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Market concerns overdone
ƒ Decent F3Q with sales growth of 6.7%, PAT growth of 16.6%
ƒMkt. pricing-in: no domestic T&D growth + 100bps compression
ƒGrowth story intact, guides to 16-18% growth in FY12
ƒ Selloff unwarranted, Upgrading to BUY, Maintain TP at INR344
Growth story intact
We believe Crompton Greaves (CRG IN)
will outperform the sector given a)
continuing strength in its consumer and
industrial segments, b) early mover
advantage in the 765kV transformer
market, c) improving outlook for its
European subsidiaries driven by short
cycle distribution orders and d) strong
cost control in a rising commodity price
environment.
Why did CRG underperform?
The stock corrected by ~15% over the last
3 months due to concerns on a)rising RM
costs, b) increasing competition, and c)
domestic power demand. While we factor, in 160bps decline in gross
margins (rising RM costs + lower ASPs) which should be offset by
improving employee productivity (offsets 110bps) and scale benefits
(offsets 30bps). CRG has a relative advantage over MNC Transmission &
Distribution players given its early mover advantage with PGCIL (PWGR
IN, BUY, INR96.50) in 765kV orders. We expect progress in power
project completion to drive recovery in T&D equipment demand over next
two to three quarters. Demand outlook for overseas entities is turning
around as can be seen by a pickup in short cycle T&D orders by peers
such as Siemens (SIE GR, NR)& ABB (ABBN VX, NR).
FY12 guidance –Sales growth 16-18% with flat margins
Management guided to 25% y-y growth in consumer segment and 20%
y-y growth in industrial segment. Management guides to double digit
growth in overseas entities driven by a pick-up in short cycle orders. Also,
given a 25%increase in domestic power segment’s backlog management
expects double digit growth in FY12 and a consolidated sales growth of
16-18%y-y which is in line with our estimates.
Recent sell off unwarranted: Raise Rating to BUY
CRG’s shares have corrected by 15% over last three months (7%
underperformance relative to Sensex) and trades at 16.1x our FY12 EPS
estimates versus its peers trading at 23.0x. We value CRG using a 20X
P/E ratio on our FY12 EPS of INR17.3/shr and maintain our TP of
INR344/shr. We raise our rating from HOLD to BUY as we see 31%
upside in the stock. Key risks include: delayed recovery in the domestic
power segment, higher than expected commodity price increase,
irrational price competition, and sharp slowdown in the consumer
segment.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Market concerns overdone
ƒ Decent F3Q with sales growth of 6.7%, PAT growth of 16.6%
ƒMkt. pricing-in: no domestic T&D growth + 100bps compression
ƒGrowth story intact, guides to 16-18% growth in FY12
ƒ Selloff unwarranted, Upgrading to BUY, Maintain TP at INR344Growth story intact
We believe Crompton Greaves (CRG IN)
will outperform the sector given a)
continuing strength in its consumer and
industrial segments, b) early mover
advantage in the 765kV transformer
market, c) improving outlook for its
European subsidiaries driven by short
cycle distribution orders and d) strong
cost control in a rising commodity price
environment.
Why did CRG underperform?
The stock corrected by ~15% over the last
3 months due to concerns on a)rising RM
costs, b) increasing competition, and c)
domestic power demand. While we factor, in 160bps decline in gross
margins (rising RM costs + lower ASPs) which should be offset by
improving employee productivity (offsets 110bps) and scale benefits
(offsets 30bps). CRG has a relative advantage over MNC Transmission &
Distribution players given its early mover advantage with PGCIL (PWGR
IN, BUY, INR96.50) in 765kV orders. We expect progress in power
project completion to drive recovery in T&D equipment demand over next
two to three quarters. Demand outlook for overseas entities is turning
around as can be seen by a pickup in short cycle T&D orders by peers
such as Siemens (SIE GR, NR)& ABB (ABBN VX, NR).
FY12 guidance –Sales growth 16-18% with flat margins
Management guided to 25% y-y growth in consumer segment and 20%
y-y growth in industrial segment. Management guides to double digit
growth in overseas entities driven by a pick-up in short cycle orders. Also,
given a 25%increase in domestic power segment’s backlog management
expects double digit growth in FY12 and a consolidated sales growth of
16-18%y-y which is in line with our estimates.
Recent sell off unwarranted: Raise Rating to BUY
CRG’s shares have corrected by 15% over last three months (7%
underperformance relative to Sensex) and trades at 16.1x our FY12 EPS
estimates versus its peers trading at 23.0x. We value CRG using a 20X
P/E ratio on our FY12 EPS of INR17.3/shr and maintain our TP of
INR344/shr. We raise our rating from HOLD to BUY as we see 31%
upside in the stock. Key risks include: delayed recovery in the domestic
power segment, higher than expected commodity price increase,
irrational price competition, and sharp slowdown in the consumer
segment.
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