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Geared for growth

CG Consumer Electricals

Initiating Coverage | 20 June 2016 Sector: Capital Goods

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.

Ankur Sharma ([email protected]); +91 22 3982 5449

Amit Shah ([email protected]); +91 22 3029 5126


20 June 2016 2

Contents: CG Consumer Electricals| Geared for growth

Summary ............................................................................................................. 3

CROMPTON: Geared for growth............................................................................ 5

Best-in-class return ratios ................................................................................... 17

Company background ......................................................................................... 22

SWOT Analysis ................................................................................................... 23

Brief about management .................................................................................... 24

Light Electricals to grow at 10% CAGR over FY16-19 ............................................. 26


20 June 2016 3

Geared for growth Set for strong innings over next few years

With its experienced management team, strong product portfolio, established brand and wide distribution network, we believe CROMPTON is well placed to capture growth opportunities in the light electricals industry.

Strategy in place for sustainable growth in the core business portfolio and also for penetrating into new business segments.

Quality growth with robust free cash flow generation of INR3/4b in FY17/18 annually should ensure valuation premium. We initiate coverage with a BUY rating with target price of INR155.

Well positioned to take advantage of upcoming opportunities: The light electricals industry is poised for robust double-digit growth over the coming few years, and we believe that CROMPTON is well positioned to take advantage of the upcoming opportunities. The company has an experienced management team, a strong product portfolio (market leader in key product categories), an established brand (leading Fan brand) and a wide distribution network (150,000+ touch points). This, coupled with the new five-dimensional strategy (developing a robust and wide product portfolio, creating brand excellence, an effective go-to-market approach, and developing robust operational and organizational excellence) devised by new management, should ensure higher-than-industry growth for the company, in our view.

Strategy in place for sustainable growth in core business portfolio and penetrating into new business segments: CROMPTON aims to sustain and grow the “core” segments of fans and pumps, while the lighting and appliances segments should record disproportionate growth over the coming few years, in our view. It’s strategy for the next few years, which aims at: a) sales growth to be at levels higher than the industry by gaining market share, b) profit growth to be in line or higher than sales growth and c) cash flow to be more than 100% of profit. The new management team has been with the company for over six months now, and the implementation of this strategy is already underway.

Quality growth with robust annual free cash flow generation of INR3/4b in FY17/18: According to management, CROMPTON’s intent is to generate cash flow of at least 100% of profits. This strategy should ensure quality growth for the company. We expect CROMPTON to record free cash flow generation of INR3-4b annually, led by strong operational cash flow generation of INR 3.5-4.5b and muted capex requirement of INR400-500m.

Initiating coverage with BUY: Given the company’s strong product portfolio, established brand, market leadership position, wide distribution network and robust ROCE profile (33%/39% in FY17/18), we believe it deserves to trade at around the same multiples as Havells (30x its FY18E EPS). We expect CROMPTON to register earnings CAGR of 15% over FY17-18E. We initiate coverage on the stock with a BUY rating, and value CROMPTON at 30x its FY18E EPS of INR5.2 at a target price of INR155.

Initiating Coverage | Sector: Capital Goods


CMP: INR133 TP: INR155 (+17%) Buy

BSE Sensex S&P CNX 26,726 8,207

Stock Info Bloomberg CGCEL IN Equity Shares (m) 626.8 52-Week Range (INR) 150/126 M.Cap. (INR b) 82.7 M.Cap. (USD b) 1.2 Avg Val ( INR m) 429 Free float (%) 65.6 Financials Snapshot (INR b) Y/E Mar 2016 2017E 2018E Net Sales 18.1 41.2 47.3 EBITDA 2.1 4.6 5.6 Adj PAT 1.1 2.6 3.3 EPS (INR) 1.9 4.2 5.2 EPS Gr. (%) (70.3) 119.9 25.6 BV/Sh. (INR) 3.6 5.8 8.6 RoE (%) 52.1 88.3 73.0 RoCE (%) 28.1 34.2 38.5 Payout (%) - 40.0 40.0 Valuations P/E (x) 69.5 31.6 25.2 P/BV (x) 36.2 22.7 15.4 EV/EBITDA (x) 43.1 19.2 15.5 Div Yield (%) - 1.2 1.6 Shareholding pattern (%)

As On May-16

Promoter 34.4

Public 65.6

Others 8.0 Stock Performance (1-year)


20 June 2016 4

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

consumer electrical companies with a presence across fans, lighting, pumps andappliances. In FY15, 45% of the company’s revenue came from fans, 30% fromlighting, 20% from pumps and 6% from appliances.

Exhibit 1: CGCEL’s sales and YoY growth (%)

Source: Company, MOSL

Exhibit 2: CGCEL’s segment-wise revenue


CGCEL is the No 1. player in the Indian fans market with a share of 26-28%,while it is also among the top five players in the domestic lighting and pumpsmarkets. The company also forayed into the consumer appliances market inFY12 and the segment already contributes to 6% of its total sales as of FY15.

0%

5%

10%

15%

20%

25%

-

10,000

20,000

30,000

40,000

50,000

FY10

FY11

FY12

FY13

FY14

FY15

FY16

e

FY17

e

FY18

e

Sales(INR m) YoY(%)

45% 41% 42% 44% 45% 45% 45% 45%

28% 30% 29% 31% 30% 29% 29% 29%

26% 23% 22% 20% 20% 20% 19% 19% 5% 8% 6% 6% 6% 6% 7%

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Fans Lighting Pumps Appliances


20 June 2016 5

CROMPTON: Geared for growth Initial steps post demerger instill confidence in CROMPTON’s growth strategy

Experienced management team roped in to ensure quality growth. Five-dimensional strategy to help register potent growth over the medium term. Inheritance of a robust product portfolio, a wide distribution network and an

established brand should enable new management to prepare for the next leg ofgrowth.

Quality management instills confidence in CROMPTON’s future growth The new promoters (Advent and Temasek) of CROMPTON have hired industry stalwarts to spearhead CROMPTON. Three key management changes have been made over the past year, with Mr. Shantanu Khosla being appointed as Managing Director, Mr. Matthew Job as CEO and Mr. Sandeep Batra as CFO.

Mr. Shantanu Khosla (Ex MD P&G): Mr. Khosla has been roped in from P&G where he spent 30 years. He worked for 13 years as CEO & MD of Procter & Gamble India, where he played a crucial role in growing revenues 15-fold to USD 1.8b, making it one of the fastest growing consumer companies in India. At CROMPTON, Mr. Khosla has set a three-pronged strategy to drive growth: 1) to register sales growth ahead of industry growth 2) profit growth in line or ahead of sales growth and 3) cash flow generation to be at least 100% of profits generated.

Mr. Matthew Job (Ex MD Racold Thermo Ltd): Mr. Job, who has been appointed as CEO of CROMPTON, had previously worked with Racold India (India’s largest manufacturer of water heaters), Phillips and Grohe India. He has vast experience in the Indian consumer electricals industry and, in our view, should lead CROMPTON’s push into the consumer appliances segment.

Mr. Sandeep Batra (Ex CFO Pidilite): Mr. Batra joins from Pidilite where he was the CFO. Prior to that, he had served as CFO of ICI Industries.

Five-dimensional strategy to ensure potent growth With an aim to become the fastest-growing consumer electricals company, CROMPTON has developed a five-dimensional strategy with a focus on developing a robust and wide product portfolio, creating brand excellence, adopting an effective go-to-market approach, and developing robust operational as well as organizational excellence.

#1 Brand excellence CROMPTON intends to invest in branding to create awareness and preference for its products by developing and marketing products which are energy efficient and easy to use. CROMPTON also intends to diversify its product portfolio away from fans and establish itself as an electricals brand. It recently launched a brand campaign by participating in ads during the IPL tournament. CROMPTON plans to advertise competitively over the medium term.

