Crompton Greaves Ltd - Rendezvous with Mr. Gautam Thapar - Antique

Antique recently hosted Mr. Gautam Thapar, Chairman and CEO, Avantha Group, to meet investors in London, Hong Kong and Singapore. Given Mr. Thapar's command over various issues concerning India's manufacturing sector, there was huge response from leading investors across geographies. He spoke in detail about issues that led to sharp decline in profitability of Crompton Greaves' overseas entities, ongoing restructuring program and outlook in the medium term. We, at the end of the busy schedule, returned with belief that efforts being made by Crompton Greaves will start producing results in the course of the year.

CG consolidated revenues to grow at 10% in FY14; overseas to operationally break even

Consolidated revenue should grow at over 10% in FY14. India should growth faster, with power, consumer and industrial segments growing at 10%, 20% and 4-5%, respectively, during the year. Overseas business should break-even, atleast operationally. Domestic business should see steady margins. Electrical engineering goods like transformers and switchgears are seeing stability in pricing.

Long-term growth strategy

CG to remain focused on its core competency of electrical engineering products and consumer electricals, which offer huge growth opportunities globally. Next phase of growth for the company will be driven by 1) broadening its clients list in the international power business, the company targets to do business with top 20 global utilities; 2) Internationalizing industrial business and 3) New product launches in the domestic consumer electricals business, particularly at higher end of spectrum with better profitability.

What is the outlook for overseas business, and what is pending in restructuring?

Restructuring is over. As part of restructuring exercise completed in December 2012, the capacity of Belgian plant is downscaled to 5000 MVA, while Hungarian facility is successfully being scaled up to 15000 MVA. Hungarian facility, which will meet power transformer demand from Europe, Middle - East and North Africa, will provide significant cost saving in the long-term. Though due to costs related to possible LDs, shifting and freight, CG's overseas business may report losses in next two quarters, it should operationally break-even in FY14. In a steady state situation, EBIT margin should reach to 6-7% in FY15.

Group restructuring to "CG one"

CG has completely revamped the business and organizational structure. From being factory driven company, it is converting itself into a product driven company. This has brought tremendous focus on various business verticals like power, industrial products and solutions and consumer products, on a global scale.

Our View - Maintain Buy

The stock is trading at P/E of 10.4 x FY14e earnings of INR 8.4 and 7.7x FY15e earnings of INR11.3. In our opinion, valuations factor in negatives and a possible recovery in demand and margins will significantly rerate the stock. We maintain BUY with SOTP based target price of INR141.

Source : Equity Bulls

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