Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Strong business risk profile, supported by revenue diversity and established brand: The company operates in four key business segments: fans, lighting, pumps and appliances. The electric consumer durables segment, comprising fans, pumps and appliances, accounted for 80% of the revenue in fiscal 2022, while lighting constituted the remaining 20%. Acquisition of BGAL will further strengthen the product portfolio of CGCEL, especially in the kitchen appliances segment. Diverse value offering in each segment has helped the company register consistent growth over the years.

A stronger distribution network and steady pace of product launches have led to sustained increase in the market share across categories in the last two years, with fans at 28%, pumps at 17%, light-emitting diode (LED) segment at 8%, geysers at 13% and water coolers at 8%. Furthermore, the premium portfolio and cost-reduction initiatives have helped the company report sustained profitability and industry-leading revenue growth. Strong focus on innovation and premiumisation and ability to come up with regular fresh product variants and devise new product categories will continue to benefit the business.

Healthy growth prospects, backed by focus on brand strengthening and pan-India distribution network: The company has a robust distribution network. Significant focus on reach expansion in go-to-market strategy has improved the numeric distribution for the fans and lighting LED bulbs segments to 58% and 21%, respectively, from 35% and 9%, respectively, over the past 3-4 years. Established brand, wide product portfolio and strong distribution reach have helped CGCEL enjoy a leading position in the domestic fans and residential pumps segments and gain significant share in water heaters. It is also the third-largest lighting company in India. Recent acquisition of BGAL would help it achieve its long-term strategic goal of becoming a leading player in the appliances segment through a complete small kitchen appliances portfolio.

Healthy financial risk profile: While the financial risk profile remains healthy on account of strong annual cash generation, it witnessed temporary moderation in the near term as a result of sizeable debt raised for acquisition of the majority stake in BGAL. Because of the debt-funded acquisition, leverage (Gross debt to Ebitda) moderated to 2.15 times in fiscal 2022, though it is expected to improve to below 1 time by the end of fiscal 2024, driven by strong cash generation. Given the sizeable debt raised and moderation in the financial risk profile, any further material acquisition will be a monitorable.

Weaknesses:

Exposure to intense competition in the domestic consumer durables sector: Over the past few years, competition has intensified in the consumer durables sector in India, with players such as Havells India Ltd establishing a strong consumer connect and brand recall. CGCEL faces competition from players in the organised and unorganised segments, though the price differential enjoyed by the unorganised sector has gradually reduced post Goods and Services tax implementation.

Evolving impact of government policies on the use of energy-efficient products: The central government's initiative to replace incandescent and compact fluorescent lamp bulbs with energy-efficient LED bulbs has helped players such as CGCEL gain market share over the past years. Nevertheless, intense bidding for tenders and pricing pressure will restrict improvement in profitability of players in the lighting segment. The impact of new BEE norms in July 2022 will also a key monitorable.