Industry stalwarts to spearhead CROMPTON


20 June 2016 6

Exhibit 3: CROMPTON’s ad spend likely to remain at competitive levels Name of company FY10 FY11 FY12 FY13 FY14 FY15 Bajaj Electricals 2.6 2.2 1.3 1.3 1.6 1.3 CROMPTON Greaves 1.4 1.7 2.2 2.7 2.7 2.5 Havells 3.4 2.5 3.1 3.1 2.5 3.4 V Guard 5.1 3.8 4.2 4.5 4.2 4.1 Surya Roshni 2.0 1.3 0.6 1.2 0.3 0.7

Source: MOSL, Company

CROMPTON has spent on average ~2-2.5% of its sales on advertising over thepast six years. However, this trend is set to change as new management intendsto aggressively increase advertising spend to gain a higher market share via TVCsand print media. This is already evident from the number of TVCs being aired byCROMPTON over the past few months with a focus on lighting, fans andappliances. In our view, ad spends could be stepped up to 3-3.5% of sales overthe next few years.

With most companies now eyeing market share in new product categories,advertising campaigns have become even more important.

#2 Portfolio excellence CROMPTON aims to sustain and grow the “core portfolio” segments of fans and pumps while also aggressively pursuing business opportunities in the lighting and appliances segments. CROMPTON’s focus would be to develop and introduce energy-efficient and star-rated products across categories to meet the changing customer requirements. CROMPTON intends to take advantage of the “premiumization” trends across

product categories. In the fans segment, its focus is on “premium” fans likedecorative fans, under light and kid fans. In lighting, it intends to focus primarilyon LEDs, where it was among 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. Besides this, it has alreadymade significant inroads into the LED market. LEDs consume 1/10th of the powerof ICLs and half of that consumed by CFLs.

#3 Go-to-market excellence CROMPTON has developed an effective go-to-market strategy with a focus on expanding its distribution reach beyond Tier I and Tier II cities. In our view, this should help in expanding its market presence and create awareness about its products in untapped markets. CROMPTON also plans to expand its network in a cost-effective way by tapping new channels (like e-commerce for its consumer durable appliances). CROMPTON has a large channel network across India with more than 3,000 direct channel partners, and has a strong electrical distribution network (150,000+ touch points). CROMPTON plans to switch to more of an FMCG/white goods mode of distribution and substantially increase its number of

CROMPTON has spent on average ~2-2.5% of its sales on advertising over the past

six years. Ad spend to be stepped up to 3-3.5% of sales over the next few

years

Crompton has introduced energy efficient “5-star”

rated fans, which consume 30% less power compared

to normal fans


20 June 2016 7

touch points. The aim is to have the right products available at the right store and at the right price.

Exhibit 4: Existing distribution network of key light electricals players Distributors by company Distribution touch points by products

Company FY14 FY15 FY16 FY14 FY15 FY16 Bajaj Electricals 1000 1000 1000 350,000 400,000 500,000 Crompton Greaves NA 4000 5000 134,000 134,000 +150,000Havells 4300 4800 5500-6300 100,000 +100,000 +100,000V Guard 407 500 500 25,000 25,000 30000-33000 Surya Roshni 20000 20000 20000 200,000 200,000 200,000 Eveready NA 4000 40000 - - 30,000


Exhibit 5: Service centers play an important role in efficient after-sales service Service Centre by players FY16 (nos) Bajaj Electricals 400 Crompton Greaves +500Racold India +100V Guard +150Murphy Richard +150Phillips +180Havells NA

Source: MOSL, Industry

While having a high number of retail touch points is important, it is equallyimportant to have a high share of retail store sales. CROMPTON has a share of~50% at each electrical outlet where its products are sold. This implies that itsper store sales are much higher compared to peers. However, with thecompany’s entry into consumer appliances (started this business only recently inFY11), it needs to get its products into home appliances/hardware stores.CROMPTON is looking to aggressively expand beyond the Tier 1/2 cities and alsodoubling its network over the next 3-5 years.

E-commerce as a channel for following the go-to-market strategy has beenincreasing in importance and most companies have opted to have separate SKUsfor the online and offline platforms – this helps to reduce the cannibalization ofsales by aggressive discounting by online stores. Companies such as BajajElectricals, Murphy Richards and Phillips also sell products through their ownwebsites. On the other hand, companies such as Havells and V Guard push salesthrough their authorized distributors and dealers only.

In our view, after-sales service is equally important in case of consumerelectricals since these products typically last for 5-7 years on average. To ensurecustomer complaints are addressed in a timely manner, CROMPTON has set up500 authorized service centers in India, which ensure that both installation andcompliant resolutions are completed within 48 hours.

#4 Operational excellence CROMPTON has taken various initiatives like focusing on premiumization, improving the product mix, maintaining an asset light business model and undertaking cost rationalization measures to improve the company’s operational performance. Incremental profits and savings through cost-reduction measures will be spent on

CROMPTON has a large channel network across

India with more than 3,000 direct channel partners, and

has a strong electrical distribution network

(150,000+ touch points).


20 June 2016 8

improving the brand, increasing distribution reach and adopting the go-to-market approach.

#5 Organizational excellence CROMPTON has hired industry stalwarts to spearhead the company, and has also added 1,500 employees who were transferred after the sale of the consumer business. CROMPTON intends to build capabilities and develop a high-performance culture in the organization.

Inheritance of strong product portfolio, established brand and wide distribution network Post the demerger with Crompton Greaves, CROMPTON has inherited a very strong product portfolio with an established brand and a wide distribution network. Across product categories, CROMPTON is among the top five players in the market. It already has a strong electricals distribution network (150,000+ touch points) and is one of the most renowned brands in the consumer electrical fans category. New management can leverage existing strengths of the company to achieve its target of higher-than-industry growth by widening the distribution network, establishing CROMPTON as a consumer electrical appliance brand and widening its product portfolio.

New management has taken the following steps to revamp its existing product portfolio.

#1 Fans - focusing on premium range CROMPTON has been the undisputed leader in the Indian fan market with a

share of around 26-28%. Our interaction with dealers and channel partnersindicates that customers prefer the CROMPTON brand for its durability (longlife), reliability (low maintenance) and the trust associated with the brand.

A comparison of the fan models available in the market shows that CROMPTONhas the largest portfolio of ceiling fans with 75 models. More importantly, ~30%of CROMPTON’s fan models are in the “Standard/Plain” category, while thebalance 70% is in the “Premium” category. In contrast, Havells has only 13% ofits range in the Standard category, as a result of which the company is increasingits focus on the “Premium” range of the market where margins typically tend tobe higher.

CROMPTON is also looking to aggressively target the “Premium” category offans while retaining/growing its market share in the “Standard” category.Premium fans contributed 10% of CROMPTON’s sales in FY16, and the companyplans to further increase this share in a meaningful manner. The result is evidentfrom its 4QFY16 results, where premium category fans witnessed growth of 54%YoY.

CROMPTON has been the undisputed leader in the Indian fan market with a share of around 26-28%.


20 June 2016 9

Exhibit 6: Ceiling fans market break-up in terms of segments and players 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 7: Market share break-up of the INR60b Indian fans industry


Exhibit 8: CROMPTON’s fan sales CAGR of 14% over FY11-16 surpasses industry average of 11%


#2 Lighting – industry shifting to LEDs; CROMPTON at the forefront In January 2015, the Indian government launched the “National Program for

LED-based Home and Street Lighting” with the aim of replacing incandescentbulbs (ICLs) with LED in residential and street lighting. Recently, Power Minister,Mr. Piyush Goyal, had stated that the government was aiming to replace 770mICLs and 35m street lights with LEDs by FY19 under its Demand SideManagement initiatives. This program has been named as “UJALA” or “UnnatJyoti by Affordable LEDs for All”.

As a result of these government initiatives, the LED market, which stood atINR5b in CY10, is expected to jump to INR115b by CY17 and form ~45-50% ofthe overall lighting market, compared to 6% in CY10. We estimate the overalllighting market to grow to INR253b in CY17 (17% CAGR over CY15-17E).

27%

11%

16% 17%

29% Crompton Greaves

Bajaj Electricals

Havells

Orient fans

Others

7,650 9,097 9,122 11,138 12,848 14,782 16,112 18,529 21,309

27%

19%

0%

22%

15% 15%

9%

15% 15%

FY10 FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e

Fans(INRm) YoY Growth(%)


20 June 2016 10

CROMPTON (currently number 4 in the lighting segment) intends to focus on theLED segment by providing better technology and innovative products in themarket. CROMPTON intends to offer dimming, color-changing LED todifferentiate its products from competitors. CROMPTON’s efforts have startedto pay off with the LED segment witnessing 129% YoY growth in 4QFY16, muchahead of industry growth. CROMPTON is also participating in the government’sEESL orders and contributes ~10% of lighting sales.

