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Industrials
India
Weak cycle likely getting priced in; enduring cash generation would have value.
We continue to evaluate mid-cap industrials stocks and upgrade Thermax to ADD (from
REDUCE, TP: Rs515) on (1) attractive valuations (13X FY2013E P/E), (2) expansion of
business opportunity and (3) strong balance sheet. Investment momentum has slowed
down; stocks already seems to be pricing in 20-30% drop in inflows in FY2012E and
trade at Mcap/average 5-year operating cash flow of about 15-18X.Our preference order
is CRG, Voltas and Thermax, based on their more diversified businesses as well as higher
consumer/infrastructure business in CRG/Voltas versus a more volatile industrial capex
cycle at Thermax.
Thermax: Attractive valuations, CMP prices in 20% dip in inflows, strong balance sheet
Thermax stock price has seen very sharp corrections - down 15% in the past week and down 30%
over the past 3-month period. We note that our base-case estimate itself builds in relatively
conservative estimates of a 10% decline in inflows in FY2012E and 80-100 bps EBITDA margin
correction (flat EPS of ~Rs32 for FY2012E and FY2013E). CMP is already pricing in a 20% decline
in inflows in FY2012E and no growth in FY2013E (EPS of Rs27-28 being priced in assuming 15X
multiple on cyclically low earnings). Strong balance sheet and expansion of opportunity set are
other positives.
Attractive valuations; still away from bottom, imply a sharp correction in benchmark as well
Thermax, Voltas and Crompton generate very strong operating cash flows with average 5-year
MCap/cash flow of about 15-18X. The companies are trading at significant discounts to their
historical levels at a P/E of 12.2X, 10.4X and 12X, respectively (versus 5-year average of 19.8X,
18X and 14.5X). We note that during the previous downturn, (Jan/Feb 2009) Thermax, Voltas and
Crompton P/E corrected to about 7.2X, 3.3X and 4.9X, respectively. However, even the
benchmark index (BSE SENSEX) had seen a sharp correction in valuations during the same period -
corrected to P/B of 1.7X and P/E of 10.3X in Feb-09 versus present levels of 2.3X and 12.9X.
Upgrade TMX to BUY, reiterate BUY on CRG and Voltas as stocks price in high stress-case scenario
Thermax: We upgrade our rating to ADD from REDUCE (revised TP of Rs515 from Rs550)
on (1) attractive valuations (13X FY2013E P/E, 7.5X EV/EBITDA) post sharp correction, (2)
estimates build in conservative assumptions, (3) strong expansion of business
opportunity, and (4) very strong balance sheet. We have revised estimates to Rs31.9
and Rs31.7 from Rs33 and Rs35 for FY2012E and FY2013E on lower order inflows
assumption. Thermax has generated strong operating cash - 5-year avg. annual
generation of Rs3.5 bn and MCap/Cash flow of 15-16X.
Crompton: We revise our estimates to Rs10.3 and Rs12.7 (from Rs10.6 and Rs13.5) for
FY2012E and FY2013E, on lower revenue growth and margin assumptions across segments.
We retain our BUY rating (revised TP: Rs200 from Rs210) on reasonable valuations (11.4X
FY2013E EPS), diversified business, capability expansion and strong balance sheet (strong cash
flow generation - 5-year annual average of Rs7 bn and MCap/Cash flow of 15.5X). Stock seems
to be pricing 2-4% revenue decline for the next two years and 10% consolidated EBITDA
margin in FY2013E.
Voltas: We revise our estimates to Rs8.8 and Rs9.5 (from Rs9.7 and Rs10.5) for FY2012E and
FY2013E, on lower inflow and margin assumptions. Retain BUY (revised TP: Rs135 from Rs150)
on attractive valuations (11X FY2013E EPS) and a strong balance sheet. The stock seems to be
pricing in 6% CAGR revenue decline over FY2012E-13E and 7% margins (implies 30% inflow
decline in EMP with 6% EBIT margins and no growth in UCP with 7.5% margins). Voltas has
generated strong operating cash - 5-year average annual of Rs2 bn and MCap/Cash flow of
18X.
