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CROMPTON GREAVES LTD (CGL)
RECOMMENDATION: BUY
TARGET PRICE: RS.295
FY12E P/E: 15.7X
q CGL stock (along with the other stocks in the peer group) has
underperformed the broader market. We believe that this has been
mainly due to 1) concerns regarding the delays in order flows in the T&D
space and 2) slowdown in the real estate activity in India.
q International order intake has shown signs of improvement. This is
mainly attributed by 1) the lower base of FY10 2) revival in demand for
distribution transformer particularly in solar and wind space.
q With significant amount of power generating capacities coming on
stream in next few years, investments in T&D space is bound to increase.
We believe that the company is likely to benefit on account of its leadership position in the space.
q Factoring the current market volatility and uncertainty in the order inflows for the company (implied slowdown), we change our valuation
methodology to DCF based vis-à-vis multiple based earlier.
q We maintain 'BUY' rating on the stock with a one year DCF based price
target of Rs.295 (Rs.322 earlier).
Power systems division has been reporting sluggish growth; industrial and consumer business continued to remain strong in
9MFY11
n Company has reported 7% YoY growth in consolidated revenues in 9MFY11.
However it has recorded 50bps increase in operating margins vis-a-vis 9MFY10
resulting in 14% YoY growth in net profits.
n Management expects muted YoY revenue growth in power system division in
Q4FY10. Growth for the segment has remained elusive in 9MFY11 due to continued delays from the clients in taking product deliveries.
n This phenomenon is witnessed in both domestic as well as overseas markets.
Revenues for the segment grew by 5.7%YoY at consolidated level in 9MFY11.
n We believe that the increasing contributions from consumer and industrial segments would help sustaining the overall margins. Going forward we expect margins at 13.8% for FY11E on the consolidated basis.
n Within the industrial systems division, power motors has been observing significant demand. HT/LT motors have also managed to grow in 9MFY11 on account
of continued demand from steel, cement, fertilizer and oil and gas sectors. Management expects 25-27% YoY growth for the segment in FY12.
n Company's overseas operations have been reporting muted growth since past
few quarters due to 1) lack of activity in the overseas wind transformer demand
2) unfavourable currency movement. We highlight that € has traded at an average of Rs 59 as against Rs 67 in 9MFY10. In constant currency terms, revenues
have grown by nearly 10% for the same period.
n Company has standing long term contracts for wind transformers. However it has
been constantly observing delays in lifting schedules for these. It expects the condition to improve in FY12.
Order intake remained sluggish in the domestic market; lower
base and improved business outlook led to increase in international order intake
n Order inflows have remained elusive in 3QFY11 for the company at Rs 12.8 bn
(standalone); down 8% YoY. Company's current order book stands at Rs 70 bn
consolidated and Rs 37 bn at standalone level. This has been mainly accounted
by the sluggish order flows from Powergrid.
n International order intake has reported meaningful recovery of nearly 60% YoY
in 3QFY11. This was mainly attributed by 1) the lower base of last year 2) revival
in demand for distribution transformer particularly in solar and wind space. Company has been observing traction in these geographies and it expects to clock
nearly 10-12% YoY revenue growth (in € terms) in FY12E.
Company has taken advantage of its strong balance sheet and
superior execution skills of the management to fulfill the gaps in
the offerings.
n Management eyes meaningful opportunity in the international power distribution
space and would contemplate the strategy of growing inorganically by means of
acquisition that offer either technology or market accessibility. Company would
be looking out for the strategic fitment and unlike in past, target size would not
be the restraint to this.
n Recently, company has entered into a JV with ZIV Aplicaciones of Spain for
manufacturing substation automation systems in India. Company has also entered into a MOU with Saudi's EIC group for exploring EPC business in the
Middle East.
Some of the key acquisitions company has made in last two years are highlighted
below.
Business Outlook
n We believe that the current slowdown in the real estate activity in India and
continuous delays from power grid would remain a matter of concern for the
company and the peer group in the short term.
n However we believe that this is a temporary phenomenon and expect company's
domestic power business to grow by over 23% CAGR between FY10-12E.
n The prime transmission utility has outlined its capex guideline worth Rs 400 bn
involving 19 no of substations with transformation capacity of 52565 MVA in
11th five year plan
n In addition to the 11th five year plan investment, PGCIL proposes to set up seven
transmission corridors at an investment of about INR 500 bn over the next five
years. These corridors will act as pooling points for transfer of over 55,000 MW
from a number of private generation projects coming up in the eastern and
southern states. The move is aimed at facilitating transfer of electricity to the
power-starved northern and western regions of the country.
n Currently company enjoys the leadership position in India along with growing
presence in other Asian countries manufacturing high quality power transformers,
distribution transformers, extra high voltage (EHV) and medium voltage (MV) circuit breakers and gas insulated switchgear (GIS).
n While we expect the industrial systems segment to grow at a CAGR of 15% YoY
between FY10-12E, we build 17% YoY growth in consumer product business in
the same period given the up turn in industrial capex and real infrastructure
projects in the domestic market. We also opine that the company shall maintain
margins across the segments.
