Crompton Greaves - Good times ahead - Antique

Profitability improvement to drive earnings; Buy with TP of INR141

We still believe in CRG's investment thesis, as we believe that earnings in FY14e 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. 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 multiyear lows and will provide upside with recovery in overseas earnings. We recommend BUY with a target price of INR141.

Consumer segment to drive domestic earnings, recovery in power margins remains critical

Revenues in consumer products grew by 21.5% YoY to INR25.9bn in FY13 with EBIT margins of 10.7%. However power segment (38% of domestic revenue) reported 5% revenue decline and reported lower EBIT margin of 8.5% since FY06. 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 believe that SEB debt restructuring scheme will accelerate investment in the Indian power sector T&D space, thus improving demand outlook for power equipment manufacturers and service providers. 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 FY14e.

Gradual recovery in overseas business

CRG's international business has significantly suffered in past two years due to cost over-runs, deferrals by clients to take physical deliveries and product replacement / refurbishments. CG 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 providing sharp boost to FY14 consolidated earnings growth.

Valuation - improved earnings outlook to re-rate the stock

CRG's stock price has corrected by a sharp 71% since the peak (INR335) in November 2010, underperforming the broader markets by 65%. The stock now trades at a steep 59% discount to its long-term median P/E of 23x. We believe that CRG commands a premium positioning in power T&D space and will bounce back with improved performance in next two quarters. In our opinion, valuation factor in negatives and a possible recovery in demand and margins will significantly rerate the stock.

Source : Equity Bulls

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