Current market price implies 20% dip in order inflows in FY2012E
The current market price of Thermax (at Rs415/share) likely prices in a sharp 20% decline in
order inflows in FY2012E and flat yoy inflows in FY2013E. The price implies an EPS of about
Rs27-28 in FY2013E assuming 15X multiple on cyclically low earnings. We note that our
base-case estimate itself builds in relatively conservative estimates of a 10% decline in order
inflows in FY2012E and about 80-100 bps correction in EBITDA margin. We expect earnings
to remain relatively flat over the next two years at Rs31.9 in FY2012E and Rs31.7 in
FY2013E.
Implied segmental assumptions in the CMP (compared to our base-case) are:
Energy segment: Low order inflow growth assumption of a 20% yoy decline in FY2012E
and no growth in FY2013E versus our base-case assumption of a 10% decline in FY2012E
and a 5% growth in FY2013E. This leads to 9% lower energy segment revenue estimate
for FY2013E versus our base-case
Environment segment: Lower order inflow growth assumption of a 20% yoy decline in
FY2012E and no growth in FY2013E versus our base-case assumption of a 5% and 10%
growth in FY2012E and FY2013E, respectively. This leads to 25% lower environment
segment revenue estimate for FY2013E versus our base-case
High-quality balance sheet with negative working capital and strong cash chest
Thermax’s balance sheet continues to remain strong with a negative net working capital
(excluding cash) of -18.3 days of sales and a net cash position of Rs6 bn at end-FY2011. The
company has generated an average annual operating cash flow of about Rs3.5 bn over the
past five years.
Expansion of opportunities across product and project segments
Thermax is expanding its opportunity set across various segments such as (1) Boilers, EPC
business for small/medium sized utilities upto 300 MW, (2) JV with Babcock and Wilcox
supercritical boilers — the company expects to be a serious contender for orders from Sept-
11E with a view that manufacturing facility would be ready by Sept-12E, (3) JV with SPX to
cater to BoP equipment (large-sized ESPs - >300MW, condensers, air pre-heaters etc.), (4)
Danstoker acquisition to build a presence in Europe in renewable and waste heat recovery
space, (5) water segment (municipal as well as industrial) and (6) solar energy through both
thermal and photovoltaic (Amonix partnership) route.
Scales up business in power sector with potential business build up in SPX JV
Thermax had recently signed up JV with SPX Corporation (key products: ESP, Regenerative
air pre-heater) for larger power plants as well. Thermax had these products in the portfolio
in the past but similar to their boiler offering, were capped at 300 MW unit size in terms of
addressability. Along with this, the company retains leadership status in terms of market
share in Heat Recovery Stream Generator (HRSG).
Danstoker acquisition to help gain from renewable energy movement in Europe
Thermax acquired Danstoker and its German subsidiary, Omnical Kessel in FY2011 for a
consideration of Rs1.87 bn. The acquisition would help expand Thermax’s green initiatives as
a significant share of Danstoker and Omnical revenues come from biomass and waste hear
recovery boilers. The acquisition also enables Thermax to gain from the ongoing renewable
energy movement in Europe aimed at targeting 20% of its overall energy generation from
renewables in 2020.
Strong progress in supercritical JV; plans to start manufacturing facility by Sep-12
The company has acquired land at Shirwal, near Pune for setting up the manufacturing
facility for the supercritical boilers JV between Thermax and Babcock & Wilcox. Construction
work has begun but a more important indication comes from the company getting
prequalified in recent NTPC tenders. The company expects to manufacture 3 GW of
subcritical and supercritical boilers annually in the first phase, with the provision of
expanding to 5 GW. Thermax has presently invested Rs492 mn towards its 51% stake in the
equity capital of the JV. We do not build any value for the JV into our target price.
Upgrade to ADD with a revised target price of Rs515/share
We revise our earnings estimates to Rs31.9 and Rs31.7 from Rs33 and Rs35 for FY2012E
and FY2013E respectively based on lower order inflows growth assumption. We
correspondingly revise our target price to Rs515/share from Rs670/share earlier based on
16X FY2013E earnings.
