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Crompton Greaves (CRG)
Industrials
Call fails to provide any confidence; acknowledges pressure across segments.
Crompton call suggested sharp downgrades to growth and margin expectations across
businesses in overseas (MENA region, slow wind energy business, competition) and
domestic (competition, higher input costs, slow consumer demand). While risk factors
have been known, their sharp reflection in CRG’s performance (vs consistency over last
few years) led the negative surprise. We cut estimates and TP to Rs210; retain BUY.
Steep erosion of growth and margin expectations on all-round business pressures
Crompton has undergone steep erosion in growth and margin expectations on all round business
pressures. While the risk factors (MENA region, competition and commodities) have been known
for a while, their sharp and simultaneous realization in CRG performance has led to negative
surprise. We build in 10.2% consolidated margins with about 13% standalone margins and 6%
margin in subsidiaries for FY2012E.
No one-off in overseas; sales down on ME, slow wind business; domestic power also faces challenges
The management cited that there were no one-offs in the overseas subsidiary business and the
sedate revenues (down 7-10% in Euro terms) were attributed to loss of Rs2.5 bn of sales in Middle
East and Africa geographies and slowdown in Europe wind energy business. This seems credible
based on Rs2.7 bn stock adjustment in consolidated numbers. We believe this may have affected
EBITDA by Rs0.5 bn or so (margins and may be some unallocable overheads not accounted in
finished stocks until they are sold). The domestic power business also faces several challenges
related to competitive intensity, demand slowdown and rising input costs. We believe that this
weakness is likely to remain for the next 1-2 quarters.
Relatively weak inflows of Rs6 bn in domestic power and Rs8 bn in overseas (backlog up 16%)
Overseas inflows dipped to about Rs7.8 bn in 1QFY12, (down 14% yoy) post sharp pick-up in the
past few quarters. Order backlog however stood at Rs35.7 bn (on strong inflows in FY2011), up
16.5% yoy providing some confidence on execution in FY2012E-13E. Crompton’s standalone and
domestic inflows recorded strong decline of 19.6% and 16.6% yoy, respectively. Slow inflows are
likely to impact revenue growth and hence pick-up is essential for growth in FY2013E.
Cut estimates and TP to Rs210; retain BUY in face of sharp correction in the stock
We cut our earnings to Rs10.6 and Rs13.5 (from Rs15.4 and Rs17.9) for FY2012E and FY2013E on
lower revenue growth and margin assumptions across segments. Cut our TP to Rs210 (from Rs310)
on earnings cut and lower target multiple of 15X FY2013E EPS (from 17X). We retain BUY rating as
valuations seem reasonable (14X FY2013E PER) post sharp correction (down 27% in last two days).
Guides for steep margin decline; may have only Rs10-11 EPS in FY2012E
Crompton management significantly reduced its revenue and margin guidance for FY2012E.
The management has cut its consolidated revenue growth guidance to about 10-12%
versus about 12-15% growth earlier. The management has also guided for steep correction
in EBITDA margin to 8-10% in FY2012E from 13.4% recorded in FY2011. We believe that at
these margin levels Crompton would be able to record earnings of only Rs10.5-11.5 in
FY2012E (versus about Rs14 in FY2011) and Rs12.5-13.5 in FY2013E.
Despite the sharp margin correction, the management argues that yoy net earnings would
still record a growth. Significantly lower yoy interest and depreciation cost could potentially
lead to a net PAT growth. However, we note that Crompton reported interest expense of
Rs110 mn and depreciation cost of Rs608 mn in 1QFY11 - both higher than implied
quarterly run-rate of our full-year estimates.
We expect the company to record a revenue growth of about 8.5-9% yoy in FY2012E with
EBITDA margin of 10% at the consolidated level (includes contribution from Emotron as
well). We expect the standalone business to broadly continue on the trend witnessed in
1QFY12, with full-year revenue growth estimate of about 8.7% (9.4% growth recorded in
1QFY12) with EBITDA margin of about 13% (12.5% in 1QFY12). This would imply a
revenue growth requirement of about 9% and EBITDA margin of 6% for the overseas
subsidiaries in FY2012E.
10% consolidated EBITDA margin would also imply recovery in overseas business
margins to about 7-8%
10% EBITDA margin at consolidated level would imply that the company does about 11%
consolidated margins incrementally in the remaining 9-month period (remaining 9MFY12E).
