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Stock Update >> Crompton Greaves
Stock Update >> Apollo Tyres
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Promoters
43%
FII
20%
DII
22%
Others
15%
Company details
Price chart
Shareholding pattern
Price performance
(%) 1m 3m 6m 12m
Absolute 16.9 6.3 48.7 155.4
Relative 9.3 -0.1 19.0 85.7
to Sensex
Price target: Rs300
Market cap: Rs14,408 cr
52-week high/low: Rs231/85
NSE volume: 50.5 lakh
(no. of shares)
BSE code: 500093
NSE code: CROMPGREAVE
Sharekhan code: CROMPGREAVE
Free float: 36.8 cr
(no. of shares)
Key points
Crompton Greaves Ltd (CGL) has got significantly re-rated on the back of an
expected revival in its industrial and power system product businesses (which
accounts for close to 50% of the profit) with an improvement in the macro
scenario locally and the efforts taken to curtail the losses in its international
subsidiaries. However, we see further scope for value unlocking for minority
shareholders through the proposed demerger of its consumer product business
(accounting for the balance 50% of the profit) into a separate listed entity that
would command much higher valuation multiple, in line with the other listed
players in the space, like Havells and V-Guard among others.
Though the structure of the demerger of the consumer business is not decided
yet and it may take a couple of quarters for clarity to emerge, but we believe
that the listed consumer business could trade at EV/EBITDA (FY2016E) of 18x as
against that of 12x of the consolidated financials of CGL today. Hence, we see
scope for around 30% upside in CGLs valuation based on the value unlocking
from the demerger proposal.
Consequently, we retain our Buy rating on the stock with a revised price target
of Rs300. CGL is our preferred pick to play the recovery in the industrial and
power segments. It also has a re-rating trigger in the form of the proposed
demerger of the consumer business into a separate listed entity, which would
command much higher valuations.
Crompton Greaves Reco: Buy
Stock Update
Demerger to unlock value; revised price target to Rs300 CMP: Rs224
investors eye stock update
Valuations
Particulars FY2012 FY2013 FY2014 FY2015E FY2016E
Net sales (Rs cr) 11,249 12,094 13,481 14,862 16,543
Operating profit (Rs cr) 810 383 682 999 1,222
OPM (%) 7.2 3.2 5.1 6.7 7.4
Adj. PAT (Rs cr) 380 85 244 540 708
Adjusted EPS (Rs) 5.9 1.3 3.9 8.6 11.3
Growth Y-o-Y (%) (59.0) (77.8) 195.7 120.9 31.1
PER (x) 37.8 170.1 57.5 26.0 19.9
P/B (x) 4.0 4.0 3.9 3.5 3.1
EV/EBIDTA (x) 17.0 38.4 22.2 14.8 11.7
RoCE (%) 14.7 5.5 10.4 14.5 17.1
RoNW (%) 10.5 (1.0) 6.7 13.4 15.6
Div. yield (%) 0.6 0.5 0.4 0.9 1.2
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September 11, 2014
investors eye stock update
Consumer (business) is king; demerger to unlock value
The consumer business contributes significantly (about 50%
of the profit in FY2014) to the overall profitability and
generates very high return ratios (return on capital
employed [RoCE] of about 250%), being extremely asset
light. Consequently, it adds significant value to the stock.
Moreover, CGL is the market leader (with a market share
of 26% in fans and that of 14% in pumps) and many of its
offerings under the consumer business are expected to
deliver a steady double-digit growth in future with a better
margin profile. We believe backed by impressive return
ratios (the highest among peers) and a healthy growth
outlook, there could be substantial value unlocking from
the demerger of the consumer business. The management
is committed to demerging the consumer business; we
expect clarity on the demerger structure by Q3FY2015 and
it could take 12-15 months to execute the proposal.
Segmental estimate (consolidated)
Revenues (Rs cr) FY15E FY16E
Power segment 9,461 10,628
Consumer segment 3,217 3,635
Industrial segment 1,850 1,932
Others 392 412
Less Segmental revenue (58) (65)
Total 14,862 16,543
PBIT (Rs cr)
Power segment 350 456
Consumer segment 386 454
Industrial segment 186 207
Others 10 15
Total 932 1,133
RoCE (%)
Power segment 8.5 10.2
Consumer segment 259.8 258.7
Industrial segment 18.8 19.2
Others 4.5 6.0
Blended RoCE (%) 15.1 16.8
Better days ahead for domestic business; pull-back
in overseas subsidiaries continues
On the domestic (power system and industrial) business
front, the management sounded optimistic about the
performance in the coming days, as it sees a significant
improvement at the directional and sentimental levels.
Given the new pro-reform government at the centre with
ambitious programmes related to infrastructure and
economic development, the opportunities for the power
system and industrial segments should expand soon,
benefiting CGL. On the other hand, the pull-back of some
of its overseas subsidiaries continues as expected. The
management is confident of turning the international
business positive at the operating level in FY2015 and
hopes it would break even at the net level in FY2016.
