Visit http://indiaer.blogspot.com/ for complete details CROMPTON GREAVES 2QFY11: In-line; Consumer business drives standalone performance; CG Global’s PAT declines 4% led by currency movement; Neutral
- Crompton Greaves (CRG IN, Mkt Cap US$4.6b, CMP Rs321, Neutral) reported standalone performance in line with estimates. Consumer division (32% of revenues and 27% of EBIT) has been the key driver in 2QFY11 where EBIT saw a jump of 28% amid overall EBIT growth of just 10% YoY. Power Division revenues remained lackluster, up 7%, with EBIT margins declining 105bp YoY to 18%. For 1HFY11, standalone revenues were up 14% with EBITDA margin flat at 15.8% and PAT at Rs3b, up 20% YoY.
- For CG Global (consisting of Pauwels, Ganz, Microsal, etc), 2QFY11 revenues stood at Rs9.5b (up 4% YoY), EBITDA at Rs1.02b (up 5% YoY) and Net profit of Rs549m (down 4% YoY). 2QFY11 EBIDTA margin remained flat at 10.7%. Adverse foreign exchange movement impacted profits. In Euro terms, the company posted strong revenue growth of 19% and PAT growth of 11% for the quarter.
2QFY11 Standalone performance in-line with estimates
- During 1QFY11, Crompton reported standalone revenues at Rs14.4b (up 14% YoY), in line with our estimates. EBITDA margin at 16% was down 50bp YoY, marginally lower than our estimate of 16%. Adjusted PAT at Rs1.58b was up 17% YoY, better than our estimates of Rs1.52b mainly due to higher other income at Rs193m which more than doubled YoY.
- Standalone power systems revenues were up 7% YoY while for 1HFY11 they are up a mere 4% YoY. Consumer products division revenues grew by a robust 24% YoY with 1HFY11 revenues now growing the fastest at 26% followed by industrial division which has grown by 18% for the quarter and 20% for the 1HFY11 period.
- In 2QFY11, raw material cost was up 120bp YoY to 68.2%, given that lower cost inventory has been utilized (commodity prices bottomed around 1QFY10). Other expenditure declined 60bp YoY to 10.7% in 2QFY11 and led to EBITDA margin decline of 50bp YoY during the quarter.
Consumer products business drives 65% of standalone EBIT increase in 2QFY11
- Power systems (44% of revenues and 45% of EBIT) revenues were up 7% YoY, while EBIT margins at 17.5% were down 105bp YoY.
- Industrial systems (23% of revenues and 28% of EBIT) revenues were up 23% YoY while EBIT margins at 20.6% were up 62bp YoY.
- Consumer division (24% of revenues and 28% of EBIT) has been the key driver in 2QFY11 and reported revenues of Rs4.63b (up 24% YoY) while EBIT margins stood at 14.5% (up 47bp YoY). The consumer business accounted for 65% of EBIT increase in 2QFY11 as overall EBIT growth was a modest 10% YoY for 2QFY11 and 15% for 1HFY11.
- In the consolidated business, Power systems revenues jumped 7% YoY with overall EBIT growth at 9% YoY. Power systems EBIT margins stood at 12.3% which were flat YoY while industrial division revenues improved 12% and EBIT margins declined 244bp YoY to 19.5%.
CG Global: Strong revenue growth of 19% YoY in Euro terms, EBIDTA margins remain flat at 10.7%; PAT grows 11% YoY
- CG Global (consisting of Pauwels, Ganz, Microsal, etc) reported strong improvement in global sales, with 2QFY11 revenues of Euro160m, up 19% YoY and PAT of Euro9m, up 10.7%. However, due to adverse currency impact, revenue and PAT were down 4% YoY in INR terms.
- 2QFY11 EBIDTA margins stayed flat at 10.7%, as material costs declined 300bp YoY and other expenditure increased 120bp YoY. Tax rates during the quarter jumped 539bp YoY to 26% which also contributed to overall PAT decline.
- For 1HFY11, CG Global revenues have declined 2% and PAT growth has been a marginal 1% in INR terms. We expect volume growth for international business to continue with pick-up in demand for distribution transformers from sectors like wind power, thereby improving profitability.
Cons balance sheet 1HFY11: Net Current Assets at 24% of revenues (up 400bp YoY); Cash down 48% from March 2010 as acquisitions add up to Rs3b
- For the period ending Sept 2010, CGL’s consolidated balance sheet shows a marked increase in Net Current Assets, up 400bp as % of revenues to 24%.
- Cash balance at end Sept 2010 stood at Rs3.45b against Rs6.68b in March 2010. The decrease is explained by the two acquisitions made by Crompton during the period, viz, i) Power systems UK (GBP30m) and ii) NELCO (Rs920m) which almost add up to Rs3b.
- Acquisitions have also led to increase in fixed assets to the tune of Rs4.52b over March 2010.
Valuation and view
- At CMP of Rs321, the stock trades at P/E of 23x FY11E and 19x FY12E consolidated earnings of Rs14 in FY11E (up 12%) and Rs17.3 in FY12E (up 23%).
- With likely pick-up in domestic power order-flows in FY11, we expect the company to maintain strong growth in FY12. Faster-than-expected recovery in developed market sales can provide upsides to FY12 earnings. However, growth in FY11 is expected to remain muted.
- Crompton Greaves is a strong play on India’s capex cycle and one of the fastest growing T&D companies worldwide. However, given strong appreciation in stock price in past few months, we see limited upside in the near term. MaintainNeutral rating with a target price of Rs329 (18x FY12E EPS) and Rs17/share attributed to CG’s investment in Avantha Power.
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