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Crompton Greaves Ltd (CRG IN)
N: Key takeaways from management meeting
International losses driven by deferrals, cost pressures &
weak demand; domestic margins seeing structural decline
Outlook for Consumer Products & margin recovery in
Industrial Systems remain muted
FY12 PAT guidance driven by lower tax expectations; we
rate CRG Neutral with a target price of INR205
We recently met with Crompton’s CFO, Mr. Madhav Acharya, to discuss the Q1 results along
with the outlook for the company in the medium term. Below are some of the key takeaways.
Q1 weakness a mix of structural as well as cyclical issues: Mgmt attributed the weakness
in the Q1 results to three main factors: 1) Deferral in shipments (in the Power business) to
the tune of around INR700m in India and EUR29m (~INR1.8bn), barring which the margins
could have been c6% in Q1, in our opinion, instead of the reported 2.6%; 2) significant
increase in the cost of certain commodities/components, such as CRGO steel, bushings, etc,
which could not be hedged; and 3) deterioration in the international demand for distribution
transformers, which not only lowered capacity utilization (c55-60%) but also gross margins
due to discounts.
Competition taking toll on Power Systems margins in India: Domestic margins in Power
Systems declined to c12.6% in Q1 FY12 compared to c18.1% in last quarter and c16.6% in Q1
FY11. Management clearly noted that the previous levels of high profitability can no longer be
sustained in the face of competition. We are seeing similar margin trends for other players as
well in this space. Siemens, for example, recently reported a margin decline of c120bp y-o-y
and c220bps q-o-q in its Power Transmission business to c12.5%. While Crompton expects to
achieve better margins (vs. 12.6% in Q1) in the coming quarters we believe that the visibility
on ‘sustainable’ margins still remain opaque as the competition, particularly from Chinese and
Korean, remains intense.
Outlook for Consumer Products & margin recovery in Industrial Systems also muted:
Mgmt attributed the sharp decline in growth in Consumers Products to rising interest rates &
inflation (CRG had put up a price hike of c15% last quarter). The growth outlook remains
weak but mgmt plans to introduce new products to capture some growth. In Industrial systems,
the margins are expected to improve somewhat (to c15-16%) given that most of the Nelco
orders are now behind us. However, in lieu of the rising input costs margins are unlikely to go
back the previous levels of c18% or so.
FY12 PAT guidance driven mainly by lower tax expectation: Mgmt plans to increase its
R&D expense to c2.5-2.7% of sales in FY12 compared to c1.5% in FY11. Mgmt believes that
this should reduce their tax rate to c14-15% in FY12 compared to c25% in FY11. In our view,
even if lower tax rate materializes, the EPS will still decline in FY12e by c24% y-o-y.
Neutral rating with TP of INR205: We have kept our estimates unchanged; we rate
Crompton Neutral with a TP of INR205. On our estimates, stock is trading at a 12-month fwd
PE is c16.3x vs. historical average of c18.3x.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Crompton Greaves Ltd (CRG IN)
N: Key takeaways from management meeting
International losses driven by deferrals, cost pressures &
weak demand; domestic margins seeing structural decline
Outlook for Consumer Products & margin recovery in
Industrial Systems remain muted
FY12 PAT guidance driven by lower tax expectations; we
rate CRG Neutral with a target price of INR205
We recently met with Crompton’s CFO, Mr. Madhav Acharya, to discuss the Q1 results along
with the outlook for the company in the medium term. Below are some of the key takeaways.
Q1 weakness a mix of structural as well as cyclical issues: Mgmt attributed the weakness
in the Q1 results to three main factors: 1) Deferral in shipments (in the Power business) to
the tune of around INR700m in India and EUR29m (~INR1.8bn), barring which the margins
could have been c6% in Q1, in our opinion, instead of the reported 2.6%; 2) significant
increase in the cost of certain commodities/components, such as CRGO steel, bushings, etc,
which could not be hedged; and 3) deterioration in the international demand for distribution
transformers, which not only lowered capacity utilization (c55-60%) but also gross margins
due to discounts.
Competition taking toll on Power Systems margins in India: Domestic margins in Power
Systems declined to c12.6% in Q1 FY12 compared to c18.1% in last quarter and c16.6% in Q1
FY11. Management clearly noted that the previous levels of high profitability can no longer be
sustained in the face of competition. We are seeing similar margin trends for other players as
well in this space. Siemens, for example, recently reported a margin decline of c120bp y-o-y
and c220bps q-o-q in its Power Transmission business to c12.5%. While Crompton expects to
achieve better margins (vs. 12.6% in Q1) in the coming quarters we believe that the visibility
on ‘sustainable’ margins still remain opaque as the competition, particularly from Chinese and
Korean, remains intense.
Outlook for Consumer Products & margin recovery in Industrial Systems also muted:
Mgmt attributed the sharp decline in growth in Consumers Products to rising interest rates &
inflation (CRG had put up a price hike of c15% last quarter). The growth outlook remains
weak but mgmt plans to introduce new products to capture some growth. In Industrial systems,
the margins are expected to improve somewhat (to c15-16%) given that most of the Nelco
orders are now behind us. However, in lieu of the rising input costs margins are unlikely to go
back the previous levels of c18% or so.
FY12 PAT guidance driven mainly by lower tax expectation: Mgmt plans to increase its
R&D expense to c2.5-2.7% of sales in FY12 compared to c1.5% in FY11. Mgmt believes that
this should reduce their tax rate to c14-15% in FY12 compared to c25% in FY11. In our view,
even if lower tax rate materializes, the EPS will still decline in FY12e by c24% y-o-y.
Neutral rating with TP of INR205: We have kept our estimates unchanged; we rate
Crompton Neutral with a TP of INR205. On our estimates, stock is trading at a 12-month fwd
PE is c16.3x vs. historical average of c18.3x.
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