Cromptom Greaves
We upgrade our rating on the stock to ADD from REDUCE based on (1) attractive valuation
(of 13X FY2013E P/E and 7.5X EV/EBITDA) post sharp correction, (2) estimates build in
conservative assumption of 10% decline in order inflows and relatively flat net earnings over
the next two years, (3) strong expansion of business opportunity, and (4) extremely strong
balance sheet, negative working capital, among the strongest corporate governance
CMP implies 2-4% CAGR revenue decline for next two years and 10% EBITDA
margin in FY2013E
The stock price appears to be pricing in relatively flat consolidated revenues for the next two
years (FY2012-13E) and EBITDA margin of 10% in FY2013E (versus 13.4% recorded in
FY2011). This is versus our base-case estimates of 7-8% revenue growth in FY2012-13E and
EBITDA margin of about 11% in FY2013E. The stock price of Rs147/share implies an EPS of
Rs10 in FY2013E (at 15X FY2013E earnings), about 22% lower versus our base-case
estimate of Rs12.7.
Implied segmental assumptions in the CMP (compared to our base-case) are:
Standalone power: 10% yoy decline in standalone power segment revenues in FY2012E
and FY2013E versus our base-case assumptions of a 5% growth in FY2012E and flat
revenues in FY2013E, 150 bps lower EBIT margin for FY2012E and FY2013E (to 12%
from 13.5%)
Consumer business: Lower yoy revenue growth of 5% in FY2012E and FY2013E versus
our base case assumptions of 7.5-10% growth during the same period, 150 bps lower
EBIT margin for FY2012E and FY2013E (to 12% from 13.5%)
Industrial segment: Lower industrial segment revenue growth assumption of flat
revenues in FY2012E and 5% for FY2013E (from 5% and 10% respectively) as well as
200 bps lower EBIT margin at 12% from a base-case assumption of 14%
Overseas subsidiaries: Slightly lower revenue growth estimate of 7% and 5% in
FY2012E and FY2013E (from 13% and 12.5%, respectively).
Crompton power segment margin estimates appear reasonable
We build in EBIT margin of 13.5% for Crompton’s standalone power segment for FY2012-
13E, about 450 bps lower than FY2011 EBIT margin of 18%. We note that Crompton had
reported a 400 bps correction in this segment’s EBIT margins in 1QFY12 (to 12.6% versus
16.6% in 1QFY11).
Crompton dealer feedback: Market remains weak; some risk on margins as well
We met a large fan dealer in Mumbai and present key takeaways from that interaction:
(1) The market has not picked up, the first quarter trend may be repeated; the price has
been rolled back (with dealer incentive etc.); may lead to margin weakness, (2) volume has
possibly been de-growing; other consumer goods are also feeling the heat; weak sentiment
is attributed to inflation, slowdown and negative news flows, (3) highlighted scope for
improvement in policies related to dealer incentives management etc. in a comparative sense,
(4) full Chinese sourcing including labeling from few Chinese companies; affect of increase
in price by these suppliers to be felt post festival season, and (5) Rupee depreciation may
also affect consumer businesses as products are imported from China in USD.
Revise estimates and target price to Rs200/share; reiterate BUY
We revise our earnings estimates on Crompton to Rs10.3 and Rs12.7 from Rs10.6 and
Rs13.5 for FY2012E and FY2013E, respectively, based on lower revenue growth and margin
assumptions across most segments. We correspondingly revise our target price to
Rs200/share (from Rs210/share) based on 15X FY2013E EPS.
We reiterate our BUY rating on Crompton as the stock is currently trading at reasonable
valuations post steep correction subsequent to the 1QFY12 results. Crompton is currently
trading at relatively attractive valuation of about 11.4X FY2013E earnings. Our positive
stance on the stock is based on (1) diversified business profile in terms of geographies as
well as business segments, (2) capability expansion in drives, generators, substation
automation, motors, consumer appliances, and (3) strong balance sheet and cash flow
generation characteristics.
