Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Crompton Greaves Ltd
Solid fundamentals but priced in
Initiate coverage of Crompton Greaves with an anti-consensus Sell rating
Crompton Greaves (CG) is one of the largest engineering companies in India. It
has three businesses—power systems, consumer products, and industrial systems.
At the current share price, we think the risk/reward ratio is unfavourable as: 1) we
forecast slower growth and strong competitive pressure in the domestic power
systems business (36% of FY10 revenue); 2) we think margins are unlikely to
increase significantly; and 3) we do not think the valuation is attractive at current
levels (16.2x FY12E EPS) for a 14% EPS CAGR (FY10-13E). We initiate
coverage with a Sell rating and a price target of Rs240.00.
Margin expansion looks difficult from current levels
CG’s EBITDA margin increased 541bp over FY07-10. However, significant
margin expansion from here looks unlikely (although we assume a 68bp
improvement in FY11). We believe sales growth and margins are unlikely to
surprise due to strong competition in the domestic power systems segment and an
uncertain outlook for the overseas business (40% of revenue).
14% earnings CAGR
We forecast EPS to increase from Rs12.86 in FY10 to Rs19.23 in FY13 (our
FY11/12 forecasts are marginally above consensus estimates). We believe CG’s
share price is more closely correlated to margin expansion than order inflow growth.
Valuation: DCF-based price target of Rs240.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. Our price target assumes a
WACC of 13.1%. On FY12E PE, CG trades at a 22% premium to Bharat Heavy
Electricals (BHEL), which we think is expensive. Our price target for CG implies a
FY12E PE of 14.3x
Investment Thesis
Crompton Greaves (CG) is one of the largest engineering companies in India.
Part of the Avantha Group (FY10 revenue of US$4bn), CG has three main
businesses: power systems, consumer products, and industrial systems—nearly
two-thirds of sales come from electrical products. CG has 22 manufacturing
divisions spread across India, and a large customer base that includes state
electricity boards and large companies in the private and public sectors. CG has
a significant presence in overseas markets through its acquisitions; Pauwels
(2005), Ganz (2006), Microsol (2007), Sonomatra (2008), MSE Power Systems
(2008), and PTS (2010).
We believe CG has a strong competitive position in India’s transmission and
distribution (T&D) market, which we expect to grow strongly during the 11th
Five-Year Plan (FY08-12) and the 12th Five-Year Plan (FY13-17). CG’s access
to technology via its subsidiaries in Europe, coupled with its domestic
manufacturing capacity, puts it in a strong position vis-à-vis peers, in our view.
CG has also increasingly focused on its overseas business—the revenue
contribution from this business has grown over the past five years and currently
comprises around 40% of the company’s total revenue.
CG’s EBITDA margin increased 541bp over FY07-10 at a time when the T&D
equipment industry faced a margin squeeze and pricing pressure. However,
significant margin expansion from here looks unlikely (although we assume a
68bp improvement in FY11). With strong competitive pressure in the domestic
power systems business and the outlook for the overseas business still uncertain,
we think a positive surprise in top-line growth is unlikely. Hence, we forecast
EPS to increase from Rs12.86 in FY10 to Rs19.23 in FY13.
We derive our price target of Rs240 from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. Cost of
capital and EBIT margin forecasts are key sensitivity factors; our analysis suggests
the company’s valuation would rise 16% to Rs278 with a 1% decline in WACC.
We believe key upside risks to our Sell rating include: 1) declining competition
from domestic and foreign companies; 2) an improvement in ordering activity of
Power Grid Corporation of India (Power Grid); and 3) faster execution.
We initiate coverage of CG with a Sell rating. Based on FY12E PE, CG is
trading at a 22% premium to BHEL, which we think is expensive. Our price
target implies a FY12E PE of 14.3x.
