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India Equity Research Reports, IPO and Stock News
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Low-cycle pain rather than a
structural concern
Action: Stock factoring in more than just the cyclical trough; BUY
Structural drivers in the form of a major domestic Transmission and
Distribution (T&D) equipment opportunities remain intact for India. CRG
is among the few players that we believe stands to benefit from an
estimated USD123bn opportunity that we think is likely to unfold during
the 11th and 12th plan. Maintain BUY.
In a sector with rising competitive intensity, we believe players with low
cost structures will benefit. CRG’s 34% market share in PGCIL’s
transformer orders over FY09-11 along with double-digit margin over
the same period testify to its low cost advantage, in our view.
Despite a structurally attractive story, CRG disappointed sharply with
lower-than-expected 1Q FY12 results. Political problems in the Middle
East led to international revenue loss, while the global economic
slowdown affecting its international business. However, peer trends
suggest the slowdown is sector-wide and reflects a cyclical trough.
Although the timing of recovery in the India and international markets is
uncertain, the structural opportunity remains attractive, in our view.
Catalysts: Easing concerns on overseas subsidiaries, margin
recovery, pick-up in domestic power systems execution/order flow
Valuation: At 9.6x FY13F EPS, stock factors in worst-case scenario
Although the near-term business outlook has deteriorated, we believe the
deterioration reflects a cyclical trough and is not company-specific.
Therefore, we believe the recent stock correction offers an even better
buying opportunity.
Long-term fundamentals in place
Crompton Greaves (CRG) has been our top pick in the India electrical equipment sector
for a long time now, given strong momentum of positive earnings surprises delivered
over the past several quarters. However, 1Q FY12 earnings were below expectations on
weaker-than-expected margins, order inflows and domestic business. Key negative
surprises for 1Q 2012 came in the consumer segment (where growth slowed
significantly) and in the international business (where margins were negative). Economic
slowdown in the distribution transformer segment in Europe is evident in the results
released by other key players from that geography. Also, the company is now not taking
any fresh orders from ME countries (Refer to our note Management clears the air on
subdued earnings and outlook; concerns are not structural, June 28, 2011). We believe
that even though the business outlook has deteriorated, the deterioration reflects a
cyclical trough and is not company-specific. We value the stock at 15x FY13F EPS to
arrive at our target price of INR240.
T&D opportunities to drive growth
We believe CRG is among the few domestic companies poised to benefit from the
USD123bn in opportunities likely to be on offer in the T&D equipment market over the
11th and 12th plan periods through recent foreign acquisitions. We calculate a
conservative 8% share of the T&D pie would lead to a 15%-plus CAGR in domestic
power revenue over the next six years. Leading its domestic peers in terms of 765kV
transformer orders from PGCIL, CRG is confident it can gain market share at better
margins than peers. Recent acquisitions in the high-end industrials segment further
boost the company’s growth prospects, in our view.
Acquisitions give access to technology and new markets
We think CRG’s acquisitions over the past few years have put the company in league
with larger multinationals like ABB and Siemens, at least in terms of product portfolio.
Apart from HVDC technology, the company now has access to a full suite of T&D
products and services. We believe this should help CRG tap sizeable opportunities in the
high and ultra-high voltage segments, which are currently dominated by European
companies such as ABB. Besides addressing the Indian market, we think CRG is well
positioned to access the European and North American markets. With the acquisition of
Emotron and QEI Inc along with the earlier Pauwels and Ganz acquisitions, the company
looks to have the technology and resources to access these highly competitive markets.
An ageing grid and stress on renewables have fuelled replacement demand in the
European and North American markets. The size of these markets gives ample
opportunity for CRG to gain significant revenues, on our reading. Pauwels, Ganz and
Microsol should help the company to address these markets, we believe. Although the
timing of global economic recovery is uncertain, the structural opportunity remains
attractive.
Overall, CRG to see 14.6% revenue CAGR over FY11-FY17F
We project a 16.9% revenue CAGR for CRG’s domestic power business over FY11-17F,
implying a ~7% share of the T&D equipment sector — in line with its historical market
share of 6-7%. On our forecasts, the industrial and consumer product segments will grow
15% each over this period, leading to an overall 16% revenue CAGR in the company’s
domestic business. International business growth is likely to be subdued near term, but
we estimate recovery from FY14 should drive a 14.1% revenue CAGR. Overall, we
expect margins to diminish further, by a forecast 225bps over FY11 levels; we project
EPS will grow 15.3% over FY11-17F.
