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Crompton Greaves- Keeping the faith
ƒ FY11 power system margins maintained despite headwinds
ƒ Lowering sales and EPS by 3.3% and 11%; TP cut to INR306/shr
ƒ BUY on a 2H12 T&D recovery, sound strategy, quality mgmt
ƒ Remains our top pick in the capital goods space
Key takeaways from concall
We took away the following from the call:
a) margin loss in power systems was due
to commodity inflation and competition, b)
revival in PGCIL capex in 2HFY12 and
mgmt believes that entry level pricing by
Chinese and Koreans is unsustainable, c)
Industrial segment’s margin collapse was
due to margin dilutive NELCO orders
(recent acquisition) which should recover
in two quarters, d) possibility of a margin
improvement in overseas business given
a 12-13% volume growth.
Credible medium term strategy
The company spelled out its medium term strategy of strengthening its
industrial segment’s capabilities by adding automation systems, taking
the business global, and expansion into substation automation solutions
via acquisitions. Mr.Trehan, MD hinted at two potential acquisitions
addressing these requirements.
Model changes: FY12 sales & EPS cut by 3.3% and 11%
Factoring in a) further delays in domestic power’s sales, b) a 100bps y-y
drop in consol. power systems margins, and c) a potential drag from
industrial systems margins (est. of 17% versus FY10 margin of 22%), we
lower our FY12 sales and EPS by 3.3% and 11% respectively.
Lowering TP by 11% but maintain our BUY rating
We cut our TP to INR306/shr (was INR344) which is based on a 20x P/E
(38% discount to MNC T&D peers). On a DCF Basis (16% growth with
11.2% EBIT margin over FY11-16 and 10% growth with 10% margin over
FY17-21, with a terminal growth of 5%) we arrive at a FV of INR299/shr.
Why still a BUY?
Crompton has navigated choppy waters (intensifying competition,
commodity inflation, regulatory changes) much better than its MNC
peers, in our view. Its ability to indigenise 765kV technology ahead of
MNC peers and tough cost control meant lower margin loss versus
peers. Going forward, its strategy to balance its power and automation
portfolios is inline with the strategy of larger T&D players. While FY12
growth remains muted due to domestic power business, CRG remains a
key beneficiary of a revival in domestic T&D. Its efforts to diversify into
substation business bodes well (mkt size: ~USD400m-650m growing
inline with PGCIL’s capex). Key risks: a) further increase in copper and
steel prices, and irrational pricing by Chinese, b) delayed recovery of
domestic T&D capex, & c) integration risk of acquisitions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Crompton Greaves- Keeping the faith
ƒ FY11 power system margins maintained despite headwinds
ƒ Lowering sales and EPS by 3.3% and 11%; TP cut to INR306/shr
ƒ BUY on a 2H12 T&D recovery, sound strategy, quality mgmt
ƒ Remains our top pick in the capital goods space
Key takeaways from concall
We took away the following from the call:
a) margin loss in power systems was due
to commodity inflation and competition, b)
revival in PGCIL capex in 2HFY12 and
mgmt believes that entry level pricing by
Chinese and Koreans is unsustainable, c)
Industrial segment’s margin collapse was
due to margin dilutive NELCO orders
(recent acquisition) which should recover
in two quarters, d) possibility of a margin
improvement in overseas business given
a 12-13% volume growth.
Credible medium term strategy
The company spelled out its medium term strategy of strengthening its
industrial segment’s capabilities by adding automation systems, taking
the business global, and expansion into substation automation solutions
via acquisitions. Mr.Trehan, MD hinted at two potential acquisitions
addressing these requirements.
Model changes: FY12 sales & EPS cut by 3.3% and 11%
Factoring in a) further delays in domestic power’s sales, b) a 100bps y-y
drop in consol. power systems margins, and c) a potential drag from
industrial systems margins (est. of 17% versus FY10 margin of 22%), we
lower our FY12 sales and EPS by 3.3% and 11% respectively.
Lowering TP by 11% but maintain our BUY rating
We cut our TP to INR306/shr (was INR344) which is based on a 20x P/E
(38% discount to MNC T&D peers). On a DCF Basis (16% growth with
11.2% EBIT margin over FY11-16 and 10% growth with 10% margin over
FY17-21, with a terminal growth of 5%) we arrive at a FV of INR299/shr.
Why still a BUY?
Crompton has navigated choppy waters (intensifying competition,
commodity inflation, regulatory changes) much better than its MNC
peers, in our view. Its ability to indigenise 765kV technology ahead of
MNC peers and tough cost control meant lower margin loss versus
peers. Going forward, its strategy to balance its power and automation
portfolios is inline with the strategy of larger T&D players. While FY12
growth remains muted due to domestic power business, CRG remains a
key beneficiary of a revival in domestic T&D. Its efforts to diversify into
substation business bodes well (mkt size: ~USD400m-650m growing
inline with PGCIL’s capex). Key risks: a) further increase in copper and
steel prices, and irrational pricing by Chinese, b) delayed recovery of
domestic T&D capex, & c) integration risk of acquisitions.
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