompton brand for its durability(long life), reliability (low maintenance) and the trust associated with theCrompton brand.

A comparison of the fan models by player indicates that Crompton with 75models in the ceiling fan range has the biggest portfolio by any player. Moreimportantly, ~30% of Crompton’s’ models are in the “Standard/Plain” categoryand the balance 70% are in the “Premium” categories. On the contrary, Havellshas only 13% of its range in the Standard category and this highlights its focuson the “Premium” range of the market where typically margins tend to behigher.

In our view, Crompton too is looking to aggressively target the “Premium”category of fans while retaining its market share in the “Standard” category.Premium fans contributed 9% of sales in FY15 and Crompton intends to growthis share in a meaningful manner.

Exhibit 3: Ceiling fan categorization by segment and player Ceiling fans Crompton Havells Orient Usha Bajaj Under light fans 18% 17% 22% 15% 8% Kids fans 4% 6% 4% 13% 13% Decorative fans 40% 61% 47% 30% 48% BEE 5 Star rated/ BLDC fans 9% 4% 10% 29% 13% Standard/Plain fans 30% 13% 18% 15% 18% Total no. of models 75 54 49 62 39

Source: Company websites, MOSL

Exhibit 4: Market share in the INR52b Indian fan industry


Crompton Greaves, 28%

Bajaj Electricals, 14% Havells, 15%

Orient fans, 17%

Others, 26%


12 May 2016 4

Exhibit 5: CGCEL fan sales grew at 14% CAGR over FY10-15 beating industry growth of 9-10%


Lighting – industry is shifting to LEDs; Crompton at the forefront The government launched the “National Programme for LED based Home and

Street lighting” with the aim to replace incandescent bulbs (ICLs) with LED lightsfor residential and street lighting in Jan, ‘15. Recently, the Power Minister, MrPiyush Goyal has said that the aim for the government is to replace the770mnICL’s and 35mn street lights with LEDs’ by FY19 under the Demand SideManagement initiatives being undertaken by the government. This programmehas been named as “UJALA” or “Unnat Jyoti by Affordable LEDs for All”.

As a result of the above government initiatives,the LED market which stood atINR5bn in CY10 is expected to jump to INR115bn by CY17e driven by thegovernment’s initiatives and will form ~45-50% of the overall lighting market vs.6% in CY10. We estimate the overall lighting market to grow to INR253bn inCY17e (17% CAGR over 2015-2017e )

Exhibit 6: India lighting industry growth CY08-CY17e


Industry growth to be driven by traditional lamps switching over to LED’s We expect the lighting industry growth in the next two years to be driven by a

sharp jump in LED sales. The LED market which stood at INR5bn in CY10 isexpected to jump to INR115bn by CY17e driven by the government’s initiativesand will form ~45-50% of the overall lighting market vs. 6% in CY10. Weestimate the overall lighting market to grow to INR253bn in CY17e (17% CAGRover 2015-2017e )

7,650 9,097 9,122 11,138 12,848 14,782

27%

19%

0%

22%

15% 15%

FY10 FY11 FY12 FY13 FY14 FY15

Fans (INRm) YoY Growth(%)

65,670 71,670 84,500 101,400 117,190 135,040 160,010 190,247 228,532

253,531 15%

9%

18% 20%

16% 15% 18% 19% 20%

11%

CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15E CY16E CY17E

India Lighting Industry(INR m) YoY(%)


12 May 2016 5

Replacement of Incandescent lamps(ICLs) and CFL’s by LED’s makes economicsense as these have a much longer life (50,000hrs vs. 10,000hrs for CFL and1,500hrs for ICL) , energy efficient (80-100 lumen/watt vs. 50 lumens for CFL and13-15 lumens for ICL), and a payback period of 2-2.5 years vs. CFL’s.

The key driver of the increased usage of LED’s over the next few years will bethe government’s push to replace street lighting (via municipalities) andresidential lighting (via state discoms) to achieve energy efficiency and savings.There are ~ 27mn street lights in India which the government targets to replaceby FY19. The government intends to ban the sale of 100W, 60W and 40W ICL’sand this along with a further fall in prices of LEDs (already down to INR200 fromRs1,000-1,200 earlier) would fuel a large scale switchover to LEDs. We alsoexpect commercial establishments (retail outlets/offices/shops) to increasinglyopt for LED down lights to replace less efficient FTL’s and CFL’s; the price gap ofLED’s vs. CFL’s down lights has narrowed significantly which provides a goodincentive to switch to LED lights.

