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Crompton Greaves (CRG)
Industrials
Weak numbers across the board but improvement possible hereon. CG reported
weak numbers with standalone revenue growth of 9% (on weak consumer sales) and
margin contraction of 230 bps (led by power, industrial segments). Potential one-offs in
overseas subsidiaries further marred consolidated results. However, improvement may be
possible with absence of one-offs and pick-up in domestic business. The stock may not be
a sell at present levels as valuations appear reasonable even in stress-case earnings.
Numbers disappoint across the board led by weak consumer revenues and power margins
Crompton reported consolidated revenue growth of 6% yoy (7% below estimates) and sharp
margin contraction (550 bps). Sedate consumer sales led the revenue disappointment while power
and industrial segments led the margin contraction. Potential one-offs in overseas subsidiaries
further marred results. Reported net PAT of Rs778 mn was down 58% yoy (estimate of Rs2.1 bn).
Demand weakness exacerbated by price hikes; seasonal factors may have marred consumer sales
Crompton reported weak consumer segment revenues of Rs5.4 bn, recording a marginal growth
of 2.2% yoy, about 11% below our estimates. The lower-than-expected revenues were likely led
by broad demand weakness across consumer segments, further exacerbated by (1) price
escalations and (2) seasonal factors such as lighter summer and early onset of monsoon (about
47% of annual consumer revenues are from fans alone).
Power: Possible one-offs in overseas subsidiaries and domestic competitive intensity impact results
The power segment reported consolidated revenues growth of 4% and low EBIT margins of 2.6%.
Overseas subsidiary business. We believe that overseas revenue growth (1% yoy despite
favorable currency of about 6%) and profitability were impacted by certain one-offs such as
quality issues, cost escalations in certain orders, slowdown in wind energy market, customers
delaying deliveries of orders and slowdown in MENA region.
Standalone power. Lower profitability in standalone power was likely led by excessive
competitive intensity and investment demand slowdown.
Sensitivity: Stock may not be a sell at current levels; retain estimates, rating
The stock may not be a sell at current levels (post sharp correction) as even in stress case as per 1Q
segmental numbers and ignoring possible one-off in overseas, it would be trading at 13-14X
FY2013E EPS. Retain estimates and TP (Rs310) for now; would revisit post today’s conference call.
Results reflect weak demand environment across industrial, infrastructure, consumer businesses
Results reflect weak demand environment across industrial, infrastructure and consumer business
segments implying weakness for other peer industrial companies such as Thermax, Voltas and L&T
1QFY12 results: Revenue underperformance exacerbated by margin contraction
Crompton reported consolidated revenues of Rs24.4 bn in 1QFY12 recording a yoy growth
of about 6%, about 7% below our estimates. The revenue disappointment was further
exacerbated by sharp margins contraction - EBITDA margin recorded a sharp decline of 550
bps yoy in 1QFY12 to 7.5% versus our estimate of 15% (down 540 bps on sequential basis
as well). The sharp decline in margin was led by higher raw material costs as a percentage of
sales. Higher tax rate for the quarter (of 38%) led to a net PAT of Rs778 mn, down 58% yoy
(from Rs1.9 bn in 1QFY11), versus our estimate of Rs2.1 bn.
Standalone: Revenues miss on weak consumer sales; power, industrial segments
drag margin down
Crompton reported 1QFY12 standalone revenues of Rs14.7 bn, up 9.4% yoy and about 3%
lower than our expectation of Rs15 bn. EBITDA margin declined by about 230 bps yoy to
12.7% on account of higher raw material cost as percentage of sales, versus out estimate of
15%. Sharp margin contraction led to an 11% yoy decline in standalone EBITDA. Crompton
reported standalone net PAT of Rs1.3 bn in 1QFY12, down 9% yoy and about 15% below
our estimates.
Revenues weak on consumer segment while power and industrials drag margins
We highlight that standalone revenue disappointment was led by consumer segment sales
while power and industrial segments led the margin contraction.
Power systems. This segment reported revenues of Rs5.7 bn, up 11.5% yoy and about
7.2% ahead of our estimates. Growth was likely to be partially aided by low base effect
(reported flat power segment revenues in 1QFY11). This segment, however, reported
sharp margin contraction (EBIT margin) to 12.6% in 1QFY12 versus our estimate of flat
yoy margins - reported margin of 16.6% in 1QFY11 and 18% in 4QFY11. We believe that
the low profitability in the power segment was likely led by excessive competitive intensity
(leading to pricing pressure) and demand slowdown (from private and industrial utilities)
in the domestic T&D segment.
