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Crompton Greaves Limited
▼ Underweight
Previous: Overweight
CROM.BO, CRG IN
Transition pain or transitory pain? Downgrade to UW
CG’s consistent healthy operational performance and margin track record over
several consecutive quarters in the past was the key underpin to our OW call.
Previous management’s ability to meet and surprise the Street on profitability had
given its guidance high credibility. Two disappointing quarters in succession,
accompanied by a sharp deterioration of business outlook without any forewarning,
have undermined this confidence. Equally sharp earning cuts imply that even after
a 27% correction over the last two days, the stock is trading expensively at 20x
FY12E EPS. We downgrade to UW.
We cut FY12E EPS by 44% and FY13E by 36%. New management cited intense
competition, pricing and RM cost pressures for the sharp step-down in previous
margin guidance (by ~350-550bps). This led the negative surprise and our revised
FY12 estimates imply 10% consolidated top-line growth and ~450bps lower margin
of ~9%. There appears to be a significant shift in RoE, which has consistently
been above 30% for the past 10 consecutive years, to <20%. From management
commentary, we infer that beyond FY12, too, the margins are likely to remain well
below historical levels. In our view, near-term quarterly results could remain
strained and drive stock underperformance. Jun-q order inflows declined ~18%
YoY; expectation of a recovery appears more back ended.
Not too late, it’s expensive even now. At CMP, CG is trading at 20x FY12E EPS.
Pre-estimate cuts, over the last three years the stock has traded at 14.5x avg. oneyear
forward P/E. In the early part of the decade, the market gave CG single digit
multiples- the re-rating was led by credibility built by ex-MD and superior
operational performance. BHEL (BHEL.BO, Rs1,956.15, OW), which offers
significantly higher assurance on near-term growth, is trading at 14.2x FY12E EPS.
Revised Mar-12 DCF-based PT of Rs135 (vs. Rs300 earlier), implies 15x FY12E
EPS vs. 18.75x earlier - we expect a sharp deterioration of profitability to lead the
P/E de-rating. We recommend a switch to Siemens India (SIEM.BO, Rs916.55,
OW) within the T&D space, industry and domestic power segment growth of CG in
Jun-q has been relatively strong. Healthy order inflow growth in the near term, or a
‘guidance’ upgrade could be an upside risk to PT and estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Crompton Greaves Limited
▼ Underweight
Previous: Overweight
CROM.BO, CRG IN
Transition pain or transitory pain? Downgrade to UW
CG’s consistent healthy operational performance and margin track record over
several consecutive quarters in the past was the key underpin to our OW call.
Previous management’s ability to meet and surprise the Street on profitability had
given its guidance high credibility. Two disappointing quarters in succession,
accompanied by a sharp deterioration of business outlook without any forewarning,
have undermined this confidence. Equally sharp earning cuts imply that even after
a 27% correction over the last two days, the stock is trading expensively at 20x
FY12E EPS. We downgrade to UW.
We cut FY12E EPS by 44% and FY13E by 36%. New management cited intense
competition, pricing and RM cost pressures for the sharp step-down in previous
margin guidance (by ~350-550bps). This led the negative surprise and our revised
FY12 estimates imply 10% consolidated top-line growth and ~450bps lower margin
of ~9%. There appears to be a significant shift in RoE, which has consistently
been above 30% for the past 10 consecutive years, to <20%. From management
commentary, we infer that beyond FY12, too, the margins are likely to remain well
below historical levels. In our view, near-term quarterly results could remain
strained and drive stock underperformance. Jun-q order inflows declined ~18%
YoY; expectation of a recovery appears more back ended.
Not too late, it’s expensive even now. At CMP, CG is trading at 20x FY12E EPS.
Pre-estimate cuts, over the last three years the stock has traded at 14.5x avg. oneyear
forward P/E. In the early part of the decade, the market gave CG single digit
multiples- the re-rating was led by credibility built by ex-MD and superior
operational performance. BHEL (BHEL.BO, Rs1,956.15, OW), which offers
significantly higher assurance on near-term growth, is trading at 14.2x FY12E EPS.
Revised Mar-12 DCF-based PT of Rs135 (vs. Rs300 earlier), implies 15x FY12E
EPS vs. 18.75x earlier - we expect a sharp deterioration of profitability to lead the
P/E de-rating. We recommend a switch to Siemens India (SIEM.BO, Rs916.55,
OW) within the T&D space, industry and domestic power segment growth of CG in
Jun-q has been relatively strong. Healthy order inflow growth in the near term, or a
‘guidance’ upgrade could be an upside risk to PT and estimates.
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