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UBS Investment Research
Crompton Greaves Ltd
S trong headwinds remain
Event: CG has delivered very poor Q1 FY12 results
In Q1 FY12, Crompton Greaves (CG) delivered very weak numbers as reported
PAT declined 58% YoY to Rs795m. The results were significantly below UBS and
consensus estimates. During the conference call organised today, the company also
guided for a weak FY12. As per the company, EBITDA could be in the range of 8-
10%; on sales, the company’s guidance is 10-12% YoY growth for FY12.
Impact: key segments under pressure, margins may decline significantly
We believe the key segments of power systems and consumer products (contribute
85% of revenues) have disappointed in Q1 FY12. The power systems business in
both the overseas and domestic markets is struggling and there is also no clarity in
the near term on the revival of the consumer products business. The company
highlighted that Q2 FY12 is also likely to be a difficult quarter, but the situation
may improve in H2 FY12 if there is a positive change in the Middle East and India.
Action: we lower our EPS estimates 34%/27% for FY12/13
We think the best-case company guidance (12% YoY revenue growth and 10%
margins for FY12) may be achievable. However, factoring this, we still have
lowered our EPS estimates to Rs10.7/13.5 for FY12/13.
Valuation: maintain Sell; new price target of Rs160 (was Rs240)
We lower our price target 33% to Rs160 on the lower estimates. We derive our
price target from a DCF-based methodology and explicitly forecast long-term
valuation drivers using UBS’s VCAM tool. Our price target assumes a WACC of
13.2%.
We lower our EPS estimates
Following the Q1 FY12 results release yesterday, CG organised a conference
call today. During the conference call, the company guided for a weak FY12 on
slower demand and competitive pressure. As per the company, FY12 EBITDA
could be in the range of 8-10% (vs. 13.4% in FY11) and on sales, the company’s
guidance is 10-12% YoY growth for FY12 (vs. 10% in FY11).
We believe that our estimates are on the higher side of management guidance
and that if the power systems and consumer products businesses do not see a
turnaround, there could be downside to our earnings.
Price target lowered 33%
We lower our price target 33% from Rs240 to Rs160 due to:
change in our near-term estimates e.g. revenues and margins
change in our long-term margin estimates (by 1% over FY16-20E, FY21-
25E and FY26-30E) e.g. from 10.5% to 9.5% for FY16-20.
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. Our key
assumptions are:
VCAM with explicit forecasts to FY15, three five-year intermediate phases
from FY16-30, and a terminal phase thereafter.
Cost of equity of 13.2% (a risk-free rate of 8.2%, a market risk premium of
5%, and Beta of 1.0). Cost of debt of 9.4% and debt:equity of zero. Cost of
capital of 13.2%.
Growth of 10.0%, 8.0% and 6.0% for FY16-20E, FY21-25E and FY26-30E,
and a long-term growth rate of 5.0%. We have not changed our sales growth
estimates.
Maintain Sell
We believe the extremely weak results and big reduction in FY12 guidance have
significantly affected investor sentiment. We think it would take a few quarters
of good results from the company for investor confidence to return.
The key segments of power systems and consumer products have disappointed
in Q1 FY12. The power systems business is struggling in both the overseas and
domestic markets. Also, there is no clarity in the near term on the revival of the
consumer products business.
The stock has already corrected 30% in the last five sessions. However, we
maintain our Sell rating (the current market price implies 16.8x FY12E EPS and
13.5x FY13E EPS) as we think there could be further downside. We also think
that the street will have significant estimate downgrades on this stock.
Conference call: key highlights
Overseas business
The volatile situation in the Middle East is responsible for the decline in
margins and poor revenue growth. However, there is higher opportunity in
traditional markets (Western Europe) such as offshore wind transformers and
distribution transformers.
In general, the activity has slowed down in most of the overseas markets.
Volumes are not coming through and there is pricing pressure. The company
believes this is only a short-term phenomenon. The outlook for overseas
business is for 8-9% growth in FY12, 5-7% in Euro terms. Rs9.68bn is
overseas revenues, some revenue got deferred (~Rs2bn).
Domestic power business
Increased competitive pressure is leading to lower profitability. However,
CG is a low-cost producer as well. But, pricing cut is more than what can be
managed.
12.6% margins in this quarter, but management believes that it is perhaps
seeing the bottom. Chinese and Korean companies are competing very
aggressively. Orders from PGCIL have declined as of now. However, this
issue is largely related to timing or order awards.
Consumer products business
Inflation and interest rate hike have taken a toll on the demand and
consumption pattern.
