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No more defying gravity
Crompton's post-results call confirmed that the big negative surprise in
the 1Q numbers was not on account on any one-offs. Strangely, within
the space of less than a quarter, the company appears to have succumbed
to industry-wide pricing pressures in the domestic power business, seen
its European business momentum fall off and also faced a sharp
slowdown in its consumer business. We have cut our FY12-13 EPS
estimates by 23-25%, but risks remain fairly balanced. We see valuations
remaining under pressure until credibility on management guidance is
restored and downgrade the stock to U-PF with an Rs180/sh target.
Poor 1Q devoid of any one-off costs
Management clarified on the call that the sharp decline in profitability of the
domestic as well as international businesses did not reflect any one-off costs.
Per management, the domestic business witnessed a 10-12% YoY fall in
realisations due to intensified competition, while revenues in the international
business declined in constant currency terms, as demand for wind
transformers as well as distribution transformers fell in Europe. Consumer
segment reported flat revenues (cf.20-26% YoY growth in FY10-11),
indicating that high inflation might have started to hurt consumer spending
power. International subsidiaries’ revenues were also hit by deferral of
deliveries to Africa and the Middle East on account of political disturbances.
Guidance slashed; we cut our FY12-13 EPS by 23-25%
Management slashed its earlier FY12 guidance of 12-15% constant currency
revenue growth and flat margins to 10-12% revenue growth and 4-6ppt
margin contraction; we find this difficult to reconcile with their expectation
that FY12 net profit will be in line with FY11. We cut our FY12-13 EPS by 23-
30% to reflect slower revenue growth and lower Ebitda margin across
international and domestic businesses. While there is indeed potential for
uptrend in revenues of the domestic power and consumer businesses as well
as revival in dispatches to MENA in 2H, our numbers build this in to a large
extent and risks to these EPS earnings remain equally balanced.
Confidence deficit; downgrade to U-PF
While the stock has had a significant 30% fall post 1Q results, this largely
reflects the extent of reset in earnings. Amidst the challenging backdrop of
uncertainty in Europe and high competitive pressures locally, the loss of
confidence in management guidance (provided as late as end-May) will, in
our view, weigh on valuations of the stocks - still at a premium to BHEL. We
cut our target multiple to 13x FY13 PE (from 15x) to arrive at an Rs180/sh
target and downgrade to U-PF. We will await evidence of a strong recovery in
the key businesses for any change in stance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
No more defying gravity
Crompton's post-results call confirmed that the big negative surprise in
the 1Q numbers was not on account on any one-offs. Strangely, within
the space of less than a quarter, the company appears to have succumbed
to industry-wide pricing pressures in the domestic power business, seen
its European business momentum fall off and also faced a sharp
slowdown in its consumer business. We have cut our FY12-13 EPS
estimates by 23-25%, but risks remain fairly balanced. We see valuations
remaining under pressure until credibility on management guidance is
restored and downgrade the stock to U-PF with an Rs180/sh target.
Poor 1Q devoid of any one-off costs
Management clarified on the call that the sharp decline in profitability of the
domestic as well as international businesses did not reflect any one-off costs.
Per management, the domestic business witnessed a 10-12% YoY fall in
realisations due to intensified competition, while revenues in the international
business declined in constant currency terms, as demand for wind
transformers as well as distribution transformers fell in Europe. Consumer
segment reported flat revenues (cf.20-26% YoY growth in FY10-11),
indicating that high inflation might have started to hurt consumer spending
power. International subsidiaries’ revenues were also hit by deferral of
deliveries to Africa and the Middle East on account of political disturbances.
Guidance slashed; we cut our FY12-13 EPS by 23-25%
Management slashed its earlier FY12 guidance of 12-15% constant currency
revenue growth and flat margins to 10-12% revenue growth and 4-6ppt
margin contraction; we find this difficult to reconcile with their expectation
that FY12 net profit will be in line with FY11. We cut our FY12-13 EPS by 23-
30% to reflect slower revenue growth and lower Ebitda margin across
international and domestic businesses. While there is indeed potential for
uptrend in revenues of the domestic power and consumer businesses as well
as revival in dispatches to MENA in 2H, our numbers build this in to a large
extent and risks to these EPS earnings remain equally balanced.
Confidence deficit; downgrade to U-PF
While the stock has had a significant 30% fall post 1Q results, this largely
reflects the extent of reset in earnings. Amidst the challenging backdrop of
uncertainty in Europe and high competitive pressures locally, the loss of
confidence in management guidance (provided as late as end-May) will, in
our view, weigh on valuations of the stocks - still at a premium to BHEL. We
cut our target multiple to 13x FY13 PE (from 15x) to arrive at an Rs180/sh
target and downgrade to U-PF. We will await evidence of a strong recovery in
the key businesses for any change in stance.
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