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UBS Investment Research
Crompton Greaves Ltd
1 Q FY12 conference call: key highlights
Event: Crompton organised the 1Q FY12 results conference call today
The key highlights from the conference call are: a) the overseas business suffered
largely due to the volatile situation in the Middle East; b) the company is
witnessing more opportunity in traditional markets (Western Europe) and in areas
such as offshore wind transformers and distribution transformers; c) decline in
margins in the domestic power systems business is due to increased competition;
and d) the consumer products business has witnessed lower growth due to higher
inflation in India.
Impact: FY12 margins will be under pressure
According to the company, full-year margins will be under pressure and EBITDA
could be in the range of 8-10% for FY12. This would mean a decline of 340bps
YoY even in the best-case scenario. The company highlighted that 2Q FY12 is also
likely to be a difficult quarter but the situation should improve in 2H FY12. On
sales, the company’s guidance is 10-12% YoY growth for FY12.
Action: couple of good quarters for investor confidence to come back
We believe the key segments of power systems and consumer products have
disappointed in 1Q FY12. The power systems business is struggling in both the
overseas and domestic markets. Also, there is no clarity in the near term on the
revival of the consumer products business.
Valuation: maintain Sell rating, price target of Rs240
We derive our price target of Rs240 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%.
Conference call: key highlights
Overseas business
The volatile situation in the Middle East is responsible for the decline in
margins and poor revenue growth. However, there is more opportunity in
traditional markets (Western Europe) and in areas such as offshore wind
transformers and distribution transformers.
In general, activity has slowed in most overseas markets. Volumes are not
coming through and there is pricing pressure. The company believes this is
only a short-term phenomenon. The outlook for the overseas business is for
8-9% growth in FY12, and 5-7% in Euro terms. Overseas revenue is at
Rs9.68bn; some revenue (~Rs2bn) got deferred.
Domestic power business
Increased competitive pressure is leading to lower profitability. Crompton is
a low-cost producer as well but the pricing cut is more than can be managed.
Margin at 12.6% in this quarter, but management believes that it is seeing the
bottom perhaps. Chinese and Korean companies are competing very
aggressively. Orders from PGCIL have declined as of now. However, this
issue is largely related to timing or order award.
Consumer products business
Inflation and interest rate hike has taken a toll on the demand and
consumption pattern.
On the impact of the price hike in April, there is no direct correlation
between volume decline and price hike, according to the company.
Industrial business
The business is doing well with good revenue growth and profitability
95% of old unexecuted Nelco orders have been completed.
Guidance
FY12 revenue growth is likely to be 10-12%
No exceptional items in the results
8-10% EBITDA guidance for full year FY12
2Q will also be difficult and things should improve starting 3Q FY12
Others
There has been a slowdown in orders for wind business in Europe. However,
the cut in working hours in Europe is temporary
Optimistic on consumer products business. Overall, in FY13, the company
expects to go back to margins seen in the past (if the global situation
improves)
Realizations have dropped 10-12% on an average due to competition
Crompton Greaves: disappointing results
In 1Q FY12;
CG’s operating income of Rs24.4bn was up 6% YoY
EBITDA margins declined 545bp YoY due to higher raw material cost
Reported PAT declined 58% YoY to Rs795m
PAT is significantly below UBS and consensus estimates.
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
1 Q FY12 conference call: key highlights
Event: Crompton organised the 1Q FY12 results conference call today
The key highlights from the conference call are: a) the overseas business suffered
largely due to the volatile situation in the Middle East; b) the company is
witnessing more opportunity in traditional markets (Western Europe) and in areas
such as offshore wind transformers and distribution transformers; c) decline in
margins in the domestic power systems business is due to increased competition;
and d) the consumer products business has witnessed lower growth due to higher
inflation in India.
Impact: FY12 margins will be under pressure
According to the company, full-year margins will be under pressure and EBITDA
could be in the range of 8-10% for FY12. This would mean a decline of 340bps
YoY even in the best-case scenario. The company highlighted that 2Q FY12 is also
likely to be a difficult quarter but the situation should improve in 2H FY12. On
sales, the company’s guidance is 10-12% YoY growth for FY12.
Action: couple of good quarters for investor confidence to come back
We believe the key segments of power systems and consumer products have
disappointed in 1Q FY12. The power systems business is struggling in both the
overseas and domestic markets. Also, there is no clarity in the near term on the
revival of the consumer products business.
Valuation: maintain Sell rating, price target of Rs240
We derive our price target of Rs240 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%.
Conference call: key highlights
Overseas business
The volatile situation in the Middle East is responsible for the decline in
margins and poor revenue growth. However, there is more opportunity in
traditional markets (Western Europe) and in areas such as offshore wind
transformers and distribution transformers.
In general, activity has slowed in most overseas markets. Volumes are not
coming through and there is pricing pressure. The company believes this is
only a short-term phenomenon. The outlook for the overseas business is for
8-9% growth in FY12, and 5-7% in Euro terms. Overseas revenue is at
Rs9.68bn; some revenue (~Rs2bn) got deferred.
Domestic power business
Increased competitive pressure is leading to lower profitability. Crompton is
a low-cost producer as well but the pricing cut is more than can be managed.
Margin at 12.6% in this quarter, but management believes that it is seeing the
bottom perhaps. Chinese and Korean companies are competing very
aggressively. Orders from PGCIL have declined as of now. However, this
issue is largely related to timing or order award.
Consumer products business
Inflation and interest rate hike has taken a toll on the demand and
consumption pattern.
On the impact of the price hike in April, there is no direct correlation
between volume decline and price hike, according to the company.
Industrial business
The business is doing well with good revenue growth and profitability
95% of old unexecuted Nelco orders have been completed.
Guidance
FY12 revenue growth is likely to be 10-12%
No exceptional items in the results
8-10% EBITDA guidance for full year FY12
2Q will also be difficult and things should improve starting 3Q FY12
Others
There has been a slowdown in orders for wind business in Europe. However,
the cut in working hours in Europe is temporary
Optimistic on consumer products business. Overall, in FY13, the company
expects to go back to margins seen in the past (if the global situation
improves)
Realizations have dropped 10-12% on an average due to competition
Crompton Greaves: disappointing results
In 1Q FY12;
CG’s operating income of Rs24.4bn was up 6% YoY
EBITDA margins declined 545bp YoY due to higher raw material cost
Reported PAT declined 58% YoY to Rs795m
PAT is significantly below UBS and consensus estimates.
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.
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