Crompton Greaves Limited - Benefits of restructuring yet to play out! - Antique

Crompton Greaves' 4QFY13 earnings performance was clearly disappointing; once again proving that the process of turnaround can be time consuming. We still believe in CRG's investment thesis, as we believe that earnings in FY14 will rebound due to: 1) likely break-even of the overseas business as benefit of improved productivity at CRG's Hungarian plant flows to bottom line, and 2) Improved domestic performance with likely margin upside coming from power segment exports and consumer business. On the flip side, given the ongoing process of ramping up capacity at Hungary plant, near-term performance may remain muted. In our view, CRG's valuations are at multi-year lows and will provide upside with recovery in overseas earnings.

Gradual recovery in overseas business

CRG reported consolidated PAT of INR252m in 4QFY13, lower than our estimate of INR434m. Though operational loss in overseas subsidiaries reduced from INR918m in 3QFY13 to INR825m in 4QFY13, it was still higher than expected. CRG incurred its highest ever loss of INR2.78bn (adjusted for one-time costs) in FY13. As part of restructuring exercise, CRG has shifted its power transformer manufacturing from Belgium to Hungary, the benefits of which by way of lower manpower cost will play out over FY14-15. The company has increased manufacturing capacity from 7500 MVA to 9000 MVA at Hungary and intends the same to increase to 12500 MVA by October 2013. We expect overseas business to break-even in FY14. However, in the near term (1-2QFY14), CRG may still incur losses due to unprofitable, unexecuted order-book shifted out of Belgium to Hungary.

Domestic power business margin lowest since 1QFY06

During the quarter, domestic revenue grew by 6.1% YoY to INR20.6bn, lower than estimates of INR21.17bn. PAT declined 21% YoY as EBITDA margin fell 3.3% YoY and 70bps QoQ. Profitability in power segment remains a big worry, as power segment EBIT margin fell to 7.1%, lowest in many years. Revenues also fell by 12% YoY. Revenues in consumer products grew by 23.3% YoY to INR7.47bn while industrial segment remain flat at INR3.9bn. We believe that power segment margins should improve in FY14, albeit marginally, due to higher share of exports and improving profitability at the company's Bhopal plant. We build revenue and PAT growth of 13% and 18%, with EBITDA margin of 8.8%, a 50 bps improvement YoY, in domestic business in FY14.

Valuation and outlook

We have cut our FY14 EPS by 16%, entirely on account of lower than expected build-up of margins in domestic business. Our current estimates factor in conservative growth and margin targets for the domestic business. We believe current valuation factors in negatives and gradual recovery in earnings will re-rate the stock. We maintain Buy with a revised target price of INR141 (earlier INR156). However, given the earnings disappointment, market would wait to see delivery in ensuing quarters, limiting upside in very near term.

Source : Equity Bulls

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