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UBS Investment Research
Crompton Greaves Ltd
T &D companies: weak results continue
Event: weak numbers continue from T&D equipment manufacturers
In our note, Crompton Greaves: Domestic T&D environment remains weak,
published on 1 August 2011, we highlighted that apart from Crompton Greaves,
T&D equipment companies such as Transformers & Rectifiers (India) and Bharat
Bijlee (both non-covered companies) reported weak April-June quarter results. We
think this trend has continued with results such as those of ABB (Sell), Areva (a
non-covered company) and Emco (a non-covered company).
Impact: strong headwinds in domestic T&D equipment space
Our channel checks suggest that Indian T&D manufacturers are facing severe
competition from overseas manufacturers and this has led to a structural decline in
business profitability. We also believe that this trend may continue in the near
term. In Crompton’s results as well, the domestic power systems business faced
significant pressure on revenue growth and margins (from 16.6% in 1Q FY11 to
12.6% EBIT in 1Q FY12 and YoY revenue growth of just 11%).
Action: no near-term triggers on key businesses, maintain Sell rating
We believe that Crompton’s 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. Since these two businesses contribute
~85% of revenue, we think investor sentiment may remain negative on the stock.
Valuation: DCF-based price target of Rs160
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
13.2%.
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
T &D companies: weak results continue
Event: weak numbers continue from T&D equipment manufacturers
In our note, Crompton Greaves: Domestic T&D environment remains weak,
published on 1 August 2011, we highlighted that apart from Crompton Greaves,
T&D equipment companies such as Transformers & Rectifiers (India) and Bharat
Bijlee (both non-covered companies) reported weak April-June quarter results. We
think this trend has continued with results such as those of ABB (Sell), Areva (a
non-covered company) and Emco (a non-covered company).
Impact: strong headwinds in domestic T&D equipment space
Our channel checks suggest that Indian T&D manufacturers are facing severe
competition from overseas manufacturers and this has led to a structural decline in
business profitability. We also believe that this trend may continue in the near
term. In Crompton’s results as well, the domestic power systems business faced
significant pressure on revenue growth and margins (from 16.6% in 1Q FY11 to
12.6% EBIT in 1Q FY12 and YoY revenue growth of just 11%).
Action: no near-term triggers on key businesses, maintain Sell rating
We believe that Crompton’s 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. Since these two businesses contribute
~85% of revenue, we think investor sentiment may remain negative on the stock.
Valuation: DCF-based price target of Rs160
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
13.2%.
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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