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com August 05, 2014

Crompton Greaves Reco: Buy
Consumer durables drove Q1 profit; demerger in the offing CMP: Rs195
Promoters
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FII
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DII
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Others
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Company details
Price chart
Shareholding pattern
Price performance
(%) 1m 3m 6m 12m
Absolute -1.8 23.6 78.8 148.9
Relative -1.2 6.6 38.9 82.3
to Sensex
Price target: Rs225
Market cap: Rs12,496 cr
52-week high/low: Rs219/75
NSE volume: 47.6 lakh
(no. of shares)
BSE code: 500093
NSE code: CROMPGREAVE
Sharekhan code: CROMPGREAVE
Free float: 36.7 cr
(no. of shares)
Key points
In Q1FY2015 Crompton Greaves Ltd (CGL) reported a revenue growth of 8% YoY
at the consolidated level to Rs3,442 crore, driven by a steady growth in the
consumer durable (domestic) business and a recovery in the power system
(overseas) business. The profitability was also mainly contributed by the
consumer durable business whose margin expanded by 94BPS YoY to 12.4%. The
consolidated operating profit grew by 19% to Rs173 crore in Q1FY2015 but due
to higher interest and depreciation charges the net profit grew by 6% YoY to
Rs64 crore, which was in line with our estimate.
During the post-results conference call, the management shared that the problem
areas (the Belgian and Canadian businesses and the power system business in
the USA) have stabilised and are about to break even at the operating level.
Moreover, there are clear signs of an improvement in the overseas business (as
evident from the strong order inflow in Q1FY2015) and the management hinted
that new orders have a better margin profile. Hence, the margin should improve
in the overseas business.
We believe the overseas business is on a recovery path; we expect it to largely
break even at the operating level in FY2015 but add value at the net level only
from FY2016. Further, a revival in the domestic demand environment could
benefit CGL. In the meanwhile, the management is looking to demerge the
consumer durable business which could unlock value. In view of these positives
we remain bullish on the stock and retain our Buy recommendation on CGL with
an unchanged price target of Rs225 (20x the FY2016E earnings).
Results Rs cr
Particulars Q1FY15 Q1FY14 YoY % Q4FY14 QoQ %
Total income from operation 3,442 3,195 7.7 3,806 (9.6)
Total expenditure 3,269 3,050 7.2 3,618 (9.7)
Operating profits 173 145 19.1 188 (8.1)
Other income 39 35 9.2 84 (54.1)
EBIDTA 211 180 17.2 272 (22.3)
Interest 24 20 21.4 30 (19.8)
Depreciation 67 53 27.2 71 (6.0)
PBT 120 107 11.5 170 (29.6)
Tax 55 46 NA 90 (38.8)
PAT before MI 65 61 6.2 81 (19.4)
Minority interest (0) 1 1
Shares of profits 1 2 17 NA
PAT after MI (Adj.) 64 60 6.1 64 0.3
EO. - - -
Reported PAT 64 60 6.1 64 0.3
Ratios (%) BPS BPS
OPM 5.0 4.5 48 4.9 8
PAT M 1.9 1.9 (3) 1.7 18
Tax rate 45.9 43.2 270 52.7 (686)
Stock Update August 05, 2014
2
sharekhan stock update
Revenue growth driven by recovery in overseas business
and growth in consumer segment
On a consolidated basis, the top line grew by 8% year on
year (YoY) to Rs3,442 crore mainly driven by a healthy
growth in the power system business (up 10% YoY) and
the consumer durable business (up 7% YoY); however, the
revenues of the industrial system business witnessed a
marginal decline (down 2% YoY) in Q1FY2015.
The healthy performance in the power system business
was mainly due to a steady performance (a 13% growth
YoY) in the international subsidiary (thanks to a recovery
post-restructuring) along with a minuscule growth in the
domestic business. The overseas industrial system business
also witnessed a strong recovery with a 19% revenue
growth; however, the same business performed poorly in
India (down 7% YoY). Consequently, at the consolidated
level the industrial segment reported a softer number
with a 2% decline YoY.
