Overseas worries resurface Crompton Greaves’ 3QFY15 ::HDFC Sec, report

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Overseas worries resurface Crompton Greaves’ 3QFY15 APAT of Rs 292mn was way below our est. of Rs 888mn as overseas business margin slipped into negative territory again. Domestic business performance was also below par. Commentary on the overseas business was weaker than previous quarters, with expectations of positive margins pushed back by another two-three quarters. Crompton’s domestic business is levered to industrial and urban consumer demand both of which are expected to revive strongly over FY16-17. Overseas business will continue to be a drag though, pulling down overall profitability. We reduce our FY15/16/17E EPS by 34/33/22% as we push back margin recovery in overseas business and increase tax rate assumption for FY15. We remain positive on the stock, largely due to its strong domestic franchise in both industrial and consumer segments. Retain Buy with a reduced TP of Rs 209/sh (from 230) based on 20x FY17E EPS. Our TP implies 16.5x FY17E EPS for the standalone entity.  Standalone PAT of Rs 1.27bn was slightly below estimates as power systems segment de-grew by 11%. Management attributed this to deferment of exports sales and expects to make up in Q4. Consumer business reported PAT of Rs 0.6/1.9bn (+10/12% YoY) for 3Q/9MFY15.  Overseas business OPM slipped into negative (0.7%) once again after showing some encouraging signs in the last three quarters. Management attributed this to Rs 640mn charge, which the company had to take on an order being executed from its Hungary plant. Contrary to previous quarters management commentary was weak and suggested that positive margins are still two-three quarters away.  Consistent disappointment in overseas performance has been the theme for several quarters now. Despite operational restructuring, European operations remain loss making, pointing towards bigger operational/business issues which remain unresolved. We expect overseas drag to continue in FY16/17 and act as an overhang on the stock price.  However, company’s strong domestic franchise will benefit from an expected revival in industrial capex cycle and urban consumer demand. At CMP, the stock trades at 16.7x FY16E standalone EPS which we believe is reasonable and is cheaper than peers. Retain BUY.

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http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011139