Exhibit 7: LED sales over CY13-17e

Exhibit 8: Cost comparison of an ICL, CFL vs. an LED Description Units ICL CFL LED Life Span hours 1,500 10,000 50,000 Wattage watts 60 14 6 Power consumed per hour Kilowatt-hour (kWh) 0.06 0.014 0.006 Cost of usage for one hour @Rs 6 per kWh rupees 0.36 0.084 0.036 Cost of usage for 50,000 hours rupees 18000 4200 1800 Bulbs needed for 50,000 hours of running no of bulbs 33 5 1 Bulb Cost rupees 10 120 300 Cost of replacement rupees 330 600 0 Total 50000 hour lighting cost rupees 18330 4800 2100 Ratio of cost ratio 8.7 2.3 1.0


19,250 33,950

61,799

95,023

115,071 76% 82%

54% 21%

CY13A CY14A CY15E CY16E CY17E

LED sales(INRm) YoY (%)


12 May 2016 6

Exhibit 9: Market share in the INR160b Indian lighting industry

Source: MOSL, Industry

Exhibit 10: CGCEL lighting sales grew at 15% CAGR over FY10-15 vs. industry growth of 10%


Pumps – Agriculture and household near term drivers for growth The Indian pump industry has grown by 6% CAGR over FY11-15 to INR85b in

FY15 with 2mn pumps being sold each year. Weak monsoons over the past twoyears have led to a decline in sale of agricultural pumps; with above averagemonsoon expectations for FY17, we expect a pickup in demand for agriculturalpumps (27% of the market).

We expect the industry growth to remain subdued at 5-7% over the next 2-3years on account of the weak industrial capex environment (46% of the endmarket) which would dampen overall demand for pumps.

Exhibit 11: Indian Pump Market (INRm) and YoY Growth (%)


Bajaj Electricals, 6%

Havells, 5%

Crompton, 6%

Surya, 7%

Philips, 27%

Others, 49%

4,923 5,703 6,667 7,689 9,010 9,836 6%

16% 17% 15%

17%

9%


Lighting sales(INRm) YoY(%)

66.0 71.6 75.8 80.3 85.1 91.4 98.2

8%

6% 6% 6%

7% 7%

2011 2012 2013 2014 2015 2016 2017

Indian Pump market(INRm) YoY Growth(%)


12 May 2016 7

Industrial segment together constitutes 46% of the pumps sold in the countrywith Power Generation, O&G and Metals constituting 24% of the total. Pumpsfor use in agriculture form the largest proportion of sale at 27% of the totalpumps sold.

Exhibit 12: End market wise usage of pumps


We highlight below our view on each of the key end markets for pumps over thenext few years:a. Agriculture. Currently subdued post 2 year of weak monsoons. Hope of an

above average monsoon in CY16 should provide a boost to agriculturalpumps. ABB and KSB Pumps are now targeting the solar power pumpsets(KSB launched in July, 15). EESL wants to replace all the existing 20m agripumps with solar pumps which would help save electricity costs

b. Oil & Gas. Post subdued demand over last few years, we expect newrefineries to come up and demand should revive from the same

c. Power Generation. Boiler feed pumps are used in power plants but due tothe current slump in power generation orders, the market is quite subdued.Super critical pumps to drive growth here which are primarily imported atthe moment

d. Fertilizer.6-7mn ton currently imported will have to be replaced and newfertilizer plants are being planned which should boost demand

e. Water /Wastewater.Increased spending on urban infra and 100 smart citiesin India, Namami Ganga programme to give the boost to the industry

f. Pulp/Steel. We expect both these end markets to decline so not much fromhere.

Power costs, reliability and service are key differentiating factors Power costs constitute 70% of the running cost of the pump and therefore one

of the key decisive factors in the purchase of pump. There is a clear preferencetowards purchase of higher star rated pumps which reduce power consumption.

The other key factor is reliability, service and zero down time for the pump.

Agriculture, 27%

Building Services, 19% Water and Waste

water, 17%

Power Generation, 12%

O&G, 8%

Metal and Mining, 4% Others, 13%


12 May 2016 8

Exhibit 13: Life cycle costs for a pump – power costs are the highest


Exhibit 14: Pump usage by type Description HP rating End market Residential/ Domestic pumps 0.25-20 Agriculture, Residential and Commercial buildings Industrial 2- 500 Across industries - Cement, Steel, Oil & Gas Pumps used for EPC projects 500HP and above Power plants, Irrigation and Municipal projects


Market share by player The pump market in India is quite fragmented with only 56% of the market with

the organized players. The top 5 players control about 44% of the overallmarket.