Listing of Avantha Power could be a possible trigger in the short
term
n Near-term triggers to watch out for the stock would be the progress on listing of
Avantha Power, in which the company has a 32% stake.
n Company has invested a sum of Rs 2.27 bn in APIL at Rs 10 per share for the
stake. APIL is an established power generation company with 191 MW of operational thermal power capacity; 2,400 MW of generating capacity under various
stages of implementation; and 1,320 MW of generating capacity under planning
spread across India.
n Once all the projects under implementation and development have achieved
commercial operation, the company is expected to have a total installed capacity
of 3,911 MW.
Financial outlook; we expect that the company would generate
strong free cash flow amidst stiff competition
n We expect company's revenues to grow at 14% CAGR between FY10-12E given
higher growth across all the segments viz. power systems led by meaningful demand in power transformers, industrial systems and consumer products.
n We believe that the company is likely to maintain margins on back of increase in
volumes going ahead. We build EBITDA% (consol) of 13.5% and 13.4% in
FY11E and FY12E respectively.
n Given the lower working capital for the company for having limited presence in
project business compare to peer group, we expect that the company would
generate significant free cash flows to fund its growth.
n We slightly tweak our earning estimates for FY11E and FY12E for the company
to factor in 1) increase in input prices affecting the margins 2) spill over of revenues from the power systems segment to the succeeding quarters.
Valuation & Recommendation
n Recently, CGL stock (along with the other stocks in the peer group) has
underperformed the broader market.
n We believe that this has been mainly due to the concerns regarding the delays in
order outflows in the T&D space and partly due to the slowdown in the real estate activity.
n We opine that the current thrust in the infrastructure space (particularly power in
sector) might get delayed in the short run but is likely to sustain in the long term.
We believe that with various power plants coming on stream in next few years,
off take in T&D infrastructure is inevitable.
n With increased capabilities in various domains acquired through JVs and acquisitions we believe that the company is well integrated and well poised to benefit
from 1) spending in T&D space in India 2) up tick in industrial capex 3) revival of
overseas markets.
n Given the current volatility in the market and uncertainly in the order inflows for
the company (implied slowdown), we change our valuation methodology to DCF
based vis-à-vis multiple based earlier.
n Our DCF model employs a WACC of 12%, beta of 0.8 and terminal growth of
3%.We arrives at a one year target price of Rs 295 for the company's stock.
n We maintain our 'BUY' rating on the company's stock with a one year DCF
based target price of Rs 295 (Rs 322 Earlier) on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CROMPTON GREAVES LTD (CGL)
RECOMMENDATION: BUY
TARGET PRICE: RS.295
FY12E P/E: 15.7X
q CGL stock (along with the other stocks in the peer group) has
underperformed the broader market. We believe that this has been
mainly due to 1) concerns regarding the delays in order flows in the T&D
space and 2) slowdown in the real estate activity in India.
q International order intake has shown signs of improvement. This is
mainly attributed by 1) the lower base of FY10 2) revival in demand for
distribution transformer particularly in solar and wind space.
q With significant amount of power generating capacities coming on
stream in next few years, investments in T&D space is bound to increase.
We believe that the company is likely to benefit on account of its leadership position in the space.
q Factoring the current market volatility and uncertainty in the order inflows for the company (implied slowdown), we change our valuation
methodology to DCF based vis-à-vis multiple based earlier.
q We maintain 'BUY' rating on the stock with a one year DCF based price
target of Rs.295 (Rs.322 earlier).
Power systems division has been reporting sluggish growth; industrial and consumer business continued to remain strong in
9MFY11
n Company has reported 7% YoY growth in consolidated revenues in 9MFY11.
However it has recorded 50bps increase in operating margins vis-a-vis 9MFY10
resulting in 14% YoY growth in net profits.
n Management expects muted YoY revenue growth in power system division in
Q4FY10. Growth for the segment has remained elusive in 9MFY11 due to continued delays from the clients in taking product deliveries.
n This phenomenon is witnessed in both domestic as well as overseas markets.
Revenues for the segment grew by 5.7%YoY at consolidated level in 9MFY11.
n We believe that the increasing contributions from consumer and industrial segments would help sustaining the overall margins. Going forward we expect margins at 13.8% for FY11E on the consolidated basis.
n Within the industrial systems division, power motors has been observing significant demand. HT/LT motors have also managed to grow in 9MFY11 on account
of continued demand from steel, cement, fertilizer and oil and gas sectors. Management expects 25-27% YoY growth for the segment in FY12.
n Company's overseas operations have been reporting muted growth since past
few quarters due to 1) lack of activity in the overseas wind transformer demand
2) unfavourable currency movement. We highlight that € has traded at an average of Rs 59 as against Rs 67 in 9MFY10. In constant currency terms, revenues
have grown by nearly 10% for the same period.
n Company has standing long term contracts for wind transformers. However it has
been constantly observing delays in lifting schedules for these. It expects the condition to improve in FY12.