Assuming that the standalone business continues at about 13% EBITDA margins
incrementally for next few quarters (reported 12.4% EBITDA margin in 1QFY12), then the
international business would have to deliver EBITDA margins of about 7.5-8% in the
remaining 9MFY12E.
No one-offs in overseas subs; affected by ME market, weak European wind
business
Crompton management suggested that there were no one-offs in the international
subsidiaries results. The overseas subsidiaries reported a sharp margin contraction (almost nil
EBITDA) as it was unable to book requisite revenues in 1QFY12 (revenues were down 7-10%
in Euro terms, relatively flat in Rupee terms). The lower-than-expected revenues were
attributed to (1) inability to deliver orders in troubled geographies such as Middle East and
Africa - led to a revenue impact of about Rs2.5 bn and (2) weaker demand in European
markets for products such as wind power transformers. High finished goods stocks may
possibly be a reflection of the fact that the goods ready for dispatch were not shipped out.
We believe that the company would not have been able to recognize the margins for the
Rs2.5 bn of business possibly affecting EBITDA by about Rs500-600 mn. This would have
implied about 5-6% EBITDA margin for the quarter.
Domestic business also facing pressure of competition, cost hikes and slower
demand
The company is also facing pressure in the domestic power segment related to (1) intensive
competition leading to sharp correction in realizations, (2) slower demand environment -
lower utility ordering activity from PGCIL and industrial demand, and (3) rising raw material
prices (certain commodities are not hedged) further exacerbating margin pressures.
Standalone power segment reported sharp margin contraction (EBIT margin) to 12.6% in
1QFY12 versus our estimate of flat yoy margins - reported margin of 16.6% in 1QFY11 and
18% in 4QFY11.
Industrials may also face incremental pressure
While industrial business has not reflected weakness so far, we believe that volume growth
in that business may have been muted and most of the revenue growth was likely led by
price increases. This business segment may also face incremental pressure in the coming
quarters. This segment reported a strong revenue growth of 16% yoy to Rs3.6 bn
(marginally below estimates). However, profitability of this segment took a hit with EBIT
margins of 15.9% from 1QFY11 levels of 20.6% likely on the back of higher input costs.
Relatively weak inflows of Rs6 bn in domestic power and Rs8 bn in overseas
Overseas subsidiary order inflows take a hit; but backlog up 16% yoy
Crompton reported moderate order inflows of about Rs7.8 bn in the overseas subsidiaries, a
decline of about 14% yoy, close to FY2010 quarterly average levels of Rs7.4 bn. This is
versus quarterly average inflow levels of about Rs11 bn in FY2011. This is post a sharp pickup
in order inflows recorded in the past few quarters. The overseas business, however
reported a strong order backlog of Rs35.7 bn (on strong inflows in FY2011), up 16.5% yoy.
This provides some confidence on execution in FY2012E-13E.
Domestic power inflows remain weak—would impact growth in FY2012E
Crompton reported standalone order inflows of Rs14.6 bn in 1QFY12, down 19.6% yoy.
The implied order inflows for the domestic (standalone) power segment stood at Rs6 bn in
1QFY12, which is significantly lower (about 16.6%) than 1QFY11 inflows of Rs7.15 bn. Slow
inflows in FY2011 and 1QFY12 are likely to impact revenue growth of FY2012E. Hence,
order inflows pick-up is essential for growth in FY2013E
Cut estimates, TP to Rs210; retain BUY on reasonable valuations post sharp
correction
We have significantly revised our earnings estimate to Rs10.6 and Rs13.5 for FY2012E and
FY2013E based on lower revenue and margin assumptions across most segments. Key
segment-wise changes to our assumptions include:
Standalone power segment: Lower EBIT margin of about 14% (versus our previous
assumption of 16.5% and 18% reported in FY2011). We have marginally revised our
revenue growth estimate for this segment for FY2012E to 7.5% (from 5%; FY2013E
revenue growth estimate remains unchanged at 15%).
Consumer products segment: Lower revenue growth assumption of 7.5% and 12.5%
in FY2012E and FY2013E, respectively versus previous assumption of 20% growth in both
years. EBIT margin assumptions broadly remain unchanged at 13.5%
Industrial systems segment: Lower revenue growth of 10% and 15% in FY2012E and
FY2013E (from 20% previously) as well as lower EBIT margin assumption of 15% (from
19% previously)
Overseas subsidiaries: Lower revenue growth (of about 13%) as well as EBITDA margin
(of 5-8%) assumption for FY2012E and FY2013E. Note that our overseas subsidiary
revenue and margin estimates also include contribution from recently acquired company,
Emotron, as well.
