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[mehak1]

Company Description

Mumbai-based CGL, a part of the B M Thapar group, is a pioneer in management and application of electrical energy. It is primarily engaged in designing, manufacturing, and marketing high-technology electrical products and services related to power generation, transmission, distribution, and executing turnkey projects. The company’s business comprises three segments viz. power systems, industrial systems, and consumer products. Nearly, two-thirds of its turnover comes from products segment, in which, it enjoys leadership.

Even as operating metrics continues to improve for Crompton Greaves (CRG), revenue growth disappointed for the second quarter in a row. Despite muted revenue growth of 13% Y-o-Y, Q3FY08 PAT of INR 679 mn was however in line with our estimates on account of a strong ~260bps improvement in EBITDA margins. We expect revenues to bounce back in Q4FY08 with the dispatch of a few large jobs, which are likely to result in higher revenue growth. In terms of consolidated results for the quarter, net revenue stood at INR 17.1 bn and PAT at INR 827 mn. For 9MFY08, consolidated net revenues and PAT stood at INR 48 bn and INR 2.6 bn, respectively, translating into EPS of INR 7.1. The cumulative order book was at USD 1.3 bn (INR 52 bn).

Revenues disappoint again; EBITDA margins continue to improve

For the second quarter consecutively, revenue growth remained subdued at 13% Y-o-Y, to INR 9.2 bn, as few large jobs spilled over to next quarter. The standalone order book was almost flat Y-o-Y, at INR 21.8 bn. However, CRG expects higher order bookings in Q4FY08, which will result in comfortable order book position.
Improving operating performance from all its segments resulted in 42% Y-o-Y growth in EBITDA, to INR 1.2 bn. EBITDA margin improved 260bps Y-o-Y, to 12.7%, due to value engineering of products by using Pauwels’ design and own R&D efforts, hedging of commodities, and better utilisation at workshops. PAT, of INR 679 mn (up 50% Y-o-Y), was in line with our expectations.

Downgrading estimates by ~ 8%; earnings expected to grow at 37%

We are downgrading our FY08E and FY09E consolidated earnings estimates by 8% on account of lower than expected standalone revenue growth, though slightly offset by better EBITDA margins. Incorporating our FY10E estimates, we expect consolidated revenue and earnings to grow at 24% and 37%, respectively, over FY08-10E. The higher earnings growth vis-à-vis revenue growth is on account of expected improvement in operating margins for the standalone entity and subsidiary portfolio. Ganz is expected to turnaround in FY09E and Microsol Holdings is likely to be operational for full year from FY09E.

Segmental snapshot

For Q3FY08, all the segments reported modest revenue growth with power systems, contributing ~50% to revenues, reporting only 13% Y-o-Y growth. The lower than expected revenue growth can be attributed to lesser jobs being dispatched in the quarter leading to lower revenue booking. The trend in Y-o-Y margin improvement across segments, which started in Q1FY08, continued in Q3FY08 as well. The industrial systems segment reported EBIT margin of 18.3%, up 405bps Y-o-Y, followed by power systems segment that reported EBIT margin of 12.4%, up 255bps Y-o-Y. The EBIT mix more or less remains unchanged with power systems contributing 46%, industrial systems 37%, and consumer products system 20%.

Investment Theme

Given the improving visibility and governments thrust on power sector reforms, we believe that ~68,869 MW of generation capacity is likely to be added in India over the Eleventh Plan, entailing investment of ~INR 4.2 tn. In the backdrop of encouraging investment environment, we remain positive on CGL based on the prospects arising from its second overseas acquisition (Ganz). Post full consolidation of Ganz in FY08, we believe Crompton will not only expand horizontally (geographically), but also vertically (enhanced product portfolio). Amongst the large-cap infrastructure plays in India, Crompton still trades at a relative discount to peers like Siemens, ABB, L&T, and BHEL. We maintain our positive stance on the company.

Report Card

PE ratio           57.03     25/02/08
EPS (Rs)          5.25     Mar, 07
Sales (Rs crore)   999.92        Dec, 07
Face Value (Rs)         2   
Net profit margin (%)   5.62   Mar, 07
Last bonus              2:5        14/10/06
Last dividend (%)    40       18/01/08
Return on average equity 29.17   Mar, 07

[Lavanay]

Crompton Greaves’ stock price is down 40% over past three months due to two consecutive quarters of slow domestic-revenue growth and signs of slowdown in sales in the US and Ireland.
 
We expect domestic-revenue growth to pick up from 4Q and power-division revenue growth to be over 20% in FY09-10. The international business is expected to grow at 14% in FY09-10. Crompton offers a 34% earnings Cagr over FY07-10 and valuations are reasonable at 19.4x FY09 and 13.6x FY10 earnings. BUY.