Kirloskar Brothers is the market leader in this segment because of its marketleadership in supply of agricultural pumps. Crompton has a 7% share in thepump market.

Exhibit 15: Market share by player in the Indian Pump industry


Government plan to replace inefficient pumps via EESL; big demand driver for the industry Under the National Energy Efficient Agriculture Pumps Programme, Energy

Efficiency Services Limited (EESL) intends to replace 20m grid connected pumpssets with BEE star rated energy efficient agricultural pumps. These pumps willcome enabled with smart control panel and a SIM card, giving farmers theflexibility to remotely control these pumps from their mobile phones and fromthe comfort of their homes.

Power costs, 70%

Pump, 15%

Maintaineince, 15%

Kirloskar Brothers, 12%

CRI, 11%

KSB Pumps, 8%

Crompton Greaves, 7%

Texmo, 6%

Grundfos, 4% WPIL, 3% Others, 5%

Unorganized, 44%


12 May 2016 9

This would result in energy savings for the discoms since farmers get electricityeither free or at a very subsidized rate. EESL in turn would be purchasing thesestar rated energy efficiency pumps via the competitive bidding route.

EESL replaces the old pumps with new energy-efficient ones free of cost andalso undertake their repair and maintenance during project duration. Thediscoms save some energy, which is then multiplied with the prevailing powerrates to monetize the same. This is then shared between discoms and EESL.

EESL targets to replace around 7 million grid-connected pumps in Maharashtra,Andhra Pradesh, Karnataka and Rajasthan in the next two years. The totalenergy saved, assuming that most of them are five-horsepower pumps, isaround 25 per cent. The total energy consumed in these four states throughpumps is 60 billion units and if 25 per cent is saved around 15 billion is saved.This when multiplied with average power rate of Rs 4.5 per unit implies anannual savings of INR60b per year. The cost of procurement of 7mn pumps atINR30, 000 per unit comes to INR200-230b which can be recovered by EESL in 2-3 years.

The aim is to replace the 10m diesel power pumps with solar power pumps –however, the cost of one solar pump is at INR300,000 which makes the projectnon feasible for EESL.

Exhibit 16: CGCEL pump sale have grown at 12% CAGR over FY10-15


3,850 5,217 5,019

5,869 5,790 6,585

38% 36%

-4%

17%

-1%

14%


Pumps (INRm) YoY(%)


12 May 2016 10

Focused on Brand building, Premiumisation, Energy efficient products and Distribution Spending on brand building to rise over next few years In order to establish itself as the brand of choice in the electrical segment,

Crompton intends to substantially increase its brand awareness and visibility viahigher advertising spends. In our view, the “Crompton” brand has been underinvested over the past few years and the new management intends to correctthis anamoly.

Exhibit 17: Advertising spends by company (% of sales) Name of company FY15 FY14 FY13 FY12 FY11 Bajaj Electricals 1.3 1.6 1.3 1.3 2.2 Crompton Greaves 2.5 2.7 2.7 2.2 1.7 Havells 3.4 2.5 3.1 3.1 2.5 V Guard 4.1 4.2 4.5 4.2 3.8 Surya Roshni 0.7 0.3 1.18 0.60 1.3


Crompton Consumer Electricals has spent on average ~2-2.5% of its sales onadvertising over the past six years. However, this is set to change with the newmanagement which intends to aggressively increase advertising spends to gain ahigher market share via TVCs and print media. This already evident from thenumber of TVC’s being aired by Crompton over the past few months with afocus on lighting, fans and appliances. In our view, ad spends could be steppedup to 3-.3.5% of sales over the next few years.

Havells on the other hand has done a brilliant job in deftly using its advertisingspend to create a premium positioning in the minds of the customer and thishas also enabled it to charge a premium on its products (~3-3.5% of sales beingspent on advertising).

With most companies now eyeing market share in new product categories, itbecomes all the more important to highlight this via advertising campaignswhich brings to light the brand extension.

Premiumisation and energy efficiency key focus areas across product categories Crompton intends to take advantage of the “Premiumisation” trends being

witnessed across product categories. In fans, its focus is on “premium’ fans likedecorative fans, under light and kid fans. In lighting, it intends to focus primarilyon LEDs where it was amongst the first few players to penetrate into the Indianmarket.