Key risks to earnings relate to (1) aggressive competition and large capacity additions in the
domestic power T&D segment may pressure revenue growth and margins, (2) slower-thanexpected
pick-up in international demand, (3) Euro area business (17% of business) and
Euro currency (translation), and (4) slower-than-expected growth and lower-than-expected
margins in the consumer and industrial business
Voltas
CMP implies steep 30% inflow decline in EMP segment and no growth in UCP
with 7.5% margins
The current market price seems to build in fairly high stress in the business of a 6% CAGR
revenue decline over FY2012E-13E and 7% consolidated EBITDA margins. At the segmental
level, it implies a 30% order inflow decline in EMP with 6% EBIT margins and no growth in
UCP with 7.5% EBIT margins.
Implied segmental assumptions in the CMP (compared to our base-case) are:
Electromechanical projects segment (EMP): Sharp de-growth of 30% in FY2012E
order inflows and flat yoy inflows in FY2013E versus our base-case assumption of 15%
de-growth in FY2012E and 5% growth in FY2013E. Also implies a 100 bps contraction in
EBIT margins for FY2013E (at 6% versus base case of 7%).
Engg products and services segment: Lower revenue growth assumption of 34% degrowth
in FY21012E and 4.5% growth in FY2013E (versus base-case of 22% de-growth
and 10% growth, respectively).
Unitary cooling products segment (UCP): Lower EBIT margin assumption for FY2013E
at 7.5%, 100 bps lower than base-case assumption of 8.5% (recorded 10.2% EBIT
margin in FY2011).
Voltas meeting: Weak takeaways across businesses particularly in the near-term
Our recent interaction with Voltas management also suggested weak market environment
across most business segments, especially in the international market. Key highlights from
the meeting were:
EMP – overseas segment has margin pressure because of cost escalations and
competition: (1) weak market environment (slow demand with aggressive competition)
in overseas continues; reduces benchmark margin to about 4-5% at bidding stage versus
7-8% earlier, (2) Voltas is adopting various strategies to boost inflows such as lower bidstage
margins, split orders and bid alongside competitors, and explore new geographies,
(3) cost escalation in Sidra and Baruha projects led to low margins in 1Q – likely to impact
FY2012E full-year margins as well, and (4) still sees opportunities in the domestic market
even though peers have had negative feedback on the domestic market as well.
UCP – Market weak and margin pressure led by competition, sourcing costs etc.:
(1) market deteriorates on unfavorable weather and general economic downturn;
1QFY12 margins not sustainable, and (2) majority of components of AC are imported
while Voltas primarily does assembly of the product – similar business model for most AC
players.
Engg Products and Services – No clarity on Caterpillar distribution business:
(1) Voltas continues to do contract manufacturing on a broadly cost plus basis for forklifts
JV, and (2) Still awaiting clarity on CAT distribution plans in India – expects some visibility
by end-2Q/ early 3Q of FY2012; demand in that segment remains weak.
Revise estimates and target price to Rs135/share; reiterate BUY
We revise our earnings estimates to Rs8.8 and Rs9.5 from Rs9.6 and Rs10.5 for FY2012E
and FY2013E, respectively, on lower order inflow and margin assumptions. We
correspondingly revise our target price to Rs135/share from Rs150/share based on 14X
FY2013E EPS.
We reiterate our BUY rating on the company based on (1) attractive valuations - trading at
11X FY2013E EPS despite building in very low expectations in our estimates (stock trades at
2X FY2013E book value, less than 1X sales), (2) no corporate governance issues, (3) strong
balance sheet in terms of no debt and low working capital, (4) strong focus on working
capital, cash generation giving further comfort on valuation, and (5) long-term track record
of the company in managing its business through cycles.
Our estimates are building relatively conservative assumptions of a 15% de-growth in EMP
segment order inflows, 15% de-growth in Engg products segment revenues and margin
contraction across most of the segments. We also note that the penetration of the AC
market is relatively low which could provide a potential for strong growth in the UCP
segment.
Still away from Jan/Feb-09 lows; but that may have been a crisis-exacerbated low,
Sensex still well above that bottom
We do note that during the previous downturn (Jan/Feb 2009) Thermax, Voltas and
Crompton P/B valuations corrected to about 1.8X, 1.1X and 1.6X, respectively. However
even the benchmark index (BSE SENSEX) had witnessed a sharp correction in valuations
during the same period. SENSEX had corrected to P/B of 1.7X and P/E of 10.3X in Feb-09
versus present trading levels of about 2.3X and 12.9X.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Industrials
India
Weak cycle likely getting priced in; enduring cash generation would have value.