Exhibit 9: Indian lighting industry’s growth over CY08-18E


Industry growth to be driven by shift from traditional lamps to LEDs Over the next two years, we expect growth in the Indian lighting industry to be

driven by a sharp increase in LED sales. The LED market, which stood at INR5b inCY10, is expected to jump to INR113b by CY18, driven by the government’sinitiatives, and form ~45-50% of the overall lighting market, compared to 6% inCY10. We estimate the overall lighting market to grow to INR262b in CY18E(17% CAGR over CY15-17E).

Replacing ICLs and CFLs with LEDs makes economic sense as the latter has amuch longer life (50,000 hours compared to 10,000 hours for CFL and 1,500hours for ICL), is more energy efficient (80-100 lumen/watt compared to 50lumen/watt for CFL and 13-15 lumen/watt for ICL) and has a lower paybackperiod of 2-2.5 years than CFLs.

The key driver of increased usage of LEDs over the next few years will be thegovernment’s push to replace street lighting (via municipalities) and residentiallighting (via state discoms) to achieve greater energy efficiency and savings.India has ~27m street lights which the government is targeting to replace withLEDs by FY19. The government intends to ban the sale of 100W, 60W and 40WICLs, which coupled with a further decline in prices of LEDs (already down toINR200 from INR1,000-1,200 earlier), should drive a large-scale shift to LEDs. Wealso expect commercial establishments (retail outlets/offices/shops) toincreasingly replace the less-efficient FTLs and CFLs with LED down lights, as theprice gap between LED and CFL down lights has narrowed significantly.

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

249,299 262,165

15%

9%

18% 20%

16% 15% 18% 19% 20%

9% 5%

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

E

CY16

E

CY17

E

CY18

E

Lighting market(INRm) YoY(%)CROMPTON (currently number 4 in the lighting

segment) intends to focus on the LED segment by

providing better technology and innovative products in

the market.

India has ~27m street lights which the government is targeting to replace with

LEDs by FY19.


20 June 2016 11

Exhibit 10: LED sales over CY13-18E


Exhibit 11: ICL, CFL and LED cost comparison 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 @INR6 per kWh INR 0.36 0.084 0.036 Cost of usage for 50,000 hours INR 18000 4200 1800 Bulbs needed for 50,000 hours of running No. of bulbs 33 5 1 Bulb cost INR 10 120 300 Cost of replacement INR 330 600 0 Total 50,000 hours of lighting cost INR 18330 4800 2100 Ratio of cost Ratio 8.7 2.3 1.0


Exhibit 12: Market share break-up of the INR190b Indian lighting industry


19,250 33,950

61,799

95,023 110,150 113,923

76% 82%

54%

16% 3%

CY13A CY14A CY15E CY16E CY17E CY18E

LED Sales(INR m) YoY (%)

Bajaj Electricals, 6%

Havells, 4%

Crompton, 6%

Surya Roshni, 8%

Philips, 25%

Others, 52%


20 June 2016 12

Exhibit 13: CROMPTON’s lighting sales CAGR of 13.5% over FY10-16 surpasses industry CAGR of 10%


#3 Pumps – agriculture and residential segments as near-term growth drivers The Indian pump industry grew at a CAGR of 6% to INR85b over FY11-15, with

2m pumps being sold each year. Weak monsoons over the past two years haveled to a decline in the sales of agricultural pumps. However, with above-averagemonsoon anticipated for FY17, we expect a pick-up in demand for agriculturalpumps (27% of the market).

We expect industry growth to remain subdued at 5-7% over the next 2-3 yearson account of the weak industrial capex environment (46% of end-market),which should dampen overall demand for pumps.

CROMPTON is the market leader (+25%) in the domestic/residential pumpmarket, and is now aiming to increase its share in the agricultural pumps marketwhere it has a relatively weak presence. In order to expand its presence in thissegment, CROMPTON is: a) adapting its pumps to work at different voltagelevels based on state-specific requirements; and b) launching rural reachprograms to connect with farmers.

Exhibit 14: Indian pumps market (INR m) and YoY growth (%)


The overall industrial segment constitutes 46% of total pumps sold in thecountry, of which power generation, O&G and metals form 24%. Pumps for usein agriculture form the largest proportion at 27% of total pumps sold.

4,923 5,703 6,667 7,689 9,010 9,836 10,525 12,103 13,919

6%

16% 17% 15%

17%

9% 7%

15% 15%

FY10

FY11

FY12

FY13

FY14

FY15

FY16

e

FY17

e

FY18

e

Lighting YoY growth

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(%)

CROMPTON is the market leader (+25%) in the

domestic/residential pump market, and is now aiming to increase its share in the agricultural pumps market


20 June 2016 13

Exhibit 15: End-market-wise usage of pumps


Below is our view on each of the key end-markets for pumps and their outlookfor the next few years:a. Agriculture: The segment is currently subdued following two consecutive

years of weak monsoon. Expectations of above-average monsoon in CY16should provide a boost to demand for agricultural pumps. ABB and KSBPumps are now targeting solar powered pump sets (launched by KSB in July2015). EESL plans to replace all its existing 20m agriculture pumps with solarpumps to reduce electricity costs.

b. Oil & gas: Post subdued demand over the past few years, we expect newrefineries to come up and drive a revival in demand.

c. Power generation: Boiler feed pumps are used in power plants, though thecurrent slump in power generation orders has made the market quitesubdued. Super critical pumps, which are being mainly imported at themoment, are likely to drive growth in this space.

d. Fertilizers: 6-7m ton of fertilizers currently being imported will have to bereplaced and new fertilizer plants are being planned, which should boostdemand.

e. Water/wastewater: Increased spending on the development of urbaninfrastructure, 100 smart cities in India and the Namami Ganga programshould provide a boost to the industry.

f. Pulp/steel: We expect both these end-markets to decline, as a result ofwhich their contribution should be marginal.

Power costs, reliability and service as key differentiating factors Power costs constitute 70% of a pump’s running cost, thus making it one of the

key factors influencing the purchase of pumps. There is a clear preference forhigher-star-rated pumps which reduce power consumption.

The other key factors influencing the purchase of pumps are reliability, serviceand zero downtime.

Agriculture, 27%

Building Services, 19% Water and Waste

water, 17%

Power Generation, 12%

O&G, 8%

Metal and Mining, 4% Others, 13%

EESL plans to replace all its existing 20m agriculture

pumps with solar pumps to reduce electricity costs.


20 June 2016 14

Exhibit 16: Life-cycle costs for a pump – power costs are the highest


Exhibit 17: 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 Indian pumps market is quite fragmented with only 56% comprising of

organized players. The top five players control about 44% of the overall market. Kirloskar Brothers is the market leader in this segment due to its strong position

in agricultural pumps. CROMPTON has a share of 7% in the Indian pumpsmarket.

Exhibit 18: Indian pumps market (player-wise share)


Exhibit 19: CROMPTON’s pumps sales grew at 11% CAGR over FY10-16


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%

3,850 5,217

5,019

5,869

5,790

6,585 7,112 7,965 8,921

38% 36%

-4%

17%

-1%

14% 8%

12% 12%

FY10 FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e

Pumps(INRm) YoY growth (%)


20 June 2016 15

#4 Consumer appliances CROMPTON had entered the appliances segment in FY12 and is a relatively small player in this category (~2% share, as per MOSL estimates). Similar to other players in the industry, CROMPTON also imports its entire appliances range from China. However, over the next few years, the company plans to increase the share of in-sourced components in order to enjoy the benefits of better quality control and lower costs.

The consumer appliances segment has seen a number of new entrants over the past few years. These players intend to use their existing brand strength to increase presence into this segment. Since most companies outsource the manufacturing of appliances to Chinese vendors, it is relatively easy to enter into this category. With no or little R&D requirement and low capital investment, it offers an attractive market for light electricals manufacturers.