Crompton Greaves over Thermax and Cummins
We prefer CRG to Thermax (TMX IN, TP INR645, Neutral) and Cummins (KKC IN, TP
INR430, Neutral) on valuation and risks to earnings. At 12.7x/9.6x FY12/13F P/E, CRG
is trading at discounts to both – Thermax (13.3x/11.1x) and Cummins (17.3x/14.3x).
Thermax (TMX) is a strong play on power shortages in India through its strength in the
captive power business. However, much of TMX’s business is highly leveraged to the
industrial capex cycle and an expected slowdown in the same would only lead to
sluggish growth momentum for the company. Further, unavailability of coal will put a
strain on order inflow for captive power plants, in our view.
In case of Cummins (KKC), we note that the company has missed street expectations for
four quarters in a row. While the jury is still out on whether the global economy could
again witness anything similar to the post-Lehman bankruptcy period, we note that
KKC’s export growth is highly correlated to global growth. For example, in the year
following the Lehman bankruptcy, KKC’s export growth dropped ~70% y-y. Looming
concerns on the global economy necessitate caution on exports, thus leading to a muted
near-term growth outlook for KKC.
In contrast, CRG, we think, is well positioned to benefit from the large opportunity in the
domestic transmission and distribution equipment sector. CRG has managed to boost its
market share in PGCIL's transformer orders despite intensifying competition due to its
low cost structure. The recent stock correction after disappointing 1Q FY12 results
provide an enhanced buying opportunity, in our view. The slowdown reflects a cyclical
trough and we think that the structural growth story remains intact.
Valuation: the stock is factoring in a worst-case scenario at
current levels; maintain BUY
We continue to value the core business at 15x FY13F EPS of INR16.06 to arrive at our
TP of INR240. Our target multiple of 15x reflects a discount to the mid-cycle multiple for
the stock, which we believe is justified under the current circumstances of reduced
earnings visibility.
In a normal scenario, we believe the stock deserves a higher-than-average multiple for a
business that is in the midst of a cyclical trough (both in the domestic and international
power markets). However, the recent jolt to investor confidence post the 1Q FY12
earnings and negative surprise should cause the Street to want to see the actual
earnings trend before believing management projections.
Investment risks
– Significant movement in the currency.
– Rising competition in domestic and international T&D could impact margins.
– Worsening of the European crisis.
– Further rise in commodity prices could dent margins further.
– Delayed pick-up in domestic power sector investments.
– Continued industrial slowdown could impact the industrial segment.
– A slowdown in consumer spending could impact the fans and lighting segments.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Low-cycle pain rather than a
structural concern
Action: Stock factoring in more than just the cyclical trough; BUY
Structural drivers in the form of a major domestic Transmission and
Distribution (T&D) equipment opportunities remain intact for India. CRG
is among the few players that we believe stands to benefit from an
estimated USD123bn opportunity that we think is likely to unfold during
the 11th and 12th plan. Maintain BUY.
In a sector with rising competitive intensity, we believe players with low
cost structures will benefit. CRG’s 34% market share in PGCIL’s
transformer orders over FY09-11 along with double-digit margin over
the same period testify to its low cost advantage, in our view.
Despite a structurally attractive story, CRG disappointed sharply with
lower-than-expected 1Q FY12 results. Political problems in the Middle
East led to international revenue loss, while the global economic
slowdown affecting its international business. However, peer trends
suggest the slowdown is sector-wide and reflects a cyclical trough.
Although the timing of recovery in the India and international markets is
uncertain, the structural opportunity remains attractive, in our view.
Catalysts: Easing concerns on overseas subsidiaries, margin
recovery, pick-up in domestic power systems execution/order flow
Valuation: At 9.6x FY13F EPS, stock factors in worst-case scenario
Although the near-term business outlook has deteriorated, we believe the
deterioration reflects a cyclical trough and is not company-specific.
Therefore, we believe the recent stock correction offers an even better
buying opportunity.
Long-term fundamentals in place
Crompton Greaves (CRG) has been our top pick in the India electrical equipment sector
for a long time now, given strong momentum of positive earnings surprises delivered
over the past several quarters. However, 1Q FY12 earnings were below expectations on
weaker-than-expected margins, order inflows and domestic business. Key negative
surprises for 1Q 2012 came in the consumer segment (where growth slowed
significantly) and in the international business (where margins were negative). Economic
slowdown in the distribution transformer segment in Europe is evident in the results
released by other key players from that geography. Also, the company is now not taking
any fresh orders from ME countries (Refer to our note Management clears the air on
subdued earnings and outlook; concerns are not structural, June 28, 2011). We believe
that even though the business outlook has deteriorated, the deterioration reflects a
cyclical trough and is not company-specific. We value the stock at 15x FY13F EPS to
arrive at our target price of INR240.