On the impact of the price hike in April, there is no direct correlation
between volume decline and price hike, according to the company.
Industrial business
The business is doing well with good revenue growth and profitability.
95% of old unexecuted Nelco orders have been completed.
Guidance
FY12 revenue growth is likely to be 10-12%.
No exceptional items in the results.
8-10% EBITDA guidance for full-year FY12
Q2 would also be difficult and things should improve starting Q3 FY12.
Others
There has been a slowdown in orders for the wind business in Europe.
However, the working hours’ cut in Europe is temporary.
Optimistic on the consumer products business. Overall, in FY13, the
company expects to go back to margins that have been recorded in the past
(if the global situation improves).
Realizations have dropped 10-12% on an average due to competition.
CG: disappointing Q1 FY12
In our view, there are three key points in the results:
a) Disappointing performance in the overseas market for Power Systems,
b) Virtually no growth in revenues for Consumer products,
c) Significant increase in Raw material costs as a proportion of sales.
In Q1 FY12;
CG’s operating income of Rs24.4bn was up 6% YoY;
EBITDA margins declined 545bp YoY due to higher raw material cost;
Reported PAT declined 58% YoY to Rs795m;
PAT is significantly below UBS and consensus estimates.
Crompton Greaves Ltd
Crompton Greaves (CG) is one of the largest engineering companies in India.
Part of the Avantha Group, CG has three main businesses - power systems,
consumer products, and industrial systems - nearly two-thirds of sales come
from electrical products. CG has 22 manufacturing divisions spread across India,
and a large customer base that includes state electricity boards and large
companies in the private and public sectors. CG has a significant presence in
overseas markets through its acquisitions; Pauwels (2005), Ganz (2006),
Microsol (2007), Sonomatra (2008), MSE Power Systems (2008), and PTS
(2010).
Statement of Risk
We believe the key upside risks to our Sell rating on CG are: 1) a pick-up in
order activity at Power Grid and SEBs; 2) increased government focus; 3)
margin expansion; and 4) a better-than-expected performance in overseas
markets. We think the key downside risks for the company are: 1) competition;
2) delays in power generation projects; 3) rising raw material prices; 4) a
slower-than-expected recovery in government spending and industrial activity;
5) a slowdown in the international business; and 6) a decline in EBITDA margin.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Crompton Greaves Ltd
S trong headwinds remain
Event: CG has delivered very poor Q1 FY12 results
In Q1 FY12, Crompton Greaves (CG) delivered very weak numbers as reported
PAT declined 58% YoY to Rs795m. The results were significantly below UBS and
consensus estimates. During the conference call organised today, the company also
guided for a weak FY12. As per the company, EBITDA could be in the range of 8-
10%; on sales, the company’s guidance is 10-12% YoY growth for FY12.
Impact: key segments under pressure, margins may decline significantly
We believe the key segments of power systems and consumer products (contribute
85% of revenues) have disappointed in Q1 FY12. The power systems business in
both the overseas and domestic markets is struggling and there is also no clarity in
the near term on the revival of the consumer products business. The company
highlighted that Q2 FY12 is also likely to be a difficult quarter, but the situation
may improve in H2 FY12 if there is a positive change in the Middle East and India.
Action: we lower our EPS estimates 34%/27% for FY12/13
We think the best-case company guidance (12% YoY revenue growth and 10%
margins for FY12) may be achievable. However, factoring this, we still have
lowered our EPS estimates to Rs10.7/13.5 for FY12/13.
Valuation: maintain Sell; new price target of Rs160 (was Rs240)
We lower our price target 33% to Rs160 on the lower estimates. We derive our
price target from a DCF-based methodology and explicitly forecast long-term
valuation drivers using UBS’s VCAM tool. Our price target assumes a WACC of
13.2%.
We lower our EPS estimates
Following the Q1 FY12 results release yesterday, CG organised a conference
call today. During the conference call, the company guided for a weak FY12 on
slower demand and competitive pressure. As per the company, FY12 EBITDA
could be in the range of 8-10% (vs. 13.4% in FY11) and on sales, the company’s
guidance is 10-12% YoY growth for FY12 (vs. 10% in FY11).
We believe that our estimates are on the higher side of management guidance
and that if the power systems and consumer products businesses do not see a
turnaround, there could be downside to our earnings.
Price target lowered 33%
We lower our price target 33% from Rs240 to Rs160 due to:
change in our near-term estimates e.g. revenues and margins
change in our long-term margin estimates (by 1% over FY16-20E, FY21-
25E and FY26-30E) e.g. from 10.5% to 9.5% for FY16-20.
