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UBS Investment Research
Crompton Greaves Ltd
2 Q FY12 analyst meet: key highlights
Event: Crompton organised the 2Q FY12 results analyst meet today
The key highlights from the analyst meet are: 1) no change in guidance for FY12,
the company maintains its post-1QFY12 guidance of 10-12% revenue growth and
8-10% EBITDA margin for full year FY12; 2) the outlook has improved for the
power systems business in India but the situation in the overseas markets remains
weak; 3) the weakness in consumer products is largely seasonal, according to the
company.
Impact: weak results in 2QFY12 as margins remain under pressure
In 2Q FY12, Crompton Greaves’s (CG) operating income of Rs27.1bn was up 13%
y/y and EBITDA margin declined 554bp y/y. Reported PAT declined 45% y/y to
Rs1.17bn. PAT is below UBS and consensus estimates. The key highlight of the
results is the decline in margin (in line with 1Q FY12). The margin decline is due
to an increase in raw material costs (in 2Q FY12, raw materials as a percentage of
sales were at 67.3% versus 61.0% in 2Q FY11). Please refer to our note, Q2 FY12:
weak results, published on 19 October 2011.
Action: pick-up in domestic T&D is positive but other businesses struggle
We believe the increased order inflow and price stabilisation in domestic T&D is a
positive for the company. However, we continue to remain concerned about: 1)
uncertain outlook for overseas power systems; 2) poor revenue growth in consumer
products; and 3) margin decline in the industrials business.
Valuation: maintain Sell rating, and price target of Rs130
We derive our price target (Rs130) from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. Our price target
assumes a WACC of 13.3%.
Apart from the points highlighted above, the key points from the analyst meet
are as follows:
According to the company, the weakness in consumer products is seasonal
though the company has improved market share in fans from 19.2% in 1Q
FY12 to 21.2% in 2Q FY12 (the company is a market leader in fans).
The company believes that Crompton has a strong presence in other
consumer products as well. For example, it is No. 2 in the lightings market
and has strong distribution in pumps with more than 4,000 distributors in
India.
Order book is Rs71.2bn versus Rs70.9bn at the end of 1Q. Order book has
remained in the Rs70-75bn range for the past five quarters; the company
thinks this is ideal for capacity utilisation.
Power systems order inflow is at Rs18.3bn in 2Q versus Rs13bn in 1Q and
order inflow in Industrials is at Rs4.3bn in 2Q versus Rs4.1bn in 1Q.
The company believes that the fundamental drivers are still intact for power
systems but there have been issues with the facilitation process and that is
why projects are not converting into orders.
According to the company, the margin drop is largely due to pricing pressure
and there has been aggressive pricing by the industry participants in the past.
However, according to the company the pricing in domestic power systems
has now stabilized.
The company does not take any currency risk and hedges the net export
position to avoid any risk arising from currency fluctuations.
Lower commodity prices help as copper is not hedged for the industrial and
consumer product businesses. Also, steel is largely not hedged. Steel,
Copper, and Aluminum comprise 40% of raw material costs.
The company has a strong focus on supply chain management and cost
savings and it will be able to share more details after 3Q.
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
2 Q FY12 analyst meet: key highlights
Event: Crompton organised the 2Q FY12 results analyst meet today
The key highlights from the analyst meet are: 1) no change in guidance for FY12,
the company maintains its post-1QFY12 guidance of 10-12% revenue growth and
8-10% EBITDA margin for full year FY12; 2) the outlook has improved for the
power systems business in India but the situation in the overseas markets remains
weak; 3) the weakness in consumer products is largely seasonal, according to the
company.
Impact: weak results in 2QFY12 as margins remain under pressure
In 2Q FY12, Crompton Greaves’s (CG) operating income of Rs27.1bn was up 13%
y/y and EBITDA margin declined 554bp y/y. Reported PAT declined 45% y/y to
Rs1.17bn. PAT is below UBS and consensus estimates. The key highlight of the
results is the decline in margin (in line with 1Q FY12). The margin decline is due
to an increase in raw material costs (in 2Q FY12, raw materials as a percentage of
sales were at 67.3% versus 61.0% in 2Q FY11). Please refer to our note, Q2 FY12:
weak results, published on 19 October 2011.
Action: pick-up in domestic T&D is positive but other businesses struggle
We believe the increased order inflow and price stabilisation in domestic T&D is a
positive for the company. However, we continue to remain concerned about: 1)
uncertain outlook for overseas power systems; 2) poor revenue growth in consumer
products; and 3) margin decline in the industrials business.
Valuation: maintain Sell rating, and price target of Rs130
We derive our price target (Rs130) from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. Our price target
assumes a WACC of 13.3%.
Apart from the points highlighted above, the key points from the analyst meet
are as follows:
According to the company, the weakness in consumer products is seasonal
though the company has improved market share in fans from 19.2% in 1Q
FY12 to 21.2% in 2Q FY12 (the company is a market leader in fans).
The company believes that Crompton has a strong presence in other
consumer products as well. For example, it is No. 2 in the lightings market
and has strong distribution in pumps with more than 4,000 distributors in
India.
Order book is Rs71.2bn versus Rs70.9bn at the end of 1Q. Order book has
remained in the Rs70-75bn range for the past five quarters; the company
thinks this is ideal for capacity utilisation.
Power systems order inflow is at Rs18.3bn in 2Q versus Rs13bn in 1Q and
order inflow in Industrials is at Rs4.3bn in 2Q versus Rs4.1bn in 1Q.
The company believes that the fundamental drivers are still intact for power
systems but there have been issues with the facilitation process and that is
why projects are not converting into orders.
According to the company, the margin drop is largely due to pricing pressure
and there has been aggressive pricing by the industry participants in the past.
However, according to the company the pricing in domestic power systems
has now stabilized.
The company does not take any currency risk and hedges the net export
position to avoid any risk arising from currency fluctuations.
Lower commodity prices help as copper is not hedged for the industrial and
consumer product businesses. Also, steel is largely not hedged. Steel,
Copper, and Aluminum comprise 40% of raw material costs.
The company has a strong focus on supply chain management and cost
savings and it will be able to share more details after 3Q.
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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