T&D opportunities to drive growth
We believe CRG is among the few domestic companies poised to benefit from the
USD123bn in opportunities likely to be on offer in the T&D equipment market over the
11th and 12th plan periods through recent foreign acquisitions. We calculate a
conservative 8% share of the T&D pie would lead to a 15%-plus CAGR in domestic
power revenue over the next six years. Leading its domestic peers in terms of 765kV
transformer orders from PGCIL, CRG is confident it can gain market share at better
margins than peers. Recent acquisitions in the high-end industrials segment further
boost the company’s growth prospects, in our view.
Acquisitions give access to technology and new markets
We think CRG’s acquisitions over the past few years have put the company in league
with larger multinationals like ABB and Siemens, at least in terms of product portfolio.
Apart from HVDC technology, the company now has access to a full suite of T&D
products and services. We believe this should help CRG tap sizeable opportunities in the
high and ultra-high voltage segments, which are currently dominated by European
companies such as ABB. Besides addressing the Indian market, we think CRG is well
positioned to access the European and North American markets. With the acquisition of
Emotron and QEI Inc along with the earlier Pauwels and Ganz acquisitions, the company
looks to have the technology and resources to access these highly competitive markets.
An ageing grid and stress on renewables have fuelled replacement demand in the
European and North American markets. The size of these markets gives ample
opportunity for CRG to gain significant revenues, on our reading. Pauwels, Ganz and
Microsol should help the company to address these markets, we believe. Although the
timing of global economic recovery is uncertain, the structural opportunity remains
attractive.
Overall, CRG to see 14.6% revenue CAGR over FY11-FY17F
We project a 16.9% revenue CAGR for CRG’s domestic power business over FY11-17F,
implying a ~7% share of the T&D equipment sector — in line with its historical market
share of 6-7%. On our forecasts, the industrial and consumer product segments will grow
15% each over this period, leading to an overall 16% revenue CAGR in the company’s
domestic business. International business growth is likely to be subdued near term, but
we estimate recovery from FY14 should drive a 14.1% revenue CAGR. Overall, we
expect margins to diminish further, by a forecast 225bps over FY11 levels; we project
EPS will grow 15.3% over FY11-17F.
Crompton Greaves over Thermax and Cummins
We prefer CRG to Thermax (TMX IN, TP INR645, Neutral) and Cummins (KKC IN, TP
INR430, Neutral) on valuation and risks to earnings. At 12.7x/9.6x FY12/13F P/E, CRG
is trading at discounts to both – Thermax (13.3x/11.1x) and Cummins (17.3x/14.3x).
Thermax (TMX) is a strong play on power shortages in India through its strength in the
captive power business. However, much of TMX’s business is highly leveraged to the
industrial capex cycle and an expected slowdown in the same would only lead to
sluggish growth momentum for the company. Further, unavailability of coal will put a
strain on order inflow for captive power plants, in our view.
In case of Cummins (KKC), we note that the company has missed street expectations for
four quarters in a row. While the jury is still out on whether the global economy could
again witness anything similar to the post-Lehman bankruptcy period, we note that
KKC’s export growth is highly correlated to global growth. For example, in the year
following the Lehman bankruptcy, KKC’s export growth dropped ~70% y-y. Looming
concerns on the global economy necessitate caution on exports, thus leading to a muted
near-term growth outlook for KKC.
In contrast, CRG, we think, is well positioned to benefit from the large opportunity in the
domestic transmission and distribution equipment sector. CRG has managed to boost its
market share in PGCIL's transformer orders despite intensifying competition due to its
low cost structure. The recent stock correction after disappointing 1Q FY12 results
provide an enhanced buying opportunity, in our view. The slowdown reflects a cyclical
trough and we think that the structural growth story remains intact.
Valuation: the stock is factoring in a worst-case scenario at
current levels; maintain BUY
We continue to value the core business at 15x FY13F EPS of INR16.06 to arrive at our
TP of INR240. Our target multiple of 15x reflects a discount to the mid-cycle multiple for
the stock, which we believe is justified under the current circumstances of reduced
earnings visibility.
In a normal scenario, we believe the stock deserves a higher-than-average multiple for a
business that is in the midst of a cyclical trough (both in the domestic and international
power markets). However, the recent jolt to investor confidence post the 1Q FY12
earnings and negative surprise should cause the Street to want to see the actual
earnings trend before believing management projections.
Investment risks
– Significant movement in the currency.
– Rising competition in domestic and international T&D could impact margins.
– Worsening of the European crisis.
– Further rise in commodity prices could dent margins further.
– Delayed pick-up in domestic power sector investments.
– Continued industrial slowdown could impact the industrial segment.
– A slowdown in consumer spending could impact the fans and lighting segments.
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