Crompton Greaves Expect gradual recovery :: Prabhudas Lilladher

! High quality improvement cost led to miss in PAT: Crompton Greaves (CRG)
reported consolidated profits of Rs247m for Q4FY13, lower than our and street
estimates (PLe: Rs774m). International subsidiaries reported loss of Rs845m in
Q4FY13, higher than our estimate of Rs450m. Higher-than-expected stabilization
costs like quality improvement cost (high un tanking rate issue) and LDs led to
losses in subsidiaries. The company incurred cost of Rs770m in the quarter
related to stabilization cost (Rs3bn for FY13). CRG highlighted that stabilization
cost was high in the quarter due to quality improvement related cost but most
issues related to design and processes have been sorted and cost should trend
downward significantly in the next two quarters. Belgium-related restructuring
is completely over and most employees have parted in Q4FY13. Hence, full
impact of savings in employee cost (~Rs200m/quarter) should be visible from
Q1FY14. Operations in Hungary have stabilised faster-than-expected and the
plant has already delivered 18 power transformers in Q4FY13 and also has been
EBIT positive. Most of the incremental losses are from the Belgium and Canada
plant which is expected to reduce (as benefits of restructuring and quality
improvement exercise fortify and LDs reduces over the next two quarters). CRG
also highlighted that various initiatives planned by the company like improved
offering, global sourcing, manufacturing foot print and continuous improvement
initiatives programmes have delivered cost saving/margin improvement of
225bps for FY13.

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! Strong consumer growth drive standalone sales: CRG’s standalone sales were
up 6% YoY to Rs20.5bn. EBITDA margins came in at 6.9%, down 330bps YoY and
PAT was down 21% YoY to Rs1bn (PLe: Rs1.2bn). Consumer segment reported
robust sales growth of 23% YoY, while sales for power segment were down 11%
YoY to Rs8.3bn. Sales in domestic power system were impacted due to
postponement of delivery to few clients of MHV switchgears due to cash flow
issues of customers. EBIT margin for power segment continued to slide and
came in at 7.1% (down 240bps YoY and 80bps QoQ). The company highlighted
that power system margins were impacted by overall pricing in the market as
well as execution of system work of 765kv transformer (low margin part of
order). EBIT margin for consumer business was also down 230bps YoY despite
23% growth in sales due to higher sales and marketing expense and higher
proportion of institutional sales in overall of sales mix.
! Subsidiary losses higher than expected: On a consolidated basis, sales was up
10% YoY to Rs33bn (PLe: Rs33bn). However, EBITDA margins dropped 660bps
YoY to 2.3% (PLe: 4.9%). Significant decline in EBITDA margins led to 75% YoY
drop in PAT to Rs247m (PLe: Rs774m). Power system reported a loss of Rs586m
on EBIT basis on account of stabilization cost of Rs770m in the current quarter.
While subsidiaries reported healthy sales growth of 20% YoY to Rs13bn, they
also reported loss of Rs845m at PAT level.
! Strong order book: Order book at the end of FY13 was Rs91.2bn, up 9% YoY.
Consolidated order inflow for the quarter was Rs29bn (up 3% YoY and 32%
QoQ). For FY13, order inflow was up 3% YoY. Order inflow in the power segment
was flat YoY in FY13 to Rs83.9bn. The inflow in power segment was lower due to
the fact that Bhopal factory was full and hence, CG was selective in bidding and
order intake in subsidiaries was also lower due to restructuring. Industrial orders
were up 20% YoY in FY13 driven bygood traction in energy efficient motors and
successful scale of drives and railways business. CG expects a robust order
intake in high value-added segments like UHV/EHV in Asia, Automation/smart
grid in the power segment, Motors in EMEA market, Railway transportation and
electronic drives in the industrial segment.
! Outlook and Valuation: The stock is trading at 12.4x FY14E earnings. We believe
that a record backlog, better/leaner cost structure, good & increasing product
basket and improved reach in terms of geography will drive earnings over the
next few years. We have assumed break even EBIT level for international
subsidiaries in FY14. We maintain ‘Accumulate’ on the stock.