Crompton Greaves CE pins hope on Shantanu Khosla but investors bit worried

Khosla, who has been elevated from the rank of managing director to executive vice-chairman, will remain on the board till December 2025. He has been with the company for seven years now

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To assuage investor concerns after a 12 percent knock in the share price, Crompton Greaves Consumer Electricals’ new management said in a conference call that Shantanu Khosla will continue to provide support, guidance and inputs to the company.

Khosla, who has been elevated from the rank of managing director to executive vice-chairman, will remain on the board till December 2025. He has been with the company for seven years now.

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The consumer durables company‘s shares saw a sharp selloff, as well as buildup of short positions on April 25, after chief executive officer Mathew Job announced surprise resignation. Promeet Ghosh, former deputy head of Temasek India, is the new MD and CEO of the company.

“While he (Ghosh) is associated with the company since 2016 (when Temasek bought a stake), we have concerns regarding his expertise in running a white goods and durables company as he has mostly been an investment banker so far,” ICICI Securities’ Aniruddha Joshi and Manoj Menon wrote in a report.

Foreign broking firm JPMorgan believes that there’s a larger issue at hand. There have been multiple changes in the leadership team – previous CFO resigned in May 2022, sales head resigned recently, and now comes Job’s exit.

“In this context, we see uncertainty on strategic priorities and execution approach, more so in a subdued demand environment amid enhanced competitive activity in the fans, lighting and pumps categories. Plus, Butterfly integration is in initial stages,” its analysts said.

Integration with Butterfly

In the conference call, it was assured that Khosla will be even more involved in the integration of Butterfly Gandhimathi. The merger between the two companies that was announced in March has been largely viewed as a positive move leading to entrenched distribution and more touchpoints.

However, it comes with a caveat – the synergies of the merger will not flow to the bottomline immediately and EPS accretion will happen gradually by FY25.

Delay in Butterfly integration is a key risk, according to analysts, and hopes are now pinned on Khosla to drive the pace.

Ghosh’s priorities

Streamlining of back-end capabilities is the top priority for the new MD and CEO now. “The company will focus on improving market position, capability building, greater ad spends, brand building and manufacturing excellence,” said the company brass in the concall.

The company will also rebalance the margin-versus-topline priorities. “Focus will be on volume growth and absolute profit rather than gross margin,” they said.

How concerned should investors be?

A little bit, believe analysts. ICICI Securities believes that senior management exits may have impact on Crompton’s business strategy, at least in the short term. “It may also result in the reduction of valuation multiples for the company, in our view,” it added, cutting the target price on the stock from Rs 495 to Rs 325.

JPMorgan has also downgraded the stock to a ‘neutral’ rating and cut target to Rs 265. It believes unexpected leadership change may add to short-term volatility and it might be too early to chase the stock despite 12 percent correction.

That said, some continue to like the stock for the long-term story. Goldman Sachs is betting on the company’s sector-leading return profile – return on equity at 20 percent for FY24 versus high teens for peers – and exposure to the domestic growth story.

Jefferies’ analysis on CEO transition indicates 68 percent of the changes were for good. “An underperfoming stock reverses into outperforming within six months.”

At 1pm, the stock was quoting at Rs 252 on the NSE, lower by 2.8 percent from the previous close. It is down over 26 percent in 2023 so far.

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