Crompton Greaves-Q3FY11 Earnings Updates (Keynote Capitals)

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Q3-FY11 earnings updates on Crompton Greaves Ltd.

CG has reported a moderate Q3FY11growth with consolidated profit after tax grew by 15.9% to Rs233cr against Rs201cr on y-o-y basis. Consolidated revenue rose by 6.7% to Rs2397cr as against Rs2246cr on y-o-y basis. The company witnessed a better performance in Industrial Systems, Consumer  Products and subdued result in Power   Systems. During this quarter lower tax rate was incidental for increased profits.

Robust growth in Consumer Product

Consumer  Products business has registered a growth of 30.3% on y-o-y basis to `475.13cr as against `364.73cr with margin decline of 40bps on y-o-y basis.

Ø  Leadership positioning: CG has leadership positioning with substantial market share of 24% in domestic fan industry. CG is ranked number 2 in lighting, and is expanding its product portfolio; is the fastest growing brand in home appliances; and is the leader in the domestic pumps .

Ø  Innovation with a focus on quality: CG will be able to sustain growth and margin on account of strong branding, new design, innovative products and penetration in urban & semi urban markets. The Company has renewed its thrust on enhanced after sales service by commissioning its customer care centre and a network of franchise based authorized service centre in metro cities.

Going forward, we believe Consumer  Product to register a CAGR of 25% during FY10-12 with a margin of 14% .

Revenue growth in Engineering Segment :

Engineering business has registered a revenue growth of 23% on y-o-y basis to `380.9cr as against `360.6cr.Due to increase in raw material prices EBIT de-grew by 250bps .We expect CG Industrial System to  grow  at 18-20% during FY12E with stable margin.

Strong order book:

CG has consolidated order book to the tune of `7017cr, a growth of 15% while its standalone order books stands at `3702cr a growth of 25%.We expect CG’s order book to grow by16-18% in FY12E.

Subdued Growth in Power System Business:

During Q3FY11 on standalone basis, CG has registered a subdued  growth of 2% on Y-o-Y basis to `580Cr from `568Cr.CG’s international business grew by13% and seen marginal decline of   0.5% in rupee term . We expect a growth of 10% in FY12E on consolidated basis due to demand for distribution transformer in renewable source of energy i.e., solar and wind in Europe and America. CG would be able to sustain margin of 12% in FY12E.

Margin Expansion & Operational Efficiency: On account of various value engineering initiatives, better product design and higher efficiency in supply chain management, the company may increase the margins in profit by 50 bps 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.

Concerns

Ø  Sharp increase in Commodity Prices: Increase in raw material prices may affect margin.

Ø  Currency Risk: Crompton derives nearly 50% of its revenues from the International business. Impact may be expected on growth due to movement of currencies.

Ø  Slowdown of Order Inflow: Delayed order inflow from Power Grid may be a constraint   for growth in future.

Outlook & Valuation

AT CMP `273.15 stock trades at 19.1x FY11E EPS and 15.8 FY12E EPS and EV/EBITDA of 11.49 xs and 9.75xs for FY11E and FY12E respectively. We revised our target price to  `328  per share with ‘Buy’ recommendation.