Multiple strategies to emerge as 'global corporation'
Spain, Hungary operations to drive growth
We visited i) Tapioszele (Hungary) where Crompton Greaves (CG) manufactures
power transformers, rotating machines and GIS substations and ii) Bilbao (Spain)
where the recently-acquired ZIV and the global headquarters of CG's newlyformed
fourth business unit, power automation, are located. We also interacted
with the senior management team, including Mr Laurent Demortier (MD and
CEO), business heads and operating management across divisions.
We noticed an increased pace of urgency to emerge as a 'global corporation'
from India. Several steps to enhance product portfolios, geography reach, correcting cost structure etc are being accelerated.
Though the reported financials continue to disappoint, the operating management demonstrated a strong commitment
to execute the long term plan.
The transition phase led to several moving aspects, which are challenging to monitor and stock's reaction to any slippages
has been significant. In our view, CG's performance would largely be driven by an improvement in overseas business,
though standalone performance would protect downsides. We estimate overseas business EPS loss of INR4.7/sh in FY13
(led by the restructuring costs in Belgium/Hungary) and breakeven in FY14 (as benefits of several initiatives show initial
results). Standalone business' performance is expected to be steady, with EPS at INR8.2/sh in FY13 (up 4% YoY) and
INR9.2/sh in FY14 (up 12% YoY). We maintain Buy, with a target price of INR131.
SPAIN: Leading the technology curve, businesses at an inflexion point
Bilbao (Spain) houses the recent acquisition ZIV (for Euro150m) and also the global
headquarters of the recently-formed fourth business unit, power automation.
We note that substation automation and metering are on the cusp of an inflexion
point over the next 1-2 years, while distribution automation presents a longer
term potential due to evolving markets and industry protocols for smart grids.
Profitability in substation automation is dependent on economies of scale, while
technological dominance and R&D are critical parameters in metering and
distribution automation. Profitability improvement in ZIV from 4-6% EBITDA margin
in CY09/10 to 16% in CY11 and ~20-21% in CY12 was driven by the metering business.
In 2013, demand for smart meters in Spain is likely to be up 50% YoY, while countries
like the UK, Poland, Romania, Portugal, France etc are showing promising trends.
This business has a large operating leverage, given R&D efforts and technology
knowhow. Substation automation also witnessed initial traction, with prequalifications
(PQs) from PGCIL and the attempt will be to leverage on CG's
overseas network. Hence, management stated that the power automation business
is on track to achieve revenues of Euro200m in next 3 years, from Euro110m now.
HUNGARY: Key part of EMEA strategy, potential game changer
Ganz, the Hungary facility acquired by CG in 2006, is a 160-year-old company.
Tapioszele facility manufactures power transformers (PT), rotating machines and
GIS substations. Though many businesses and manufacturing related to rotating
machines and GIS had been curtailed by the previous owners, CG made successful
attempts to consolidate and expand its presence in these segments too.
The restructuring entails right-sizing of capacity in Belgium and expansion in
Hungary by 10,000MVA and thus CG's operational capacity in Europe will expand.
Hungary contributed 10% of the overseas revenues of CG Global and the attempt
is to make Hungary the manufacturing hub for Europe, Middle East and Africa
(EMEA) region. Manufacturing capacities are being doubled in PT by 2.5x in GIS etc
and in 1HFY13 order intake from EMEA region is already up ~70% YoY, largely driven
by the Middle East (new office started in December 2011).
The key risk to profitability in Hungary is that most of the 31 PT projects transferred
from Belgium have peak execution/delivery in January 2013. Any delays can lead
to damages being payable to the clients. While the management team at the
plant believes that they are on track and there were ~23 transformers on the shop
floor being manufactured, there could be contingencies/re-works due to the
sudden increase in activity levels.
Over the past 2 years, Hungary received pre-qualifications (PQs) from several
utilities in Europe and priority is to increase penetration in the Middle East and
Africa. Order intake in CG's consolidated overseas business is up ~60% YoY in trailing
12 months and in FY13 would grow 20% YoY (FY13 revenue growth in the overseas
business shall be stagnant due to the impact of restructuring and stabilization
period). We believe that the operating leverage to any possible revenue increase
is meaningful as staff costs contribute 23% of the overseas business revenues.
Interactions with management: Focused growth strategies
Management is not scouting for any acquisitions in the medium term. Technology
gaps like GIS etc are planned to be covered through technology partnerships.
The organization structure has been revamped and is in effect from October 15,
2012, whereby marketing heads have been formed on the basis of regions to
present a unified face to the customer.
Industrial business is being revamped as rotating machines and the strategy is to
move up the curve in HT motors and also turbo-generators. Company's consumer
business is being refurbished and a new management team has been appointed;
the plan is to increase the market share of fans.
Management outlined a 450bp EBITDA margin expansion program in May 2012 and
it entailed accretion of 300bp from 'improved sourcing' and 'increased offerings'.
The inflexion point in sourcing is expected in 4QFY13; the effective roll-out can
lead to consolidated margin expansion of 100bp+ in FY14 for CG, in our view.
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