You are on page 1of 6

Systematix

Institutional Research
1QFY12 Result Update
Industry

Crompton Greaves (CRG IN)

July 20, 2011

Capital goods

Shocker 1Q, guidance belied; Cut to Sell!!! Downgrade to Sell (CMP: `208)
Market Cap ` 133bn; USD: 2.9bn Crompton Greaves reported disappointing performance in 1QFY12 both in domestic as well as International business. Much below than expected operational performance led to ~9% decline in domestic business and ~59% decline in consolidated business. International business witnessed ~9-10% sales decline in Euro terms. Lower sales coupled with higher competition and lower realization led to significant contraction in EBITDA margins from 9.2% in 1QFY11 to (0.5)% in 1QFY12. Post the conference call with the management of Crompton Greaves, we got a sense that the competitive intensity will further increase thereby keeping the profitability under check in FY12E and FY13E. With muted order inflow from PGCIL and increasing competition, we remain cautious on the outlook for domestic Indian power transmission and distribution sector. To factor in the below than expected performance in 1QFY12, we have downgraded our consolidated earnings estimate to ` 10.6 (earlier ` 16) in FY12 and to ` 14.1 (earlier ` 18.9) in FY13. We are also changing our recommendation on the stock from BUY to SELL with a revised target price of ` 170 based on 12 xFY13E consolidated earnings. Any uptick in the stock price post the recent steep correction should be used as an opportunity to sell as the margin pressure will persist over the next few quarters.
Key Highlights of 1QFY12 results Standalone Business Sales grew by 9.4% to ` 14.7 bn. EBITDA margins declined by 290 basis points to 12.7% primarily led by the power systems segment. Higher competitive intensity + higher commodity prices have resulted in power segment margins decline to 12.6% vis--vis 16.6% in 1QFY11. Consumer segment also reported decline in margins to 13.9% led by lower off take of fans.

Price 208 Target Price 170 Last Call BUY (02-05-2011 at ` 252) Expected share price return (18.1) Expected dividend yield 1.0 Expected total return (17.1)

Market Data
Market Cap. Share Cap. (mn) 52 Wk High/Low Avg. Vol. (Weekly) ` 133bn/ US$ 2.9 bn 641.5 349 / 208 1.5 mn

(Price Performance (RIC: CROM.BO, BB: CRG IN)

Shareholding Pattern th (As on 30 June 2011)

(%)

Poor operational performance coupled with higher depreciation cost resulted in profitability decline by 9% to ` 1.29 bn. Standalone order book at ` 35.1 bn (down 6% YoY) and order intake at ` 14.6 bn (up 73% YoY). Consolidated Business Sales grew by 5.9% to ` 24.4 bn EBITDA margins contracted by 540 basis points to 7.5% vis--vis 12.9% in 1 QFY11. International business, too, reported disappointing operational performance. International business reported EBITDA margin of (0.5) % vis--vis 9.2% in 1QFY11. This drop in EBITDA margin is attributed to lower sales and lower realization (Intense competition). Overall profitability declined by 59% to ` 778 mn. Consolidated order book at ` 70.9 bn (up 4.2% YoY) and order intake at ` 22.5 bn (down 23.5% YoY).

Financials (` Mn)

FY11 FY12E

FY13E
125,476 13,700 12,445 9,041 10.9 7.2 14.1 17.7 14.7 9.4 21.6 27.5

Net Sales 100,051 110,953 EBITDA 13,438 10,969 PBT 11,910 9,782 PAT 9,191 6,827 EBITDA Margin (%) 13.4 9.9 PAT Margin (%) 9.2 6.2 EPS 14.3 10.6 CEPS 17.3 14.0 P/E 14.5 19.5 EV/EBITDA 10.0 11.9 ROE (%) 31.7 19.2 ROCE (%) 35.8 24.6

Shreegopal Jaju gopaljaju@systematixshares.com (+91 22 3029 8187)


SYSTEMATIX SHARES & STOCKS (I) LTD.

