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Crompton Greaves Limited
▲Overweight ; Previous: Neutral
CROM.BO, CRG IN
Value pick: Upgrade to OW
• We upgrade CG to OW, revised Mar-12 PT of Rs345 implies ~23.5%
upside potential. In 9MFY11, CG has managed to improve margins 50bps
to 13.7%, despite a tough commodity price environment and competitionled pricing pressures. The improvement has been led by operational
efficiency, superior absorption of fixed overhead, and R&D-led savings in
raw material consumption. We expect flat margin performance in 4Q
(~16.2%) and believe management can deliver on stable margin guidance
for FY12 if commodity prices do not increase excessively next year.
• We estimate ~16% top-line growth and ~15% PAT growth in FY12. We
factor in conservative ~11% revenue growth in domestic power segment+
exports. Standalone order book (mainly power) is up 25% YoY at the end of
Dec-q to Rs37B. Deferral of deliveries by customers due to slow progress
on their projects has led to muted growth in this segment in FY11 (est. 4%).
However, we expect project clearances to be awarded eventually, leading to
the possibility of higher growth in domestic power segment in FY12.
• Healthy guidance. Management expects the consumer and industry
segments to record top-line growth of ~25% and ~20%, respectively, in
FY12. CG is witnessing strong rural and urban consumer demand, healthy
inflows and robust inquiries in the industry segment. Overseas segment is
expected to grow 11-13% in euro terms in FY12.
• Mr. Trehan is due to retire in May-11, after 11years as MD. He will
continue to sit on CG’s board in an advisory capacity. Succession planning
is ongoing. The new leader will have to take charge of CG's vision of
growing the top line almost four-fold to US$8B by 2015E. CG’s M&A
track record has been its strength so far.
• CG (OW) is our top pick, followed by Siemens India (OW): Our Mar-12
DCF-based PT of Rs345 (was Rs350) does not include a value for its stake
in Avantha Power (earlier Rs11/share) as its IPO seems to be delayed. At
16.7x FY12E EPS, CG is trading at a discount of 41% to ABB Ltd (rated
UW). Siemens is expected to remain range-bound post the open offer
announced today (see our Alert). Key downside risks: weak order inflows,
sharp commodity price inflation
Key takeaways from Dec-q analyst call
• Order book growth healthy: Standalone order book grew 25% YoY to
Rs37B and overseas order book to Rs33B (up 15.4% YoY). According to
management, order inflow in Dec-q has been ~Rs25B, up 23% YoY. See
Table 1 below. Weak growth in domestic power segment YTD in FY11 has
been led by deferral of deliveries by customers, as their projects are getting
delayed. However, there have been no major project cancellations so far and
we expect the delayed clearances (land acquisition, forest or environment
clearances) to be awarded eventually. Thus, in our view, there is the
possibility of upside to our revenue growth estimate for domestic power
segment in FY12E (~11%), in line with management’s guidance.
• PGCIL and SEB ordering to pick up in 2HCY11. Management has
deferred growth outlook in power segment. We expect ordering for 9 high
capacity power transmission corridors (Rs580B orders) to happen largely
thru FY12.
• Severe erosion in transformer price realization witnessed by
management. In 9MFY11, CG has witnessed 31% growth in MVA terms,
though this has translated into low single-digit growth in the power
segment. The implied price erosion is an outcome of severe competition
from the Chinese/ Koreans and other domestic players. However, the dip in
realization may also be attributed to a decline in scope of work and mix b/w
power transformer and switchgear components in orders.
• CG expects to maintain margins in 4Q and FY12. In 9MFY11, CG has
managed to improve margins 50bps to 13.7% despite a tough commodity
price environment and competition-led pricing pressures. The improvement
has been led by operational efficiency, superior absorption of fixed
overheads and R&D-led savings in raw material consumption. We expect
flat margin performance in 4Q (~16.2%) and believe management can
deliver on stable margin guidance for FY12E, if commodity prices do not
increase excessively next year.
• Growth guidance and segment-wise outlook: Management expects
consumer and industry segment to report top-line growth of ~25% and
~20%, respectively, in FY12. CG is witnessing strong rural and urban
consumer demand. In the industry segment, the company has seen healthy
order inflows and robust inquiries. All industry sectors- cement, steel,
fertilizer, oil and gas, railways - have contributed to the growth momentum.
Overseas segment is expected to grow 11-13% in euro terms in FY12. We
have not assumed any INR appreciation vs. the euro in FY12 in our
estimates. According to management, the revival in distribution transformer
demand is ongoing, mainly led by renewable sector.
• Tax-rate to track 9MFY11 levels of ~27.6%. According to management,
R&D expenditure invites lower tax rate, and this has led to a lower
consolidated tax rate YTD. As R&D spend is expected to continue, the trend
is EPS accretive.
• Mr. Trehan is due to retire in May-11, after 11years as MD. He will
continue to sit on CG’s board in an advisory capacity. Succession planning
is ongoing. The new leader will have to take charge of CG's vision of
growing the top line almost four-fold to US$8B by 2015E. Revenue has
already grown over four times since 2005, when the vision was first
conceived. M&A track record of CG has been its strength so far.