We continue to evaluate mid-cap industrials stocks and upgrade Thermax to ADD (from
REDUCE, TP: Rs515) on (1) attractive valuations (13X FY2013E P/E), (2) expansion of
business opportunity and (3) strong balance sheet. Investment momentum has slowed
down; stocks already seems to be pricing in 20-30% drop in inflows in FY2012E and
trade at Mcap/average 5-year operating cash flow of about 15-18X.Our preference order
is CRG, Voltas and Thermax, based on their more diversified businesses as well as higher
consumer/infrastructure business in CRG/Voltas versus a more volatile industrial capex
cycle at Thermax.
Thermax: Attractive valuations, CMP prices in 20% dip in inflows, strong balance sheet
Thermax stock price has seen very sharp corrections - down 15% in the past week and down 30%
over the past 3-month period. We note that our base-case estimate itself builds in relatively
conservative estimates of a 10% decline in inflows in FY2012E and 80-100 bps EBITDA margin
correction (flat EPS of ~Rs32 for FY2012E and FY2013E). CMP is already pricing in a 20% decline
in inflows in FY2012E and no growth in FY2013E (EPS of Rs27-28 being priced in assuming 15X
multiple on cyclically low earnings). Strong balance sheet and expansion of opportunity set are
other positives.
Attractive valuations; still away from bottom, imply a sharp correction in benchmark as well
Thermax, Voltas and Crompton generate very strong operating cash flows with average 5-year
MCap/cash flow of about 15-18X. The companies are trading at significant discounts to their
historical levels at a P/E of 12.2X, 10.4X and 12X, respectively (versus 5-year average of 19.8X,
18X and 14.5X). We note that during the previous downturn, (Jan/Feb 2009) Thermax, Voltas and
Crompton P/E corrected to about 7.2X, 3.3X and 4.9X, respectively. However, even the
benchmark index (BSE SENSEX) had seen a sharp correction in valuations during the same period -
corrected to P/B of 1.7X and P/E of 10.3X in Feb-09 versus present levels of 2.3X and 12.9X.
Upgrade TMX to BUY, reiterate BUY on CRG and Voltas as stocks price in high stress-case scenario
Thermax: We upgrade our rating to ADD from REDUCE (revised TP of Rs515 from Rs550)
on (1) attractive valuations (13X FY2013E P/E, 7.5X EV/EBITDA) post sharp correction, (2)
estimates build in conservative assumptions, (3) strong expansion of business
opportunity, and (4) very strong balance sheet. We have revised estimates to Rs31.9
and Rs31.7 from Rs33 and Rs35 for FY2012E and FY2013E on lower order inflows
assumption. Thermax has generated strong operating cash - 5-year avg. annual
generation of Rs3.5 bn and MCap/Cash flow of 15-16X.
Crompton: We revise our estimates to Rs10.3 and Rs12.7 (from Rs10.6 and Rs13.5) for
FY2012E and FY2013E, on lower revenue growth and margin assumptions across segments.
We retain our BUY rating (revised TP: Rs200 from Rs210) on reasonable valuations (11.4X
FY2013E EPS), diversified business, capability expansion and strong balance sheet (strong cash
flow generation - 5-year annual average of Rs7 bn and MCap/Cash flow of 15.5X). Stock seems
to be pricing 2-4% revenue decline for the next two years and 10% consolidated EBITDA
margin in FY2013E.
Voltas: We revise our estimates to Rs8.8 and Rs9.5 (from Rs9.7 and Rs10.5) for FY2012E and
FY2013E, on lower inflow and margin assumptions. Retain BUY (revised TP: Rs135 from Rs150)
on attractive valuations (11X FY2013E EPS) and a strong balance sheet. The stock seems to be
pricing in 6% CAGR revenue decline over FY2012E-13E and 7% margins (implies 30% inflow
decline in EMP with 6% EBIT margins and no growth in UCP with 7.5% margins). Voltas has
generated strong operating cash - 5-year average annual of Rs2 bn and MCap/Cash flow of
18X.