Exhibit 20: Consumer appliances market growth FY11-16

Source: Company, MOSLe

Exhibit 21: Recently entered product categories by player Company Core Product New product categories Orient Electric Fans Consumer Appliances, Switchgear, Lighting Finolex Cables Cables Lighting. Fans, Switches Anchor Switches Cables, Lighting, Fans Eveready Appliances Consumer Appliances Surya Roshni Lighting Fans, Consumer Durables V-Guard Voltage Stabilisers Fans, Switchgears, Cookers

Crompton Greaves Fans, Lighting, Pumps Consumer Appliances Havells Switchgear, Lighting, Fans Consumer appliances, Coolers, Pumps Luminous Invertors Fans,Switches, CFL, Switchgears Polycab Electrical wires Fans, Lighting, Switches

Source: MOSL, Industry, Company

Building distribution network a key challenge for new entrants For most companies that have recently entered the consumer appliances business, the challenge is to develop an appliance network since the existing electricals dealer network is not suited for the same.

41 45

50 55

65 65

10% 10% 10%

18%

0%

FY11

FY12

FY13

FY14

FY15

FY16

Consumr Appliace (INR b) YoY change (%)


20 June 2016 16

Exhibit 22: Dealer-wise sale of products Name of company Electricals

Store Appliance

Store Multi Brand retail E

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


Competitive intensity remains high Bajaj Electricals is the clear market leader in the appliances segment, given its presence in this market for the past 75 years and its extensive distribution reach across the country.

We highlight that this is an extremely competitive market with a large number of players (presence of both Indian and MNC brands) competing for market share.

Exhibit 23: Market share of players in the consumer appliances segment

Source: Industry, MOSL

Exhibit 24: Company-wise presence across key consumer appliances Name of company Water Heaters Irons Mixer Grinders Toasters Havells Y Y Y Y CROMPTON Greaves Y Y Y Y Bajaj Electricals Y Y Y Y Khaitan Y Y Y Usha Y Y Y Y TTK Prestige Y Y Y Philips Y Racold Y Panasonic Y Y

Source: Industry, MOSLe

FY12

FY13

FY14

FY15

FY16

CG Orient Bajaj Havells Murphy Others


20 June 2016 17

Best-in-class return ratios Expect cash flow generation of INR3/4b annually in FY17/18

CROMPTON has best-in-class return ratios, led by its asset light business model. Free cash flow generation to be higher than profit generation, indicating quality

earnings growth. Higher ad-spend to keep operating margins in check over the near-to-medium term.

Expect revenue CAGR of 15% over FY17-18 We expect CROMPTON to register 15% revenue CAGR growth over FY17-18E, ahead of industry growth. We expect the consumer durable division to contribute 71% of revenue and lighting to contribute 29%. We expect the appliances division to grow at a 20% CAGR over FY16-18E on account of a lower base effect.

Exhibit 25: CROMPTON’s revenue growth to be ahead of industry growth


Exhibit 26: Revenue mix to remain stable


Asset light business model to ensure robust return ratios CROMPTON follows a business strategy that ensures capital efficiency by focusing investments only on those assets where the company has expertise on. CROMPTON has in-house manufacturing facilities for fans, pumps and lighting, whereas the appliances business is completely outsourced. CROMPTON has a very lean capex plan of INR300-400m over the next two years. The asset light business model will ensure optimal utilization of assets and robust return ratios. We expect CROMPTON to register RoE/RoCE of 88.3%/34.1% in FY17 and 73%/38.3% in FY18.

488 519 558 636 685

769 841

22.0 26.8 29.5 33.2 35.9 41.2 47.3

11%

6% 7%

14%

8% 12% 9%

10%

22%

10% 13% 8%

15% 15%

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Total Ind size(INR b) CGCEL Revenue (INR b)YoY Ind growth(%) CGCEL YoY growth (%)

45% 41% 42% 44% 45% 45% 45% 45%

28% 30% 29% 31% 30% 29% 29% 29%

26% 23% 22% 20% 20% 20% 19% 19% 6% 6% 6% 6% 7%

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Fans Lighting Pumps Appliances


20 June 2016 18

Exhibit 27: Asset turnover remains high for industry


Exhibit 28: Return ratios to remain robust for CROMPTON


Exhibit 29: Well-balanced outsourcing strategy for CROMPTON Name of company FY15 FY16 Bajaj Electricals 4% 3% CROMPTON Greaves 50% 50% Havells 90% >90%V Guard 40% 40%


Higher ad spend to keep operating margins in check in near term CROMPTON has a clear strategy to establish itself as a leading electrical appliance brand from its existing positioning of a leading fans brand. New management believes that CROMPTON as a brand is under-invested and thus there is a strong need to invest competitively in the brand over the medium term. This strategy will require higher ad spend in the near-to-medium term. Higher ad spend will reap dividends in the medium term, but would prove to be a drag on operating margins in the near term. Thus, we believe that operating margins in the near-to-medium term would remain in the 11.5-12% range.

Exhibit 30: CROMPTON to accelerate ad spend to establish itself as leading electrical appliance brand


Strong cash flow generation likely to be paid out as dividend CROMPTON’s intent is to generate cash flow of at least 100% of profits. This strategy will ensure strong cash flow generation for the company. We expect CROMPTON to record free cash flow generation of INR3-4b annually, led by strong operational cash flow generation of INR 3.5-4.5b and muted capex requirement of INR400-500m. We expect the company to pay back the excess cash as dividends to its shareholders.

25.9 24.2

14.5 16.0

4.1 3.9 6.7 7.3

4.0 4.3

11.0 11.2

05

1015202530

FY14

FY15

Bajaj CG Havells V Guard Surya Roshni Average

52.1

88.3 73.0

28.1 34.1 38.3

FY16

FY17

FY18

RoE RoCE

224 1,240 1,550

1.2%

3.0% 3.3%

FY16 FY17e FY18e

Ad spend (INR m) ad psend as a % to sales


20 June 2016 19

CROMPTON’s gross debt stood at INR6.5b in Q416, and the company intends to refinance this debt at a lower rate to reduce its interest costs. The new debt raised will be in the form of debentures to be repaid over the next 3-4 years.

Exhibit 31: Robust free cash flow generation of INR3-4b annually


1,052 2,620 3,290 1,342 3,224 4,331

128

123

132

FY16 FY17E FY18E

Net Profit (INR m) Free cash flow (INR m) FCF as a % to net proft


20 June 2016 20

Valuation and View

Given its strong product portfolio, established brand, market leadershipposition, wide distribution reach and robust ROCE profile (33%/39% in FY17/18),we believe that CROMPTON deserves to trade at around the same multiples asHavells (30x its FY18E EPS). Incrementally, Havells derives ~20% of revenue fromthe B2B segment, whereas majority of CROMPTON’s revenue is from the B2Csegment.

In our view, new management would focus on expanding product portfolio,distribution network and establish CROMPTON as an electricals brand ratherthan a fans manufacturing brand. These initiatives should help CROMPTON tomaintain its market share and enhance footprint in new product categories, inour view.

We believe given the clear-cut strategy laid out by management, CROMPTON ispoised for strong earnings growth in the long term. We expect CROMPTON toregister earnings growth of 15% over FY17-18E. We initiate coverage on thestock with a BUY rating and value CROMPTON at 30x its FY18E EPS of INR5.2 at atarget price of INR155.

Exhibit 32: Valuation multiples for peers in consumer electricals space Name of Company P/E EV/EBIDTA P/BV P/Sales

FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Havells 47.0 36.0 29 26.1 24.1 18.5 8.8 8.0 7.1 2.9 3.6 3.0 Crompton Consumer 32.1 25.5 20.8 19.1 15.4 12.8 37.0 23.0 15.8 4.7 2.1 1.8 V Guard 36.8 27.1 22.6 22.9 17.7 14.5 8.7 7.0 5.6 2.2 1.9 1.6 Bajaj Electricals 22.0 15.0 12.5 10.2 7.7 6.7 3.0 2.6 2.2 0.5 0.4 0.4 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


Exhibit 33: CROMPTON’s return ratios are superior to comparable peers Name of Company ROE ROCE

FY16 FY17E FY18E FY16 FY17E FY18E Havells 19% 22% 25% 20% 22% 25% Crompton Consumer 52% 88% 73% 28% 34% 39% V Guard 26% 29% 27% 25% 29% 27% Bajaj Electricals 15% 19% 19% 15% 18% 19%

Exhibit 34: Sales growth and EBITDA margins for companies in electricals sector Name of Company Revenue Growth (%) EBITDA margin (%)

FY16 FY17E FY18E FY16-18 CAGR

FY16E FY17E FY18E FY16-18 average

Havells -10% -17.9% 18% -2.0% 10.4% 13.6% 14.7% 12.9% CROMPTON Consumer - 127% 15% 15.0% 11.6% 11.2% 11.8% 11.5% V Guard 6.7% 17.1% 16% 17% 9.6% 10.3% 10.5% 10.1% Bajaj Electricals 12% 15% 15% 15% 5.5% 6.3% 6.3% 6% Industry average 7% 15% 14% 12% 10% 10% 11% 10%



20 June 2016 21

Risks and concerns

Threat of imports from China in LED segment With the boom in the global LED market, Chinese companies had set up huge capacities in the past to cater to mounting demand. However, capacity utilization took a beating with a slowdown in the Chinese economy. Consequently, many Chinese importers have been offering aggressive discounts to push sales. Although Indian players that import have benefited, the threat of Chinese importers seeking to enter the Indian market through tie-ups can impact sales of domestic players.

