Crompton Greaves- Results in line, power systems recover; BUY :: Religare

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Crompton Greaves Ltd
Results in line, power systems recover; Maintain BUY
Crompton Greaves’ (CRG) Q2FY11 results were in line with our expectations.
Net profit for the consolidated entity was up 10.5% YoY to Rs 2.1bn.
Importantly, consolidated revenues for the power systems segment grew 6.8%
YoY during the quarter after a weak showing in Q1FY11. Both the consumer
products and industrial systems segments continued to display robust growth,
registering a 23.9% and 13.3% YoY increase in their consolidated revenues
respectively. The consolidated EBITDA margin at 13.9% was flat YoY even as it
contracted 50bps YoY to 16% for the parent company. At our current estimates,
the stock trades at a P/E of 23.3x/20.7x for FY11E/FY12E. Maintain BUY.
Power segment recovery likely led by higher shipments: Growth in CRG’s power
systems segment was possibly driven by an increase in shipments during the
quarter. In earlier interactions, the management had highlighted that the power
segment growth had been subdued since customers were postponing shipments of
the finished product. The consolidated order backlog at the end of Q2FY11 was at
~Rs 71 bn, while the order backlog for the standalone entity was at ~Rs 38 bn.
The implied consolidated order intake grew by ~22% to ~Rs 27 bn in the quarter.
Consumer products continue to show strength: Consumer products continued to
show robust growth with 26.5% YoY higher revenues for H1FY11. This growth,
in our view, was driven by the company’s product line for fans (up 26.7 %YoY in
FY10). The industrial segment too saw 19.9%/14.1% higher sales YoY for the
parent/consolidated entity in H1FY11. In earlier calls, the management had
highlighted that growth in the industrial segment was across product lines.
Margins may have topped out: The parent company’s operating margin (EBIT)
was 100bps lower for both, the power and industrial segments even as it
expanded for the consumer segment by ~50bps YoY. We believe that upside
risks to margins are limited from current levels as the levers of margin expansion,
i.e. global sourcing and improved engineering, may have played out.

Enters into substation business via JV with ZIV: In line with plans to enter the
project segment, the company has entered into a MoU with ZIV Aplicaciones y
Tecnologia, SL (ZIV) for establishing a JV in India. The JV will manufacture
substation automation systems in the extra high voltage (EHV) and ultra high
voltage (UHV) range. For a 70% stake, CRG is likely to invest Rs 70mn in the JV.
Valuation: We expect CRG to see higher order inflows for the power segment,
which is in our view would be the next trigger for the stock. Maintain BUY.