Current market price implies 20% dip in order inflows in FY2012E
The current market price of Thermax (at Rs415/share) likely prices in a sharp 20% decline in
order inflows in FY2012E and flat yoy inflows in FY2013E. The price implies an EPS of about
Rs27-28 in FY2013E assuming 15X multiple on cyclically low earnings. We note that our
base-case estimate itself builds in relatively conservative estimates of a 10% decline in order
inflows in FY2012E and about 80-100 bps correction in EBITDA margin. We expect earnings
to remain relatively flat over the next two years at Rs31.9 in FY2012E and Rs31.7 in
FY2013E.
Implied segmental assumptions in the CMP (compared to our base-case) are:
Energy segment: Low order inflow growth assumption of a 20% yoy decline in FY2012E
and no growth in FY2013E versus our base-case assumption of a 10% decline in FY2012E
and a 5% growth in FY2013E. This leads to 9% lower energy segment revenue estimate
for FY2013E versus our base-case
Environment segment: Lower order inflow growth assumption of a 20% yoy decline in
FY2012E and no growth in FY2013E versus our base-case assumption of a 5% and 10%
growth in FY2012E and FY2013E, respectively. This leads to 25% lower environment
segment revenue estimate for FY2013E versus our base-case
High-quality balance sheet with negative working capital and strong cash chest
Thermax’s balance sheet continues to remain strong with a negative net working capital
(excluding cash) of -18.3 days of sales and a net cash position of Rs6 bn at end-FY2011. The
company has generated an average annual operating cash flow of about Rs3.5 bn over the
past five years.
Expansion of opportunities across product and project segments
Thermax is expanding its opportunity set across various segments such as (1) Boilers, EPC
business for small/medium sized utilities upto 300 MW, (2) JV with Babcock and Wilcox
supercritical boilers — the company expects to be a serious contender for orders from Sept-
11E with a view that manufacturing facility would be ready by Sept-12E, (3) JV with SPX to
cater to BoP equipment (large-sized ESPs - >300MW, condensers, air pre-heaters etc.), (4)
Danstoker acquisition to build a presence in Europe in renewable and waste heat recovery
space, (5) water segment (municipal as well as industrial) and (6) solar energy through both
thermal and photovoltaic (Amonix partnership) route.
Scales up business in power sector with potential business build up in SPX JV
Thermax had recently signed up JV with SPX Corporation (key products: ESP, Regenerative
air pre-heater) for larger power plants as well. Thermax had these products in the portfolio
in the past but similar to their boiler offering, were capped at 300 MW unit size in terms of
addressability. Along with this, the company retains leadership status in terms of market
share in Heat Recovery Stream Generator (HRSG).
Danstoker acquisition to help gain from renewable energy movement in Europe
Thermax acquired Danstoker and its German subsidiary, Omnical Kessel in FY2011 for a
consideration of Rs1.87 bn. The acquisition would help expand Thermax’s green initiatives as
a significant share of Danstoker and Omnical revenues come from biomass and waste hear
recovery boilers. The acquisition also enables Thermax to gain from the ongoing renewable
energy movement in Europe aimed at targeting 20% of its overall energy generation from
renewables in 2020.
Strong progress in supercritical JV; plans to start manufacturing facility by Sep-12
The company has acquired land at Shirwal, near Pune for setting up the manufacturing
facility for the supercritical boilers JV between Thermax and Babcock & Wilcox. Construction
work has begun but a more important indication comes from the company getting
prequalified in recent NTPC tenders. The company expects to manufacture 3 GW of
subcritical and supercritical boilers annually in the first phase, with the provision of
expanding to 5 GW. Thermax has presently invested Rs492 mn towards its 51% stake in the
equity capital of the JV. We do not build any value for the JV into our target price.
Upgrade to ADD with a revised target price of Rs515/share
We revise our earnings estimates to Rs31.9 and Rs31.7 from Rs33 and Rs35 for FY2012E
and FY2013E respectively based on lower order inflows growth assumption. We
correspondingly revise our target price to Rs515/share from Rs670/share earlier based on
16X FY2013E earnings.
