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UBS Investment Research
Crompton Greaves Ltd
D omestic T&D environment remains weak
Event: results from T&D equipment manufacturers indicate weakness
Post Crompton Greaves’ (Crompton) results, a few more domestic power
transmission and distribution (T&D) equipment manufacturers have declared their
results; Q1 FY12 data indicates strong competitive pressure in the space.
Transformers & Rectifiers (India) (a non-covered company) has reported a YoY
margin decline (from 15.9% in Q1 FY11 to 10.1% in Q1 FY12). Bharat Bijlee
(non-covered company) has also reported a revenue decline (17% YoY) and
negative PBIT in its power systems (transformers) business.
Impact: strong headwinds should continue in domestic T&D space
Our channel checks suggest Indian T&D manufacturers are facing strong
competition from overseas manufacturers, which led to lower profitability. We also
expect this trend to continue in the near term. Crompton’s results also showed the
domestic power systems business has experienced significant pressure on revenue
growth and margins (from 16.6% in Q1 FY11 to 12.6% in Q1 FY12; YoY revenue
growth of just 11%).
Action: no clarity in the near term on key businesses; maintain Sell
We believe Crompton’s power systems business is struggling in both the overseas
and domestic markets. There is also no clarity in the near term on the revival of its
consumer products business. Since these two businesses contribute around 85% of
its revenue, investor sentiment on the stock could remain negative.
Valuation: maintain Rs160.00 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
13.2%.
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
D omestic T&D environment remains weak
Event: results from T&D equipment manufacturers indicate weakness
Post Crompton Greaves’ (Crompton) results, a few more domestic power
transmission and distribution (T&D) equipment manufacturers have declared their
results; Q1 FY12 data indicates strong competitive pressure in the space.
Transformers & Rectifiers (India) (a non-covered company) has reported a YoY
margin decline (from 15.9% in Q1 FY11 to 10.1% in Q1 FY12). Bharat Bijlee
(non-covered company) has also reported a revenue decline (17% YoY) and
negative PBIT in its power systems (transformers) business.
Impact: strong headwinds should continue in domestic T&D space
Our channel checks suggest Indian T&D manufacturers are facing strong
competition from overseas manufacturers, which led to lower profitability. We also
expect this trend to continue in the near term. Crompton’s results also showed the
domestic power systems business has experienced significant pressure on revenue
growth and margins (from 16.6% in Q1 FY11 to 12.6% in Q1 FY12; YoY revenue
growth of just 11%).
Action: no clarity in the near term on key businesses; maintain Sell
We believe Crompton’s power systems business is struggling in both the overseas
and domestic markets. There is also no clarity in the near term on the revival of its
consumer products business. Since these two businesses contribute around 85% of
its revenue, investor sentiment on the stock could remain negative.
Valuation: maintain Rs160.00 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
13.2%.
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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