Energy efficiency is the other key theme being targeted by the company. It hasalready introduced “5 star” rated fans which consume 30% less powercompared to normal fans. It is also looking to introduce BLDC motor fans whichconsume 50% less power compared to normal fans. It has already madesignificant inroads into the LED market; LED’s consume 1/10th of the power ofICL’s and half those of CFL’s.


12 May 2016 11

Distribution network – key driver of growth across the industry One of the key differentiators in the light electrical industry is the distribution

reach and dealer touch points available with the company. The distributionnetwork is necessary to ensure that the product manufactured reach the lengthand breadth of the country.

We highlight that Bajaj Electricals has the highest reach across consumerelectrical companies – this can be partly explained by the fact that it has been inthe Indian market for almost 80 years and also has a very wide product portfolioacross consumer appliances (Induction cookers, Irons, water heaters, mixer,grinders etc,.), fans and lighting. Crompton is looking to aggressively expandbeyond the Tier 1/2 cities and looks to double its network over the next 3-5years.

Exhibit 18: Retail Touch points by player (No. of units) Name of company FY16 FY15 Other touch points Bajaj Electricals 500,000 400,000 5,000 authorized dealers and 104 “Bajaj World” showrooms Crompton Greaves +150,000 134,000 60 exclusive Electrical showrooms Havells +100,000 +100,000 350 Havells Galaxy stores and 2500 dealersV Guard 30,000-33,000 25,000 2000 channel partners Surya Roshni 200,000 200,000 Eveready 30,000 3.2m touch points for batteries

Source: Company, MOSL, ** Eveready touch points for electrical outlets only

Exhibit 19: Distributors by company Name of company FY15 Bajaj Electricals 1,000 Crompton Greaves 4,000 Havells 6,300 V Guard 500 Surya Roshni 20,000 Eveready 4,000

While having a high number of retail touch points is important, it is equallyimportant to have a high share of the retail store sales and this is somethingwhich each player continuously works upon. For example, Crompton has a shareof ~50% at each electrical outlet that its products are sold – this implies its perstore sales are much higher compared to peers. However, with its entry intoconsumer appliances, it needs to get its products into homeappliances/hardware stores where it has been a recent entrant having startedthis business only in FY11.

E commerce as a channel to go to market has been increasing in importance andmost companies have opted to have separate SKUs for the online and offlineplatform – this helps to reduce the cannibalization of sales by aggressivediscounting by the online stores. Companies such as Bajaj Electricals, MurphyRichards, Phillips also sell their products online through their own website; onthe other hand, companies such as Havells, V Guard push sales through theirauthorized distributors and dealers only.


12 May 2016 12

Service Network is equally important – more so in the case of consumer appliances In our view, after sales service is equally important in the case of consumer

electrical since these products would typically last between 5-7 years onaverage. This is more so in the case of consumer appliances where the customerwould typically want to get the product repaired at the service center of thecompany. In case of fans, the repair work is normally done by the localelectrician and therefore, the need for a service center is less important.

Exhibit 20: Service center across key players in the light electricals sector Name of company Nos. Bajaj Electricals 400 Crompton Greaves 500 Racold India +100 Phillips +180 V Guard 150 Murphy Richard 150

Dealer commission and incentives necessary to gain and retain dealers Given the intensely competitive environment in the light electrical sector, dealer

commission and incentives are key to gaining acceptance at the retail stores. Wenotice that Crompton Greaves has been ahead of peers in offering dealercommission and incentives and this would explain its high share in the retailstores where it is present.

Dealer incentives and commission ensure that the distribution channelcontinues to push the company’s’ products into the market.

While Crompton’s’ new management has been pushing up the advertisingspends as it tries to garner a higher connect with the consumer, we believe thatthere could be an uptick in the Dealer commission/incentives as well as it triesto increase its penetration – our feedback suggests that the company is lookingto double its dealer network and the fastest way to do this is by increasing thedealer commission and incentives.

Exhibit 21: Dealer commission/incentives offered across players (% of sales) Name of Company FY15 FY14 FY13 FY12 FY11 Crompton Greaves 1.4 1.8 2.0 1.6 2.6 Havells 0.8 0.7 0.8 0.7 0.8 V Guard 1.0 1.0 0.9 0.6 4.2 Surya Roshni 1.1 0.9 1.2 1.0 0.8


One area which would be of renewed focus by Crompton would be theconsumer appliances market where it has ~3% share. It is a recent entrant intothe consumer appliances space and needs to get its products into homeappliances/hardware stores which are different from its traditional electricalsstores.