Cromptom Greaves
We upgrade our rating on the stock to ADD from REDUCE based on (1) attractive valuation
(of 13X FY2013E P/E and 7.5X EV/EBITDA) post sharp correction, (2) estimates build in
conservative assumption of 10% decline in order inflows and relatively flat net earnings over
the next two years, (3) strong expansion of business opportunity, and (4) extremely strong
balance sheet, negative working capital, among the strongest corporate governance
CMP implies 2-4% CAGR revenue decline for next two years and 10% EBITDA
margin in FY2013E
The stock price appears to be pricing in relatively flat consolidated revenues for the next two
years (FY2012-13E) and EBITDA margin of 10% in FY2013E (versus 13.4% recorded in
FY2011). This is versus our base-case estimates of 7-8% revenue growth in FY2012-13E and
EBITDA margin of about 11% in FY2013E. The stock price of Rs147/share implies an EPS of
Rs10 in FY2013E (at 15X FY2013E earnings), about 22% lower versus our base-case
estimate of Rs12.7.
Implied segmental assumptions in the CMP (compared to our base-case) are:
Standalone power: 10% yoy decline in standalone power segment revenues in FY2012E
and FY2013E versus our base-case assumptions of a 5% growth in FY2012E and flat
revenues in FY2013E, 150 bps lower EBIT margin for FY2012E and FY2013E (to 12%
from 13.5%)
Consumer business: Lower yoy revenue growth of 5% in FY2012E and FY2013E versus
our base case assumptions of 7.5-10% growth during the same period, 150 bps lower
EBIT margin for FY2012E and FY2013E (to 12% from 13.5%)
Industrial segment: Lower industrial segment revenue growth assumption of flat
revenues in FY2012E and 5% for FY2013E (from 5% and 10% respectively) as well as
200 bps lower EBIT margin at 12% from a base-case assumption of 14%
Overseas subsidiaries: Slightly lower revenue growth estimate of 7% and 5% in
FY2012E and FY2013E (from 13% and 12.5%, respectively).
Crompton power segment margin estimates appear reasonable
We build in EBIT margin of 13.5% for Crompton’s standalone power segment for FY2012-
13E, about 450 bps lower than FY2011 EBIT margin of 18%. We note that Crompton had
reported a 400 bps correction in this segment’s EBIT margins in 1QFY12 (to 12.6% versus
16.6% in 1QFY11).
Crompton dealer feedback: Market remains weak; some risk on margins as well
We met a large fan dealer in Mumbai and present key takeaways from that interaction:
(1) The market has not picked up, the first quarter trend may be repeated; the price has
been rolled back (with dealer incentive etc.); may lead to margin weakness, (2) volume has
possibly been de-growing; other consumer goods are also feeling the heat; weak sentiment
is attributed to inflation, slowdown and negative news flows, (3) highlighted scope for
improvement in policies related to dealer incentives management etc. in a comparative sense,
(4) full Chinese sourcing including labeling from few Chinese companies; affect of increase
in price by these suppliers to be felt post festival season, and (5) Rupee depreciation may
also affect consumer businesses as products are imported from China in USD.
Revise estimates and target price to Rs200/share; reiterate BUY
We revise our earnings estimates on Crompton to Rs10.3 and Rs12.7 from Rs10.6 and
Rs13.5 for FY2012E and FY2013E, respectively, based on lower revenue growth and margin
assumptions across most segments. We correspondingly revise our target price to
Rs200/share (from Rs210/share) based on 15X FY2013E EPS.
We reiterate our BUY rating on Crompton as the stock is currently trading at reasonable
valuations post steep correction subsequent to the 1QFY12 results. Crompton is currently
trading at relatively attractive valuation of about 11.4X FY2013E earnings. Our positive
stance on the stock is based on (1) diversified business profile in terms of geographies as
well as business segments, (2) capability expansion in drives, generators, substation
automation, motors, consumer appliances, and (3) strong balance sheet and cash flow
generation characteristics.
