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Crompton Greaves Limited
Overweight
CROM.BO, CRG IN
Margin hiccup in the price: Maintain OW
• What caused the margin disappointment in Mar-q? Anaemic order
inflows in domestic power segment combined with a volatile commodity
price environment impacted CG's ability to hedge RM costs (especially
copper). In the short cycle industry segment, the company was unable to
pass-on commodity impact to customers. Bunching of execution of low
quality legacy orders in Nelco (acquired in Aug-10) was a one-off.
• Concerns are in the price. We lower FY12 EPS by ~4.6% post
conference call, implying 9.5% YoY growth. The stock correction of
~10% post results adequately factors in earnings risk, in our view. The
events leading to margin disappointment are expected to ease over the
next 2 quarters owing to- (A) Revival of domestic sub-station ordering led
by PGCIL in 2HFY12; industrial ordering has already seen pick-up, (B)
Since Mar-q CG has been able to raise pricing in the industry segment to
counter margin impact and unexecuted orders in Nelco are less than
Rs0.5bn currently, (C) Worst impact of competition led pricing pressure
owing to Chinese/Korean entrants is behind us, in our view.
• Growth outlook beyond FY12 and fundamentals remain attractive,
maintain OW. Management outlook on growth in consumer (22-25%)
and industry segment (18-20%) remains strong and overseas segment may
still have room for margin expansion. Domestic power segment is
expected to return to high-double digit growth in FY13. CG has by far
exhibited a more efficient cost structure relative to peers in domestic T&D
and superior RoE (~32.1%).
• Our revised Mar-12 DCF based PT of Rs300 (vs. Rs345 earlier)
factors in sustainable EBIT margin of 10.8% (vs. 11.5% currently, after
factoring in weak 4Q). Our PT implies 16x FY13E P/E which we believe
appears reasonable in context of 17.1% EPS growth estimate. Stock price
declines based on risks to near-term growth, or leadership change in CG
are opportunities to buy, in our view. Macro factors resulting in push-back
of order inflow recovery beyond 2HFY11, and sharp commodity price
inflation are key risks to PT and margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Crompton Greaves Limited
Overweight
CROM.BO, CRG IN
Margin hiccup in the price: Maintain OW
• What caused the margin disappointment in Mar-q? Anaemic order
inflows in domestic power segment combined with a volatile commodity
price environment impacted CG's ability to hedge RM costs (especially
copper). In the short cycle industry segment, the company was unable to
pass-on commodity impact to customers. Bunching of execution of low
quality legacy orders in Nelco (acquired in Aug-10) was a one-off.
• Concerns are in the price. We lower FY12 EPS by ~4.6% post
conference call, implying 9.5% YoY growth. The stock correction of
~10% post results adequately factors in earnings risk, in our view. The
events leading to margin disappointment are expected to ease over the
next 2 quarters owing to- (A) Revival of domestic sub-station ordering led
by PGCIL in 2HFY12; industrial ordering has already seen pick-up, (B)
Since Mar-q CG has been able to raise pricing in the industry segment to
counter margin impact and unexecuted orders in Nelco are less than
Rs0.5bn currently, (C) Worst impact of competition led pricing pressure
owing to Chinese/Korean entrants is behind us, in our view.
• Growth outlook beyond FY12 and fundamentals remain attractive,
maintain OW. Management outlook on growth in consumer (22-25%)
and industry segment (18-20%) remains strong and overseas segment may
still have room for margin expansion. Domestic power segment is
expected to return to high-double digit growth in FY13. CG has by far
exhibited a more efficient cost structure relative to peers in domestic T&D
and superior RoE (~32.1%).
• Our revised Mar-12 DCF based PT of Rs300 (vs. Rs345 earlier)
factors in sustainable EBIT margin of 10.8% (vs. 11.5% currently, after
factoring in weak 4Q). Our PT implies 16x FY13E P/E which we believe
appears reasonable in context of 17.1% EPS growth estimate. Stock price
declines based on risks to near-term growth, or leadership change in CG
are opportunities to buy, in our view. Macro factors resulting in push-back
of order inflow recovery beyond 2HFY11, and sharp commodity price
inflation are key risks to PT and margins.
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