Key model revisions and segment-wise P&L
A weak outlook for domestic power segment growth in 4Q (~3-5% YoY) and FY12
(~11% vs. our estimate of 20% growth earlier), has led to a reduction of ~2.2-2.3% in
top-line estimates for FY11 and FY12. The impact was cushioned by high growth
guidance for the consumer, industry and overseas subsidiaries. Overall lower tax rate
guidance (it will track 9mFY11 tax rate < 28% of PBT) is EPS accretive, and our
FY12 EPS estimate is down marginally (~1%)
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Crompton Greaves Limited
▲Overweight ; Previous: Neutral
CROM.BO, CRG IN
Value pick: Upgrade to OW
• We upgrade CG to OW, revised Mar-12 PT of Rs345 implies ~23.5%
upside potential. In 9MFY11, CG has managed to improve margins 50bps
to 13.7%, despite a tough commodity price environment and competitionled pricing pressures. The improvement has been led by operational
efficiency, superior absorption of fixed overhead, and R&D-led savings in
raw material consumption. We expect flat margin performance in 4Q
(~16.2%) and believe management can deliver on stable margin guidance
for FY12 if commodity prices do not increase excessively next year.
• We estimate ~16% top-line growth and ~15% PAT growth in FY12. We
factor in conservative ~11% revenue growth in domestic power segment+
exports. Standalone order book (mainly power) is up 25% YoY at the end of
Dec-q to Rs37B. Deferral of deliveries by customers due to slow progress
on their projects has led to muted growth in this segment in FY11 (est. 4%).
However, we expect project clearances to be awarded eventually, leading to
the possibility of higher growth in domestic power segment in FY12.
• Healthy guidance. Management expects the consumer and industry
segments to record top-line growth of ~25% and ~20%, respectively, in
FY12. CG is witnessing strong rural and urban consumer demand, healthy
inflows and robust inquiries in the industry segment. Overseas segment is
expected to grow 11-13% in euro terms in FY12.
• Mr. Trehan is due to retire in May-11, after 11years as MD. He will
continue to sit on CG’s board in an advisory capacity. Succession planning
is ongoing. The new leader will have to take charge of CG's vision of
growing the top line almost four-fold to US$8B by 2015E. CG’s M&A
track record has been its strength so far.
• CG (OW) is our top pick, followed by Siemens India (OW): Our Mar-12
DCF-based PT of Rs345 (was Rs350) does not include a value for its stake
in Avantha Power (earlier Rs11/share) as its IPO seems to be delayed. At
16.7x FY12E EPS, CG is trading at a discount of 41% to ABB Ltd (rated
UW). Siemens is expected to remain range-bound post the open offer
announced today (see our Alert). Key downside risks: weak order inflows,
sharp commodity price inflation
• Order book growth healthy: Standalone order book grew 25% YoY to
Rs37B and overseas order book to Rs33B (up 15.4% YoY). According to
management, order inflow in Dec-q has been ~Rs25B, up 23% YoY. See
Table 1 below. Weak growth in domestic power segment YTD in FY11 has
been led by deferral of deliveries by customers, as their projects are getting
delayed. However, there have been no major project cancellations so far and
we expect the delayed clearances (land acquisition, forest or environment
clearances) to be awarded eventually. Thus, in our view, there is the
possibility of upside to our revenue growth estimate for domestic power
segment in FY12E (~11%), in line with management’s guidance.
• PGCIL and SEB ordering to pick up in 2HCY11. Management has
deferred growth outlook in power segment. We expect ordering for 9 high
capacity power transmission corridors (Rs580B orders) to happen largely
thru FY12.
• Severe erosion in transformer price realization witnessed by
management. In 9MFY11, CG has witnessed 31% growth in MVA terms,
though this has translated into low single-digit growth in the power
segment. The implied price erosion is an outcome of severe competition
from the Chinese/ Koreans and other domestic players. However, the dip in
realization may also be attributed to a decline in scope of work and mix b/w
power transformer and switchgear components in orders.
• CG expects to maintain margins in 4Q and FY12. In 9MFY11, CG has
managed to improve margins 50bps to 13.7% despite a tough commodity
price environment and competition-led pricing pressures. The improvement
has been led by operational efficiency, superior absorption of fixed
overheads and R&D-led savings in raw material consumption. We expect
flat margin performance in 4Q (~16.2%) and believe management can
deliver on stable margin guidance for FY12E, if commodity prices do not
increase excessively next year.
• Growth guidance and segment-wise outlook: Management expects
consumer and industry segment to report top-line growth of ~25% and
~20%, respectively, in FY12. CG is witnessing strong rural and urban
consumer demand. In the industry segment, the company has seen healthy
order inflows and robust inquiries. All industry sectors- cement, steel,
fertilizer, oil and gas, railways - have contributed to the growth momentum.
Overseas segment is expected to grow 11-13% in euro terms in FY12. We
have not assumed any INR appreciation vs. the euro in FY12 in our
estimates. According to management, the revival in distribution transformer
demand is ongoing, mainly led by renewable sector.
• Tax-rate to track 9MFY11 levels of ~27.6%. According to management,
R&D expenditure invites lower tax rate, and this has led to a lower
consolidated tax rate YTD. As R&D spend is expected to continue, the trend
is EPS accretive.
• Mr. Trehan is due to retire in May-11, after 11years as MD. He will
continue to sit on CG’s board in an advisory capacity. Succession planning
is ongoing. The new leader will have to take charge of CG's vision of
growing the top line almost four-fold to US$8B by 2015E. Revenue has
already grown over four times since 2005, when the vision was first
conceived. M&A track record of CG has been its strength so far.
Key model revisions and segment-wise P&L
A weak outlook for domestic power segment growth in 4Q (~3-5% YoY) and FY12
(~11% vs. our estimate of 20% growth earlier), has led to a reduction of ~2.2-2.3% in
top-line estimates for FY11 and FY12. The impact was cushioned by high growth
guidance for the consumer, industry and overseas subsidiaries. Overall lower tax rate
guidance (it will track 9mFY11 tax rate < 28% of PBT) is EPS accretive, and our
FY12 EPS estimate is down marginally (~1%)
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