Competitive landscape remains fierce in electrical appliances segment In India, there are many electric lighting players: regional and national, organized and unorganized. Almost two-thirds of lighting product imports into India are from China. Despite the top six players accounting for ~70% of the overall organized market, competition in the segment remains high due to the commoditized nature of products. The market continues to be very price sensitive and, although strong brands perform better than others, pricing power remains limited due to high competition from organized as well as unorganized segments.

Growth of substitute goods such as air coolers and air conditioners Offices in metro and tier 1-3 cities have been increasingly opting for air conditioners as against ceiling fans. Even in manufacturing units with sophisticated machines, air conditioners are used to maintain stable temperatures. On the residential side, with an increase in disposable income, sales of air coolers and air conditioners have increased. The rise in sales of substitute products can hamper sales of fans and impact earnings of the company.

Availability of low-cost power for irrigation can impact agri-pump sales Cheap local pumps sold by unorganized players are energy inefficient and consume a lot of power. However, as farmers get low-cost power due to government subsidies, they prefer to use cheap pumps from unorganized players. This too can have an adverse impact on the company’s sales.


20 June 2016 22

Company background

Crompton Greaves Consumer Electricals Ltd. manufactures and markets a wide spectrum of consumer products, ranging from fans, light sources and luminaires, pumps, and household appliances such as geysers, mixer grinders, toasters and irons. CROMPTON has been the market leader in fans, domestic pumps and street lighting for over 20 years. It has manufacturing facilities in Goa, Vadodara, Ahmednagar and Baddi. The company’s products are available in nearly 150,000 retail points across the country.

CROMPTON's portfolio of energy-efficient products includes 5-star-rated durable lights, fans, pumps and appliances for home and offices. It has the largest number of '5-star' rated energy-efficient products. It was the first company to cross sales of a million fans in 1989, and sales crossed 10 million fans, the highest in the world.

Exhibit 35: Key manufacturing facilities of CROMPTON Location Product GIDC Industrial Estate: Goa Fans Kundaim Industrial Estate: Goa Fans HPSIDC Industrial Area, Baddi, Dist: Solan, HP Fans HPSIDC Industrial Area, Baddi, Dist: Solan, HP Fans Kural Village, Padra Taluka, Dist: Baroda, Gujarat Lighting Village Thane, Tehsil Baddi, Dist: Solan, Himachal Pradesh Lighting A-28, MIDC Area, Ahmednagar, Maharashtra, Pumps C-19, MIDC Area, Ahmednagar, Maharashtra Pumps



20 June 2016 23

SWOT Analysis

Strengths Renowned and

established brand Market leadership in key

product categories High-quality

management team Robust distribution

network in Tier I and tierII cities

Weaknesses Limited product portfolio Limited presence beyond

tier II cities Perceived as a fans brand

Opportunities “Housing for All by 2020”

should create robustdemand for the company’sproduct portfolio

Huge untappedopportunities in the LEDsegment led by thegovernment’s initiative toreplace 770m GLS and CFLbulbs

Threats Competitive intensity

from the unorganized aswell as organized playerscontinues to remain high

Weak macroeconomicoutlook could weakendemand for thecompany’s key products


20 June 2016 24

Brief about management

Shantanu Khosla – Managing Director Mr. Khosla joined the company in January 2016. Prior to this, he served as MD & CEO of Procter & Gamble India from July 2002 to June 2015. He holds Bachelor of Technology in Mechanical Engineering from Indian Institute of Technology, Mumbai. Mr. Shantanu Khosla has also completed his Master’s in Business Administration from Indian Institute of Management, Calcutta.

Mathew Job – CEO Mr. Job joined CROMPTON in January 2016. Previously, he worked with Philips Electronics India Ltd from June 1994 to October 2009, where he held several key positions. From November 2009 till January 2012, Mr. Job worked with Grohe India Pvt. Ltd as vice president and managing director. He then moved on to Racold (Ariston) Thermo Ltd as managing director where he worked till September 2015. He has studied Bachelor in Technology (Electrical & Electronics). He is an alumnus of Indian Institute of Management, Calcutta.

Mr. Sandeep Batra – CFO Mr. Sandeep Batra joined CROMPTON in January 2016. Prior to joining CROMPTON, he was with ICI Limited from January 1988 to January 2009, where he held various important responsibilities and eventually assumed the role of chief financial officer. He then joined Pidilite Industries Limited as its chief financial officer in January 2009. He is an alumnus from St. Xavier’s College, Kolkata, a chartered accountant and a company secretary by profession. He also serves as company secretary and compliance officer of CROMPTON.

Mr. D Sundaram – Independent Director Mr. Sundaram is vice chairman and managing director of TVS Capital Funds. He was associated with HUL for more than 34 years, where he served under various roles before becoming the vice chairman in 2008. He is also on the Board of Governors of Institute of Financial Management and Research, Chennai. He is Post Graduate in Management Studies (MMS), Chennai, Fellow of the Institute of Cost and Management Accountants, and has attended the Harvard Business School’s Advanced Management Programme.

Mr. P M Murty – Independent Director Mr. P M Murty was a graduate from Indian Institute of Management, Calcutta. Mr. Murty had more than 42 years of experience with Asian Paints Limited (APL), where he held various senior positions including that of managing director of APL from 2009–2012

Mr. Hemant Madhusudan Nerurkar – Additional Independent Director Mr. Nerurkar has experience of over 35 years in Tata Steel in various positions. He joined Tata Steel in 1972 and rose to the level of managing director in-charge of India and South East Asia operations. He is chairman of board of directors in TRL Krosaki Refractories Limited (formerly Tata Refractories Limited - a JV company of Tata Steel and Krosaki Harima Corporation, Japan) and NCC Ltd (formerly Nagarjuna


20 June 2016 25

Construction Company Limited) and Independent Director of several other listed entities. He is a Bachelor of Technology in metallurgical engineering from the College of Engineering, Pune University. He has attended several management courses in India and overseas, including CEDEP in France. Ms. Sonia Niranjan Das – Non-Executive Additional Director Ms. Sonia Niranjan Das is qualified company secretary with over 15 years’ of experience in the profession in different industries, including in listed companies, in secretarial, law and compliance. She also holds a degree in law. At present, she is working with Avantha and leading secretarial and law function.


20 June 2016 26

Light Electricals to grow at 10% CAGR over FY16-19 Multiple drivers falling into place

Over FY16-19, we expect Light Electricals to grow at 10% CAGR, with faster growth in Appliances (15% CAGR), Lighting (12% CAGR), Fans (12% CAGR) and Switches (11% CAGR).

The key growth drivers are (a) rising disposable income, (b) improved power availability and increased reach through the government’s rural electrification program, (c) implementation of the 7th Pay Commission wage hikes for central government employees, followed by hikes for state government and PSU employees, (d) government impetus on low cost housing and (e) shift of sales towards the organized segment post GST implementation.

Slowdown behind; expect growth to revive The Indian Light Electricals market stood at INR685b as at the end of FY16,

having grown at a CAGR of 9% over FY11-16. Slowdown in construction activity had led to a slowdown in the sale of Light Electricals as well during this period. Over FY16-19, we expect Light Electricals to grow at 10% CAGR, with faster growth in Appliances (15% CAGR), Lighting (12% CAGR), Fans (12% CAGR) and Switches (11% CAGR).