July 2011

Systematix Research is also available on Bloomberg SSSL <Go>, Thomson & Reuters

SYSTEMATIX
Table 1: ` mn Earlier Revenues EBITDA EBTDA margin Adjusted PAT EPS 66,704 9,829 14.7 7,027 FY12 Revised Standalone % Earlier 75,895 11,540 15.2 8,242 FY13 Revised % Earlier 112,100 14,732 13.1 10,234 16 FY12 Revised

Institutional Research

Consolidated % Earlier 126,738 17,133 13.5 12,095 18.9 FY13 Revised 125,476 13,700 10.9 9,041 14.1 % (1.0) (20.0) (25.2) (25.2)

66,704 0 8,695 (11.5) 13 6,144 (12.6)

75,895 0 10,250 (11.2) 13.5 7,193 (12.7)

110,953 (1.0) 10,969 (25.5) 9.9 6,827 (33.3) 10.6 (33.3)

Source: Company, Systematix Research

Table 2: 1QFY12 Quarterly Highlights ` mn 1QFY11 Net Revenues EBITDA EBITDA margin (%) Other Income Depreciation Interest PBT Tax PAT PAT margin (%) EPS (`)
Source: Company, Systematix Research

Standalone 1QFY12 YoY (%) 14,688 1,867 12.7 157 286 14 1,723 433 1,290 8.8 2 9.4 -10.8 6 65.8 -327 -17 -33.8 -9.2 -9.2

International 1QFY11 1QFY12 YoY (%) 9,593 880 9.2 35 243 56 616 140 476 5 0.7 9,689 -48 -0.5 -5 322 95 -470 42 -513 -5.3 -0.8 1 -105.5 -115.1 32.6 68.8 -176.4 -69.9 -207.8 -207.8

Consolidated 1QFY11 1QFY12 YoY (%) 23,022 2,973 12.9 183 415 50 2,691 794 1,897 8.2 3 24,377 1,819 7.5 151 608 110 1,253 475 778 3.2 1.2 5.9 -38.8 -17.3 46.4 118.6 -53.5 -40.1 -59 -59

13,429 2,094 15.6 148 172 -6 2,075 654 1,422 10.6 2.2

Table 3: 1QFY12 Segmental highlights ` mn Revenues Power Consumer Industrial Others Total Inter-seg. Income from Op. PBIT Power Consumer Industrial Others Total Interest Un-allocable Exp. PBT PBIT Margin (%) Power Consumer Industrial Others Total
Source: Company, Systematix Research

Standalone 1QFY11 1QFY12 YoY (%) 5,101 5,318 3,112 54 13,585 156 13,429 846 803 642 10 2,300 -6 231 2,075 16.6 15.1 20.6 17.5 17.1 5,686 5,437 3,617 28 14,768 80 14,688 717 754 576 4 2,050 14 312 1,723 12.6 13.9 15.9 12.5 14 11.5 2.2 16.2 (48.3) 8.7 9.4 (15.3) (6.1) (10.4) (63.2) (10.9)

Consolidated 1QFY11 1QFY12 YoY (%) 14,564 5,318 3,210 86 23,178 156 23,022 1,556 803 598 16 2,972 50 231 2,691 10.7 15.1 18.6 18.6 12.9 15,166 5,437 3,797 57 24,457 80 24,377 401 754 509 11 1,674 110 312 1,253 2.6 13.9 13.4 19.9 6.9 4.1 2.2 18.3 (33.3) 5.5 (48.7) 5.9 (74.2) (6.1) (14.9) (28.3) (43.7)

(17.0)

(53.5)

July 2011 Systematix Research is also available on Bloomberg SSSL <Go>, Thomson & Reuters

