Crompton Greaves -Concall takeaways – Outlook remains strong ::Macquarie Research

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Crompton Greaves India
Concall takeaways – Outlook remains strong
Event
 Crompton Greaves hosted a conference call to discuss 2Q FY11 results. We
believe the company is well placed to deliver much stronger top-line growth as
visibility on the India business improves on the back of order book growth. We
are raising our price target to Rs361 and retain Outperform.
Impact
 Growth in domestic consumer and industrial business to surprise: The
domestic business grew by 14%, with 24% growth in consumers and 18%
growth in industrial systems. Management expects these growth rates to
continue or even improve in the industrial segment. CRG is still maintaining its
topline guidance of 14–15% in its parent business as it is building in cushion
for potential delay in pickup in power systems. However, we think that they
will surpass as we expect power systems growth to pick up going forward.
 Order book growth healthy despite no Power Grid orders: In 2Q FY11,
the company had order inflows of Rs25.6bn and order book stands at
Rs71.2bn (up 11% YoY, 5% QoQ). The domestic order book grew 23%
despite no orders from Power Grid (PWGR IN, Rs102, UP, TP: Rs91, Jeff
Evans). We believe that order inflow and hence, the order book will see a
major boost as Power Grid gives orders in 2HFY11 and industrial capex picks
up further.
 International business surprised; margins to trend upwards: The
international business grew by 7% as work on semi-finished wind farms
picked up. Management is guiding for 5% and 7% growth in FY11 and FY12
in local currency terms and expects margins to trend upwards from here.
 Doubling capex to augment capacity in anticipation of demand:
Management guided for capex of Rs6bn each in FY11 and FY12 to augment
its capacity in power systems and industrial divisions. We believe that the
capex is in anticipation of sizable order inflows in the near future.
Earnings and target price revision
 We are revising our target price by 11% to Rs361 as we assign a 20x multiple
to FY12E EPS (up from the 18x assigned earlier).

Price catalyst
 12-month price target: Rs361.00 based on a PER methodology.
 Catalyst: pickup in power systems execution and project wins in T&D space.
Action and recommendation
 Consensus earnings estimates to be upgraded: We believe that there is
still room for earnings upgrade coming both from margin expansion and
revenue growth. The consensus is building in EBITDA margin of 13.2%, which
we believe will be increased to atleast 14–14.5%.
 Revising our target price to Rs361: We are raising our TP to Rs361 (from
Rs327) as we now assign a 20x multiple to FY12E EPS. We retain our OP
rating on the stock and think it is the best stock to play the power capex story
in the transmission and distribution space.