Key catalysts
Slowdown in sales growth. We think sales growth could be muted for the
following reasons: 1) slow growth in the key segment, power systems—9M
FY11 revenue was flat YoY; 2) during the Q3 FY11 results conference call,
CG management guided for power systems revenue growth of 8-10% at most
in FY12; and 3) consumer product revenue grew 27% YoY in 9M FY11 but
contributed only 20% of CG’s total revenue. Hence, we believe our overall
revenue growth assumption for CG (15% YoY growth for FY12) is not
conservative. We also highlight that sub-10% growth from the largest
revenue contributor, power systems, would mean the other two businesses
(industrial systems and consumer products) have to grow more than 25% to
achieve overall growth in consolidated revenue above 15%. We think this
will be difficult to achieve.
Margins may remain stagnant. We think it will be difficult for CG to
expand margins as: 1) the cost of key raw materials—copper and steel (20-
25% of raw material costs)—has increased sharply; 2) the domestic power
systems business (approximately 35% of revenue) is facing significant
competition, and there have been instances of customers refusing to accept
products on delivery; 3) industrial systems is a commodity business and may
not record significant margin expansion in future; and 4) if revenue does not
grow significantly, the scope of margin expansion through these initiatives
would be limited. Hence, in line with a 50bp improvement in margin in the
9M FY11 results, we forecast a 70bp YoY margin improvement in FY11.
We forecast similar margins in FY12, and do not think it would be easy to
expand margins beyond 14.5-15%.
Slower activity in Indian T&D market. Most of the large orders in India’s
T&D space come from Power Grid and state electricity boards (SEBs).
Power Grid has invested Rs254bn in the T&D market in the past three years
and has a robust project pipeline. We expect orders of more than Rs400bn in
the next three years. However, ordering activity slowed in 9M FY11. This
could be negative as Power Grid and SEBs contribute more than 60% of
CG’s orders in the power systems segment in India.
Delay in pick-up in overseas markets. The overseas business contributes
42% of CG’s total revenue. Given its increasing focus on the overseas
business, a delay in a global recovery could impact CG’s ability to grow its
revenue base.
Slowdown in industrial and consumer products. The industrial segment
contributes 22% of CG’s revenue, and a decline in growth in this segment
could impact CG. The consumer products segment contributes 18% of CG’s
revenue, and we expect this segment to continue to grow due to a pick-up in
construction activity and the company’s strong position in this market.
However, any slowdown in this segment would be a strong negative for CG, in
our opinion.
Risks
We believe the key upside risks to our Sell rating for CG are: 1) a pick-up in order
activity at Power Grid and SEBs; 2) increased government focus; 3) margin
expansion; and 4) a better-than-expected performance in overseas markets.
We believe the key downside risks are: 1) competition; 2) delays in power
generation projects; 3) rising raw material prices; 4) a slower-than-expected
recovery in government spending and industrial activity; 5) a slowdown in the
international business; and 6) a decline in margins.
Valuation and basis for our price target
We derive our price target from a DCF-based methodology (assuming a WACC of
13.1%) and explicitly forecast long-term valuation drivers using UBS’s VCAM
tool. We consider this the most appropriate method to value CG and its growth
prospects. However, we also highlight an alternative valuation method (PE).
Price-to-earnings valuation
CG is trading at an FY12E PE of 16.2x, which we consider expensive. Our price
target implies an FY12E PE of 14.3x. In the past year, the company has traded at a
premium to competitors apart from ABB India, and we do not think this is
justified considering CG’s growth prospects
CG’s share price has corrected 12% YTD and we attribute this to: 1) general
weakness in the Indian market —the BSE Sensex has corrected 7% YTD; and
2) share prices of stocks in the capital goods space have corrected 15% YTD.
Fundamentally, we think it is difficult to justify very aggressive valuations for a
company with an EPS CAGR of 14% over FY10-13E.
Sensitivity analysis
Our valuation is sensitive to cost of capital, long-term EBIT margin and the
capex-to-sales ratio. The results of our analysis suggest WACC is the key
sensitivity factor. In the valuation section of this report, we assess the sensitivity
of our valuation to different parameters, which we summarise below.