SYSTEMATIX SHARES & STOCKS (I) LTD. 2

SYSTEMATIX

Institutional Research
Till Date, we have been positive on the stock for the following reasons:We expected the domestic business to grow at a CAGR of 13% over FY11-13E. We have factored in ~90 basis points decline in EBITDA margin to 14.7% thereby capturing the higher competition and commodity price scenario in the Power segment. We expected the Industrial and Consumer segments to report good and stable performance over the next two years primarily led by uptick in the Industrial capex, strong distribution network and leadership status in sub-segments of consumer durable segments such as fans and agricultural pumps. Post our interaction with the management of Crompton Greaves in the beginning of 1QFY12, we believed that Cromptons International business will pick up both in volume as well as value terms thereby boosting the overall consolidated earnings. Why are we changing our recommendation from Buy to Sell? We expect the outlook of the Indian Power transmission and distribution sector to continue to remain cautious. Earlier we were hopeful that the order inflow momentum will start picking up post 2HFY12. It should be noted that only ` 1.6 bn worth of orders were awarded by PGCIL in 1QFY12. At the same time, competition is becoming fiercer with the number of players increasing. We expect that the margins in the domestic power segment will be under check over the remaining quarters of FY12. During 1QFY12, the company has reported a decline of 290 basis points in EBITDA margins. EBITDA margins in International business contracted significantly during 1QFY12 to (0.5) %. This is primarily due to lower sales coupled with intense competition. Our Channel Checks indicated that the International business executed certain loss making orders during the quarter and certain set of Slim Transformers were returned to the company for repair purpose.

July 2011 Systematix Research is also available on Bloomberg SSSL <Go>, Thomson & Reuters

SYSTEMATIX SHARES & STOCKS (I) LTD. 3

SYSTEMATIX PROFIT & LOSS STATEMENT


Year ended 31 Mar (` m) Net sales growth (%) Operating expenses Operating profit Other operating income EBITDA growth (%) Depreciation Other income EBIT Interest paid Pre-tax profit (before non-recurring items) Non-recurring items Tax on non-recurring items Pre-tax profit (after non-recurring items) Tax (current + deferred) Net profit Adjusted net profit Prior period adjustments Minority interests Preference dividend Net income growth (%)
Source: Company, Systematix Institutional Research

Institutional Research

FY10 91,409 4.6 (78,639) 12,770 12,770 28.3 (1,551) 1,100 12,318 (428) 11,891 352 12,243 (3,650) 8,593 8,241 8,593 (16.3)

FY11 100,051 9.5 (86,613) 13,438 13,438 5.2 (1,936) 999 12,501 (209) 12,291 (381) 11,910 (3,100) 8,810 9,191 8,810 11.5

FY12E 110,953 10.9 (99,984) 10,969 10,969 (18.4) (2,145) 1,154 9,977 (195) 9,782 9,782 (2,955) 6,827 6,827 6,827 (25.7)

FY13E 125,476 13.1 (111,777) 13,700 13,700 24.9 (2,345) 1,290 12,645 (200) 12,445 12,445 (3,404) 9,041 9,041 9,041 32.4

BALANCE SHEET
Year ended 31 Mar (` m) Current assets Investments Net fixed assets Other non-current assets Total assets Current liabilities Total Debt Other non-current liabilities Total liabilities Share capital Reserves & surplus Less: Misc. expenditure Shareholders' funds Minorities interests Total equity & liabilities Capital employed
Source: Company, Systematix Institutional Research

FY10 41,018 5,536 13,760 896 61,210 30,170 5,010 945 36,125 1,283 23,760 0 25,043 43 61,210 31,041

FY11 45,496 6,747 19,417 1,084 72,744 33,892 4,703 1,244 39,840 1,283 31,464 0 32,747 157 72,744 38,851

FY12E 51,502 7,168 20,563 0 79,232 36,990 4,145 0 41,135 1,283 36,814 0 38,097 0 79,232 42,242

FY13E 60,569 7,631 21,219 0 89,419 39,632 4,150 0 43,782 1,283 44,355 0 45,638 0 89,419 49,788

July 2011 Systematix Research is also available on Bloomberg SSSL <Go>, Thomson & Reuters

