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4QFY11 results, analyst call update
Rising metal prices and competitive pressures eroded Crompton’s
profitability in 4QFY11. The sharp decline in PowerGrid orders for
transformers and substations made competition tougher. Orders may not
pick in near term and margins are likely to remain under pressure in
FY12. We have cut our FY12-13 EPS by 5-6% to reflect this. However,
given strong power capacity addition in the country, orders should pick
up by 2HFY12 and margin pressure should ease. Meanwhile, consumer,
industrial and overseas businesses will help sustain growth in FY12.
Power business growth and profits should rebound strongly in FY13. BUY.
Ebitda margins decline after 11 quarters of expansion
After posting rising or flat margins for 11 successive quarters, Crompton’s
consolidated Ebitda margins fell by 323bps YoY in 4QFY11. Management
attributed margin erosion to increase in material costs, intensifying pricing
pressure, more EPC work in the international business and low margin projects in
the acquired Nelco business. Domestic power business continued to disappoint
(revenue down 1% YoY), while other businesses (consumer, industrial and
overseas) posted robust revenue growth (20-26% YoY).
Power business revenue growth will be muted in FY12 as well
The poor revenue growth and margin pressure in domestic power business can be
attributed to poor orderflow from Power Grid for products supplied by Crompton.
While Power Grid’s total orders were up 39% YoY in FY11, order for substations/
transformers fell by 42% to Rs42bn. Thus company has guided for only 6%
growth in power revenues and 20-50pbs margin pressure. Industrial and
consumer businesses should, however, continue to grow strongly. Moreover, we
have upgraded our international operations revenue forecast on account of strong
growth in 4Q and c.9% Euro appreciation since Jan-11. This has helped our
consolidated FY12-13 revenue estimates to be upgraded by 3-4%. However, we
are now factoring in 150bps increase in domestic material costs which has
resulted in overall earnings being down 5-6% for FY12-13.
Power order revival likely in 2HFY12; revenues to revive in FY13
Given the sharp pick up in power capacity addition in the country, we believe it is
matter of time before orderflow from Power Grid for substations and transformers
picks up. We expect a pick up in orders in 2HFY12 which should help the power
business return to a strong double digit growth in FY13. We also see some easing
of competition from overseas players going forward and should see profit margins
recover from FY13. Next two quarters will be challenging for the company and
profits and orders will not be great. However, we believe the recent price
correction offers a good opportunity for longer term investors. We have cut our
target price multiple from 16x to 15x (c.10% below average five year multiple)
and target price to Rs300/sh (from Rs340/sh earlier).
Future strategy
• Management intends to increase its industrial offering and better balance power
and industrial businesses, by having a global presence in industrial business.
• It plans to expand its service offering in sub-station automation. It has started
construction of a plant in Bangalore for in JV with ZIV. The same should get
operational by Dec-11; it has already won an order from Rajasthan.
• The company is also planning an acquisition overseas to complete its sub-station
automation services.
Industrial capex
• Management is seeing industrial capex cycle picking up.
• Crompton is facing increased demand for motors, especially from oil and gas and
sugar sectors.
Succession planning
• Mr Trehan was the member of nomination committee, along with the Chairman.
• Laurent Demortier has been chosen in view of its experience of working in the
European and American markets, where Crompton wants to expand.
Capex and capacity expansion plans
• Crompton’s fixed assets increased by Rs2.7bn to Rs16.5bn in FY11. The company
has converted its distribution transformer facility in Ireland to SLIM transformers,
increased capacities in the US, added 5,000MVA capacity in India and made
additions in consumer and industrial businesses.
• All these acquisitions were brownfield; capacity utilisation stands at 65-70% for
most facilities.
• In FY12, Crompton expects a capex of Rs4.5bn, mostly in India.
Employee costs
• Employee costs for the standalone entity rose by 30% YoY in 4QFY11 (21% YoY in
FY11). This was because the company gave salary hikes this year.
• Employee expenses for international operations fell by 6% YoY (590bps) in 4Q as
the company undertook restructuring earlier.
Tax rate
• 4QFY11 tax rate was lower because Crompton enjoyed tax 200% deduction on
R&D expenses, which went up sharply.
• Management believes that FY10 tax rates are sustainable for FY11 as well.
Exceptional loss
• Exceptional loss relates to claim by a customer in Bahrain for supply of products by
Ganz prior to its acquisition, which was awarded in favour of customer in the
Arbitration.
