Crompton Greaves India- U-turn for the worse ::Macquarie Research

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Crompton Greaves India
U-turn for the worse
Event
 The 1Q FY12 conference call failed to provide any relief from the
disappointing quarterly results. Management has substantially cut guidance
for FY12 when previously the outlook was supposed to be much better as late
as early June. We have cut our earnings estimates by 34–38% and target
price to Rs158 (from Rs347). We believe the stock will remain under pressure
until we have clarity on FY12 numbers and hence, we downgrade to
Underperform from Outperform.
Impact
 U–turn on guidance raises uncertainity: Crompton’s management lowered
guidance (8–10% EBITDA margin from ~13% earlier guidance and revenue
guidance of 10–12% vs ~15% earlier). We believe the sharp cut in guidance in
a matter of six weeks is surprising, especially when the company had painted a
much better picture in early June. In our opinion, this puts management’s
credibility at stake. We were blind-sided by the consistent delivery on guidance
for the last four years. Events like aircraft purchase and the sale of shares by
the ex-CEO before earnings have added to our concerns.
 Difficult to reconcile revenue and earnings guidance: Earnings growth
with 30% cut in EBITDA guidance is difficult to reconcile in the absence of any
clarity on levers below the operating level, which could help boost earnings.
CRG’s guidance of margin improvement in most segments and yet, EBITDA
margin of 8–10% (against 1QFY12 margin of 7.5%) does not add together, in
our view.
 Overseas revenues pickup critical for margin revival: Overseas revenues
were lower by Rs2.5bn due to delay in shipments to politically unstable Libya.
Management’s expectation of reversing operating loss in 1QFY12 in overseas
subsidiaries is contingent on revenue growth (which has been scaled down to
5% from 12–15% earlier) with bigger push in Western Europe.
 Order inflow in domestic power more crucial than ever: Order inflow in
domestic power is becoming critical for delivering revenue growth as other
businesses slow down sharply. The company expects pickup in orders only
towards 2H FY12.
Earnings and target price revision
 We lower our FY12/13 EPS by 38% and 34% mainly driven by revenue and
margin cut. Our revised target price is Rs158 (previously Rs347).
Price catalyst
 12-month price target: Rs158.00 based on a PER methodology.
 Catalyst: Slippage on revised revenue and margin guidance.
Action and recommendation
 Downgrade to Underperform on uncertainty: In our view, the company
needs to deliver on numbers before investor confidence on guidance revives.
We downgrade the stock to Underperform with a revised target price of Rs158
based on 15x FY12 earnings.