Exhibit 36: Segment-wise size of Indian Light Electricals market (INR b)

Description FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E % of total

CAGR (FY11-16E)

CAGR (FY16-

19) Domestic Switchgear 14 16 17 18 18 20 21 23 24 3% 7% 7% LV Industrial Switchgear 28 30 30 34 38 38 40 43 46 6% 6% 7% Modular Switches 12 14 15 16 17 20 22 25 27 3% 11% 11% Domestic Wires and Cables(LT) 60 63 65 72 80 80 84 88 97 13% 6% 7% Industrial cables(HT) 100 100 100 100 120 120 132 145 160 19% 4% 10% Pumps 66 72 76 80 85 92 99 107 116 13% 7% 8% Lighting (incl. LED) 59 67 72 79 98 122 149 158 157 15% 16% 9% Luminaires 24 43 50 56 62 68 79 91 105 10% 24% 15% Consumer Appliances (Home/ Kitchen) 41 45 50 55 65 65 75 86 99 10% 9% 15% Fans 35 38 45 48 53 60 67 75 84 8% 11% 12% Total light electricals market size 439 488 519 558 636 685 769 841 915 9% 10%


Rising disposable income levels imply greater affordability Rising income levels across urban and rural India imply greater affordability for

Electrical Products. With growing disposable income, the Indian consumer has become more discerning in his choice and taste. Low penetration of Light Electrical Products, especially in rural areas, should drive growth. The household penetration of Fans, for instance, is 90% in urban areas and 65% in rural areas. The penetration of home and kitchen appliances is much lower (see table below).


20 June 2016 27

Exhibit 37: Low household penetration of home/kitchen appliances to drive growth Description % penetration Fans 80% Water Heaters 10% Mixer - Grinder 35% Induction cooktop <2-3% TV 77% Fridge 33% Air Cooler 8-10% Washing machine 13% Air Conditioner 3-4%


Exhibit 38: Rising disposable income to drive growth in Light Electricals (per capita; INR)

Source: RBI, MOSL

Exhibit 39: Rural incomes have been rising helped by MNREGA implementation and MSP increase

Source: GOI, MOSL

A Light Electrical Product lasts for 3-15 years. There is an increasing tendency to

trade up, as these products are typically bought only once or twice over a decade and are much cheaper relative to the cost of the house. This, along with increasing consumer focus on aesthetics and energy efficiency, has also resulted in a falling share of the unorganized segment (local players, Chinese imports) and a shift to the organized segment over the last few years.

70,345 72,868 76,438 78,627 81,821 86,975 93,064

4%

5%

3%

4%

6% 7%

2012 2013 2014 2015 2016 2017 2018

Per capital income(Rs) YoY Growth(%)

51

52 55 58

64 71 83

100 120

140

161 173 183

2% 4%

5%

10% 11%

18% 20% 20%

17% 14%

8% 6%

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Rural wages/day

YoY growth(%)


20 June 2016 28

Exhibit 40: Value of electrical equipment used in a typical 1,000sf house Description Units No. of units INR/pc INR Building Wires 1 sq. mm 7 coils 1,355 9,485 2.5 sq. mm 4 coils 3,205 12,820 4 sq. mm 2 coils 4,730 9,460 6 sq. mm 1 coil 7,115 7,115 MCB 40A 14 nos. 410 5,740 Distribution Box 4 way 1 nos. 3,500 3,500 Phase Selector 40 A 1 nos. 2,835 2,835 Switches, Sockets, Regulator Modular 70 nos. 5,575 Motor 1HP Equivalent 1 nos. 12,000 12,000 Fans 1200mm sweep 5 nos. 1,600 8,000 Ventilating Fan 250mm sweep 1 nos. 1,750 1,750 Lights With fittings 10 nos. 450 4,500 Total 82,880

Source: Industry, MOSL Exhibit 41: Average life of key Light Electrical Products

Description Average life Building Wires 15+ years Distribution Boards 15+ years Miniature Circuit Breakers(MCB’s) 10+ years Switches 10+ years Fans 5-7 years GLS / CFL 2-3 years Fluorescent Tube Lamps 2 years Consumer Appliances 5-7 years

Source: MOSL, Industry Customers also take into account the safety features associated with the

product while making the purchase decision. A case in point is the market for Miniature Circuit Breakers, which is largely with the organized players. This is primarily because of the safety aspect.

Real Estate – mixed trends The Light Electricals industry is closely linked to the fortunes of the Real Estate

sector. We see a mixed picture here – the Urban Commercial (Office) and Retail Real Estate market has bottomed out and is on track for strong recovery. However, the Residential market remains subdued due to low affordability, developers’ reluctance to cut prices and constrained supply – this is especially true for tier-1 cities (we define these as the top-7 cities). Low Cost Housing would be driven by the government’s thrust towards “Housing for All by 2022” via the Pradhan Mantri Awas Yojna.

The Commercial Real Estate market was in a deep slump in CY12 (sales down 27%) and was flat in CY13. Recovery in absorption set in from CY14 and picked up pace from CY15, with office absorption at 38.1msf, higher than the previous peak of 37msf in CY11.


20 June 2016 29

Exhibit 42: Office space absorption and completion


* we take top-7 cities in India

Exhibit 43: Vacancy rates declining, with higher absorption



Even within Retail Real Estate, CY14 was the bottom, with absorption declining

69% to 1.6msf. However, CY15 has seen a sharp bounce, with 3.3msf sold; the strong growth should continue over the next few years.

Exhibit 44: Retail space absorption and completion



Exhibit 45: Vacancy rates have peaked out



The Residential Real Estate market remains subdued. CY15 was another year of

decline – 0.16m units were sold against the peak of 0.2m units in FY12. We also highlight that 0.45m units are lying unsold and at the current pace of sales would take 3-4 years to be cleared out. New launches also declined to 0.2m units in CY15 against the peak of 0.26m units in CY12.

Given the builders’ reluctance to cut prices, reduced affordability, high inventory of unsold flats (0.56m as of December 2015) and the new clauses introduced by the recent Real Estate Regulatory Act, there could be a lull in new launches over the next 6-9months. However, CY16 should be the bottom for the market – we expect a recovery in CY17 in both new launches and unit absorption. This would be driven by continued rate cuts by the RBI, a recovery in the general economy and quicker completion of ongoing projects as required under the new Real Estate Act.

22 23 32 33

20 31 37

27 27 30 38 36 32

25

23 23

33

43 41 41 44

30 36

30 36

32 33 29

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

CY16

e

CY17

e

CY18

e

Office Space - Absorption Office Space - Completion

8.0 6.0 5.0

9.0

17.0 18.0 18.0 17.2 18.5

16.9 16.0 15.0 14.0 12.0

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

CY16

e

CY17

e

CY18

e

Vacancy (%)

3.8 3.7 9.6 6.6 4.0 4.0 10.7 4.5 5.1 1.6 3.3 4.9 6.0 4.6

2.8 4.1

9.4 8.5 6.3 6.9

13.8

4.1 5.7

1.3 3.6

7.5 7.5 5.4

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

CY16

e

CY17

e

CY18

e

Absorption(mn sq ft) Completion(mn sq ft)

15

18

20

18 17

16 16

18 18 18

CY09

CY10

CY11

CY12

CY13

CY14

CY15

CY16

e

CY17

e

CY18

e

Vacancy (%)


20 June 2016 30

Exhibit 46: Residential Real Estate to bottom out in CY16 (units)



Another key indicator of Housing growth is home loans by housing finance companies, NBFCs and banks. These have grown at a CAGR of 19% over FY05-16. The slowdown in Residential Real Estate is more specific to the top-7 cities; smaller cities and towns have remained largely insulated.

Exhibit 47: Housing loans have grown at 19% CAGR over FY05-16


“Pradhan Mantri Awas Yojna” aims to add 30m houses by FY19 In June 2015, the Union Cabinet approved the “Pradhan Mantri Awas Yojna” to

provide “Housing for All” by 2022. The aim was to construct 20m houses in urban areas. The highlights of the scheme are:

On an average, central grant of INR0.1m/house would be available under the slum rehabilitation program. The state government would have flexibility in deploying this slum rehabilitation grant to any slum rehabilitation project taken for development using land as a resource for providing houses to slum dwellers.

Under the credit-linked interest subsidy component, interest subsidy of 6.5% on housing loans availed up to tenure of 15 years would be provided to economically weaker section (EWS) / low income group categories, wherein the subsidy payout on NPV basis would be ~INR0.23m/house.

