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Crompton Greaves
It’s surely not the time: More
headwinds expected; New U/P
Initiate with Underperform, PO of Rs133
We initiate coverage on Crompton Greaves (CRG) with a SOTP-based price
objective of Rs133 and an Underperform rating. Key arguments that back our view
are: a) lack of clarity in the pricing scenario of domestic power transmission and
distribution (T&D) orders as foreign competitors set up shop in India, b) a narrowing
technological and timing edge against domestic manufacturers and c) the impact
of the European crisis on international power orders and execution.
Domestic power: Problem child; PGCIL orders near peak!
We expect PGCIL’s annual ordering to peak in FY12 and remain flat until FY15;
although the mix of orders may change, we believe that the competitive intensity
will not lessen – thus keeping the margins of all players under check. We believe
that the technological and timing edge that CRG developed during FY09-11 –
against its domestic peers in 765KV transformers – has diminished. Its margins
peaked in FY11 and will likely be restricted to 12% from FY12 onward by competition.
International power segment: Impacted by contagion
The international power segment (40% of revenue) will be impacted by the continued
slowdown in EU (17% of revenue) and its fallout on orders, production and execution.
In this scenario, margins will likely depend on the success of management’s strategy
to shift production to low-cost countries, which we believe will take time to play out.
Re-rating off the cards, lack of business triggers; key risks
We see no re-rating catalysts, as headwinds on pricing and demand persist.
Despite building in a 24% CAGR for FY12-14 earnings (low base and bottoming
margins), our Sept 2013-based PO for core operations implies no upside. The
risks to our view are: A price recovery in the domestic power segment, a pickup in
ordering activity by its international subsidiaries, and a lower-than-expected tax
rate provisioning for FY12, led by R&D benefits.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Crompton Greaves
It’s surely not the time: More
headwinds expected; New U/P
Initiate with Underperform, PO of Rs133
We initiate coverage on Crompton Greaves (CRG) with a SOTP-based price
objective of Rs133 and an Underperform rating. Key arguments that back our view
are: a) lack of clarity in the pricing scenario of domestic power transmission and
distribution (T&D) orders as foreign competitors set up shop in India, b) a narrowing
technological and timing edge against domestic manufacturers and c) the impact
of the European crisis on international power orders and execution.
Domestic power: Problem child; PGCIL orders near peak!
We expect PGCIL’s annual ordering to peak in FY12 and remain flat until FY15;
although the mix of orders may change, we believe that the competitive intensity
will not lessen – thus keeping the margins of all players under check. We believe
that the technological and timing edge that CRG developed during FY09-11 –
against its domestic peers in 765KV transformers – has diminished. Its margins
peaked in FY11 and will likely be restricted to 12% from FY12 onward by competition.
International power segment: Impacted by contagion
The international power segment (40% of revenue) will be impacted by the continued
slowdown in EU (17% of revenue) and its fallout on orders, production and execution.
In this scenario, margins will likely depend on the success of management’s strategy
to shift production to low-cost countries, which we believe will take time to play out.
Re-rating off the cards, lack of business triggers; key risks
We see no re-rating catalysts, as headwinds on pricing and demand persist.
Despite building in a 24% CAGR for FY12-14 earnings (low base and bottoming
margins), our Sept 2013-based PO for core operations implies no upside. The
risks to our view are: A price recovery in the domestic power segment, a pickup in
ordering activity by its international subsidiaries, and a lower-than-expected tax
rate provisioning for FY12, led by R&D benefits.
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