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Crompton Greaves ---------------------------------------------------------- Maintain OUTPERFORM
Comforting guidance to aid stock price recovery
● CGL management, in a post results conference call, has
increased guidance for FY11 international business(12% growth
in local currency from 5% guidance previously). For FY12 too,
management expects 11-12% growth with flat margins.
● For domestic business, management expects 9M revenue growth
of 14% YoY to continue into 4Q. Domestic T&D revenue booking
will remain in low single digits in 4Q. For FY12, management
expects to accelerate domestic revenue growth to 16-18% driven
by recovery in domestic T&D revenue growth (11-12%). Growth
for the industrial segment is expected at 20% while consumer
over 25% YoY. Margins are expected to be maintained.
● While ahead of the quarter, the street was concerned about a
likely weak quarter and a possibility of guidance cut, we believe
that the comforting guidance should help stock price to recover.
● At 17x, valuations appear attractive relative to peers.(25-35x).
CGL, in our view, will be a beneficiary of fund flows given the
open offer announcement by Siemens, that leaves CGL as the
only listed relevant play on the T&D cycle in India.
Domestic T&D segment: expect acceleration in FY12
Management highlighted the expectation of maintaining 14% growth
with flat margins for its domestic business. (versus prior 15% growth
guidance). For FY12, management drew attention to the expectation
of growth to accelerate to 16-18% YoY. For power systems,
management expects 11-12% revenue growth (i.e., execution to
improve), industrial segment - 20% growth and >25% growth for
consumer business.
Management expects to maintain margins next year, if commodity
prices remain at current levels. In the product segment, management
stressed that it is able to pass on the price increases with a lag (This
explains the decline in margins for the industrial segment this year).
On the cost side, management indicated that the initiative taken under
the one world programme has been implemented to a large extent.
Order book for domestic T&D business at Rs37 bn, grew 25% YoY.
Management highlighted that it has won orders for 17 transformers
and 11 reactors worth Rs2.5 bn recently (L1 position). While
management stated that competitive intensity remains stiff with
Chinese firms reducing prices further, we believe that CGL stands to
benefit from the new domestic manufacturing clauses. (Please refer
report titled, Powergrid introduces domestic manufacturing clauses
dated 12 January 2011).
Management pointed out that that last year volume growth in MVA
terms was 31% and given that revenue growth has been in single
digits, price pressure has been significant. We are of the view that
pricing should stabilise now, given the likely increase in volume of
ordering ahead of commencement of next plan period.
International business: revise up guidance
For international business, 9M revenues have grown by 13% (Euro
terms). Management expects 11-12% (Euro terms) growth to continue
even in 4Q. This is higher than management’s prior guidance of 5%
YoY growth in Euro terms. Consolidated order book at Rs70 bn was
up 15% YoY.
Based on current order visibility, management was of the view that it
would be possible to grow revenues by 12-13% growth in Euro terms
for FY12 and given that the negative impact of currency (i.e., Euro
depreciation last year impacted translated financials by 15%) may not
be felt next year, this should translate into similar growth in rupee
terms.
Management highlighted that the distribution segment on the
international front has seen a pick up in order activity. This supports
our view that medium voltage and distribution business has
strengthened in Europe (related to the HV segment). For margins,
management did not anticipate an improvement in the near term but
expects it to trend up in the coming years.
Capex to decline next year
Management highlighted that Rs4bn has been spent this year in
expanding capacities for various products. The expanded capacity is
sufficient to manage growth until next year and in case management
sees significant strength in order intake next year, it plans to embark
on further capex. This decision however will be taken in 2H next year .
Succession planning
CMD of Crompton Greaves, Mr Trehan said that he is due to retire in
May 2011 and a successor would be nominated in the coming
months.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Crompton Greaves ---------------------------------------------------------- Maintain OUTPERFORM
Comforting guidance to aid stock price recovery
● CGL management, in a post results conference call, has
increased guidance for FY11 international business(12% growth
in local currency from 5% guidance previously). For FY12 too,
management expects 11-12% growth with flat margins.
● For domestic business, management expects 9M revenue growth
of 14% YoY to continue into 4Q. Domestic T&D revenue booking
will remain in low single digits in 4Q. For FY12, management
expects to accelerate domestic revenue growth to 16-18% driven
by recovery in domestic T&D revenue growth (11-12%). Growth
for the industrial segment is expected at 20% while consumer
over 25% YoY. Margins are expected to be maintained.
● While ahead of the quarter, the street was concerned about a
likely weak quarter and a possibility of guidance cut, we believe
that the comforting guidance should help stock price to recover.
● At 17x, valuations appear attractive relative to peers.(25-35x).
CGL, in our view, will be a beneficiary of fund flows given the
open offer announcement by Siemens, that leaves CGL as the
only listed relevant play on the T&D cycle in India.
Domestic T&D segment: expect acceleration in FY12
Management highlighted the expectation of maintaining 14% growth
with flat margins for its domestic business. (versus prior 15% growth
guidance). For FY12, management drew attention to the expectation
of growth to accelerate to 16-18% YoY. For power systems,
management expects 11-12% revenue growth (i.e., execution to
improve), industrial segment - 20% growth and >25% growth for
consumer business.
Management expects to maintain margins next year, if commodity
prices remain at current levels. In the product segment, management
stressed that it is able to pass on the price increases with a lag (This
explains the decline in margins for the industrial segment this year).
On the cost side, management indicated that the initiative taken under
the one world programme has been implemented to a large extent.
Order book for domestic T&D business at Rs37 bn, grew 25% YoY.
Management highlighted that it has won orders for 17 transformers
and 11 reactors worth Rs2.5 bn recently (L1 position). While
management stated that competitive intensity remains stiff with
Chinese firms reducing prices further, we believe that CGL stands to
benefit from the new domestic manufacturing clauses. (Please refer
report titled, Powergrid introduces domestic manufacturing clauses
dated 12 January 2011).
Management pointed out that that last year volume growth in MVA
terms was 31% and given that revenue growth has been in single
digits, price pressure has been significant. We are of the view that
pricing should stabilise now, given the likely increase in volume of
ordering ahead of commencement of next plan period.
International business: revise up guidance
For international business, 9M revenues have grown by 13% (Euro
terms). Management expects 11-12% (Euro terms) growth to continue
even in 4Q. This is higher than management’s prior guidance of 5%
YoY growth in Euro terms. Consolidated order book at Rs70 bn was
up 15% YoY.
Based on current order visibility, management was of the view that it
would be possible to grow revenues by 12-13% growth in Euro terms
for FY12 and given that the negative impact of currency (i.e., Euro
depreciation last year impacted translated financials by 15%) may not
be felt next year, this should translate into similar growth in rupee
terms.
Management highlighted that the distribution segment on the
international front has seen a pick up in order activity. This supports
our view that medium voltage and distribution business has
strengthened in Europe (related to the HV segment). For margins,
management did not anticipate an improvement in the near term but
expects it to trend up in the coming years.
Capex to decline next year
Management highlighted that Rs4bn has been spent this year in
expanding capacities for various products. The expanded capacity is
sufficient to manage growth until next year and in case management
sees significant strength in order intake next year, it plans to embark
on further capex. This decision however will be taken in 2H next year .
Succession planning
CMD of Crompton Greaves, Mr Trehan said that he is due to retire in
May 2011 and a successor would be nominated in the coming
months.
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