We have correspondingly cut our target price to Rs210/share (from Rs310/share earlier)
based on (1) 25% downward revision to FY2013E earnings estimates and (2) revision in
target multiple to 16X FY2013E EPS from 17X earlier based on slow demand environment
across segments (industrial capex as well as consumers).
We, however, retain our BUY rating on the stock as the stock is presently trading at
reasonable valuations post steep correction over the past two days (has corrected by about
27% over the last two days). Crompton is presently trading at relatively reasonable valuation
of about 13X FY2013E earnings.
Key risks to earnings relate to (1) aggressive competition and large capacity additions in the
domestic power T&D segment may pressure revenue growth and margins, and (2) slowerthan-
expected pick-up in international demand, (3) Euro area business (17% of business)
and Euro currency (translation), and (4) change in guard at the top.
1Q performance: Revenue disappointment exacerbated by margin contraction
Crompton reported consolidated revenues of Rs24.4 bn in 1QFY12 recording a yoy growth
of about 6%, about 7% below our estimates. The revenue disappointment was further
exacerbated by sharp margins contraction - EBITDA margin recorded a sharp decline of 550
bps yoy in 1QFY12 to 7.5% versus our estimate of 15% (down 540 bps on sequential basis
as well). The sharp decline in margin was led by higher raw material costs as a percentage of
sales. Higher tax rate for the quarter (of 38%) led to a net PAT of Rs778 mn, down 58% yoy
(from Rs1.9 bn in 1QFY11), versus our estimate of Rs2.1 bn.
Standalone: Revenues miss on weak consumer sales; power, industrial segments drag
margin down
Crompton reported 1QFY12 standalone revenues of Rs14.7 bn, up 9.4% yoy and about 3%
lower than our expectation of Rs15 bn. EBITDA margin declined by about 230 bps yoy to
12.7% on account of higher raw material cost as percentage of sales, versus out estimate of
15%. Sharp margin contraction led to an 11% yoy decline in standalone EBITDA. Crompton
reported standalone net PAT of Rs1.3 bn in 1QFY12, down 9% yoy and about 15% below
our estimates. Standalone revenue disappointment was led by consumer segment sales
while power and industrial segments led the margin contraction.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Crompton Greaves (CRG)
Industrials
Call fails to provide any confidence; acknowledges pressure across segments.
Crompton call suggested sharp downgrades to growth and margin expectations across
businesses in overseas (MENA region, slow wind energy business, competition) and
domestic (competition, higher input costs, slow consumer demand). While risk factors
have been known, their sharp reflection in CRG’s performance (vs consistency over last
few years) led the negative surprise. We cut estimates and TP to Rs210; retain BUY.
Steep erosion of growth and margin expectations on all-round business pressures
Crompton has undergone steep erosion in growth and margin expectations on all round business
pressures. While the risk factors (MENA region, competition and commodities) have been known
for a while, their sharp and simultaneous realization in CRG performance has led to negative
surprise. We build in 10.2% consolidated margins with about 13% standalone margins and 6%
margin in subsidiaries for FY2012E.
No one-off in overseas; sales down on ME, slow wind business; domestic power also faces challenges
The management cited that there were no one-offs in the overseas subsidiary business and the
sedate revenues (down 7-10% in Euro terms) were attributed to loss of Rs2.5 bn of sales in Middle
East and Africa geographies and slowdown in Europe wind energy business. This seems credible
based on Rs2.7 bn stock adjustment in consolidated numbers. We believe this may have affected
EBITDA by Rs0.5 bn or so (margins and may be some unallocable overheads not accounted in
finished stocks until they are sold). The domestic power business also faces several challenges
related to competitive intensity, demand slowdown and rising input costs. We believe that this
weakness is likely to remain for the next 1-2 quarters.
Relatively weak inflows of Rs6 bn in domestic power and Rs8 bn in overseas (backlog up 16%)
Overseas inflows dipped to about Rs7.8 bn in 1QFY12, (down 14% yoy) post sharp pick-up in the
past few quarters. Order backlog however stood at Rs35.7 bn (on strong inflows in FY2011), up
16.5% yoy providing some confidence on execution in FY2012E-13E. Crompton’s standalone and
domestic inflows recorded strong decline of 19.6% and 16.6% yoy, respectively. Slow inflows are
likely to impact revenue growth and hence pick-up is essential for growth in FY2013E.
