Crompton Greaves - Nirmal Bang

Risk-Reward Ratio Turns Favourable; We Upgrade To Buy

Crompton Greaves (CGL) reported 4QFY12 consolidated revenue of Rs30.7bn, in line with our estimate, posting a 5.8% YoY revenue growth. However, as seen in the 9MFY12 period, profitability was under severe pressure as consolidated EBITDA/PAT fell 42.9%/60.1% YoY to Rs2.1bn/Rs1.0bn, respectively. EBITDA/PAT was 16.6%/31.2% below our and 19.3%/38.7% below Bloomberg consensus estimates, respectively. Consequently, we revise downwards our FY13 earnings estimates by 15.3%. On the positive side, operating margin grew 90bps sequentially, while order inflow was better than expected at Rs29bn. After a 630bps YoY decline in operating margin in FY12, from 13.4% to 7.1%, we expect recovery in margins in FY13/14E across business segments driven by cost rationalisation and improving product realisation. We believe the erosion of margins in FY12 is priced in and the stock trades at an attractive valuation considering likely 34.8% earnings CAGR over FY12-14E, albeit on a low base. We introduce FY14 financials and upgrade the stock from Sell to Buy with a target price of Rs127 (from Rs108 earlier) based on 12xFY14E EPS.

Healthy order book to drive revenue: Order inflows rose 12% YoY to Rs29bn for the quarter led by a 13% YoY rise in Power systems orders (Rs24.5bn) and a 9% YoY rise in Industrial systems orders (Rs4.5bn). As a result, the order backlog rose 17% YoY to Rs83.6bn, the highest ever, offering healthy revenue visibility. Order book to TTM sales ratio stands at 0.74x, maintained even during the tough times in FY12.

FY13 guidance encouraging: The management believes the worst is over in FY12 and have given guidance of 12-14% revenue growth, 8-9% operating margin and robust order inflow in FY13. Our expectations are lower than the management's guidance as we expect revenue to show 10.5% CAGR over FY12-14E while we factor in 90bps/80bps YoY rise in operating margin to 8.0%/8.8% in FY13/14E, respectively.

Valuation attractive, we upgrade stock to Buy: Owing to severe erosion in margins in FY12, the stock declined 57.8% YTD and 25% since we initiated coverage in January 2012, trading near our earlier TP of Rs108. We find it attractive at CMP considering healthy revenue visibility owing to a life-time high order backlog, recovery in operating margin over FY13-14E and likely strong earnings CAGR of 34.8% over FY12-14E. At the CMP of Rs106, it trades at 12.8x/10x FY13/14E EPS versus the past five years' average PE of 17.9x. We value CGL at 12xFY14E EPS of Rs10.6 with a TP of Rs127, offering 20% upside, and upgrade our rating on it from Sell to Buy.

Source : Equity Bulls

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