(1) Cost of capital. The key sensitivity is our WACC assumption. Our
valuation rises 12% to Rs269 for a 1% decline in our cost of capital
assumption. It declines 10% to Rs216 for a 1% higher cost of capital.
(2) Long-term EBIT margin. Our valuation increases 8% for a 1% higher
long term EBIT margin, and vice-versa.
(3) Capex to sales. Our valuation increases 7% for every 1% decrease in the
capex-to-sales ratio.
(4) Sales growth. We assume a 15% sales CAGR over FY10-15. If T&D and
industrial activity is strong and the CAGR increases to 17.5%, this would
increase our valuation 16% to Rs278. Similarly, if T&D and industrial
activity is weaker than expected and the sales CAGR is 12.5%, this would
lower our valuation 15% to Rs204.
Crompton Greaves Ltd
Crompton Greaves (CG) is one of the largest engineering companies in India.
Part of the Avantha Group, CG has three main businesses - power systems,
consumer products, and industrial systems - nearly two-thirds of sales come
from electrical products. CG has 22 manufacturing divisions spread across India,
and a large customer base that includes state electricity boards and large
companies in the private and public sectors. CG has a significant presence in
overseas markets through its acquisitions; Pauwels (2005), Ganz (2006),
Microsol (2007), Sonomatra (2008), MSE Power Systems (2008), and PTS
(2010).
Statement of Risk
We believe the key upside risks to our Sell rating on CG are: 1) a pick-up in
order activity at Power Grid and SEBs; 2) increased government focus;
3) margin expansion; and 4) a better-than-expected performance in overseas
markets. We think the key downside risks for the company are: 1) competition;
2) delays in power generation projects; 3) rising raw material prices; 4) a
slower-than-expected recovery in government spending and industrial activity;
5) a slowdown in the international business; and 6) a decline in EBITDA margin.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Crompton Greaves Ltd
Solid fundamentals but priced in
Initiate coverage of Crompton Greaves with an anti-consensus Sell rating
Crompton Greaves (CG) is one of the largest engineering companies in India. It
has three businesses—power systems, consumer products, and industrial systems.
At the current share price, we think the risk/reward ratio is unfavourable as: 1) we
forecast slower growth and strong competitive pressure in the domestic power
systems business (36% of FY10 revenue); 2) we think margins are unlikely to
increase significantly; and 3) we do not think the valuation is attractive at current
levels (16.2x FY12E EPS) for a 14% EPS CAGR (FY10-13E). We initiate
coverage with a Sell rating and a price target of Rs240.00.
Margin expansion looks difficult from current levels
CG’s EBITDA margin increased 541bp over FY07-10. However, significant
margin expansion from here looks unlikely (although we assume a 68bp
improvement in FY11). We believe sales growth and margins are unlikely to
surprise due to strong competition in the domestic power systems segment and an
uncertain outlook for the overseas business (40% of revenue).
14% earnings CAGR
We forecast EPS to increase from Rs12.86 in FY10 to Rs19.23 in FY13 (our
FY11/12 forecasts are marginally above consensus estimates). We believe CG’s
share price is more closely correlated to margin expansion than order inflow growth.
Valuation: DCF-based price target of Rs240.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. Our price target assumes a
WACC of 13.1%. On FY12E PE, CG trades at a 22% premium to Bharat Heavy
Electricals (BHEL), which we think is expensive. Our price target for CG implies a
FY12E PE of 14.3x
Investment Thesis
Crompton Greaves (CG) is one of the largest engineering companies in India.
Part of the Avantha Group (FY10 revenue of US$4bn), CG has three main
businesses: power systems, consumer products, and industrial systems—nearly
two-thirds of sales come from electrical products. CG has 22 manufacturing
divisions spread across India, and a large customer base that includes state
electricity boards and large companies in the private and public sectors. CG has
a significant presence in overseas markets through its acquisitions; Pauwels
(2005), Ganz (2006), Microsol (2007), Sonomatra (2008), MSE Power Systems
(2008), and PTS (2010).
