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Hangover
We are cutting Crompton’s FY12-14 EPS by 13-20%. These estimates still
give the management the benefit of doubt of being able to orchestrate a
turnaround in margins from 2HFY12 onwards. Pricing pressure in
domestic market is intense (though a 13% appreciation in RMB/INR
should help) and business environment in EU remains bleak. At least one
quarter of tangible improvement in business performance is needed
before the company’s credibility is restored. Till then the hangover of
events of last couple of quarters will remain. TP cut to Rs135/sh. U-PF.
Delivery of promises needed to restore credibility
2Q results confirm that the poor performance in 1Q was not primarily due to
one-off events (like slippages in high margin sales etc.) and lower margins is
the new normal for the company (after 1Q the company had offered hope of
return to old margins). While the communication from the company has
certainly improved from 1Q, there are still some issues which need more
clarity. Though the company stuck to the FY12 guidance it gave after 1Q (10-
12% revenue growth; 8-10% Ebidta margins; 15% tax rate and flattish
profits) not much comfort was given on how some of these will be achieved.
For instance, tax rate in 1H was 26% or 11ppt higher than full year guidance
and flattish profits for full year would mean c.25-40% YoY profit growth in 2H.
The disclosure of the corporate jet being sold at best market price instead of
earlier indication of purchase price was also disappointing.
Earnings cut by 13-20%
We are cutting Crompton’s FY12-14 earnings by 13-20%, implying 30% profit
drop in FY12, as we have reduced our Ebitda margin estimate by 40-170bps
and increased our depreciation and interest expenses given higher expenses
in 2Q. Even after this cut we are in-line with management’s revenue and
Ebitda margin guidance for FY12. We have stuck with our 25% tax rate
assumption for full year vs. guidance of 15%.
Share price factors in a reasonable recovery in business
The stock trades at 14.8x FY12 and 11.9x FY13 earnings, which factor in a
recovery from 2HFY12. While attractive compared to past valuations, stock is
at a premium to peers (BHEL at 10.7x/ Thermax at 11.7x FY13 earnings) with
higher risk on earnings delivery. Our new 12-mth TP of Rs135/sh is based on
10x Sep-13 PE, 20% lower than target multiples for BHEL/Thermax. If the
management is able to deliver on the targeted cost savings by shifting its
overseas manufacturing to India and cheaper sourcing, Crompton can prove
to be a good long term bet. We would like to see some concrete evidence of
things normalising before turning positive on the stock. Maintain U-PF.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hangover
We are cutting Crompton’s FY12-14 EPS by 13-20%. These estimates still
give the management the benefit of doubt of being able to orchestrate a
turnaround in margins from 2HFY12 onwards. Pricing pressure in
domestic market is intense (though a 13% appreciation in RMB/INR
should help) and business environment in EU remains bleak. At least one
quarter of tangible improvement in business performance is needed
before the company’s credibility is restored. Till then the hangover of
events of last couple of quarters will remain. TP cut to Rs135/sh. U-PF.
Delivery of promises needed to restore credibility
2Q results confirm that the poor performance in 1Q was not primarily due to
one-off events (like slippages in high margin sales etc.) and lower margins is
the new normal for the company (after 1Q the company had offered hope of
return to old margins). While the communication from the company has
certainly improved from 1Q, there are still some issues which need more
clarity. Though the company stuck to the FY12 guidance it gave after 1Q (10-
12% revenue growth; 8-10% Ebidta margins; 15% tax rate and flattish
profits) not much comfort was given on how some of these will be achieved.
For instance, tax rate in 1H was 26% or 11ppt higher than full year guidance
and flattish profits for full year would mean c.25-40% YoY profit growth in 2H.
The disclosure of the corporate jet being sold at best market price instead of
earlier indication of purchase price was also disappointing.
Earnings cut by 13-20%
We are cutting Crompton’s FY12-14 earnings by 13-20%, implying 30% profit
drop in FY12, as we have reduced our Ebitda margin estimate by 40-170bps
and increased our depreciation and interest expenses given higher expenses
in 2Q. Even after this cut we are in-line with management’s revenue and
Ebitda margin guidance for FY12. We have stuck with our 25% tax rate
assumption for full year vs. guidance of 15%.
Share price factors in a reasonable recovery in business
The stock trades at 14.8x FY12 and 11.9x FY13 earnings, which factor in a
recovery from 2HFY12. While attractive compared to past valuations, stock is
at a premium to peers (BHEL at 10.7x/ Thermax at 11.7x FY13 earnings) with
higher risk on earnings delivery. Our new 12-mth TP of Rs135/sh is based on
10x Sep-13 PE, 20% lower than target multiples for BHEL/Thermax. If the
management is able to deliver on the targeted cost savings by shifting its
overseas manufacturing to India and cheaper sourcing, Crompton can prove
to be a good long term bet. We would like to see some concrete evidence of
things normalising before turning positive on the stock. Maintain U-PF.
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