CROMPTON GREAVES Sustainable performance :: Edelweiss,

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CROMPTON GREAVES
Sustainable performance 


Crompton Greaves (Crompton) reported Q2FY11 numbers in line with our estimates,
with consolidated revenue and PAT growth of 9.5% and 10.5%, Y-o-Y, respectively.
The consumer segment maintained its growth momentum in the domestic market,
aided by 24% Y-o-Y growth in revenues coupled with a strong margin improvement
in the overseas subsidiary in power systems business. There was, however, ~13%
adverse currency impact in the quarter on account of depreciation of the Euro versus
INR, adjusted for which revenues would have grown much higher.
􀂃 Execution picks up in overseas power system
Crompton has witnessed a gradual pick up in power system revenues (slow in
Q1FY11) on the back of healthy off take from overseas entities, led by good
traction in distribution transformers. Domestic power systems, however,
remained muted on account of customer deferments (both domestic and export).
􀂃 Peaking utilisation levels warrant INR 12 bn capex
The top management expects to incur INR 6 bn each for FY11E and FY12E
towards capacity expansion in power and industrial systems, which should
increase overall capacities in these segments by ~20%. Of this, INR 4.3 bn has
already been expensed in H1FY11 as capex. We have incorporated higher
depreciation in our FY11E and FY12E numbers, cutting our EPS for FY11E and
FY12E by 4% and 6%, respectively. Also, we have not built in any upside to
revenues for the increased capex, due to lack of clarity as of now.
􀂃 H2FY11 to see increased new orders in domestic market
Crompton currently has a consolidated order book of INR 71 bn (+4% Q-o-Q and
+6% Y-o-Y), implying 36% Y-o-Y growth in new orders for H1FY11 to INR 52.9
bn, and 36% Y-o-Y for Q2FY11 to INR 25.6 bn. More than 60% of the Q2FY11
consolidated new orders came from the domestic market (both private and
SEBs). Management expects H2FY11 new orders to be more than H1FY11, led by
awards from PGCIL and others.

􀂃 Outlook and valuations: Consistent performer; maintain ‘BUY’
Crompton’s diversified business model with dominant presence in the high end
T&D products, consumer products and industrial segment has helped it manage
growth expectations. While the management guidance re-affirms our confidence
on earnings growth for the next few quarters, we further expect new order
traction to remain buoyant over the next 2-3 quarters due to expected awards in
the domestic market. The stock is currently trading at P/E of 23x and 20x FY11E
and FY12E, respectively. We maintain our ‘BUY/Sector Outperformer’.