RBS: Buy Crompton Greaves- Raise TP to Rs 364

Crompton Greaves
In a sweet spot
We hosted an investor road show in Asia with management of Crompton
Greaves. We remain positive on CGL, as we believe the company is in a sweet
spot, with all segments firing. We raise our FY12F and FY13F earnings and our
target price to Rs364. CGL is our preferred pick in the T&D space.

Domestic outlook remains strong; tone on the international business more positive
We continue to have a positive outlook for the company, given the strong order pipeline in its
domestic T&D business. Crompton’s largest customer, Powergrid, has indicated a spending
plan of around Rs260bn over FY11 and FY12 and this will form the revenue base for CGL in
FY12 and FY13, in our view. We also see potential benefit from signs of a revival in demand
for transformers from the renewables sector in the international business. We expect the
industrial segment to do well, as demand for motors picks up, which we expect it will given
rising industrial capex. We also expect CGL to sustain margins of 13-14% on the back of
higher inflows in its order book from higher rating 765kv transmission systems, which have
better margins than systems of up to 400kv.
Building a cash chest for growth through further acquisitions
Since 2005, CGL has been augmenting its project and product capabilities via niche
acquisitions. We expect this trend to continue, as the company plans to enhance its
technology portfolio via further acquisitions. CGL currently has a cash balance of about
Rs7bn and expects strong cash generation, especially from its industrial and consumer
businesses, which are asset light with depreciated assets. Management expects to maintain
its FY10 payout level of 20% as it builds a cash chest to fund acquisitions and provide
working capital for its power equipment business.
Increasing FY12F and FY13F earnings; raising target price to Rs364
We increase our FY12F and FY13F earnings by 6% and our medium-term growth estimates
from 13.6% to 14.9%. This raises our DCF-based target price to Rs364. CGL remains our
preferred pick in the T&D space, as the company’s mostly products-based business gives it
an advantage over peers. We believe CGL’s consumer products business gives it a unique
diversification among peers. The stock currently trades at 18.3x FY12F EPS.