We believe CG has a strong competitive position in India’s transmission and
distribution (T&D) market, which we expect to grow strongly during the 11th
Five-Year Plan (FY08-12) and the 12th Five-Year Plan (FY13-17). CG’s access
to technology via its subsidiaries in Europe, coupled with its domestic
manufacturing capacity, puts it in a strong position vis-à-vis peers, in our view.
CG has also increasingly focused on its overseas business—the revenue
contribution from this business has grown over the past five years and currently
comprises around 40% of the company’s total revenue.
CG’s EBITDA margin increased 541bp over FY07-10 at a time when the T&D
equipment industry faced a margin squeeze and pricing pressure. However,
significant margin expansion from here looks unlikely (although we assume a
68bp improvement in FY11). With strong competitive pressure in the domestic
power systems business and the outlook for the overseas business still uncertain,
we think a positive surprise in top-line growth is unlikely. Hence, we forecast
EPS to increase from Rs12.86 in FY10 to Rs19.23 in FY13.
We derive our price target of Rs240 from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. Cost of
capital and EBIT margin forecasts are key sensitivity factors; our analysis suggests
the company’s valuation would rise 16% to Rs278 with a 1% decline in WACC.
We believe key upside risks to our Sell rating include: 1) declining competition
from domestic and foreign companies; 2) an improvement in ordering activity of
Power Grid Corporation of India (Power Grid); and 3) faster execution.
We initiate coverage of CG with a Sell rating. Based on FY12E PE, CG is
trading at a 22% premium to BHEL, which we think is expensive. Our price
target implies a FY12E PE of 14.3x.
Key catalysts
Slowdown in sales growth. We think sales growth could be muted for the
following reasons: 1) slow growth in the key segment, power systems—9M
FY11 revenue was flat YoY; 2) during the Q3 FY11 results conference call,
CG management guided for power systems revenue growth of 8-10% at most
in FY12; and 3) consumer product revenue grew 27% YoY in 9M FY11 but
contributed only 20% of CG’s total revenue. Hence, we believe our overall
revenue growth assumption for CG (15% YoY growth for FY12) is not
conservative. We also highlight that sub-10% growth from the largest
revenue contributor, power systems, would mean the other two businesses
(industrial systems and consumer products) have to grow more than 25% to
achieve overall growth in consolidated revenue above 15%. We think this
will be difficult to achieve.
Margins may remain stagnant. We think it will be difficult for CG to
expand margins as: 1) the cost of key raw materials—copper and steel (20-
25% of raw material costs)—has increased sharply; 2) the domestic power
systems business (approximately 35% of revenue) is facing significant
competition, and there have been instances of customers refusing to accept
products on delivery; 3) industrial systems is a commodity business and may
not record significant margin expansion in future; and 4) if revenue does not
grow significantly, the scope of margin expansion through these initiatives
would be limited. Hence, in line with a 50bp improvement in margin in the
9M FY11 results, we forecast a 70bp YoY margin improvement in FY11.
We forecast similar margins in FY12, and do not think it would be easy to
expand margins beyond 14.5-15%.
Slower activity in Indian T&D market. Most of the large orders in India’s
T&D space come from Power Grid and state electricity boards (SEBs).
Power Grid has invested Rs254bn in the T&D market in the past three years
and has a robust project pipeline. We expect orders of more than Rs400bn in
the next three years. However, ordering activity slowed in 9M FY11. This
could be negative as Power Grid and SEBs contribute more than 60% of
CG’s orders in the power systems segment in India.
Delay in pick-up in overseas markets. The overseas business contributes
42% of CG’s total revenue. Given its increasing focus on the overseas
business, a delay in a global recovery could impact CG’s ability to grow its
revenue base.