Cut estimates and TP to Rs210; retain BUY in face of sharp correction in the stock
We cut our earnings to Rs10.6 and Rs13.5 (from Rs15.4 and Rs17.9) for FY2012E and FY2013E on
lower revenue growth and margin assumptions across segments. Cut our TP to Rs210 (from Rs310)
on earnings cut and lower target multiple of 15X FY2013E EPS (from 17X). We retain BUY rating as
valuations seem reasonable (14X FY2013E PER) post sharp correction (down 27% in last two days).
Guides for steep margin decline; may have only Rs10-11 EPS in FY2012E
Crompton management significantly reduced its revenue and margin guidance for FY2012E.
The management has cut its consolidated revenue growth guidance to about 10-12%
versus about 12-15% growth earlier. The management has also guided for steep correction
in EBITDA margin to 8-10% in FY2012E from 13.4% recorded in FY2011. We believe that at
these margin levels Crompton would be able to record earnings of only Rs10.5-11.5 in
FY2012E (versus about Rs14 in FY2011) and Rs12.5-13.5 in FY2013E.
Despite the sharp margin correction, the management argues that yoy net earnings would
still record a growth. Significantly lower yoy interest and depreciation cost could potentially
lead to a net PAT growth. However, we note that Crompton reported interest expense of
Rs110 mn and depreciation cost of Rs608 mn in 1QFY11 - both higher than implied
quarterly run-rate of our full-year estimates.
We expect the company to record a revenue growth of about 8.5-9% yoy in FY2012E with
EBITDA margin of 10% at the consolidated level (includes contribution from Emotron as
well). We expect the standalone business to broadly continue on the trend witnessed in
1QFY12, with full-year revenue growth estimate of about 8.7% (9.4% growth recorded in
1QFY12) with EBITDA margin of about 13% (12.5% in 1QFY12). This would imply a
revenue growth requirement of about 9% and EBITDA margin of 6% for the overseas
subsidiaries in FY2012E.
10% consolidated EBITDA margin would also imply recovery in overseas business
margins to about 7-8%
10% EBITDA margin at consolidated level would imply that the company does about 11%
consolidated margins incrementally in the remaining 9-month period (remaining 9MFY12E).
Assuming that the standalone business continues at about 13% EBITDA margins
incrementally for next few quarters (reported 12.4% EBITDA margin in 1QFY12), then the
international business would have to deliver EBITDA margins of about 7.5-8% in the
remaining 9MFY12E.
No one-offs in overseas subs; affected by ME market, weak European wind
business
Crompton management suggested that there were no one-offs in the international
subsidiaries results. The overseas subsidiaries reported a sharp margin contraction (almost nil
EBITDA) as it was unable to book requisite revenues in 1QFY12 (revenues were down 7-10%
in Euro terms, relatively flat in Rupee terms). The lower-than-expected revenues were
attributed to (1) inability to deliver orders in troubled geographies such as Middle East and
Africa - led to a revenue impact of about Rs2.5 bn and (2) weaker demand in European
markets for products such as wind power transformers. High finished goods stocks may
possibly be a reflection of the fact that the goods ready for dispatch were not shipped out.
We believe that the company would not have been able to recognize the margins for the
Rs2.5 bn of business possibly affecting EBITDA by about Rs500-600 mn. This would have
implied about 5-6% EBITDA margin for the quarter.
Domestic business also facing pressure of competition, cost hikes and slower
demand
The company is also facing pressure in the domestic power segment related to (1) intensive
competition leading to sharp correction in realizations, (2) slower demand environment -
lower utility ordering activity from PGCIL and industrial demand, and (3) rising raw material
prices (certain commodities are not hedged) further exacerbating margin pressures.
Standalone power segment reported sharp margin contraction (EBIT margin) to 12.6% in
1QFY12 versus our estimate of flat yoy margins - reported margin of 16.6% in 1QFY11 and
18% in 4QFY11.
Industrials may also face incremental pressure
While industrial business has not reflected weakness so far, we believe that volume growth
in that business may have been muted and most of the revenue growth was likely led by
price increases. This business segment may also face incremental pressure in the coming
quarters. This segment reported a strong revenue growth of 16% yoy to Rs3.6 bn
(marginally below estimates). However, profitability of this segment took a hit with EBIT
margins of 15.9% from 1QFY11 levels of 20.6% likely on the back of higher input costs.