Key risks to earnings relate to (1) aggressive competition and large capacity additions in the
domestic power T&D segment may pressure revenue growth and margins, (2) slower-thanexpected
pick-up in international demand, (3) Euro area business (17% of business) and
Euro currency (translation), and (4) slower-than-expected growth and lower-than-expected
margins in the consumer and industrial business
Voltas
CMP implies steep 30% inflow decline in EMP segment and no growth in UCP
with 7.5% margins
The current market price seems to build in fairly high stress in the business of a 6% CAGR
revenue decline over FY2012E-13E and 7% consolidated EBITDA margins. At the segmental
level, it implies a 30% order inflow decline in EMP with 6% EBIT margins and no growth in
UCP with 7.5% EBIT margins.
Implied segmental assumptions in the CMP (compared to our base-case) are:
Electromechanical projects segment (EMP): Sharp de-growth of 30% in FY2012E
order inflows and flat yoy inflows in FY2013E versus our base-case assumption of 15%
de-growth in FY2012E and 5% growth in FY2013E. Also implies a 100 bps contraction in
EBIT margins for FY2013E (at 6% versus base case of 7%).
Engg products and services segment: Lower revenue growth assumption of 34% degrowth
in FY21012E and 4.5% growth in FY2013E (versus base-case of 22% de-growth
and 10% growth, respectively).
Unitary cooling products segment (UCP): Lower EBIT margin assumption for FY2013E
at 7.5%, 100 bps lower than base-case assumption of 8.5% (recorded 10.2% EBIT
margin in FY2011).
Voltas meeting: Weak takeaways across businesses particularly in the near-term
Our recent interaction with Voltas management also suggested weak market environment
across most business segments, especially in the international market. Key highlights from
the meeting were:
EMP – overseas segment has margin pressure because of cost escalations and
competition: (1) weak market environment (slow demand with aggressive competition)
in overseas continues; reduces benchmark margin to about 4-5% at bidding stage versus
7-8% earlier, (2) Voltas is adopting various strategies to boost inflows such as lower bidstage
margins, split orders and bid alongside competitors, and explore new geographies,
(3) cost escalation in Sidra and Baruha projects led to low margins in 1Q – likely to impact
FY2012E full-year margins as well, and (4) still sees opportunities in the domestic market
even though peers have had negative feedback on the domestic market as well.
UCP – Market weak and margin pressure led by competition, sourcing costs etc.:
(1) market deteriorates on unfavorable weather and general economic downturn;
1QFY12 margins not sustainable, and (2) majority of components of AC are imported
while Voltas primarily does assembly of the product – similar business model for most AC
players.
Engg Products and Services – No clarity on Caterpillar distribution business:
(1) Voltas continues to do contract manufacturing on a broadly cost plus basis for forklifts
JV, and (2) Still awaiting clarity on CAT distribution plans in India – expects some visibility
by end-2Q/ early 3Q of FY2012; demand in that segment remains weak.
Revise estimates and target price to Rs135/share; reiterate BUY
We revise our earnings estimates to Rs8.8 and Rs9.5 from Rs9.6 and Rs10.5 for FY2012E
and FY2013E, respectively, on lower order inflow and margin assumptions. We
correspondingly revise our target price to Rs135/share from Rs150/share based on 14X
FY2013E EPS.
We reiterate our BUY rating on the company based on (1) attractive valuations - trading at
11X FY2013E EPS despite building in very low expectations in our estimates (stock trades at
2X FY2013E book value, less than 1X sales), (2) no corporate governance issues, (3) strong
balance sheet in terms of no debt and low working capital, (4) strong focus on working
capital, cash generation giving further comfort on valuation, and (5) long-term track record
of the company in managing its business through cycles.
Our estimates are building relatively conservative assumptions of a 15% de-growth in EMP
segment order inflows, 15% de-growth in Engg products segment revenues and margin
contraction across most of the segments. We also note that the penetration of the AC
market is relatively low which could provide a potential for strong growth in the UCP
segment.
Still away from Jan/Feb-09 lows; but that may have been a crisis-exacerbated low,
Sensex still well above that bottom
We do note that during the previous downturn (Jan/Feb 2009) Thermax, Voltas and
Crompton P/B valuations corrected to about 1.8X, 1.1X and 1.6X, respectively. However
even the benchmark index (BSE SENSEX) had witnessed a sharp correction in valuations
during the same period. SENSEX had corrected to P/B of 1.7X and P/E of 10.3X in Feb-09
versus present trading levels of about 2.3X and 12.9X.
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