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UBS Investment Research
Crompton Greaves Ltd
O utlook remains uncertain
Event: we believe the outlook is still uncertain in core businesses
We think the near-term outlook for Crompton is still uncertain because: a) as
indicated by Indian T&D equipment manufacturers’ results, the companies are
facing severe competition from overseas and this has led to a structural decline in
profitability; b) the overseas markets remain challenging for Crompton; c) interest
rate hikes continue and inflation is not under control, which is bad for the
consumer products business; and d) ordering activity has slowed down in
industrials.
Impact: power systems business is the key
We think that in both domestic and overseas markets for power systems, Crompton
is facing severe challenges. The company has highlighted that Q2 FY12 may also
be a difficult quarter but the situation may improve in H2 FY12 if there is a
positive change in the Middle East and India. We think this revival (earlier
expected in H2 FY12) may get delayed by another six months at least.
Action: we lower our EPS estimates by 10%/8%/4% for FY12/13/14
We lower our FY12/FY13/FY14 EPS estimates from Rs10.70/13.53/16.34 to
Rs9.66/12.43/15.65 due to lower and less profitable growth. We have lowered our
estimates mainly for the power systems business and for the current year i.e. FY12.
However, we are still close to the top end of company guidance for FY12.
Valuation: maintain Sell, lower price target to Rs130
We lower our price target 19% to Rs130 from Rs160 on lower near-term estimates
and an updated discount rate. We derive our price target from a DCF-based
methodology and explicitly forecast long-term valuation drivers using UBS’s
VCAM tool (assuming a WACC of 13.3%).
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
O utlook remains uncertain
Event: we believe the outlook is still uncertain in core businesses
We think the near-term outlook for Crompton is still uncertain because: a) as
indicated by Indian T&D equipment manufacturers’ results, the companies are
facing severe competition from overseas and this has led to a structural decline in
profitability; b) the overseas markets remain challenging for Crompton; c) interest
rate hikes continue and inflation is not under control, which is bad for the
consumer products business; and d) ordering activity has slowed down in
industrials.
Impact: power systems business is the key
We think that in both domestic and overseas markets for power systems, Crompton
is facing severe challenges. The company has highlighted that Q2 FY12 may also
be a difficult quarter but the situation may improve in H2 FY12 if there is a
positive change in the Middle East and India. We think this revival (earlier
expected in H2 FY12) may get delayed by another six months at least.
Action: we lower our EPS estimates by 10%/8%/4% for FY12/13/14
We lower our FY12/FY13/FY14 EPS estimates from Rs10.70/13.53/16.34 to
Rs9.66/12.43/15.65 due to lower and less profitable growth. We have lowered our
estimates mainly for the power systems business and for the current year i.e. FY12.
However, we are still close to the top end of company guidance for FY12.
Valuation: maintain Sell, lower price target to Rs130
We lower our price target 19% to Rs130 from Rs160 on lower near-term estimates
and an updated discount rate. We derive our price target from a DCF-based
methodology and explicitly forecast long-term valuation drivers using UBS’s
VCAM tool (assuming a WACC of 13.3%).
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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