While the challenges in Canada are being sorted out, the
operations in Hungary and Belgium are stabilising and are
expected to be positive operationally.
Potential re-rating post demerger
Though the structure of the demerger of the consumer
business is not decided yet, but we have worked out a
potential value for the business (refer the details below)
with the information available and we see significant value
unlocking for the shareholders.
The consumer business generates very high return ratios
(RoCE of about 250%), being extremely asset light. We
believe the business would be a significant cash generator
and is likely to operate with a lean balance sheet in future
as most of the assets of the company have depreciated
and the company outsources almost half of the products
that it offers. We believe that given the impressive return
ratios (the highest among peers) and a healthy growth
outlook, the consumer business of CGL would be valued
in line with the peers, like Havells India and V-Guard
Industries (V-Guard). Havells Indias stand-alone business
is currently trading at 20x enterprise value (EV)/earnings
before interest, tax, depreciation and amortisation
(EBITDA; FY2016 estimates) as per Bloomberg estimates.
While Havells India enjoys a leadership position and larger
size, CGLs consumer business earns very high return
ratios. Considering this, we have assigned 18x EV/EBITDA
multiple to the consumer business of CGL (a 10% discount
to Havells India).
The power system business is comparable to that of
multinational players like ABB, Siemens and Alstom. On
the domestic side, transformer companies like Voltamp,
TRIL and EMCO are comparable with the companys power
system business because of transformers, which have a
significant share in the business. We believe the
multinational peers of CGL in the power system space
are trading at a very high multiple (EV/EBITDA) while the
domestic peers are largely trading at 10-14x. We have
conservatively assigned a valuation of 11x EV/EBITDA to
its power system business as the business is facing
challenges in some of its overseas subsidiaries and is on a
recovery path (relatively risky). The industrial system
business is sluggish but manages to generate healthy return
on capital employed (RoCE) of 19% in down cycles; further
with an expected revival in the domestic industrial cycle,
it could perform better. Hence, we have assigned EV/
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EBITDA of 13x to the industrial business. Consequently,
we arrive at a new price target of Rs300 in view of the
value unlocking process, which could take place in the
next 12-15 months.
SOTP
EBITDA (Rs cr) FY15E FY16E
Power segment 545 682
Consumer segment 400 471
Industrial segment 234 262
Total 1,179 1,415
EV multiplesegment (x)
Power segment 11.0
Consumer segment 18.0
Industrial segment 13.0
EVsegment (Rs cr)
Power segment 7,506
Consumer segment 8,473
Industrial segment 3,407
Total EV 19,385
Debt 1,997
Cash 1,288
Target M-cap 18,675
O/s shares 62.7
Price target 300
CMP 224
Potential upside (%) 34
investors eye stock update
Comparable peer valuation
Peer comparison EV/EBITDA (x)
Consumer segment FY15E FY16E
Havells (stand-alone) 23.2 19.8
Bajaj Electricals 10.7 8.2
V-Guard 16.4 13.6
Power & industrial segment
ABB 42.9 33.1
Siemens 45.6 31.4
Alstom T&D 22.0 17.1
Voltamp Transformer 22.1 16.9
Transformers and rectifiers 11 9
Value unlocking from demerger of consumer business;
continue to buy
We continue to like CGL and retain it as one of our top
picks among the quality cyclicals as we see three key
positive triggers in favour of the stock: (1) improving outlook
of the domestic business; (2) potential turn-around of the
overseas business post-restructuring exercise; and (3)
significant value unlocking from the demerger of the high
cash & return generating consumer business. Therefore,
we continue to rate the stock as Buy and revise upward
our price target to Rs300 (based on the sum-of-the-parts
valuation method) with a time horizon of 12-15 months.
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
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Institutions
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Bodies
corporate
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Foreign
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Public &
Others
11%
Company details
Price chart
Shareholding pattern
Price performance
(%) 1m 3m 6m 12m
Absolute 25.3 3.1 65.6 227.8
Relative 17.1 -3.1 32.5 138.3
to Sensex
Price target: Rs237
Market cap: Rs10,646 cr
52 week high/low: Rs218/61
NSE volume: 74.8 lakh
(no. of shares)
BSE code: 500877
NSE code: APOLLOTYRE
Sharekhan code: APOLLOTYRE
Free float: 28.2 cr
(no. of shares)
Apollo Tyres Reco: Buy
Stock Update
GPM gets a boost; maintain Buy with revised price target of Rs237 CMP: Rs211
investors eye stock update
Key points
Natural rubber (NR) prices have been under pressure over the past fortnight
with negative cues emanating from Thailand, which is the largest producer of
NR, and China, which is the largest consumer of the commodity. Domestic NR
prices, which had been hovering at Rs135-a-kg levels for about two months
broke the resistance and are currently trading at Rs120-a-kg levels. The fall in
international prices has been steeper.