• Crompton has appealed against the same
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
4QFY11 results, analyst call update
Rising metal prices and competitive pressures eroded Crompton’s
profitability in 4QFY11. The sharp decline in PowerGrid orders for
transformers and substations made competition tougher. Orders may not
pick in near term and margins are likely to remain under pressure in
FY12. We have cut our FY12-13 EPS by 5-6% to reflect this. However,
given strong power capacity addition in the country, orders should pick
up by 2HFY12 and margin pressure should ease. Meanwhile, consumer,
industrial and overseas businesses will help sustain growth in FY12.
Power business growth and profits should rebound strongly in FY13. BUY.
Ebitda margins decline after 11 quarters of expansion
After posting rising or flat margins for 11 successive quarters, Crompton’s
consolidated Ebitda margins fell by 323bps YoY in 4QFY11. Management
attributed margin erosion to increase in material costs, intensifying pricing
pressure, more EPC work in the international business and low margin projects in
the acquired Nelco business. Domestic power business continued to disappoint
(revenue down 1% YoY), while other businesses (consumer, industrial and
overseas) posted robust revenue growth (20-26% YoY).
Power business revenue growth will be muted in FY12 as well
The poor revenue growth and margin pressure in domestic power business can be
attributed to poor orderflow from Power Grid for products supplied by Crompton.
While Power Grid’s total orders were up 39% YoY in FY11, order for substations/
transformers fell by 42% to Rs42bn. Thus company has guided for only 6%
growth in power revenues and 20-50pbs margin pressure. Industrial and
consumer businesses should, however, continue to grow strongly. Moreover, we
have upgraded our international operations revenue forecast on account of strong
growth in 4Q and c.9% Euro appreciation since Jan-11. This has helped our
consolidated FY12-13 revenue estimates to be upgraded by 3-4%. However, we
are now factoring in 150bps increase in domestic material costs which has
resulted in overall earnings being down 5-6% for FY12-13.
Power order revival likely in 2HFY12; revenues to revive in FY13
Given the sharp pick up in power capacity addition in the country, we believe it is
matter of time before orderflow from Power Grid for substations and transformers
picks up. We expect a pick up in orders in 2HFY12 which should help the power
business return to a strong double digit growth in FY13. We also see some easing
of competition from overseas players going forward and should see profit margins
recover from FY13. Next two quarters will be challenging for the company and
profits and orders will not be great. However, we believe the recent price
correction offers a good opportunity for longer term investors. We have cut our
target price multiple from 16x to 15x (c.10% below average five year multiple)
and target price to Rs300/sh (from Rs340/sh earlier).
Future strategy
• Management intends to increase its industrial offering and better balance power
and industrial businesses, by having a global presence in industrial business.
• It plans to expand its service offering in sub-station automation. It has started
construction of a plant in Bangalore for in JV with ZIV. The same should get
operational by Dec-11; it has already won an order from Rajasthan.
• The company is also planning an acquisition overseas to complete its sub-station
automation services.
Industrial capex
• Management is seeing industrial capex cycle picking up.
• Crompton is facing increased demand for motors, especially from oil and gas and
sugar sectors.
Succession planning
• Mr Trehan was the member of nomination committee, along with the Chairman.
• Laurent Demortier has been chosen in view of its experience of working in the
European and American markets, where Crompton wants to expand.
Capex and capacity expansion plans
• Crompton’s fixed assets increased by Rs2.7bn to Rs16.5bn in FY11. The company
has converted its distribution transformer facility in Ireland to SLIM transformers,
increased capacities in the US, added 5,000MVA capacity in India and made
additions in consumer and industrial businesses.
• All these acquisitions were brownfield; capacity utilisation stands at 65-70% for
most facilities.
• In FY12, Crompton expects a capex of Rs4.5bn, mostly in India.
Employee costs
• Employee costs for the standalone entity rose by 30% YoY in 4QFY11 (21% YoY in
FY11). This was because the company gave salary hikes this year.
• Employee expenses for international operations fell by 6% YoY (590bps) in 4Q as
the company undertook restructuring earlier.
Tax rate
• 4QFY11 tax rate was lower because Crompton enjoyed tax 200% deduction on
R&D expenses, which went up sharply.
• Management believes that FY10 tax rates are sustainable for FY11 as well.
Exceptional loss
• Exceptional loss relates to claim by a customer in Bahrain for supply of products by
Ganz prior to its acquisition, which was awarded in favour of customer in the
Arbitration.
• Crompton has appealed against the same
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