Key Takeaway
The business cycle for industrial companies has been difficult post FY08-09.
Some companies have managed the environment better than the others. On
several occasions, we have discussed that segment leadership is a critical
element. This is reflected in the balance sheets of Cummins, Crompton
Greaves (CRG) and Thermax, with segment leader Cummins seeing far less
deterioration in this cycle. We expect this comparative trend to continue.
Cummins' monetisation focus on debtor days: In the downturn, Cummins'
management has focused on monetising revenue to cash flow, rather than growth, reflected
in Cummins reducing its debtor days by 20% from 76 in FY08 to 61 in FY13 (Exhibit 1).
Thermax has seen a sharp deterioration in debtor days in FY13 to 99 vs 73 in FY12 and 49 in
FY08. Crompton has seen a more gradual deterioration of about 10% during FY08-13. For
debtors more than six months old, Cummins is the least at 2% of overall debtors followed
by Crompton at 12% and Thermax at 14% in FY13 (Exhibit 2).
Thermax's working capital moves to positive from a negative cycle: Working
capital trends are a good indicator of business stress. Thermax has been among the best
in working capital cycle management, which has been negative for the company given
advances. However, as order flow has seen pressure, Thermax’s working capital has seen
some deterioration (Exhibit 3). While it still remains fairly low at +5%, trend-wise it has
worsened from a band of -15%-0% over the past 5-7 years. CRG’s overall working capital
has been broadly stable at 5-10%, while Cummins has seen improvement from 20% levels
to 14%.
CRG’s FY13 ROE falls to 2% from a peak of 38%: Clearly, of the three companies, CRG
has seen the sharpest deterioration in profitability. The company’s ROE has fallen from a high
of 38% in FY10 to 2% in FY13 (Exhibit 4). Despite assuming cost benefits from restructuring,
we anticipate this to be well below 20% levels even over the next 2-3 years. Thermax has seen
its ROEs more than halve from a peak of 43% in FY08 to 19% in FY13. The sharp deterioration
has been YoY as well, from 27% in FY12 to 19% in FY13. Cummins has managed to contain
ROE erosion given its high dividend payout ratio (ROE 30% in FY13 v/s peak of 35% in FY11
and 34% in FY09).
Is the past reflective of the future? Over the past six years, in a difficult backdrop, CRG
and Thermax have lost upwards of 30% from their peak share price levels vs Sensex 10%
off its peak. Cummins, on the contrary, has risen by 50% vs its peak levels. FY13 annual
reports and B/S of these companies clearly spell out the reasons. Cummins' 1HFY14E will be
likely weak given seasonally lower power deficit has impacted genset sales (see report, Power
Deficit: Seasonal Fall, published on 5 July 2013). However, if power deficit recovers during the
year, as supply growth averages lower and demand growth remains steady, genset sales will
recover, in our view. On the other hand, we believe pricing pressure globally will continue
to hurt earnings of Crompton and Thermax.
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The business cycle for industrial companies has been difficult post FY08-09.
Some companies have managed the environment better than the others. On
several occasions, we have discussed that segment leadership is a critical
element. This is reflected in the balance sheets of Cummins, Crompton
Greaves (CRG) and Thermax, with segment leader Cummins seeing far less
deterioration in this cycle. We expect this comparative trend to continue.
Cummins' monetisation focus on debtor days: In the downturn, Cummins'
management has focused on monetising revenue to cash flow, rather than growth, reflected
in Cummins reducing its debtor days by 20% from 76 in FY08 to 61 in FY13 (Exhibit 1).
Thermax has seen a sharp deterioration in debtor days in FY13 to 99 vs 73 in FY12 and 49 in
FY08. Crompton has seen a more gradual deterioration of about 10% during FY08-13. For
debtors more than six months old, Cummins is the least at 2% of overall debtors followed
by Crompton at 12% and Thermax at 14% in FY13 (Exhibit 2).
Thermax's working capital moves to positive from a negative cycle: Working
capital trends are a good indicator of business stress. Thermax has been among the best
in working capital cycle management, which has been negative for the company given
advances. However, as order flow has seen pressure, Thermax’s working capital has seen
some deterioration (Exhibit 3). While it still remains fairly low at +5%, trend-wise it has
worsened from a band of -15%-0% over the past 5-7 years. CRG’s overall working capital
has been broadly stable at 5-10%, while Cummins has seen improvement from 20% levels
to 14%.
CRG’s FY13 ROE falls to 2% from a peak of 38%: Clearly, of the three companies, CRG
has seen the sharpest deterioration in profitability. The company’s ROE has fallen from a high
of 38% in FY10 to 2% in FY13 (Exhibit 4). Despite assuming cost benefits from restructuring,
we anticipate this to be well below 20% levels even over the next 2-3 years. Thermax has seen
its ROEs more than halve from a peak of 43% in FY08 to 19% in FY13. The sharp deterioration
has been YoY as well, from 27% in FY12 to 19% in FY13. Cummins has managed to contain
ROE erosion given its high dividend payout ratio (ROE 30% in FY13 v/s peak of 35% in FY11
and 34% in FY09).
Is the past reflective of the future? Over the past six years, in a difficult backdrop, CRG
and Thermax have lost upwards of 30% from their peak share price levels vs Sensex 10%
off its peak. Cummins, on the contrary, has risen by 50% vs its peak levels. FY13 annual
reports and B/S of these companies clearly spell out the reasons. Cummins' 1HFY14E will be
likely weak given seasonally lower power deficit has impacted genset sales (see report, Power
Deficit: Seasonal Fall, published on 5 July 2013). However, if power deficit recovers during the
year, as supply growth averages lower and demand growth remains steady, genset sales will
recover, in our view. On the other hand, we believe pricing pressure globally will continue
to hurt earnings of Crompton and Thermax.
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