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Margins expanded 140bp in 2Q, although very high other operating income takes some
sheen off. The order book at the end of the quarter was robust. We remain cautious on
margins given historical volatility in the power business. Valuations look expensive. We prefer
Crompton Greaves in this space.
2Q numbers strong, although partly powered by strong ‘other operating income’
2Q11 recurring sales of Rs30.4bn (up 37.6% yoy) and recurring PAT of Rs2.7bn (up 48%
yoy) exceeded our forecasts by 10% and 12%, respectively. EBITDA margin rose to 14.3%
(up 141bp yoy) as an increase in materials costs was offset by a reduction in other expenses.
PBIT margins were 12.2% (up 160bp yoy), mainly driven by 234bp margin improvement for
the industry segment (8.5%), although slightly offset by a 202bp contraction (14.3%) in the
energy segment. The quarter also saw abnormally high other operating income (typically
comprising export incentives, profit of sale of fixed assets, recovery from subsidiaries and
miscellaneous income), which also contributed to margin expansion.
Order book strong, but environment tough
Order inflow was Rs33bn in the quarter, up 47% yoy but down 17% qoq. The company’s
order book grew to Rs154bn (up 15% yoy and 2% qoq). Sustainability of margins remains
key for the company, particularly as it enters an enhanced stage of execution in the Qatar
order that it is executing for its parent. The competitive environment is tough, with pressure
from Chinese and Korean vendors, and domestic ordering in the power business likely to
improve after a couple of quarters. Higher margins in FY10 were partly attributable to
completion of several old better-priced orders, as well as one-off gains. In addition, the rising
trend in cost of materials may further dampen margins in the future.
Siemens more diversified than ABB, but we prefer Crompton Greaves
Siemens, being more diversified than ABB, is thus a better pick among MNC T&D
companies, in our view. Its recent initiatives may generate future growth, but we await better
clarity. However, we prefer Crompton Greaves to the MNC T&D companies. We increase our
FY11-13 earnings forecasts 4-5% to take into account 1H11 results, which increases our
DCF-based TP to Rs660. We maintain our Sell rating. On our forecasts, the stock trades at
30x FY11F EPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Margins expanded 140bp in 2Q, although very high other operating income takes some
sheen off. The order book at the end of the quarter was robust. We remain cautious on
margins given historical volatility in the power business. Valuations look expensive. We prefer
Crompton Greaves in this space.
2Q numbers strong, although partly powered by strong ‘other operating income’
2Q11 recurring sales of Rs30.4bn (up 37.6% yoy) and recurring PAT of Rs2.7bn (up 48%
yoy) exceeded our forecasts by 10% and 12%, respectively. EBITDA margin rose to 14.3%
(up 141bp yoy) as an increase in materials costs was offset by a reduction in other expenses.
PBIT margins were 12.2% (up 160bp yoy), mainly driven by 234bp margin improvement for
the industry segment (8.5%), although slightly offset by a 202bp contraction (14.3%) in the
energy segment. The quarter also saw abnormally high other operating income (typically
comprising export incentives, profit of sale of fixed assets, recovery from subsidiaries and
miscellaneous income), which also contributed to margin expansion.
Order book strong, but environment tough
Order inflow was Rs33bn in the quarter, up 47% yoy but down 17% qoq. The company’s
order book grew to Rs154bn (up 15% yoy and 2% qoq). Sustainability of margins remains
key for the company, particularly as it enters an enhanced stage of execution in the Qatar
order that it is executing for its parent. The competitive environment is tough, with pressure
from Chinese and Korean vendors, and domestic ordering in the power business likely to
improve after a couple of quarters. Higher margins in FY10 were partly attributable to
completion of several old better-priced orders, as well as one-off gains. In addition, the rising
trend in cost of materials may further dampen margins in the future.
Siemens more diversified than ABB, but we prefer Crompton Greaves
Siemens, being more diversified than ABB, is thus a better pick among MNC T&D
companies, in our view. Its recent initiatives may generate future growth, but we await better
clarity. However, we prefer Crompton Greaves to the MNC T&D companies. We increase our
FY11-13 earnings forecasts 4-5% to take into account 1H11 results, which increases our
DCF-based TP to Rs660. We maintain our Sell rating. On our forecasts, the stock trades at
30x FY11F EPS.
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