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Crompton Greaves India
Correction overdone, margins to revert
Event
ƒ Post CRG’s conference call we believe margin dip in industrial segment is
temporary as higher commodity prices are passed on. Stock reaction after
earnings is unwarranted, in our view. CRG is now one of our top picks with
revised target price of Rs344 (from Rs361) as valuations are at 14x FY12.
Impact
ƒ Power segment to remain subdued in FY12, robust growth in others to
continue: Management has guided for 6-8% growth in power systems due to
lower than expected order inflows, 25% in consumers and 18-20% in
industrials segment. Growth in overseas subsidiaries is expected to be ~13%
in local currency translating into 15% overall growth in consolidated revenues.
ƒ Industrial margin shock in 4QFY11 temporary in nature: Margin decline of
10% in industrial segment in 4QFY11 is primarily due to sharp rise in copper
prices and execution of low margin legacy orders of NELCO. Margin should
improve in FY12 as it has already taken price increase in April and NELCO
orders would be executed by 1HFY12.
⇒ Expect margins to improve by 40bps in FY12: We remain confident
that consolidated margins will improve by 40bps to 13.8% as margins in
industrial segment revert to 20% level. We are building in slight margin
decline of 50bps in power systems and stable margin in consumer
business.
ƒ Domestic order inflows bounce back in 2HFY12 critical: Management
expects robust growth in order inflows in domestic power business which
would drive high double digits revenue growth in FY13. Any further delay can
put FY13 estimates at risk. Meanwhile, activity in industrial segment continues
to remain strong especially from sugar and cement sectors.
ƒ Limited downside to estimates, our assumptions at low end of guidance:
We see limited downside risks to our estimates. We are building in revenue
growth at the lower end of guidance (6%, 18% and 25% revenue growth in
power, industrials and consumer segments in standalone entity) with margin
decline of 50bps in power and 130bps improvement in industrials.
Earnings and target price revision
ƒ We marginally reduce our EPS by 5%. Our new target price is Rs344 (from
Rs361 earlier). We introduce FY14 estimates.
Price catalyst
ƒ 12-month price target: Rs344.00 based on a PER methodology.
ƒ Catalyst: pickup in power orders and improvement in industrials’ margin.
Action and recommendation
ƒ Stock at very reasonable 14x FY12 in bottom cycle: CRG is available at
what see as a very attractive valuation of 14x FY12 with 19% earnings CAGR
over the next 2-3 years. With improving order inflows especially in power
segments and subsequent easing in margin pressure, earnings downgrades
are unlikely to play out. Retain Outperform with a price target of Rs344 (from
Rs361 earlier)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Crompton Greaves India
Correction overdone, margins to revert
Event
ƒ Post CRG’s conference call we believe margin dip in industrial segment is
temporary as higher commodity prices are passed on. Stock reaction after
earnings is unwarranted, in our view. CRG is now one of our top picks with
revised target price of Rs344 (from Rs361) as valuations are at 14x FY12.
Impact
ƒ Power segment to remain subdued in FY12, robust growth in others to
continue: Management has guided for 6-8% growth in power systems due to
lower than expected order inflows, 25% in consumers and 18-20% in
industrials segment. Growth in overseas subsidiaries is expected to be ~13%
in local currency translating into 15% overall growth in consolidated revenues.
ƒ Industrial margin shock in 4QFY11 temporary in nature: Margin decline of
10% in industrial segment in 4QFY11 is primarily due to sharp rise in copper
prices and execution of low margin legacy orders of NELCO. Margin should
improve in FY12 as it has already taken price increase in April and NELCO
orders would be executed by 1HFY12.
⇒ Expect margins to improve by 40bps in FY12: We remain confident
that consolidated margins will improve by 40bps to 13.8% as margins in
industrial segment revert to 20% level. We are building in slight margin
decline of 50bps in power systems and stable margin in consumer
business.
expects robust growth in order inflows in domestic power business which
would drive high double digits revenue growth in FY13. Any further delay can
put FY13 estimates at risk. Meanwhile, activity in industrial segment continues
to remain strong especially from sugar and cement sectors.
ƒ Limited downside to estimates, our assumptions at low end of guidance:
We see limited downside risks to our estimates. We are building in revenue
growth at the lower end of guidance (6%, 18% and 25% revenue growth in
power, industrials and consumer segments in standalone entity) with margin
decline of 50bps in power and 130bps improvement in industrials.
Earnings and target price revision
ƒ We marginally reduce our EPS by 5%. Our new target price is Rs344 (from
Rs361 earlier). We introduce FY14 estimates.
Price catalyst
ƒ 12-month price target: Rs344.00 based on a PER methodology.
ƒ Catalyst: pickup in power orders and improvement in industrials’ margin.
Action and recommendation
ƒ Stock at very reasonable 14x FY12 in bottom cycle: CRG is available at
what see as a very attractive valuation of 14x FY12 with 19% earnings CAGR
over the next 2-3 years. With improving order inflows especially in power
segments and subsequent easing in margin pressure, earnings downgrades
are unlikely to play out. Retain Outperform with a price target of Rs344 (from
Rs361 earlier)
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