12 May 2016 13

Exhibit 22: Product category wise “Go to Market” channels

Name of company Electricals Store

Hardware Store

Appliance Store

Multi Brand retail

E Commerce

Fans Y Y N Y Y Lighting Y Y N Y Y Switches Y N N Y Y Pumps N Y N N Y Cable and Wires Y N N N Iron N N Y Y Y Mixer/Grinder N N Y Y Y Cookware N N Y Y Y Water Heater Y N Y Y Y

Source: MOSL, Industry


12 May 2016 14

New management team brings in the right mix of knowledge and experience Three key management changes have been made over the past one year with

MrShantanuKhosla being appointed as the Managing Director, Mr MatthewJacob as the CEO and Mr Sandeep Batra as the CFO.

MrShantanuKhosla has been roped in from P&G where he spent 13 years. AsCEO & MD of Procter & Gamble India, he grew the revenue 15 fold - to USD 1.8billion making it one of the fastest growing consumer companies in India.

MrM. Jacob, the new CEO has done stints in Racold India (India’s largestmanufacturer of water heaters), Phillips and Grohe India and has a very strongexperience of the Indian consumer electricals industry and would, in our viewlead Crompton’s push into the consumer appliances segment.

Mr S. Batra joins from Pidilite where he was the CFO and prior to his assignmentin Pidilite he has also worked as the CFO of ICI, Industries.

Valuation and view Given the strong ROCE profile (33%/39% in FY17/18) enjoyed by Crompton

Greaves Consumer Electricals, we believe that it deserves to trade at around thesame multiples as Havells. In our view, the new management of CromptonConsumer would be keen to diversify its product profile and with this aim isaggressively focusing on gaining share in the consumer appliances segment; thiswould also help reduce its dependence on the core fan segment whichcontributes ~45% to sales in FY15.

In our view, Crompton Greaves Consumer Electricals should list in a fair band ofINR99-125(20-25x FY18e EPS). We highlight that the Avantha Group hasproposed to divest their 34.3% stake for INR20b which translates intoINR93/share and an open offer needs to be made to the existing shareholdersfor acquiring a 26% stake and this price should serve as the floor for the shareon the day of listing.

Exhibit 23: Valuation multiples for peers in the Consumer electrical space P/E (x) EV/EBIDTA (x) P/BV (x) P/Sales (x)

Company FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E

V Guard 32.0 26.5 21.8 20.0 17.3 14.4 7.6 6.3 5.1 1.9 1.6 1.4

Bajaj Electricals 22.9 15.5 12.4 10.2 10.1 8.1 3.1 2.7 2.3 0.5 0.5 0.4

Havells 46.2 32.1 27.3 25.3 21.3 17.5 9.4 8.3 7.3 3.0 3.5 3.0

Average 33.7 24.7 20.5 18.5 16.2 13.3 6.7 5.8 4.9 1.8 1.9 1.6


Our rationale for valuing CGCEL around the same multiples as Havells flows fromthe fact that CGCEL has return ratios (ROE/ROCE) better than Havells and weexpect CGCEL to therefore get a similar multiple as well. Our assumptions buildin debt repayment starting from FY16 onwards – INR2b is likely to get repaidover the next two years which would help to improve the ROCEs’ for thecompany during the same time.

MrShantanuKhosla, Managing Director

MrSandeep Batra, CFO


12 May 2016 15

Exhibit 24: CGCEL return ratios are superior to comparable peers Name of Company RoE RoCE

FY16 FY17E FY18E FY16 FY17E FY18E

Havells 20% 26% 27% 21% 27% 27%

Crompton Consumer 47% 77% 58% 28% 33% 39%

V Guard 26% 27% 27% 37% 38% 38%

Bajaj Electricals 15% 19% 19% 23% 28% 29%

Exhibit 25: Sales growth and EBITDA margins for companies in the Electricals sector Name of Company Revenue growth (%) EBITDA margin (%)

FY16 FY17E FY18E FY16-18 CAGR FY16E FY17E FY18E FY16-18

average Havells 1.0 15.3 15.2 10.4 13.7 14.8 15.0 14.5

Crompton Consumer 11.0 12.2 12.4 12.1 10.7 10.7 11.0 11.0

V Guard 6.7 17.1 17.0 14.0 9.6 9.7 10.0 10.3

Bajaj Electricals 12.0 15.0 13.0 13.1 5.5 6.3 6.3 6.2

Industry average 7.2 15.1 14.3 12.2 10.3 10.3 11.4 10.2


Given the strong ROCE profile (33%/39% in FY17/18) and operating cash flows(INR2.8b, FY17) enjoyed by CG Consumer Electricals, we believe that it deservesto trade at around the same multiples as Havells. In our view, Crompton GreavesConsumer Electricals should list in a fair band of INR99-125(20-25x FY18e EPS).

