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UBS Investment Research
Crompton Greaves Ltd
Q 2 FY12: weak results
Q2 FY12 results: weak numbers, below expectations
In Q2 FY12, Crompton Greaves’ (CG) operating income of Rs27.1bn was up 13%
YoY and EBITDA margins declined 554bps YoY, impacted due to higher raw
material cost. Net profit declined 45% YoY to Rs1.17bn, which is below UBS and
consensus estimates. However, the Q2 FY12 numbers have better-than-expected
sales.
Q2 FY12: margins remain under pressure
The key highlight of the results is a decline in margins (in line with Q1 FY12).
This was due to an increase in raw material costs (in Q2 FY12, the raw materials
cost as a percentage of sales is 67.3% vs. 61.0% in Q2 FY11). However, staff costs
and other costs have not deteriorated and this is a positive.
Segmental results: margins decline across the board
In Q2 FY12, Industrial systems revenue grew 29% YoY, Power systems grew 12%
YoY, and consumer products segment revenue grew 4% YoY. The slowdown in
the consumer segment is a major cause of concern, in our view. EBIT margins
declined across segments with a 695bps YoY decline in power systems; industrial
and consumer businesses margins have also declined significantly YoY. The
company has scheduled an analyst meeting tomorrow at 10:15am and we expect to
get more details.
Valuation: maintain Sell and price target of Rs130
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
Q 2 FY12: weak results
Q2 FY12 results: weak numbers, below expectations
In Q2 FY12, Crompton Greaves’ (CG) operating income of Rs27.1bn was up 13%
YoY and EBITDA margins declined 554bps YoY, impacted due to higher raw
material cost. Net profit declined 45% YoY to Rs1.17bn, which is below UBS and
consensus estimates. However, the Q2 FY12 numbers have better-than-expected
sales.
Q2 FY12: margins remain under pressure
The key highlight of the results is a decline in margins (in line with Q1 FY12).
This was due to an increase in raw material costs (in Q2 FY12, the raw materials
cost as a percentage of sales is 67.3% vs. 61.0% in Q2 FY11). However, staff costs
and other costs have not deteriorated and this is a positive.
Segmental results: margins decline across the board
In Q2 FY12, Industrial systems revenue grew 29% YoY, Power systems grew 12%
YoY, and consumer products segment revenue grew 4% YoY. The slowdown in
the consumer segment is a major cause of concern, in our view. EBIT margins
declined across segments with a 695bps YoY decline in power systems; industrial
and consumer businesses margins have also declined significantly YoY. The
company has scheduled an analyst meeting tomorrow at 10:15am and we expect to
get more details.
Valuation: maintain Sell and price target of Rs130
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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