Industrials systems. The industrials systems segment reported a strong revenue growth
of 16% yoy to Rs3.6 bn (marginally below estimates). However, profitability of this
segment took a hit with EBIT margins of 15.9% from 1QFY11 levels of 20.6% likely on
the back of higher input costs.
Consumer products. Crompton reported sedate consumer segment revenues of Rs5.4
bn, relatively flat (up 2.2%) on a yoy basis versus our expectation of a strong growth of
15% in this segment. Broad demand slowdown in the consumer segment may have been
further exacerbated by (1) price escalations - Crompton had taken three price increases in
motors and pumps of about 5-6% each over March-June and (2) seasonal factors such as
milder summer and early onset of monsoons - note that about 47% of Crompton’s
consumer business is from fans alone. Price escalation in fans was done but needed to be
rolled back based on demand weakness affecting margins and growth.
Stock may not be a sell at current levels
We believe that the stock may not further underperform from current levels. Even if we
build in assumptions implied in the reported standalone and overseas segments in the
current quarter, Crompton may still have an EPS of about Rs15-16 in FY2013E. This is versus
our current projection of about Rs18. This would imply valuations of about 13-14X FY2013E
EPS at current trading levels and thus we do would not suggest selling at current levels. The
key assumptions include:
Decline in standalone power segment margins to about 14% versus 18% reported in
FY2011 (our present assumption of 16.5%) with 5% and 15% growth FY2012E and
FY2013E,
Consumer revenue growth of 5% and 10% in FY2012E and FY2013E, respectively (versus
25% growth in FY2011) with 14% margins,
Industrial segment revenue growth of 15% with 16% EBIT margins (19% reported in
FY2011), and
5% and 10% revenue growth in overseas business in FY2012E and FY2013E, respectively
with relatively flat margins (assuming this quarter’s overseas loss is a one-off).
Key risks to earnings relate to (1) aggressive competition and large capacity additions in the
domestic power T&D segment may pressure revenue growth and margins, and (2) slowerthan-
expected pick-up in international demand, (3) Euro area business (17% of business)
and Euro currency (translation), and (4) change in guard at the top.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Crompton Greaves (CRG)
Industrials
Weak numbers across the board but improvement possible hereon. CG reported
weak numbers with standalone revenue growth of 9% (on weak consumer sales) and
margin contraction of 230 bps (led by power, industrial segments). Potential one-offs in
overseas subsidiaries further marred consolidated results. However, improvement may be
possible with absence of one-offs and pick-up in domestic business. The stock may not be
a sell at present levels as valuations appear reasonable even in stress-case earnings.
Numbers disappoint across the board led by weak consumer revenues and power margins
Crompton reported consolidated revenue growth of 6% yoy (7% below estimates) and sharp
margin contraction (550 bps). Sedate consumer sales led the revenue disappointment while power
and industrial segments led the margin contraction. Potential one-offs in overseas subsidiaries
further marred results. Reported net PAT of Rs778 mn was down 58% yoy (estimate of Rs2.1 bn).
Demand weakness exacerbated by price hikes; seasonal factors may have marred consumer sales
Crompton reported weak consumer segment revenues of Rs5.4 bn, recording a marginal growth
of 2.2% yoy, about 11% below our estimates. The lower-than-expected revenues were likely led
by broad demand weakness across consumer segments, further exacerbated by (1) price
escalations and (2) seasonal factors such as lighter summer and early onset of monsoon (about
47% of annual consumer revenues are from fans alone).
Power: Possible one-offs in overseas subsidiaries and domestic competitive intensity impact results
The power segment reported consolidated revenues growth of 4% and low EBIT margins of 2.6%.
Overseas subsidiary business. We believe that overseas revenue growth (1% yoy despite
favorable currency of about 6%) and profitability were impacted by certain one-offs such as
quality issues, cost escalations in certain orders, slowdown in wind energy market, customers
delaying deliveries of orders and slowdown in MENA region.
Standalone power. Lower profitability in standalone power was likely led by excessive
competitive intensity and investment demand slowdown.
Sensitivity: Stock may not be a sell at current levels; retain estimates, rating
The stock may not be a sell at current levels (post sharp correction) as even in stress case as per 1Q
segmental numbers and ignoring possible one-off in overseas, it would be trading at 13-14X
FY2013E EPS. Retain estimates and TP (Rs310) for now; would revisit post today’s conference call.
