Crompton Greaves - Operating leverage plays out; maintain Sell:: Anand Rathi

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Crompton Greaves
Operating leverage plays out; maintain Sell
 Moderate growth. Crompton saw a moderate 10% yoy sales and
PAT growth due to healthy performance in the consumer and
industrials segments backed by good domestic demand, albeit a
weaker power systems business. Subsidiaries’ revenue grew 3.5%
yoy despite adverse currency owing to rise in volumes. We believe
operating leverage has played out and maintain Sell on account of
lack of triggers in the medium term and expensive valuations.
 Healthy growth in Consumer, Industrials. Domestic demand
drove the strong growth in consumer (up 24% yoy) and industrials
(up 13% yoy). Power systems dampened the results, despite
improving qoq (but only 7% yoy) in standalone and subsidiaries.
 Operating leverage plays out. Operating margin declined 22bps
yoy due to higher ‘other expenses’. The power segment saw a flat
EBIT margin due to lower raw material cost in subsidiaries.
Margins of the power and industrial segment fell in standalone.
 Conference call takeaways. Management guided for growth of
14-15% in standalone and 5-7% in subsidiaries (local currency)
and aims to maintain operating margin. 2Q growth in subsidiaries
is a one off and outlook for European/US market remains
bearish. Order book of `71bn (0.8x FY10 sales) assures revenue
for 8-10 months.
 Valuation and risks. We maintain target price of `271, which is
18xFY12eEPS. Faster revival in US/Europe, favorable currency
and better pricing in the domestic market are key upside risks.