Crompton Greaves - Pressure on margins intensifies - Nirmal Bang

Crompton Greaves reported weak results for 3QFY12 following rising pressure on margins across business segments. Consolidated EBITDA and PAT fell 46.3% and 66.9% YoY to Rs1.8bn and Rs771mn, respectively. Operating profit was 24.1%/25.6% lower and net profit 41.8%/44% lower from our/Bloomberg estimates, respectively. EBIT margins of the domestic power systems and industrial systems segments were the lowest since 3QFY07 while the consumer product segment did not witness any revival in demand, posting a tepid 5.9% YoY revenue growth. Even though consolidated top-line grew 26.3% YoY to Rs30.3bn (higher than our/Bloomberg estimate by 11.8%/13.5%, respectively), we believe it was partly aided by translation gains arising from depreciation of the rupee against the euro during the quarter. We have a negative outlook on the stock with a target price of Rs118 (to be reviewed post analyst meet scheduled on 1 February 2012).

Severe pricing pressure in power systems segment: The domestic power systems segment reported an EBIT margin of 10.7%, lowest since 3QFY07 and even registered a sequential decline of 500bps compared to 2QFY12 margin of 11.2%. This strengthens our belief of a structural decline in margins because of rising competition in the domestic transformer segment and also diversification into the low-margin substation segment. On the other hand, the consolidated power system segment's margin slumped to all-time low of 2.5% as international subsidiaries reported operating losses of Rs293mn (partly due to higher goodwill write-off of Emotron and QEI)

No recovery in consumer products/industrial system segments: The slowdown in demand continued for the consumer products segment for third quarter in a row as it registered only 5.9% YoY revenue growth. Standalone industrial systems segment witnessed its margins declining sequentially by 110bps to 14.6%, the lowest since 3QFY07, which is surprising considering that the management had indicated that 95% of low-margin NELCO orders were executed by the end of 2QFY12.

Outlook: We expect the growth prospects of Crompton Greaves to be hindered by global economic turmoil (51% revenue from international markets, 17% from Europe) and relentless pricing pressure in the domestic power transmission and distribution equipment market. In addition, the further slide in the operating margin of the industrial systems segment and delay in demand pick-up for the consumer products segment in 3QFY12 raises concerns. We continue to maintain our negative outlook on the stock.

Source : Equity Bulls

Keywords