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. Our key
assumptions are:
VCAM with explicit forecasts to FY15, three five-year intermediate phases
from FY16-30, and a terminal phase thereafter.
Cost of equity of 13.2% (a risk-free rate of 8.2%, a market risk premium of
5%, and Beta of 1.0). Cost of debt of 9.4% and debt:equity of zero. Cost of
capital of 13.2%.
Growth of 10.0%, 8.0% and 6.0% for FY16-20E, FY21-25E and FY26-30E,
and a long-term growth rate of 5.0%. We have not changed our sales growth
estimates.
Maintain Sell
We believe the extremely weak results and big reduction in FY12 guidance have
significantly affected investor sentiment. We think it would take a few quarters
of good results from the company for investor confidence to return.
The key segments of power systems and consumer products have disappointed
in Q1 FY12. The power systems business is struggling in both the overseas and
domestic markets. Also, there is no clarity in the near term on the revival of the
consumer products business.
The stock has already corrected 30% in the last five sessions. However, we
maintain our Sell rating (the current market price implies 16.8x FY12E EPS and
13.5x FY13E EPS) as we think there could be further downside. We also think
that the street will have significant estimate downgrades on this stock.
Conference call: key highlights
Overseas business
The volatile situation in the Middle East is responsible for the decline in
margins and poor revenue growth. However, there is higher opportunity in
traditional markets (Western Europe) such as offshore wind transformers and
distribution transformers.
In general, the activity has slowed down in most of the overseas markets.
Volumes are not coming through and there is pricing pressure. The company
believes this is only a short-term phenomenon. The outlook for overseas
business is for 8-9% growth in FY12, 5-7% in Euro terms. Rs9.68bn is
overseas revenues, some revenue got deferred (~Rs2bn).
Domestic power business
Increased competitive pressure is leading to lower profitability. However,
CG is a low-cost producer as well. But, pricing cut is more than what can be
managed.
12.6% margins in this quarter, but management believes that it is perhaps
seeing the bottom. Chinese and Korean companies are competing very
aggressively. Orders from PGCIL have declined as of now. However, this
issue is largely related to timing or order awards.
Consumer products business
Inflation and interest rate hike have taken a toll on the demand and
consumption pattern.
On the impact of the price hike in April, there is no direct correlation
between volume decline and price hike, according to the company.
Industrial business
The business is doing well with good revenue growth and profitability.
95% of old unexecuted Nelco orders have been completed.
Guidance
FY12 revenue growth is likely to be 10-12%.
No exceptional items in the results.
8-10% EBITDA guidance for full-year FY12
Q2 would also be difficult and things should improve starting Q3 FY12.
Others
There has been a slowdown in orders for the wind business in Europe.
However, the working hours’ cut in Europe is temporary.
Optimistic on the consumer products business. Overall, in FY13, the
company expects to go back to margins that have been recorded in the past
(if the global situation improves).
Realizations have dropped 10-12% on an average due to competition.
CG: disappointing Q1 FY12
In our view, there are three key points in the results:
a) Disappointing performance in the overseas market for Power Systems,
b) Virtually no growth in revenues for Consumer products,
c) Significant increase in Raw material costs as a proportion of sales.
In Q1 FY12;
CG’s operating income of Rs24.4bn was up 6% YoY;
EBITDA margins declined 545bp YoY due to higher raw material cost;
Reported PAT declined 58% YoY to Rs795m;
PAT is significantly below UBS and consensus estimates.
Crompton Greaves Ltd
Crompton Greaves (CG) is one of the largest engineering companies in India.
Part of the Avantha Group, CG has three main businesses - power systems,
consumer products, and industrial systems - nearly two-thirds of sales come
from electrical products. CG has 22 manufacturing divisions spread across India,
and a large customer base that includes state electricity boards and large
companies in the private and public sectors. CG has a significant presence in
overseas markets through its acquisitions; Pauwels (2005), Ganz (2006),
Microsol (2007), Sonomatra (2008), MSE Power Systems (2008), and PTS
(2010).
Statement of Risk
We believe the key upside risks to our Sell rating on CG are: 1) a pick-up in
order activity at Power Grid and SEBs; 2) increased government focus; 3)
margin expansion; and 4) a better-than-expected performance in overseas
markets. We think the key downside risks for the company are: 1) competition;
2) delays in power generation projects; 3) rising raw material prices; 4) a
slower-than-expected recovery in government spending and industrial activity;
5) a slowdown in the international business; and 6) a decline in EBITDA margin.
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