Crompton Greaves - 2QFY2013 Result Update - Angel Broking

Crompton Greaves (CG) reported a weak performance for 2QFY2013, which was below our estimates and street expectations. Though, CG's top-line performance was in line with our expectations at Rs.2,924cr up 8.1% yoy, losses of Rs.80cr due to ongoing restructuring at its Belgium unit led to 63.9% yoy decline in profitability to Rs.42cr.

International business remains a drag: Although CG's international business, driven by power systems, contributed 43% to the total consolidated revenues, it made losses at the EBITDA level and dragged the consolidated EBITDA down by 8% during 2QFY2013. As part of its three year plan to improve its profitability, CG is in the process of right sizing its Belgium operations, which led to Rs.80cr loss in 2QFY2013. The loss does not include VRS scheme package which is still undergoing consultation with worker's council in Belgium and the whole process might take another two to three months.

The consolidated order intake for 2QFY2013 was Rs.2,575cr, a yoy jump of 13.9%, led by a 15% yoy growth in the power system segment to Rs.2,100cr and 10% yoy growth in industrial segment to Rs.475cr. The order backlog stood at Rs.9,400cr, increasing 32% yoy.

Outlook and Valuation: Although the company is expected to register a healthy 12-14% yoy sales growth, supported by healthy order backlog, its operating margins are expected to remain under pressure till the restructuring of its Belgium operations. However, we are of the opinion that CG's margins will bottom out in FY2013 and we expect the operating margin to improve going forward. Given the attractive valuations (stock trading at 0.5x FY2014E EV/Sales compared to its five year trading range of 0.7x to 1.6x and median of 1.2x), we maintain BUY recommendation on the company. We have assigned a multiple of 0.7x to arrive at a target price of Rs.145.

Source : Equity Bulls

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