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Pain in subsidiaries continues: Crompton Greaves (CRG) disappointed the street
again with lower-than-expected PAT numbers; PAT numbers were lower by
~40%. The consolidated PAT came in at Rs1bn against our estimate of Rs1.6bn.
The disappointing PAT numbers were primarily driven by a loss of Rs408m at
subsidiary level. Apart from poor pricing levels, the issue related to deferment of
orders in both USA and European markets, certain cost related to product
development and shifting of orders from the Belgium plant to the plant in
Hungary impacted earnings in subsidiaries. In standalone business, profitability
in power and industrial segment continues to fall QoQ. However, the company
commented that the pricing in domestic business is stabilizing; however, we
think it could continue to see pressure.
A three‐year action plan to set thing right and rolling: Management highlighted
its three-year action plan to improve margins and grow sales. (1) Improve
Offerings (a) move towards high value offerings both in Power (1200/765 kV)
and Industrial segments (energy efficient motors/drives for global markets) (b)
enter new segments like engineering services for utilities (c) enter new
geographies like Brazil, Europe and Middle East. The company believes that this
should help improve EBITDA margins by 150bps over the next three years; (2)
Measures to improvise the sourcing. The management has put in place a global
sourcing organization with new sourcing office opened in Shanghai. It believes
that the improved sourcing effort should help improve margins by 150bps over
the next three years. (3) Optimize manufacturing footprint (a) The company will
consolidate the European platform by FY13 to ensure loading to factories and
optimize production based on cost (b) expected to add 50,000 MVA capacity in
India to take the total capacity to 1,40,000MVA (c) to implement CGPS in
European plants. The company believes this should help margins improve by
100bps over next three years
(4) Continuous improvement: This includes implementing six-sigma and rolling
out sustainability program in each unit. This should help improve EBITDA
margins by 50bps over the next three years. The plan, though quite elaborate, is
a long drawn process and we are not sure that the management has factored in
uncertainties of entering new business, geographies as well as other market
uncertainties in target improving to 400bps over the next three years.
Guidance for FY13: The company has guided for a sales growth of 12-14% on
top-line and EBITDA margin of 8-9%. We believe the guidance on margin is
slightly ambitious, given that the margin in domestic power business is likely to
be under pressure and there would be uncertainty in international subsidiaries.
The company is also quite confident of improved order intake in FY13, mainly
driven by UHV and renewable markets in Asia, Europe and America in power
SBU. In industrial SBU, penetration of European and Middle East should support
growth and in consumer SBU, portfolio expansion and consolidation of trade
channel should yield results.
Focusing to grow industrial and consumer business: The management is looking
at industrial business by increasing export to Europe markets with new offering
(mainly motors). It is also increasing focus on railways business in India (for
traction motors) and scaling up the new drives business (Emotron) in Indian
market and export market. In the consumer business, it is looking at further
improving the product offering in fans (both consumer and speciality fans). It
believes speciality fans like industrial fans, solar fans and off grid fans have huge
potential market in coming years. It is also looking at increasing its presence in
fast growth kitchen appliances and personal care products segment. Focus has
also been improved in better channel management.
Outlook and Valuation: The stock is trading at 11.9x FY13E earnings. Though the
management has put in place a plan to increase profitability over medium term,
we expect the near-term pressure on profitability to continue as management
tries to put house in order, leading to continued under performance. Also,
recent loss in credibility will make it difficult for the market to believe in the
ability to execute the plan.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Pain in subsidiaries continues: Crompton Greaves (CRG) disappointed the street
again with lower-than-expected PAT numbers; PAT numbers were lower by
~40%. The consolidated PAT came in at Rs1bn against our estimate of Rs1.6bn.
The disappointing PAT numbers were primarily driven by a loss of Rs408m at
subsidiary level. Apart from poor pricing levels, the issue related to deferment of
orders in both USA and European markets, certain cost related to product
development and shifting of orders from the Belgium plant to the plant in
Hungary impacted earnings in subsidiaries. In standalone business, profitability
in power and industrial segment continues to fall QoQ. However, the company
commented that the pricing in domestic business is stabilizing; however, we
think it could continue to see pressure.
A three‐year action plan to set thing right and rolling: Management highlighted
its three-year action plan to improve margins and grow sales. (1) Improve
Offerings (a) move towards high value offerings both in Power (1200/765 kV)
and Industrial segments (energy efficient motors/drives for global markets) (b)
enter new segments like engineering services for utilities (c) enter new
geographies like Brazil, Europe and Middle East. The company believes that this
should help improve EBITDA margins by 150bps over the next three years; (2)
Measures to improvise the sourcing. The management has put in place a global
sourcing organization with new sourcing office opened in Shanghai. It believes
that the improved sourcing effort should help improve margins by 150bps over
the next three years. (3) Optimize manufacturing footprint (a) The company will
consolidate the European platform by FY13 to ensure loading to factories and
optimize production based on cost (b) expected to add 50,000 MVA capacity in
India to take the total capacity to 1,40,000MVA (c) to implement CGPS in
European plants. The company believes this should help margins improve by
100bps over next three years
(4) Continuous improvement: This includes implementing six-sigma and rolling
out sustainability program in each unit. This should help improve EBITDA
margins by 50bps over the next three years. The plan, though quite elaborate, is
a long drawn process and we are not sure that the management has factored in
uncertainties of entering new business, geographies as well as other market
uncertainties in target improving to 400bps over the next three years.
Guidance for FY13: The company has guided for a sales growth of 12-14% on
top-line and EBITDA margin of 8-9%. We believe the guidance on margin is
slightly ambitious, given that the margin in domestic power business is likely to
be under pressure and there would be uncertainty in international subsidiaries.
The company is also quite confident of improved order intake in FY13, mainly
driven by UHV and renewable markets in Asia, Europe and America in power
SBU. In industrial SBU, penetration of European and Middle East should support
growth and in consumer SBU, portfolio expansion and consolidation of trade
channel should yield results.
Focusing to grow industrial and consumer business: The management is looking
at industrial business by increasing export to Europe markets with new offering
(mainly motors). It is also increasing focus on railways business in India (for
traction motors) and scaling up the new drives business (Emotron) in Indian
market and export market. In the consumer business, it is looking at further
improving the product offering in fans (both consumer and speciality fans). It
believes speciality fans like industrial fans, solar fans and off grid fans have huge
potential market in coming years. It is also looking at increasing its presence in
fast growth kitchen appliances and personal care products segment. Focus has
also been improved in better channel management.
Outlook and Valuation: The stock is trading at 11.9x FY13E earnings. Though the
management has put in place a plan to increase profitability over medium term,
we expect the near-term pressure on profitability to continue as management
tries to put house in order, leading to continued under performance. Also,
recent loss in credibility will make it difficult for the market to believe in the
ability to execute the plan.
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