Central assistance at the rate of INR0.15m/house for EWS category would be provided under affordable housing in partnership and beneficiary-led individual house construction or enhancement. State governments or housing boards can take up affordable housing projects to avail the central government grant.

90,000

130,000

247,000

203,000

256,000 237,621 225,821

200,334

102,000 101,000

184,000 167,000 198,000 193,386 165,840 157,798

2008 2009 2010 2011 2012 2013 2014 2015

Units launched Units sold

1.7 2.4 3.0 3.4 3.8 4.3

5.1 6.2

7.2 8.4

9.9

11.5

41

25

13 12 13 19

22 16 17 18 16

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Housing loan O/S YoY Growth(%)


20 June 2016 31

The scheme would cover the entire urban area consisting of 4,041 statutory towns with initial focus on 500 class-I cities and it will be implemented in three phases till April 2019. Phase-I (April 2015 - March 2017) to cover 100 cities to be selected from

states/UTs as per their willingness Phase-II (April 2017 - March 2019) to cover additional 200 cities Phase-III (April 2019 - March 2022) to cover other remaining cities

As seen in the table below, ~0.7m EWS houses have been taken up for funding across states with a total budgeted spend of INR100b as of May 2016.

Exhibit 48: Progress of Pradhan Mantri Awas Yojna as of May 2016 (INR in Crore)

Sr. No. Name of the State

No of Cities considered for funding

Project Proposals

Considered

EWS Houses

Central Assistance

involved

Central Assistance

Released (projects)

1 A&N Island (UT) - - - - - 2 Andhra Pradesh 59 110 1,93,147 2,897.21 334.95 3 Arunanchal Pradesh - - - - - 4 Assam - - - - - 5 Bihar 85 85 30,216 453.24 79.89 6 Chandigarh (UT) - - - - - 7 Chhattisgarh 9 11 12,670 190.05 76.02 8 D&N Haveli (UT) - - - - - 9 Daman & Diu (UT) - - - - - 10 Delhi (UT) - - - - - 11 Goa - - - - - 12 Gujarat 12 77 66,983 853.62 318.05 13 Haryana - - - - - 14 Himachal Pradesh 9 9 1,077 16.16 6.46 15 Jammu & Kashmir 2 2 224 3.36 - 16 Jharkhand 38 38 20,239 303.59 121.43 17 Karnataka 15 21 16,522 247.83 - 18 Kerala - - - - - 19 Lakshdweep (UT) - - - - - 20 Madhya Pradesh 37 45 43,393 644.12 208.44 21 Maharashtra 10 17 71,701 1,063.74 - 22 Manipur - - - - - 23 Meghalaya - - - - - 24 Mizoram 8 8 10,286 154.29 8.18 25 Nagaland - - - - - 26 Orissa 2 6 11,548 143.22 33.29 27 Puducherry (UT) - - - - - 28 Punjab 1 1 1,280 12.80 - 29 Rajasthan 19 23 12,307 184.61 37.53 30 Sikkim - - - - - 31 TamilNadu 175 197 34,013 510.20 40.50 32 Telangana 63 144 80,481 1,207.22 261.76 33 Tripura - - - - - 34 Uttar Pradesh - - - - - 35 Uttrakhand 19 21 2,757 41.36 13.76 36 West Bengal 108 108 74,880 1,123.20 88.85 Grand Total 671 923 6,83,724 10,049.77 1,629.11

Source: Ministry of Housing and Urban Development

In March 2016, the Union Cabinet approved the “Pradhan Mantri Awas Yojna”

for rural areas. All the existing rural housing programs have devolved into this. Highlights of the scheme:


20 June 2016 32

Subsidy provided by the state and central governments under this scheme has increased by more than 70%; from INR70,000, the allocation has now gone up to INR120,000. In hilly and difficult areas, it has increased from INR75,000 to INR130,000. Additionally, taking into account benefits of labor under MNREGA (90 days) and INR12,000 under Swach Bharat Mission, the total benefit adds up to INR150,000 for house construction. Bringing transparency in the selection of beneficiaries, the data from the census conducted in 2011 will be used.

In the years from 1985 to 2015, around 35m houses have been constructed; under the new program, the government targets to construct 10m houses in three years till FY19.

The central government will spend INR820b on rural housing till FY19; in addition, the states will be spending over INR500b as their share. The annual allocation from the central government will go up from INR100b to over INR270b. In our view, the infusion of resources of this magnitude will be a game changer in the rural housing scene and the rural economy.

Our view: If the government is able to construct 30m new houses under this program, it would alone generate demand for ~60m new fans (assuming two fans used in one house) or 20m fans per year over a three-year period to FY19. To put this in perspective, the Indian Fan industry sells ~47m fans per year.

GST implementation to drive faster shift to organized segment The Goods and Services Tax (GST) legislation was passed in the Lok Sabha (lower

house of Parliament) on May 6, 2015. The Government of India seems committed to replace all indirect taxes levied on goods and services by the center and the states with a common GST by April 2017. With GST implementation, it is anticipated that the tax base will be comprehensive, as all goods and services will be taxable, with minimum exemptions.

In India, there is significant presence of the unorganized segment in Light Electricals. We estimate that in FY15, the unorganized segment constituted ~25% of overall industry sales, though down from ~40% in FY10.

GST implementation is expected to narrow the large indirect tax differential between the organized and unorganized players. This would be achieved by ensuring better compliance and enforcement by (a) reducing the threshold limit for exemption from indirect taxes to INR2.5m under GST from INR15m under the current excise duty regime, (b) tracking the flow of GST credit in the entire value chain using technology platforms, (c) ensuring availability of seamless input credit, and (d) reducing the overall effective tax rates.

http://www.ey.com/IN/en/Services/Tax/VAT--GST-and-Other-Sales-Taxes


20 June 2016 33

Exhibit 49: Measures that will lead to shift of trade from unorganized to organized segment

Source: Havells, Frost, Industry, MOSLe

Exhibit 50: Unorganized players as a % of overall category sales for Light Electricals

Description FY10 FY15 Fans 40% 25% Lighting 60% 40% Pumps 45% 30% Domestic Switchgear 20% <5% Industrial Switchgear 30% 20-25% Switches 50% 30%

Source: Havells, Frost, Industry, MOSLe

7th Pay Commission wage hike implementation to accelerate demand growth over next two years The central government constitutes the Pay Commission every 10 years to

recommend revisions in pay scales for central government employees. Very often, these recommendations are also adopted by the states after some modifications. Recommendations of the 7th Pay Commission, which came into effect from January 2016, are expected to impact 4.8m central government employees and 5.5m pensioners.

The 7th Pay Commission has recommended a 24% increase in pay and allowances for government employees. Pay would go up by 16%, allowances by 63% and pensions by 24%. It has also recommended an annual increment of 3% for central government employees.

The government estimates the impact of the Pay Commission recommendations at INR1.02t for FY17. Moreover, the state governments would also be revising the salaries of their employees (~10m), followed by similar revisions by public sector undertakings (PSUs).

The impact of the 6th Pay Commission was much bigger, as (a) it had recommended a 36% pay hike, and (b) the hike was paid with arrears of two years. The 6th Pay Commission was set up in July 2006 and its recommendations were submitted in March 2008. 40% of the arrears were paid in 2009 and 60% in 2010 instead of the originally scheduled 2006.


20 June 2016 34

Exhibit 51: 6th Pay Commission impact on pay and allowances of central government employees

Source: MOSL, GOI

Exhibit 52: Pay and allowances as a percentage of the government’s total expenditure

Source: MOSL, GOI

We expect the wage hikes recommended by the 7th Pay Commission to be paid

on current basis. Unlike the previous occasion, there wouldn’t be a significant arrears portion. We believe the limited bounty would result in a disproportionate benefit for smaller ticket items like Light Electricals and also lead to increased premiumization of the same product.

