Buy CG Consumer Electricals; target of Rs 260: Motilal Oswal

Motilal Oswal's research report on CG Consumer Electricals

Results meaningfully above estimates: CG Consumer Electricals (CGCEL) reported a strong set of numbers. 2QFY18 sales stood at INR9.6b (+9.8% YoY, +15.9% YoY adjusted for excise duty on manufactured and sourced products), meaningfully above our estimates, led by market share gains in the Fans segment and healthy growth in the Lighting division (+16% YoY, +25% YoY adjusted for excise duty on manufactured and sourced products). EBITDA improved 19.3% YoY to INR1.2b, with EBIDTA margin improving 100bp YoY to 12.6%, led by close to zero spending on advertising & promotion. Net profit of INR0.7b was above our estimate of INR0.6b.  Margin improvement led by lower adspend and focus on premiumization: Gross margin expanded 90bp YoY to 30.3%, led by premiumization initiatives taken by the company. EBITDA of INR1.2b (13% YoY) was meaningfully above our estimate. Operating margin stood at 12.6% v/s 11.6% in 2QFY17. Margin improvement was on account of close-to-zero ad spend during the quarter, as against INR120m in 2QFY17. Lighting business contributed 35% of revenue (v/s 32% in 2QFY17), while Electrical consumer durables accounted for 65% (v/s 68% in 2QFY17). Excluding non-cash ESOP expenditure of INR141m, the operating margin stood at a healthy 14%.

Outlook
We marginally increase our earnings estimates by 4/1% for FY18/19 to adjust for better-than-expected margins. We like CGCEL for its strong product portfolio, established brand, market leadership, wide distribution network and a robust RoCE profile (29%/31% in FY18/19). We maintain our Buy rating on the stock, with a revised target price of INR260 (33x its FY20E EPS of INR7.9).

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