Crompton Greaves: Slowly getting back in shape:: Kotak Sec, report link

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
Slowly getting back in shape. Crompton has used the slowdown to recalibrate its
businesses – (1) domestic power has widened its geographical reach, launched products
in higher kV range, gained new pre-qualifications, (2) overseas power has undertaken
restructuring and increased its exposure to higher-margin automation and EMEA
systems business and (3) industrial business is prepared with new factories and products
to meet the global requirements. A likely confluence of domestic and overseas
improvements should lead to stock outperformance.

Domestic power: realigns its business for enhanced profitable growth
The company has used the slowdown to realign its business for enhanced profitable growth:
(1) widened its geographical reach (power BU export at `8 bn in FY2014 versus `5 bn in
FY2012; exports share at 26% in 1HFY15), (2) launched/improved products in higher kV range
(sales at `4.3 bn in FY2014 versus `2.9 bn in FY2012), which will help decrease contribution
from lower-margins areas, and (3) gained new pre-qualifications. That said, given the business
dynamics, it needs to increase its outlay in capacity (running at high utilization) and R&D to
grow the business/generate value.
Overseas power: a gradual path to recovery
The company has taken several steps to turn around the overseas power business: (1) plants
restructuring with net cost savings of ~200 bps (Exhibit 4), (2) increasing sales contribution from
higher-margin automation (sales of `7 bn in FY2014 versus negligible in FY2012 with 8-10%
EBITDA margin) and EMEA systems businesses (backlog at EUR153 mn), and (3) better margins
in recently booked orders. We expect a return to positive EBIT (1.8% in FY2016E and 3.2% in
FY2017E), which will magnify the consolidated financial improvement and can help further rerate
the stock.
Industrial: capex revival and launch of new products to drive growth
CRG has used the downturn to improve internal processes and invest in the business (set two
new factories, including LV drives), which will allow it to sell best-in-class motors and drives to
the global markets. We expect a pick-up in sales from FY2016 onwards, led by demand uptick
in capex-led sectors (oil & gas, cement, metals), pick-up in railways and higher exports.
Consumer: to be a consistent performer; continued overseas loss is a key risk to our call
The consumer business will continue to command premium valuations led by (1) its strong
position in key segments (fans, lightings, pumps) led by strong brand recall and increasing
distribution penetration, (2) medium-term market sales growth potential of 12-15%, (3) very
high RoCE (products sourced through vendors at ~60%) and high free cash-flow generation.
Key downside risks to our call are (1) overseas EBIT losses continuing beyond FY2015, (2)
slower-than-expected recovery in the industrial business. We revise EPS estimates to `5.7, `9.2
and `13.1 from `5.5, `10.6 and `15.4 for FY2015, FY2016 and FY2017 (Exhibit 35).

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily26122014ao.pdf