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Initiating Coverage report on Crompton Greaves Ltd.
Executive Summary
Ø First mover advantage in high voltage substation business: India is likely to see a major shift from low-medium voltage substation to high voltage substation viz., 400kV, 765kV, and 1100kV power transmission networks to create huge potential opportunities for the players like CG, which has an edge over its peers. We see a major trigger for CG as fresh order inflows for 765kV substations is likely to expect from PGCIL in FY11. Power Grid is a major customer of CG, which has a capex plan of `260bn in FY2011-12.
Ø Diversified business Verticals: CG is a diversified into different business verticals such as Power System, Consumer Products, and Industrial Systems. The company’s growth momentum is well connected to the growth in Indian economy. The company’s diversification differentiates it from its peers and makes it less vulnerable to sector slowdown. CG has strong brand name in consumer products and enjoys market leadership in electric fans in India.CG is expecting an increase in order flow for motor division and improved activity in industrial engineering space
Ø Immense Opportunity in power business: As government has huge investment plan in power transmission & distribution segment in XI five year plan, CG certainly has better position to take advantage of this favorable scenario. Through recent international acquisitions, the company has already made footprint in global power sector which will fuel its top line growth with main thrust on power system division. The demand for transformers in US & Europe market is likely to be improved based on the proposed plans of generating 20% of total power from renewable sources by 2020,which may benefit the company to grow inorganically in the international market.
Ø Functional Efficiency: On account of various value engineering initiatives, better product design and higher efficiency in supply chain management, the profit margin of the company might increase by 50bps and sustain the operating margins at current levels of 13-14%. Increase in manufacturing capacity and changes in plant layout will create additional shop floor space to further improve its productivity.
Ø Healthy Financial Position: The company has cash balance to the tune of `669Cr and positive operational cash flows of `1000Cr demonstrates healthy financial position.
Ø Valuation: At the CMP, the stock is trading at 22.6x and 19.5x of FY11 & FY12 respectively. Based on the DCF valuation ,we recommend a “buy” with a target price of `374/- per share.
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