New norms may hit demand, keep CG Consumer under pressure

The stock of Crompton Greaves Consumer (CG Consumer) could continue to underperform the broader markets due to near-term challenges in the fans segment, where it is the market leader. The stock has underperformed the broader indices — such as the BSE 100 — with a flattish performance since the start of October.

The transition to energy efficiency norms from January 1 2023 for fans would mean nearterm headwinds for the market leader due to destocking, demand drop and higher prices.

The new norms will make it mandatory for ceiling fans to have star ratings, as is currently the case with air conditioners and refrigerators. The transition will mean that the cost of energy efficient fans is expected to be 15-20 per cent higher than conventional fans.

Say Kunal Sheth and Archit Shah of B&K Securities, “Apart from direct monetary implications, transitioning and adapting to new norms will also have some indirect impact in the near-term like demand slowdown, reluctance by channel partners to stock new fans and rapid destocking of conventional fans.”

CG Consumer has a 28.5 per cent market share in the ~10,000 crore plus fans segment. Brokerages expect demand to be hit in the first half (H1) of the fourth quarter of the 2022-23 financial year (Q4FY23) with price hikes of around 9 per cent while normalcy is expected to return in H2.

Despite the overhang,

Jefferies Research, which has CG Consumer as a top ‘buy’ in its portfolio, believes that fans will continue to be the key growth driver. Mahesh Nandurkar and Abhinav Saha of the brokerage say that it has typically outpaced industry growth by 1.5 times and has registered a 19 per cent year-onyear (YOY) growth in FY22.

The growth is led by premiumisation, including new launches and innovation focus on premium offering, market share gains of 650 basis points (bps) between FY16-22 and expansion of its reach. The brokerage believes that the rapid adoption of new technology (new efficiency norms) and focus on premiumisation could help fans sustain higher growth as compared to industry.

What should offer relief for the company is easing of commodity prices. The company took a 292 bps hit on its operating profit margins in the September quarter. Most brokerages expect some margin gains in Q3FY23 with further expansion dependent on volume trends.

The other benefits for the stock are revenue and cost synergies after its acquisition of Butterfly Gandhimathi Appliances. In addition to cross-selling opportunities for an expanded portfolio, the company will benefit from the larger manufacturing footprint, research and development capabilities and gains on the procurement front.

While prospects remain healthy, the near-term worries would mean that the stock, which is down 17 per cent from its highs over the past three months, could remain under pressure.