SYSTEMATIX SHARES & STOCKS (I) LTD. 4

SYSTEMATIX CASH FLOW


Year ended 31 Mar (` m) Pre-tax profit Depreciation Chg in working capital Total tax paid Other operating activities Cash flow from operations (a) Capital expenditure Chg in investments Other investing activities Cash flow from investing (b) Free cash flow (a+b) Equity raised/(repaid) Chg in minorities Debt raised/(repaid) Dividend (incl. tax) Other financing activities Cash flow from financing (c) Net chg in cash (a+b+c)
Source: Company, Systematix Institutional Research

Institutional Research

FY10 12,243 194 2,333 (5,362) (917) 8,490 (169) (3,864) (4,033) 4,458 0 (96) (2,173) (1,158) (3,426) 1,032

FY11 11,910 2,028 (4,036) (3,412) 605 7,095 (7,684) (1,211) (8,896) (1,801) (550) 114 (306) (1,651) (2,393) (4,194)

FY12E 9,782 2,137 1,093 (3,115) (1) 9,896 (3,283) (421) (3,704) 6,192 (157) (558) (1,501) (2,216) 3,975

FY13E 12,445 2,334 (4,715) (3,404) 6,660 (2,990) (463) (3,453) 3,207 5 (1,501) (1,496) 1,711

RATIOS
Year ended 31 Mar (` m) DJ. EPS (`) EPS growth (%) EBITDA margin (%) EBIT margin (%) ROCE (%) Net debt/Equity (%) Valuations PER (x) PCE (x) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) Du Pont Analysis - ROE Net margin (%) Asset turnover (x) Leverage factor (x) Return on equity (%)
Source: Company, Systematix Institutional Research

FY10 12.8 (16.3) 14.0 13.5 42.8 (6.7) FY10 16.2 13.6 5.3 0.6 1.4 10.3 FY10 9.0 1.5 2.7 37.9

FY11 14.3 11.5 13.4 12.5 35.8 5.2 FY11 14.5 12.0 4.1 1.1 1.3 10.0 FY11 9.2 1.5 2.3 31.7

FY12E 10.6 (25.7) 9.9 9.0 24.6 (7.5) FY12E 19.5 14.8 3.5 1.0 1.2 11.9 FY12E 6.2 1.5 2.1 19.2

FY13E 14.1 32.4 10.9 10.1 27.5 (10.0) FY13E 14.7 11.7 2.9 1.0 1.0 9.4 FY13E 7.2 1.5 2.0 21.6

July 2011 Systematix Research is also available on Bloomberg SSSL <Go>, Thomson & Reuters

SYSTEMATIX SHARES & STOCKS (I) LTD. 5

SYSTEMATIX
For any queries contact us at: Institutional Team
N. Subramaniam Equity Sales Mamta Singh Ridhim Thapar Derivatives Raghvendra Kedia Abhishek Karande Sales Trading / Dealing Sachin Parekh Jigar Kamdar Vinod Bhuwad Vijayendra Devadiga Nayan Narnoli Monish Lotia Equity Research RESEARCH ANALYST Sudarshan Narasimhan Surya Narayan Patra Vibhash Prakash Awasthi Madhu Babu Eric Martins Shreegopal Jaju Vishal Shah Binod Modi Rohit Jain Abhishek Gaoshinde Prateek Khandelwal SECTOR ALLOCATION Sr. VP & Head of Research Oil & Gas, Petrochemicals AVP - Pharma AVP - Metals & Mining AVP - IT, Telecom AVP Metals & Mining, Pipes AVP Capital Goods AVP Banking Sr. Analyst Cement & Construction Analyst - Real Estate Analyst - Automobile Associate DIRECT Nos. + 91-22-3029 8293 + 91-22-3029 8186 + 91-22-3029 8296 + 91-22-3029 8258 + 91-22-3029 8253 + 91-22-3029 8187 + 91-22-3029 8260 + 91-22-3029 8264 + 91-22-3029 8269 + 91-22-3029 8292 + 91-22-3029 8259 Sr. Manager Sales Trader Sales Trader Trader Derivatives Dealer Derivatives Dealer + 91-22-3029 8291 + 91-22-3029 8181 + 91-22-3029 8267 + 91-22-3029 8268 + 91-22-3029 8180 + 91-22-3029 8252 VP Sales (Derivatives) Technical Analyst +91- 22-3029 8091 + 91-22-3029 8261 AVP Sales AVP Sales +91-22-3029 8092 +91-22-3029 8265 Sr. VP & Head Sales & Sales Trading +91- 22-3029 8285