Order intake remained sluggish in the domestic market; lower
base and improved business outlook led to increase in international order intake
n Order inflows have remained elusive in 3QFY11 for the company at Rs 12.8 bn
(standalone); down 8% YoY. Company's current order book stands at Rs 70 bn
consolidated and Rs 37 bn at standalone level. This has been mainly accounted
by the sluggish order flows from Powergrid.
n International order intake has reported meaningful recovery of nearly 60% YoY
in 3QFY11. This was mainly attributed by 1) the lower base of last year 2) revival
in demand for distribution transformer particularly in solar and wind space. Company has been observing traction in these geographies and it expects to clock
nearly 10-12% YoY revenue growth (in € terms) in FY12E.
Company has taken advantage of its strong balance sheet and
superior execution skills of the management to fulfill the gaps in
the offerings.
n Management eyes meaningful opportunity in the international power distribution
space and would contemplate the strategy of growing inorganically by means of
acquisition that offer either technology or market accessibility. Company would
be looking out for the strategic fitment and unlike in past, target size would not
be the restraint to this.
n Recently, company has entered into a JV with ZIV Aplicaciones of Spain for
manufacturing substation automation systems in India. Company has also entered into a MOU with Saudi's EIC group for exploring EPC business in the
Middle East.
Some of the key acquisitions company has made in last two years are highlighted
below.
Business Outlook
n We believe that the current slowdown in the real estate activity in India and
continuous delays from power grid would remain a matter of concern for the
company and the peer group in the short term.
n However we believe that this is a temporary phenomenon and expect company's
domestic power business to grow by over 23% CAGR between FY10-12E.
n The prime transmission utility has outlined its capex guideline worth Rs 400 bn
involving 19 no of substations with transformation capacity of 52565 MVA in
11th five year plan
n In addition to the 11th five year plan investment, PGCIL proposes to set up seven
transmission corridors at an investment of about INR 500 bn over the next five
years. These corridors will act as pooling points for transfer of over 55,000 MW
from a number of private generation projects coming up in the eastern and
southern states. The move is aimed at facilitating transfer of electricity to the
power-starved northern and western regions of the country.
n Currently company enjoys the leadership position in India along with growing
presence in other Asian countries manufacturing high quality power transformers,
distribution transformers, extra high voltage (EHV) and medium voltage (MV) circuit breakers and gas insulated switchgear (GIS).
n While we expect the industrial systems segment to grow at a CAGR of 15% YoY
between FY10-12E, we build 17% YoY growth in consumer product business in
the same period given the up turn in industrial capex and real infrastructure
projects in the domestic market. We also opine that the company shall maintain
margins across the segments.
Listing of Avantha Power could be a possible trigger in the short
term
n Near-term triggers to watch out for the stock would be the progress on listing of
Avantha Power, in which the company has a 32% stake.
n Company has invested a sum of Rs 2.27 bn in APIL at Rs 10 per share for the
stake. APIL is an established power generation company with 191 MW of operational thermal power capacity; 2,400 MW of generating capacity under various
stages of implementation; and 1,320 MW of generating capacity under planning
spread across India.
n Once all the projects under implementation and development have achieved
commercial operation, the company is expected to have a total installed capacity
of 3,911 MW.
Financial outlook; we expect that the company would generate
strong free cash flow amidst stiff competition
n We expect company's revenues to grow at 14% CAGR between FY10-12E given
higher growth across all the segments viz. power systems led by meaningful demand in power transformers, industrial systems and consumer products.
n We believe that the company is likely to maintain margins on back of increase in
volumes going ahead. We build EBITDA% (consol) of 13.5% and 13.4% in
FY11E and FY12E respectively.
n Given the lower working capital for the company for having limited presence in
project business compare to peer group, we expect that the company would
generate significant free cash flows to fund its growth.
n We slightly tweak our earning estimates for FY11E and FY12E for the company
to factor in 1) increase in input prices affecting the margins 2) spill over of revenues from the power systems segment to the succeeding quarters.
Valuation & Recommendation
n Recently, CGL stock (along with the other stocks in the peer group) has
underperformed the broader market.
n We believe that this has been mainly due to the concerns regarding the delays in
order outflows in the T&D space and partly due to the slowdown in the real estate activity.
n We opine that the current thrust in the infrastructure space (particularly power in
sector) might get delayed in the short run but is likely to sustain in the long term.
We believe that with various power plants coming on stream in next few years,
off take in T&D infrastructure is inevitable.
n With increased capabilities in various domains acquired through JVs and acquisitions we believe that the company is well integrated and well poised to benefit
from 1) spending in T&D space in India 2) up tick in industrial capex 3) revival of
overseas markets.
n Given the current volatility in the market and uncertainly in the order inflows for
the company (implied slowdown), we change our valuation methodology to DCF
based vis-à-vis multiple based earlier.
n Our DCF model employs a WACC of 12%, beta of 0.8 and terminal growth of
3%.We arrives at a one year target price of Rs 295 for the company's stock.
n We maintain our 'BUY' rating on the company's stock with a one year DCF
based target price of Rs 295 (Rs 322 Earlier) on the stock.
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