In addition, crude oil prices have cooled off over the past week providing
further benefit to tyre companies, which are consumers of crude derivative
products such as synthetic rubber and carbon black. Thus, the GPM for tyre
companies is expected to get an additional boost on the back of the fall in the
raw material basket and the same is reflected in the rally in tyre stocks over
the past few days.
Apollo Tyres (Apollo) has finalised Hungary for its greenfield facility in Eastern
Europe and will be investing about EUR450 million for the new facility. Hungary
has also received the European Unions regulatory approval for a grant of
EUR95.7 million in aid to Apollo.
We have tweaked our FY2015-16 earnings estimate to account for the subdued
raw material prices. Hence though we have increased our GPM estimate but
we have curtailed our realisation growth projection. We have raised our earnings
estimate for FY2015-16 by 2%. Given the higher visibility of earnings in the
medium term and growth prospects in India as well as in Europe, we remain
positive on the Apollo and reiterate a Buy with a revised price target of Rs237
(earlier Rs210), discounting FY2016E earnings by 10x.
Valuations (consolidated)
Particulars FY2012 FY2013 FY2014 FY2015E FY2016E
Net sales (Rs cr) 12,153.3 12,794.6 13,310.3 13,584.9 15,377.8
Growth (%) 37.1 5.3 4.0 2.1 13.2
EBITDA (Rs cr) 1,166.1 1,460.9 1,875.5 1,950.1 2,179.4
OPM (%) 9.6 11.4 14.0 14.3 14.1
PAT (Rs cr) 439.1 594.2 1,051.8 1,071.1 1,207.4
Growth (%) -0.2 35.3 77.0 1.8 12.7
FD EPS (Rs) 8.7 11.7 20.7 21.0 23.7
P/E (x) 23.8 17.6 9.9 9.9 8.7
P/B (x) 3.7 3.1 2.3 1.9 1.6
EV/EBITDA (x) 11.3 8.7 6.1 5.6 5.6
RoE (%) 16.7 19.1 26.4 21.0 19.5
RoCE (%) 15.3 18.1 23.5 22.3 20.9
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investors eye stock update
Rubber prices soften further
International NR prices have been under severe pressure
over the past three years as supply continues to outstrip
demand and are currently trading at a three-year low of
Rs100 a kg. The domestic NR prices have nearly halved
from the peak of Rs240 a kg in June 2011 and are currently
trading at Rs120 a kg. Over the past week the prices have
broken the two-month support of Rs135 a kg and are
trending lower. The global demand-supply mismatch for
NR is expected to continue in CY2015-16. As per industry
estimates, the global NR supply is expected to exceed
the demand by 483,000 tonne in CY2015 and by 316,000
tonne in CY2016. This will ensure than NR prices remain
under pressure in the next couple of years.
rubber deteriorates over time and rubber also attracts
high storage costs. China, which is the largest consumer
of NR, is facing a slowdown and hence the consumption
of rubber is on a decline in the country. The NR inventory
in China has risen 1.6% to 166,300 tonne, which is the
highest in four months.
Apollo finalises Hungary for greenfield facility in
Eastern Europe
Apollo will be investing to the tune of EUR450 million in a
greenfield facility in Gyongyoshalasz area of northern
Hungary. The facility will have a capacity of 5.5 million
passenger car tyres and 0.7 million truck tyres. Production
from the facility is expected to start in early CY2017.
Hungary has also received the European Unions regulatory
approval for a EUR95.7-million aid for Apollo. The aid
includes a direct grant of EUR48.2 million, an employment
grant of EUR2.8 million and tax allowances of about
EUR44.7 million. Apollos European plants are currently
operating at about 90% capacity utilisation and hence this
greenfield facility is essential to cater to the long-term
growth. In addition, Apollo will be investing Rs2,000 crore
to enhance the capacity of its Indian operations.
Valuations
Given the continued weakness in NR prices and, more
importantly, some relief in crude oil derivative products,
such as synthetic rubber and carbon black, we have raised
our gross profit margin (GPM) estimates for the company.
However, with the weakness in raw material prices the
growth in realisations would be capped in FY2016 and we
have reduced our estimates to factor in the impact of the
same. Our earnings estimate for FY2015-16 stands revised
upwards by 2%. We remain positive on the stock, given
the companys strong fundamentals and the bright growth
prospects for both the domestic and the European
operations. We reiterate our Buy recommendation on the
stock with a revised price target of Rs237 (vs Rs210 earlier)
discounting FY2016E earnings by 10x.
Domestic rubber prices
Negative cues for NR from Thailand and China
The Thai government, which had a stockpile of 200,000
tonne of rubber, agreed to sell half the quantity at 62.6
baht ($1.95) per kg last week triggering another fall in
the prices. The government had bought the commodity
in 2012-13 while paying a 10% premium to farmers (about
100 baht) so as to stabilise the prices of NR of which
Thailand is the largest producer. The government is also
expected to sell the remaining quantity as the quality of
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
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