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Crompton Greaves (CRG)
Industrials
Results disappoint; near-term outlook remains challenging. Crompton’s results
disappointed with higher-than-expected margin correction across segments. The nearterm
outlook remains challenging in terms of growth as well as margins. The company’s
balance sheet also took a hit with higher debt levels to fund higher working capital
requirements. Inflows at Rs22 bn were reasonable leading to a backlog of Rs71 bn.
Downgrade to ADD as business remains under pressure (though may be largely priced-in).
Near-term outlook challenging, low cost sourcing, manufacturing to drive medium-term growth
Business across segments may remain challenging in terms of growth as well as margins. Long-term
drivers were identified as (1) using Indian manufacturing base to supply to global markets and (2) low
cost sourcing to increase margins. However, both these may pan out only over a period of time.
BS takes a bit of a knock; skeptical of backlog-based explanation of higher inventories in overseas
The increase in inventory and debtor levels (particularly in overseas subsidiaries) was attributed to
execution of backlog. We remain skeptical of this rationale as the order backlog has not increased
materially on a yoy basis. Debt increased to Rs9.7 bn (up Rs5 bn from FY11-end).
Reasonable order inflows lead to flat backlog; PGCIL substation order win is a first
Consolidated inflows of Rs22 bn were relatively flat on a yoy basis (up 33% qoq) even as
consolidated backlog remained flat at Rs71.2 bn. 765 KV substation win from PGCIL (a first as
earlier one from UP state); though the focus remains on manufacturing and not on EPC business.
Revise estimates and target price to Rs160/share (Rs200 earlier); downgrade to ADD
Revise estimates to Rs9.3 and Rs11.2 from Rs10.3 and Rs12.7 for FY2012E and FY2013E, on lower
revenue growth and margins. Key assumptions include (1) 8% consolidated revenue CAGR over
FY2011-13E, (2) 8.7% consolidated EBITDA margin in FY2012E (11.5% standalone) and (3) 20% tax
rate (standalone). Downgrade to ADD (from BUY) with a revised TP of Rs160 (from Rs200) as (1)
business remains under pressure on both revenues and margins across segments even though it may
be largely priced-in, (2) negatively surprised by sequential decline in standalone business, (3) lack of
visible improvement in overseas business margins and (4) balance sheet deterioration with higher
debt and inventory levels. Attempts at enhanced and more transparent communication are visible
and positive. Valuations appear reasonable at about 12.5X FY2013E EPS.
The medium/long-term outlook remains positive, however, in the near term, CRG may continue to
face pressures as (1) the power segment may remain weak as competition and cycle concerns linger
and (2) overseas business growth is partly fed by acquisition/currency which may not continue while
margin may remain weak. Consumer segment may pick up but only to the extent of 10-15% as
dealer feedback on business remains weak.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Crompton Greaves (CRG)
Industrials
Results disappoint; near-term outlook remains challenging. Crompton’s results
disappointed with higher-than-expected margin correction across segments. The nearterm
outlook remains challenging in terms of growth as well as margins. The company’s
balance sheet also took a hit with higher debt levels to fund higher working capital
requirements. Inflows at Rs22 bn were reasonable leading to a backlog of Rs71 bn.
Downgrade to ADD as business remains under pressure (though may be largely priced-in).
Near-term outlook challenging, low cost sourcing, manufacturing to drive medium-term growth
Business across segments may remain challenging in terms of growth as well as margins. Long-term
drivers were identified as (1) using Indian manufacturing base to supply to global markets and (2) low
cost sourcing to increase margins. However, both these may pan out only over a period of time.
BS takes a bit of a knock; skeptical of backlog-based explanation of higher inventories in overseas
The increase in inventory and debtor levels (particularly in overseas subsidiaries) was attributed to
execution of backlog. We remain skeptical of this rationale as the order backlog has not increased
materially on a yoy basis. Debt increased to Rs9.7 bn (up Rs5 bn from FY11-end).
Reasonable order inflows lead to flat backlog; PGCIL substation order win is a first
Consolidated inflows of Rs22 bn were relatively flat on a yoy basis (up 33% qoq) even as
consolidated backlog remained flat at Rs71.2 bn. 765 KV substation win from PGCIL (a first as
earlier one from UP state); though the focus remains on manufacturing and not on EPC business.
Revise estimates and target price to Rs160/share (Rs200 earlier); downgrade to ADD
Revise estimates to Rs9.3 and Rs11.2 from Rs10.3 and Rs12.7 for FY2012E and FY2013E, on lower
revenue growth and margins. Key assumptions include (1) 8% consolidated revenue CAGR over
FY2011-13E, (2) 8.7% consolidated EBITDA margin in FY2012E (11.5% standalone) and (3) 20% tax
rate (standalone). Downgrade to ADD (from BUY) with a revised TP of Rs160 (from Rs200) as (1)
business remains under pressure on both revenues and margins across segments even though it may
be largely priced-in, (2) negatively surprised by sequential decline in standalone business, (3) lack of
visible improvement in overseas business margins and (4) balance sheet deterioration with higher
debt and inventory levels. Attempts at enhanced and more transparent communication are visible
and positive. Valuations appear reasonable at about 12.5X FY2013E EPS.
The medium/long-term outlook remains positive, however, in the near term, CRG may continue to
face pressures as (1) the power segment may remain weak as competition and cycle concerns linger
and (2) overseas business growth is partly fed by acquisition/currency which may not continue while
margin may remain weak. Consumer segment may pick up but only to the extent of 10-15% as
dealer feedback on business remains weak.
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