Crompton Greaves - Turnaround Caught in a Bind; Result Update Q3FY15 :Edelweiss

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Twin blows of double digit dip in domestic power business and flattish overseas power sales (adjusted for currency) took a heavy toll on Crompton Greaves’ (CRG) Q3FY15 revenue. Moreover, re-work on a large power transformer project in Hungary costing INR640mn due to technical specifications added fuel to fire. We believe the overseas power business turnaround will take some time given sustained re-work cost issues in Hungary and risks in Canada. We cut FY15E and FY16E earnings 46% and 35%, respectively, building in higher losses and tax rate, and downgrade to ‘HOLD’ in light of sustained losses in overseas business and weak domestic demand in power and industrial segments. We roll forward to FY17E earnings with a revised target price of INR185 valuing CRG at 16x.

Fresh issues in Hungary, tepid power sales dent performance

CRG reported re-work cost of INR640mn in a large EUR17mn transformer project, which escalated costs, contributing to a sharp jump in overseas loss. Management expects this issue to sustain for the next 2 quarters. The company’s total outstanding legacy order in Hungary stands at EUR20mn. Also, weak exports off-take in domestic power business (down 50% YoY) coupled with flattish overseas power business was a key negative for the quarter.

Poor near-term recovery outlook clouds revenue visibility

While CRG reported 9mFY15 order intake of INR78bn (up mere 2.8% YoY), order book plummeted 13% YoY to INR86.7bn. With limited visibility of a broad-based recovery in power and industrial segments, we foresee near-term growth challenges for CRG.

LINK
https://www.edelweiss.in/research/Crompton-Greaves--Turnaround-Caught-in-a-Bind;-Result-Update-Q3FY15/28235.html