Slowdown in industrial and consumer products. The industrial segment
contributes 22% of CG’s revenue, and a decline in growth in this segment
could impact CG. The consumer products segment contributes 18% of CG’s
revenue, and we expect this segment to continue to grow due to a pick-up in
construction activity and the company’s strong position in this market.
However, any slowdown in this segment would be a strong negative for CG, in
our opinion.
Risks
We believe the key upside risks to our Sell rating for CG are: 1) a pick-up in order
activity at Power Grid and SEBs; 2) increased government focus; 3) margin
expansion; and 4) a better-than-expected performance in overseas markets.
We believe the key downside risks are: 1) competition; 2) delays in power
generation projects; 3) rising raw material prices; 4) a slower-than-expected
recovery in government spending and industrial activity; 5) a slowdown in the
international business; and 6) a decline in margins.
Valuation and basis for our price target
We derive our price target from a DCF-based methodology (assuming a WACC of
13.1%) and explicitly forecast long-term valuation drivers using UBS’s VCAM
tool. We consider this the most appropriate method to value CG and its growth
prospects. However, we also highlight an alternative valuation method (PE).
Price-to-earnings valuation
CG is trading at an FY12E PE of 16.2x, which we consider expensive. Our price
target implies an FY12E PE of 14.3x. In the past year, the company has traded at a
premium to competitors apart from ABB India, and we do not think this is
justified considering CG’s growth prospects
CG’s share price has corrected 12% YTD and we attribute this to: 1) general
weakness in the Indian market —the BSE Sensex has corrected 7% YTD; and
2) share prices of stocks in the capital goods space have corrected 15% YTD.
Fundamentally, we think it is difficult to justify very aggressive valuations for a
company with an EPS CAGR of 14% over FY10-13E.
Sensitivity analysis
Our valuation is sensitive to cost of capital, long-term EBIT margin and the
capex-to-sales ratio. The results of our analysis suggest WACC is the key
sensitivity factor. In the valuation section of this report, we assess the sensitivity
of our valuation to different parameters, which we summarise below.
(1) Cost of capital. The key sensitivity is our WACC assumption. Our
valuation rises 12% to Rs269 for a 1% decline in our cost of capital
assumption. It declines 10% to Rs216 for a 1% higher cost of capital.
(2) Long-term EBIT margin. Our valuation increases 8% for a 1% higher
long term EBIT margin, and vice-versa.
(3) Capex to sales. Our valuation increases 7% for every 1% decrease in the
capex-to-sales ratio.
(4) Sales growth. We assume a 15% sales CAGR over FY10-15. If T&D and
industrial activity is strong and the CAGR increases to 17.5%, this would
increase our valuation 16% to Rs278. Similarly, if T&D and industrial
activity is weaker than expected and the sales CAGR is 12.5%, this would
lower our valuation 15% to Rs204.
Crompton Greaves Ltd
Crompton Greaves (CG) is one of the largest engineering companies in India.
Part of the Avantha Group, CG has three main businesses - power systems,
consumer products, and industrial systems - nearly two-thirds of sales come
from electrical products. CG has 22 manufacturing divisions spread across India,
and a large customer base that includes state electricity boards and large
companies in the private and public sectors. CG has a significant presence in
overseas markets through its acquisitions; Pauwels (2005), Ganz (2006),
Microsol (2007), Sonomatra (2008), MSE Power Systems (2008), and PTS
(2010).
Statement of Risk
We believe the key upside risks to our Sell rating on CG are: 1) a pick-up in
order activity at Power Grid and SEBs; 2) increased government focus;
3) margin expansion; and 4) a better-than-expected performance in overseas
markets. We think the key downside risks for the company are: 1) competition;
2) delays in power generation projects; 3) rising raw material prices; 4) a
slower-than-expected recovery in government spending and industrial activity;
5) a slowdown in the international business; and 6) a decline in EBITDA margin.
No comments:
Post a Comment