Exhibit 26: Value per share based on FY18E EPS Description 15x 20x 25x 30x PE(x) 74 99 125 150

Source: MOSL


12 May 2016 16

Financials and Valuations

Income Statement (INR Million) Y/E March 2016E 2017E 2018E Total Revenues 18,130 40,871 45,971 Change (%) - 125.4 12.5 Raw Materials 12,851 28,971 32,586 Staff Cost 925 2,136 2,408 Other Expenses 2,418 5,428 5,957 EBITDA 1,936 4,335 5,019 % of Total Revenues 10.7 10.6 10.9 Depreciation 60 62 65 Other Income 24 31 28 Interest 329 617 364 PBT 1,571 3,687 4,618 Tax 503 1,217 1,524 Rate (%) 32.0 33.0 33.0 Adjusted PAT 1,068 2,470 3,094 Extra-ordinary Income (net) -47 0 0 Reported PAT 1,022 2,470 3,094 Change (%) -96.9 141.8 25.3

Balance Sheet (INR Million) Y/E March 2016E 2017E 2018E Share Capital 1,254 1,254 1,254 Reserves 1,005 2,882 5,233 Net Worth 2,259 4,136 6,487 Loans 6,661 4,561 2,061 Deferred Tax Liability -9 -10 -10Capital Employed 8,910 8,687 8,538

Gross Fixed Assets 2,021 2,121 2,221 Less: Depreciation 1,211 1,273 1,338 Net Fixed Assets 810 848 883 Capital WIP 0 0 0 Goodwill 7,794 7,794 7,794

Curr. Assets 8,168 8,945 9,824 Inventory 1,870 2,130 2,395 Debtors 3,937 4,485 4,541 Cash & Bank Balance 1,502 1,353 1,788 Loans & Advances 841 958 1,077 Other Assets 18 20 23

Current Liab. & Prov. 7,474 8,513 9,575 Current Liabilities 7,091 8,076 9,084 Provisions 383 436 491 Net Current Assets 694 433 249 Application of Funds 9,298 9,074 8,926 E: MOSL Estimates


12 May 2016 17

Financials and Valuations

Ratios Y/E March 2016E 2017E 2018E Basic (INR) Adj EPS 1.7 3.9 4.9 Cash EPS 1.8 4.0 5.0 Book Value 3.6 6.6 10.3 DPS 0.3 0.8 1.0 Payout (incl. Div. Tax.) 20.0 20.0 20.0

Profitability Ratios (%) RoE 47.3 77.3 58.3 RoCE 28.0 32.7 38.7

Turnover Ratios Debtors (Days) 40 40 36 Inventory (Days) 19 19 19 Creditors. (Days) 65 65 65 Asset Turnover (x) 1.9 4.5 5.2

Leverage Ratio Debt/Equity (x) 2.9 1.1 0.3

Cash Flow Statement (INR Million) Y/E March 2016E 2017E 2018E PBT before EO Items 1,571 3,687 4,618 Depreciation 60 62 65 Interest 329 617 364 Direct Taxes Paid -503 -1,217 -1,524(Inc)/Dec in WC 373 111 619 CF from Operations 1,830 3,261 4,142 EO Income 0 0 0 CF from Oper. Incl. EO Items 1,830 3,261 4,142

(Inc)/Dec in FA (1) (100) (100) Free Cash Flow 1,829 3,161 4,042 Investment & Others 0 0 0 CF from Investments -1 -100 -100

(Inc)/Dec in Networth 247 0 0 (Inc)/Dec in Debt 0 0 0 Interest Paid -329 -617 -364Dividend Paid -245 -593 -743Others 0 -2,100 -2,500CF from Fin. Activity (327) (3,310) (3,607)

Inc/Dec of Cash 1,502 (149) 435Add: Beginning Balance 1 1,502 1,353 Closing Balance 1,502 1,353 1,788


12 May 2016 18

Disclosures

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