Relatively weak inflows of Rs6 bn in domestic power and Rs8 bn in overseas
Overseas subsidiary order inflows take a hit; but backlog up 16% yoy
Crompton reported moderate order inflows of about Rs7.8 bn in the overseas subsidiaries, a
decline of about 14% yoy, close to FY2010 quarterly average levels of Rs7.4 bn. This is
versus quarterly average inflow levels of about Rs11 bn in FY2011. This is post a sharp pickup
in order inflows recorded in the past few quarters. The overseas business, however
reported a strong order backlog of Rs35.7 bn (on strong inflows in FY2011), up 16.5% yoy.
This provides some confidence on execution in FY2012E-13E.
Domestic power inflows remain weak—would impact growth in FY2012E
Crompton reported standalone order inflows of Rs14.6 bn in 1QFY12, down 19.6% yoy.
The implied order inflows for the domestic (standalone) power segment stood at Rs6 bn in
1QFY12, which is significantly lower (about 16.6%) than 1QFY11 inflows of Rs7.15 bn. Slow
inflows in FY2011 and 1QFY12 are likely to impact revenue growth of FY2012E. Hence,
order inflows pick-up is essential for growth in FY2013E
Cut estimates, TP to Rs210; retain BUY on reasonable valuations post sharp
correction
We have significantly revised our earnings estimate to Rs10.6 and Rs13.5 for FY2012E and
FY2013E based on lower revenue and margin assumptions across most segments. Key
segment-wise changes to our assumptions include:
Standalone power segment: Lower EBIT margin of about 14% (versus our previous
assumption of 16.5% and 18% reported in FY2011). We have marginally revised our
revenue growth estimate for this segment for FY2012E to 7.5% (from 5%; FY2013E
revenue growth estimate remains unchanged at 15%).
Consumer products segment: Lower revenue growth assumption of 7.5% and 12.5%
in FY2012E and FY2013E, respectively versus previous assumption of 20% growth in both
years. EBIT margin assumptions broadly remain unchanged at 13.5%
Industrial systems segment: Lower revenue growth of 10% and 15% in FY2012E and
FY2013E (from 20% previously) as well as lower EBIT margin assumption of 15% (from
19% previously)
Overseas subsidiaries: Lower revenue growth (of about 13%) as well as EBITDA margin
(of 5-8%) assumption for FY2012E and FY2013E. Note that our overseas subsidiary
revenue and margin estimates also include contribution from recently acquired company,
Emotron, as well.
We have correspondingly cut our target price to Rs210/share (from Rs310/share earlier)
based on (1) 25% downward revision to FY2013E earnings estimates and (2) revision in
target multiple to 16X FY2013E EPS from 17X earlier based on slow demand environment
across segments (industrial capex as well as consumers).
We, however, retain our BUY rating on the stock as the stock is presently trading at
reasonable valuations post steep correction over the past two days (has corrected by about
27% over the last two days). Crompton is presently trading at relatively reasonable valuation
of about 13X FY2013E earnings.
Key risks to earnings relate to (1) aggressive competition and large capacity additions in the
domestic power T&D segment may pressure revenue growth and margins, and (2) slowerthan-
expected pick-up in international demand, (3) Euro area business (17% of business)
and Euro currency (translation), and (4) change in guard at the top.
1Q performance: Revenue disappointment exacerbated by margin contraction
Crompton reported consolidated revenues of Rs24.4 bn in 1QFY12 recording a yoy growth
of about 6%, about 7% below our estimates. The revenue disappointment was further
exacerbated by sharp margins contraction - EBITDA margin recorded a sharp decline of 550
bps yoy in 1QFY12 to 7.5% versus our estimate of 15% (down 540 bps on sequential basis
as well). The sharp decline in margin was led by higher raw material costs as a percentage of
sales. Higher tax rate for the quarter (of 38%) led to a net PAT of Rs778 mn, down 58% yoy
(from Rs1.9 bn in 1QFY11), versus our estimate of Rs2.1 bn.
Standalone: Revenues miss on weak consumer sales; power, industrial segments drag
margin down
Crompton reported 1QFY12 standalone revenues of Rs14.7 bn, up 9.4% yoy and about 3%
lower than our expectation of Rs15 bn. EBITDA margin declined by about 230 bps yoy to
12.7% on account of higher raw material cost as percentage of sales, versus out estimate of
15%. Sharp margin contraction led to an 11% yoy decline in standalone EBITDA. Crompton
reported standalone net PAT of Rs1.3 bn in 1QFY12, down 9% yoy and about 15% below
our estimates. Standalone revenue disappointment was led by consumer segment sales
while power and industrial segments led the margin contraction.
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