Institutional Research

nsubramaniam@systematixshares.com

mamtasingh@systematixshares.com ridhimt@systematixshares.com

rkedia@systematixshares.com abhishekk@systematixshares.com

sachinp@systematixshares.com jigarkamdar@systematixshares.com vinodbhuwad@systematixshares.com vijayendrad@systematixshares.com nayan@systematixshares.com monishlotia@systematixshares.com Telephone: + 91-22- 3029 8000 E-mail sudarshan@systematixshares.com suryapatra@systematixshares.com vawasthi@systematixshares.com madhu@systematixshares.com eric@systematixshares.com gopaljaju@systematixshares.com vishalshah@systematixshares.com binodmodi@systematixshares.com rohitj@systematixshares.com abhishekg@systematixshares.com prateekk@systematixshares.com

Stock Ratings
BUY (B) ACCUMULATE (A) HOLD (H) SELL (S) NOT RATED (NR) ATTRACTIVE (AT) NEUTRAL (NL) CAUTIOUS (CS) The stock's total return is expected to exceed 20% over the next 12 months. The stock's total return is expected to be within 10-20% over the next 12 months. The stock's total return is expected to be within0-10% over the next 12 months. The stock's is expected to give negative returns over the next 12 months. The analyst has no recommendation on the stock under review.

Industry Views
Fundamentals /Valuations of the sector is expected to be attractive over the next 12-18 months. Fundamentals /Valuations of the sector are expected to neither improve nor deteriorate over the next 12-18 months. Fundamentals /Valuations of the sector is expected to deteriorate over the next 12-18 months.
ANALYST DISCLAIMER This document has been prepared by Systematix Shares & Stocks (I) Ltd. This report is the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. We, at Systematix Shares & Stocks (I) Ltd., have prepared this report based on the data we consider reliable, but we do not vouch it to be accurate or complete, and it may not be relied upon as such. Systematix Shares & Stocks (I) Ltd does not in any way be responsible for any loss or damage that may arise to any person due to the content in the report. Each recipient of this document should make an independent valuation of their own in the securities referred to in this report. Besides, the data in this document is subject to change without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other use of the report and the content within, is prohibited. Disclosure of Interest 1. The analysts who have prepared the report have in no way received or are expected to receive any compensation from the subject company. 2. The analysts do not hold any position in the subject companys stock, as on the date of release. 3. Neither the company nor an affiliate company of Systematix Shares & Stocks (I) Ltd. has received a mandate from the subject company. 4. Systematix Shares & Stocks (I) Ltd., or its affiliates do not hold any paid up capital in the company

SYSTEMATIX SHARES & STOCKS (I) LTD.


Head Office J. K. Somani Building, 2 Floor, British Hotel Lane, Fort, Mumbai, Pin: 400001, Tel: +91 22 66198000, Fax: +91 22 66198029
nd

Registered Office EGA Trade Center, 4th Floor, 809-, Poonamalle High Road, Kilpauk, Chennai, Pin: 600010Tel: +91 44 26612184/ 87/ 88Fax: +91 44 26612190

July 2011 Systematix Research is also available on Bloomberg SSSL <Go>, Thomson & Reuters

SYSTEMATIX SHARES & STOCKS (I) LTD. 6

You might also like