Exhibit 53: CY09 and CY10 see increased lighting sales post 6th Pay commission pay out


Exhibit 54: FY10 fan volumes see a spurt post the 6th Pay Commission payout


Exhibit 55: Breakdown of employees by rank

Source: 7th Pay Commission, MOSL

Exhibit 56: Employee break up by age

Source: 7th Pay Commission, MOSL

460

737

966 928 993 1,116

1,252 1,392

60

31

-4 7 12 12 11


Pay and Allowances(INRb) YoY (%)

6.45

8.34 9.43

7.75 7.61 7.91 7.87 7.76


% of total expenditure

968 1,057

1,126

1,140

1,218

1,305

1,317

1,384

1,492 1,418

9% 7%

1%

7% 7%

1%

5% 8%

-5%

CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14

Lighting(Units m) YoY (%)

18.0 20.8 20.9 29.1 37.4 36.2 39.2 40.3 44.8

23.8

16.1

2.6

29.9 28.6

(3.1)

8.3 2.7

10

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Fans (mn units) YoY Growth(%)

Senior Management position, 3%

Middle management,

9%

Supervisory and clerical tasks, 89%

22%

22%

26%

29%

1% 20-30 years

30-40 years

40-50 years

50-60 years

Others


20 June 2016 35

Exhibit 57: Break up of Central Government employees by area of residence

Source: 7th Pay Commission , 2011 Census, MOSL

Increased pace of village electrification and improved power availability to drive rural demand for Electricals Rural electrification has been a challenge for successive central governments.

Given India’s federal structure, the states provide last-mile connectivity and maintain infrastructure; the center provides policy and financial support.

With its aim of “Power for All”, the Government of India has put village electrification at the top of its agenda. The Modi government launched the “Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY)” to ensure rapid electrification, feeder separation, and strengthening of rural distribution infrastructure. The aim is to electrify the remaining 18,452 villages across India by May 2018. (Note: A village is considered electrified if all the public places and 10% of households have electricity).

Exhibit 58: Villages electrified in India – 7,008 villages electrified in FY16

Source: CEA, MOSL

In FY16, a record 7,008 villages were electrified (target: 7,000 villages), higher

than the total villages electrified in the preceding three years. A total 580k villages (~98% of total villages) have been electrified and the aim is to complete the electrification of all villages in FY17 itself, much before the deadline of May 2018 that the government has set for itself.

An increase in grid connected villages, and in turn, higher availability of power for households would lead to higher demand for Light Electrical Products such as Fans, Lights, Switches, etc.

Metros, 18%

Top 67 cities (ex metros), 29%

Others, 53%

512,513

482,864

556,633 560,552 572,414 577,629 584,637

FY02 FY07 FY12 FY13 FY14 FY15 FY16

Villages electrified


20 June 2016 36

Financials and Valuations

Income Statement (INR Million) Y/E March FY16 FY17E FY18E FY19E Total Revenues 18,117 41,203 47,274 54,254 Change (%) - 127.4 14.7 14.8 Raw Materials 12,702 28,724 32,957 37,823 Staff Cost 1,005 2,432 2,727 3,190 Other Expenses 2,315 5,417 6,007 6,648 EBITDA 2,095 4,630 5,584 6,594 % of Total Revenues 11.6 11.2 11.8 12.2 Depreciation 63 136 149 167 Other Income 2 19 25 49 Interest 318 660 550 440 PBT 1,716 3,853 4,910 6,036 Tax 525 1,233 1,620 1,992 Rate (%) 30.6 32.0 33.0 33.0 Adjusted PAT 1,191 2,620 3,290 4,044 Extra-ordinary Income (net) -139 0 0 0 Reported PAT 1,052 2,620 3,290 4,044 Change (%) -96.7 149.1 25.6 22.9 Adj. Consolidated PAT 1,052 2,620 3,290 4,044 Change (%) -96.7 149.1 25.6 22.9

Balance Sheet

Y/E March FY16 FY17E FY18E FY19E Share Capital 1,254 1,254 1,254 1,254 Reserves 1,034 2,396 4,107 5,724 Net Worth 2,287 3,650 5,360 6,978 Loans 6,500 5,500 4,500 3,500 Deferred Tax Liability -43 -43 -43 -43 Capital Employed 8,744 9,106 9,817 10,435 Gross Fixed Assets 2,030 2,330 2,630 2,930 Less: Depreciation 1,244 1,380 1,528 1,695 Net Fixed Assets 787 951 1,102 1,235 Capital WIP 0 0 0 0 Goodwill 7,794 7,794 7,794 7,794 Curr. Assets 7,907 9,255 11,125 13,116 Inventory 2,100 2,412 2,767 3,176 Debtors 4,165 4,784 4,971 5,705 Cash & Bank Balance 900 1,207 2,409 3,113 Loans & Advances 734 844 968 1,111 Other Assets 7 8 9 11 Current Liab. & Prov. 7,742 8,894 10,204 11,711 Current Liabilities 7,317 8,405 9,644 11,068 Provisions 425 488 560 643 Net Current Assets 164 361 921 1,405 Application of Funds 8,745 9,106 9,817 10,434 E: MOSL Estimates


20 June 2016 37

Financials and Valuations

Ratios Y/E March FY16 FY17E FY18E FY19E Basic (INR) Adj EPS 1.9 4.2 5.2 6.5 Cash EPS 2.0 4.4 5.5 6.7 Book Value 3.6 5.8 8.6 11.1 DPS 0.0 1.7 2.1 3.2 Payout (incl. Div. Tax.) 0.0 40.0 40.0 50.0 Valuation (x) P/E 70.5 32.1 25.5 20.8 Cash P/E 67.0 30.5 24.4 19.9 EV/EBITDA 42.8 19.1 15.4 12.8 EV/Sales 4.9 2.1 1.8 1.6 Price/Book Value 36.7 23.0 15.7 12.0 Dividend Yield (%) - 1.2 1.6 2.4 Profitability Ratios (%) RoE 52.1 88.3 73.0 65.6 RoCE 28.1 34.2 38.5 42.7 Turnover Ratios Debtors (Days) 42 42 38 38 Inventory (Days) 21 21 21 21 Creditors. (Days) 68 68 68 68 Asset Turnover (x) 2.1 4.5 4.8 5.2 Leverage Ratio Debt/Equity (x) 2.8 1.5 0.8 0.5

Cash Flow Statement (INR Million) Y/E March FY16 FY17E FY18E FY19E PBT before EO Items 1,716 3,853 4,910 6,036 Depreciation 63 136 149 167 Interest 318 660 550 440 Direct Taxes Paid -525 -1,233 -1,620 -1,992 (Inc)/Dec in WC (229) 108 643 220 CF from Operations 1,342 3,524 4,631 4,871 EO Income 0 0 0 0 CF from Oper. Incl. EO Items 1,342 3,524 4,631 4,871 (Inc)/Dec in FA (1) (300) (300) (300) Free Cash Flow 1,342 3,224 4,331 4,571 Investment & Others 0 0 0 0 CF from Investments -1 -300 -300 -300 (Inc)/Dec in Networth (18) 0 0 0 (Inc)/Dec in Debt -316 -1,000 -1,000 -1,000 Interest Paid -318 -660 -550 -440 Dividend Paid 0 -1,258 -1,579 -2,426 Others 210 CF from Fin. Activity (442) (2,918) (3,129) (3,866) Inc/Dec of Cash 900 307 1,202 704 Add: Beginning Balance 1 900 1,207 2,409 Closing Balance 900 1,207 2,409 3,113 E: MOSL Estimates

RECENT INITIATING COVERAGE REPORTS

REPORT GALLERY

http://ftp.motilaloswal.com/emailer/Research/BOS-20150921-MOSL-IC-PG034.pdf

http://ftp.motilaloswal.com/emailer/Research/SRF-20150910-MOSL-IC-PG028.pdf

http://ftp.motilaloswal.com/emailer/Research/MCX-20150819-MOSL-IC-PG024.pdf

http://ftp.motilaloswal.com/emailer/Research/INDIGO-20151210-MOSL-IC-PG056.pdf

http://ftp.motilaloswal.com/emailer/Research/Eveready-20151218-MOSL-IC-PG042.pdf

http://ftp.motilaloswal.com/emailer/Research/MUTH-20151006-MOSL-IC-PG030.pdf

http://ftp.motilaloswal.com/emailer/Research/SKSM-20151228-MOSL-IC-PG032.pdf

http://ftp.motilaloswal.com/emailer/Research/ALKEM-20160121-MOSL-IC-PG042.pdf

http://ftp.motilaloswal.com/emailer/Research/PG-20160425-MOSL-IC-PG038.pdf


20 June 2016 39

N O T E S


20 June 2016 40

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