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Receding hopes of a near-term
turnaround; downgrade to Reduce
Action: Margin pressure may continue; Downgrade to Reduce
CRG surprised negatively again in 3Q as subsidiary margins deteriorated
further, belying expectations of an improving trend. Management clarified
subsequently that the poor margins were not due to inventory liquidation
at a discount (in contrast to our initial belief). While we note few positives
from the results such as a strong pick-up in power system revenue as well
as strong order intake, we are now increasingly concerned over CRG’s
medium-term margin outlook. Our concerns emanate from the following
key observations (in sync with investors who saw this much before us):
Margins continue to worsen across segments despite a revenue pickup;
inspires little confidence in margin recovery when growth stabilises.
Order inflow in the current environment might continue to deliver subnormal
margins due to heightened competitive intensity.
Management has refrained from giving guidance for the FY13 outlook
and has further hinted that the FY12F guidance could be at risk.
Catalysts: Europe overhang and competition
Profitability in overseas subsidiaries, delayed recovery are key triggers.
Valuation: Still expensive on our lowered est.; downgrade to Reduce
We believe that CRG is yet to hit the cyclical trough and further
downgrade in FY13F earnings is possible. Our revised estimates are still
based on the hope of a recovery and we would wait for visible recovery
signals. Deteriorating ROE profile and uncertainties prompt us to assign a
discount to average sector multiples; we now value the stock at 11x Sep-
13F EPS to arrive at our new TP of INR130. Downgrade to Reduce
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Receding hopes of a near-term
turnaround; downgrade to Reduce
Action: Margin pressure may continue; Downgrade to Reduce
CRG surprised negatively again in 3Q as subsidiary margins deteriorated
further, belying expectations of an improving trend. Management clarified
subsequently that the poor margins were not due to inventory liquidation
at a discount (in contrast to our initial belief). While we note few positives
from the results such as a strong pick-up in power system revenue as well
as strong order intake, we are now increasingly concerned over CRG’s
medium-term margin outlook. Our concerns emanate from the following
key observations (in sync with investors who saw this much before us):
Margins continue to worsen across segments despite a revenue pickup;
inspires little confidence in margin recovery when growth stabilises.
Order inflow in the current environment might continue to deliver subnormal
margins due to heightened competitive intensity.
Management has refrained from giving guidance for the FY13 outlook
and has further hinted that the FY12F guidance could be at risk.
Catalysts: Europe overhang and competition
Profitability in overseas subsidiaries, delayed recovery are key triggers.
Valuation: Still expensive on our lowered est.; downgrade to Reduce
We believe that CRG is yet to hit the cyclical trough and further
downgrade in FY13F earnings is possible. Our revised estimates are still
based on the hope of a recovery and we would wait for visible recovery
signals. Deteriorating ROE profile and uncertainties prompt us to assign a
discount to average sector multiples; we now value the stock at 11x Sep-
13F EPS to arrive at our new TP of INR130. Downgrade to Reduce
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