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Crompton Greaves India
Order inflow blip - Opportunity to accumulate
Event
�� Crompton Greaves has fallen by 10% in the past month on concerns of further
delays in orders from Power Grid (PWGR IN, Rs97.65, Neutral, TP: Rs100,
covered by Jeff Evans). We believe order inflow from PWGR is a certainty as
associated generation projects move closer to completion.
�� The stock has corrected to 17x FY12E, a discount of more than 35% to peers
despite a similar growth and return profile. We reiterate our Outperform
recommendation with a target price of Rs361.
Impact
�� Delay in orders as PWGR tightens bidding norms, CRG to benefit: Our
discussions with industry players suggest that Power Grid has delayed orders
as it was re-working on tightening technical qualification norms after a number
of projects awarded initially to smaller players have been stuck due to various
reasons. Despite the delay, this would work in favour of established players
like CRG. The norms are mainly regarding the requirement of local
manufacturing or JV within six months of project award.
�� Capex financing by cash rich Power Grid: Transmission capex would be
primarily financed by Power Grid and to some extent by private players rather
than distressed state electricity boards. In our view, street concerns on capex
financing are misplaced regarding transmission though valid for distribution.
�� Little choice but to start work on inter-regional high transmission
corridors: Power Grid has identified nine high voltage transmission corridors
for the XIIth plan to connect power-surplus generation areas (like Chattisgarh,
Orissa) with power-deficit demand centres. Work on the first corridor worth
Rs88bn in Orissa would need to begin soon as thermal projects linked to this
project would be commissioned over the next 24-36 months.
�� Concerns on subsidiaries are overdone: Continental Europe contributed
only 6.7% to consolidated earnings in FY10 as the company uses its subs to
enter new markets like Southeast Asia and the Americas. With outlook on
developed markets improving and entry into more profitable new geographies,
we believe subsidiary margins would expand in FY12.
Earnings and target price revision
�� No change.
Price catalyst
�� 12-month price target: Rs361.00 based on a PER methodology.
�� Catalyst: Awards of projects by Power Grid.
Action and recommendation
�� Correction overdone, buy the best play on Indian power T&D capex
story: We believe that the stock provides an extremely attractive entry point
for investors keen to play the Indian power T&D capex story. At Rs300, the
stock is available at 16.5x FY12E EPS with earnings CAGR of 20% over next
2-3 years.
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