JM Financial: Crompton Greaves -Core biz disappoints, international back to growth

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􀂄 IB breaks growth jinx; sales +19%, net profit +13%: Crompton Greaves’ (CG)
international business (IB) reported net profit growth of 13.1% YoY on stable
margins of 10.7% led by savings in RM (-280bps YoY). After four quarters of
decline, reported sales grew 3.5% to `9.5bn despite 15.5% YoY EUR
depreciation against INR. Adjusted sales and profits grew 19.6% and 12.6%
YoY respectively, on low base effect.
􀂄 Standalone in-line: Power/industry pullback, consumer sales strong: Net
profit grew 16.4% YoY as sales grew 13.9% YoY to `14.4bn, driven by growth
in consumer business (+23.9% YoY) and industrial systems (+17.6% YoY).
120bps increase in RM was partially offset by savings in other expenses (-
150bps), leading to a 50bps decline in margin (first decline in 6 quarters) to
16% (JMFe 16.2%). Single digit (6%) growth in the core power biz is due to
customer delays. Power and industrial systems reported 110bps margin
decline, while consumers’ margins increased 50bps. OB flat sequentially.
􀂄 Cash declined by `2.4bn on higher WC: Balance sheet deteriorated
marginally on 35% YoY increase in capital employed and decrease in cash
balance by `2.4bn (assuming `0.8bn is in liquid investments). Working capital
increased by `2.7bn on inventories pile-up on deferred off-take (Exhibit 7).
􀂄 Consolidated net profit up 10.5% as sales grew 9.5%: CG reported net
profit at `2.1bn, up 10.5% YoY and in-line with JMFe of `2.1bn. Sales grew
9.5% YoY to `24bn, offsetting marginal decline in margins (-11bps YoY at
13.9%). Slight increase in other expenses (+20bps YoY) was more than offset
by lower tax rate, and hence inline profits. OB grew 4.6% QoQ.
􀂄 Maintain HOLD; roll-forward to Sept’11 with `330 TP: We marginally tweak
our estimates by 0.6-1.3% and introduce FY13E EPS of `18.9. We continue to
believe that re-rating potential is limited and stock will track earnings growth
(13.8% expected over FY10-13E). We roll-forward to Sept’11 and revise our
target price to `330 from `320 (18x Sept’12 EPS), reducing Avantha Power
contribution from `20 to `10 based on PE deal valuing APIL at `25bn. Key
risks are decline in margins on higher MV orders and higher competition from
new 765kV domestic JVs; better sales in core business could be a trigger.