Crompton Greaves India -- Disappointment galore :Macquarie Research,

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Crompton Greaves India
Disappointment galore
Event
 Expectations of revival were belied in CRG’s 2QFY12 results. India business
has started facing problems and issues in overseas businesses remain
unresolved. We reduce our earnings estimates by ~15% and our target price
from Rs158 to Rs117. Retain Underperform.
Impact
 Problem creeping into India business: CRG’s India power business had a
7% revenue decline (v/s 11% growth in 1QFY12). The consumer business
continues to struggle with low growth of 4% and the industrial segment slowed
down significantly to 9% in 2QFY12.
 No revival yet in overseas power systems: Contrary to expectations, the
liquidation of inventories in overseas power systems has not taken place,
resulting in an increase of Rs5.5bn (~50%) from FY11 levels. We note that the
standalone company has been extending loans and advances to its overseas
subsidiaries to help them meet their rising working capital needs.
 Margin revival unlikely to happen in a hurry: Competition continues to hurt
India’s power business (30% decline in transformer realisations since Jan’09).
Interestingly, the recently won 765kV substation order from Powergrid has
~8% margins. Slow growth in the consumer business (~3% in 1HFY12) will
continue to pressure margins.
 Management maintains FY12 guidance: Management maintains FY12
guidance of 10-12% revenue growth, with 8-10% EBITDA margin in the
consolidated entity. It also plans to reduce its effective tax rate from 25% in
FY11 to 15% in FY12E on an increase in R&D expenses from ~Rs1bn in
FY11 to ~Rs2.5bn.
o CRG paid Rs1bn of tax at overseas subsidiaries in 1HFY12 despite
Rs3bn of losses, indicating that there is no tax offset across
geographies. Even with 15% tax rate on higher R&D, FY12 tax
outgoings will be at least Rs1.9bn (which has been paid in 1HFY12).
 Downside risks to consensus estimates: We believe there is downside risk
to consensus EPS estimate of Rs11 in FY12, given that CRG clocked just
Rs3.8 EPS in 1HFY12. We reduce our FY12-13E EPS by 15-16%.
Earnings and target price revision
 We cut our FY12-13E EPS estimates by 15-16%, mainly due to cuts in
margins. We reduce our target price from Rs158 to Rs117 due to cut in EPS
and target multiple from 15x to 13x, as uncertainty persists on the company
meeting its guidance and the lower tax rate boosting its earnings.
Price catalyst
 12-month price target: Rs117.00 based on a PER methodology.
 Catalyst: rising competition in India power and late revival in overseas power
Action and recommendation
 Investor confidence unlikely to return in a hurry: Operating performance
for CRG needs to improve significantly for investor confidence to return to the
stock. We retain our Underperform and revise our TP to Rs117.