Crompton Greaves Limited - Encouraging performance - Antique

Crompton Greaves' standalone performance has continued to remain strong, which will please investors, despite overseas losses, largely from North American power transformer facilities. The company's restructuring process has started to pay-off with most European facilities in profit now. Though a likely delay in the net profit breakeven for overseas businesses will result in a lower than earlier anticipated FY14 EPS, we believe stronger outlook for FY15 will support valuations. At 12.7x FY15e earnings, Crompton Greaves offers good investment opportunity. We maintain our Buy rating.

Currency impacted consolidated profit

The company is well on track to post healthy standalone PAT in FY14 and will most likely meet our standalone PAT estimate of INR 5.3bn. In overseas, the restructuring has started to pay-off and European loss-making entities have started to make profits. 2QFY14 loss of INR750m is higher by INR110m due to currency translation. In EUR terms, the company incurred loss of EUR9.3m, which is similar to 1Q. The bulk of losses are restricted to the US and Canadian facilities (USD 10m). The company is trying to pare losses here, but it may take a few quarters. In the meantime, there is an attempt to improve profitability in other units, so that overseas entities make minimal losses.

Encouraging margin improvement in domestic businesses

Crompton Greaves reported standalone revenue growth of 7.7% while profits grew 11.8% to INR2.59bn on the back of strong recovery in 2Q. Despite subdued growth in revenues, the company was able to maintain margin sequentially, led by aggressive cost optimisation. EBIT margin in the consumer segment improved 220bps YoY to 11.7% while in power business, EBIT margins recovered 130bps to 9.4% QoQ. The company expects to maintain power segment margins at 8.5-9%, supported by higher export sales.

Consumer segment to remain strong

The company is a leading player in the consumer durables space. It has developed and launched energy efficient products and its foray into the rural segment is expected to help the business maintain growth. Key products - fans and lighting - grew at a strong 23% and 38% YoY, respectively. Consumer segment margins were maintained at ~11 -12%.

Valuation and outlook

Consolidated earnings would recover sharply to INR3.4bn in FY14 from INR1.9bn in FY13, driven by an overseas recovery. We expect revenue growth of 10% to INR148.1bn and profit growth of 90% to INR6.4bn in FY15e. The Crompton Greaves' stock has corrected by a sharp 64% from its peak of INR335 per share in Nov-10, underperforming the broader markets. The stock is trading at a 32% discount to its long-term median P/E of 21x. Crompton Greaves is a company with a strong background and we believe the long-term outlook is still good. We maintain our Buy rating with a target price of INR156 per share.

Source : Equity Bulls

Keywords