Results reflect weak demand environment across industrial, infrastructure, consumer businesses
Results reflect weak demand environment across industrial, infrastructure and consumer business
segments implying weakness for other peer industrial companies such as Thermax, Voltas and L&T
1QFY12 results: Revenue underperformance exacerbated by margin contraction
Crompton reported consolidated revenues of Rs24.4 bn in 1QFY12 recording a yoy growth
of about 6%, about 7% below our estimates. The revenue disappointment was further
exacerbated by sharp margins contraction - EBITDA margin recorded a sharp decline of 550
bps yoy in 1QFY12 to 7.5% versus our estimate of 15% (down 540 bps on sequential basis
as well). The sharp decline in margin was led by higher raw material costs as a percentage of
sales. Higher tax rate for the quarter (of 38%) led to a net PAT of Rs778 mn, down 58% yoy
(from Rs1.9 bn in 1QFY11), versus our estimate of Rs2.1 bn.
Standalone: Revenues miss on weak consumer sales; power, industrial segments
drag margin down
Crompton reported 1QFY12 standalone revenues of Rs14.7 bn, up 9.4% yoy and about 3%
lower than our expectation of Rs15 bn. EBITDA margin declined by about 230 bps yoy to
12.7% on account of higher raw material cost as percentage of sales, versus out estimate of
15%. Sharp margin contraction led to an 11% yoy decline in standalone EBITDA. Crompton
reported standalone net PAT of Rs1.3 bn in 1QFY12, down 9% yoy and about 15% below
our estimates.
Revenues weak on consumer segment while power and industrials drag margins
We highlight that standalone revenue disappointment was led by consumer segment sales
while power and industrial segments led the margin contraction.
Power systems. This segment reported revenues of Rs5.7 bn, up 11.5% yoy and about
7.2% ahead of our estimates. Growth was likely to be partially aided by low base effect
(reported flat power segment revenues in 1QFY11). This segment, however, reported
sharp margin contraction (EBIT margin) to 12.6% in 1QFY12 versus our estimate of flat
yoy margins - reported margin of 16.6% in 1QFY11 and 18% in 4QFY11. We believe that
the low profitability in the power segment was likely led by excessive competitive intensity
(leading to pricing pressure) and demand slowdown (from private and industrial utilities)
in the domestic T&D segment.
Industrials systems. The industrials systems segment reported a strong revenue growth
of 16% yoy to Rs3.6 bn (marginally below estimates). However, profitability of this
segment took a hit with EBIT margins of 15.9% from 1QFY11 levels of 20.6% likely on
the back of higher input costs.
Consumer products. Crompton reported sedate consumer segment revenues of Rs5.4
bn, relatively flat (up 2.2%) on a yoy basis versus our expectation of a strong growth of
15% in this segment. Broad demand slowdown in the consumer segment may have been
further exacerbated by (1) price escalations - Crompton had taken three price increases in
motors and pumps of about 5-6% each over March-June and (2) seasonal factors such as
milder summer and early onset of monsoons - note that about 47% of Crompton’s
consumer business is from fans alone. Price escalation in fans was done but needed to be
rolled back based on demand weakness affecting margins and growth.
Stock may not be a sell at current levels
We believe that the stock may not further underperform from current levels. Even if we
build in assumptions implied in the reported standalone and overseas segments in the
current quarter, Crompton may still have an EPS of about Rs15-16 in FY2013E. This is versus
our current projection of about Rs18. This would imply valuations of about 13-14X FY2013E
EPS at current trading levels and thus we do would not suggest selling at current levels. The
key assumptions include:
Decline in standalone power segment margins to about 14% versus 18% reported in
FY2011 (our present assumption of 16.5%) with 5% and 15% growth FY2012E and
FY2013E,
Consumer revenue growth of 5% and 10% in FY2012E and FY2013E, respectively (versus
25% growth in FY2011) with 14% margins,
Industrial segment revenue growth of 15% with 16% EBIT margins (19% reported in
FY2011), and
5% and 10% revenue growth in overseas business in FY2012E and FY2013E, respectively
with relatively flat margins (assuming this quarter’s overseas loss is a one-off).
Key risks to earnings relate to (1) aggressive competition and large capacity additions in the
domestic power T&D segment may pressure revenue growth and margins, and (2) slowerthan-
expected pick-up in international demand, (3) Euro area business (17% of business)
and Euro currency (translation), and (4) change in guard at the top.
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