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Management meeting update
We met Mr Laurent Demortier (MD) and Mr Madhav Acharya (CFO)
yesterday. They expect 8-10% YoY revenue growth for consolidated
entity in FY12 and Ebitda margins of 8-10% (down from 13.4% in FY11).
The earnings recovery is likely to be back ended. Management expects
consolidated tax rate to come down to 14-15%; maintain net profit flat at
FY11 levels. Our estimates on both revenues and Ebidta margins are at
the upper end of management guidance and the risk is on the downside.
Tax rate is likely to be lower than our estimate of 24%. However,
management guidance of 14-15% tax-rate and flat profits is aggressive.
Guidance assumes a pick up in domestic power business by 4Q
Management’s guidance of 10-12% YoY revenue growth in the domestic
business assumes a pick up in power execution in 4Q; delays in pick up of
deliveries from customers’ side are likely to continue over the next two
quarters. Consumer business growth would be impacted by high inflation,
though industrial business should continue growing strongly. In 1Q,
standalone margins declined due to intense pricing pressure, higher
commodity costs and lower revenues. We believe that competitive intensity is
unlikely to ease in the near term and thus margin pressure will not abate.
International business weak; scope of disappointment
In 1Q, many international customers did not pick up their deliveries in
international markets (mainly Middle East and Africa), leading to an inventory
of €29m (Rs1.9bn) piling up. Management plans to sell this at spot market,
which would lead to lower realisations and margins. Management does not
see a quick revival; we note that Crompton’s exports (from standalone entity)
have also been falling in the last two years.
Management guiding for a 10ppt drop in tax rates
Despite the likely sharp fall in Ebitda, management believes that Crompton
could still post flat PAT in FY12. This would be on account of lower tax rate
(14-15% in FY12 cf. 25% in FY11), partly explained by higher R&D
expenditure (2.5% of revenues in FY12 cf. 1.5% in FY11). If we assume 15%
effective tax rate (our assumption: 24%), it would increase our FY12 PAT by
~10% and would still imply a ~10% YoY drop in PAT. Actual tax payments,
however, could still be higher, as was the case in FY11 (tax rate fell from
~30% to ~26%; tax paid of Rs3bn higher than tax expensed of Rs2.3bn).
Business environment weak; maintain U-PF
Amidst the challenging backdrop of uncertainty in Europe, Middle East and
Africa, and high competitive pressures locally, we believe that risk to our PBT
estimate is on the downside, though tax rate could be lower than our
estimate. However, management guidance of 14-15% tax rate appears a bit
aggressive given MAT rate of c.20% in India, which accounts for 85% of profit
in FY12. Maintain U-PF with a Rs180/sh target price. We will await evidence of
a some recovery in the key businesses for any change in stance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Management meeting update
We met Mr Laurent Demortier (MD) and Mr Madhav Acharya (CFO)
yesterday. They expect 8-10% YoY revenue growth for consolidated
entity in FY12 and Ebitda margins of 8-10% (down from 13.4% in FY11).
The earnings recovery is likely to be back ended. Management expects
consolidated tax rate to come down to 14-15%; maintain net profit flat at
FY11 levels. Our estimates on both revenues and Ebidta margins are at
the upper end of management guidance and the risk is on the downside.
Tax rate is likely to be lower than our estimate of 24%. However,
management guidance of 14-15% tax-rate and flat profits is aggressive.
Guidance assumes a pick up in domestic power business by 4Q
Management’s guidance of 10-12% YoY revenue growth in the domestic
business assumes a pick up in power execution in 4Q; delays in pick up of
deliveries from customers’ side are likely to continue over the next two
quarters. Consumer business growth would be impacted by high inflation,
though industrial business should continue growing strongly. In 1Q,
standalone margins declined due to intense pricing pressure, higher
commodity costs and lower revenues. We believe that competitive intensity is
unlikely to ease in the near term and thus margin pressure will not abate.
International business weak; scope of disappointment
In 1Q, many international customers did not pick up their deliveries in
international markets (mainly Middle East and Africa), leading to an inventory
of €29m (Rs1.9bn) piling up. Management plans to sell this at spot market,
which would lead to lower realisations and margins. Management does not
see a quick revival; we note that Crompton’s exports (from standalone entity)
have also been falling in the last two years.
Management guiding for a 10ppt drop in tax rates
Despite the likely sharp fall in Ebitda, management believes that Crompton
could still post flat PAT in FY12. This would be on account of lower tax rate
(14-15% in FY12 cf. 25% in FY11), partly explained by higher R&D
expenditure (2.5% of revenues in FY12 cf. 1.5% in FY11). If we assume 15%
effective tax rate (our assumption: 24%), it would increase our FY12 PAT by
~10% and would still imply a ~10% YoY drop in PAT. Actual tax payments,
however, could still be higher, as was the case in FY11 (tax rate fell from
~30% to ~26%; tax paid of Rs3bn higher than tax expensed of Rs2.3bn).
Business environment weak; maintain U-PF
Amidst the challenging backdrop of uncertainty in Europe, Middle East and
Africa, and high competitive pressures locally, we believe that risk to our PBT
estimate is on the downside, though tax rate could be lower than our
estimate. However, management guidance of 14-15% tax rate appears a bit
aggressive given MAT rate of c.20% in India, which accounts for 85% of profit
in FY12. Maintain U-PF with a Rs180/sh target price. We will await evidence of
a some recovery in the key businesses for any change in stance.
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