The power system and industrial system businesses in India
remained sluggish while there was a recovery in the
international operations. On the other hand, the domestic
consumer business registered a 7% growth on a high base
of Q1FY2014. The growth in the domestic consumer
business was driven by a jump in the fan and pump business
in the quarter.
[PBIT] level) and offset the profit from the power system
business (a PBIT of Rs30 crore). The consolidated operating
profit grew by 19% YoY to Rs173 crore during the period.
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Consol Sales Grow th(%)- YoY
Consolidated sales (Rs cr)
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Pow er system Industrial System Consumer Products
Segmental consolidated PBIT margin (%)
Consumer durables driving profit; overseas business
remains positive at operating level
CGL (consolidated) reported an operating profit margin
(OPM) of 5%, an expansion of 48 basis points (BPS) mainly
due to a margin improvement in the consumer durable
business in Q1FY2015. The profitability too was mainly
driven by the consumer durable business, which contributed
more than 60% of the total profit and recorded a growth.
On the other hand, the industrial profit declined by 20% (a
loss of Rs31 crore at the profit before interest and tax
Net profit growth restricted to 6% on higher interest
and depreciation
The profit after tax (PAT) grew by 6% YoY to Rs64 crore in
Q1FY2015 despite a 19% growth at the operating profit
level because of higher depreciation and interest costs.
In the domestic operations, due to a lower other income,
the PAT reported a flat growth at Rs126 crore despite a
12% growth at the operating level.
Conference call highlights
Order book and inflow: The consolidated order inflow
stood at Rs2,900 crore, a growth of 19% YoY, due to a
robust growth of 81% YoY in the international subsidiary
(mainly in the automation and system businesses)
during Q1FY2015. The order inflow in the domestic
market remained weak (a decline of 24% YoY) due to
the general election during the period. However, the
management expects the order inflow activity in the
domestic business to show an uptick from Q3FY2015
onwards while the international business is expected
to grow. The consolidated order backlog declined by
2% to Rs9,585 crore in the same quarter.
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Order Book- Consolidated (Rs cr) Order Book -Standalone (Rs cr)
Order backlog trend (Rs cr)
Stock Update August 05, 2014
3 3
Result snapshot Rs cr
Performance YoY Standalone Subsidiaries (derived) Consolidated
Q1FY15 Q1FY14 Grwth (%) Q1FY15 Q1FY14 Grwth (%) Q1FY15 Q1FY14 Grwth (%)
Net sales 1,905 1,841 3.5 1,537 1,354 13.5 3,442 3,195 7.7
Operating profits 171 153 12.0 2 (8) NA 173 145 19.1
Other Income 20 30 -32.1 18 5 NA 39 35 9.2
Interest (4) (7) -36.4 29 27 7.2 24 20 21.4
Depreciation 24 21 12.8 43 32 36.8 67 53 27.2
PBT 172 168 2.2 (52) (60) -14.3 120 107 11.5
Tax 45 43 4.7 10 3 NA 55 46 18.5
Adj. PAT 127 125 1.3 (63) (65) -3.1 64 60 6.1
OPM 9.0 8.3 69 0.1 -0.6 68 5.0 4.5 48
NPM 6.6 6.8 (14) -4.1 -4.8 70 1.9 1.9 (3)
Tax rate (%) 26.2 25.6 63 -19.2 -5.6 (1,359) 45.9 43.2 270
Problematic overseas subsidiaries stabilise; better
days ahead: The Belgian plant has stabilised now;
further, the first phase of restructuring in the Canadian
plant is complete (15% of the staff has been removed)
and the power system business in the USA is also
undergoing a similar restructuring exercise. The good
news is that the problematic plants in Belgium, Canada
and the USA (power systems) are close to breaking
even. But the interest cost of the international business
continues to pinch the bottom line. On the positive
side, the new orders won by the company especially
the power transformer orders have significantly better
margins (900BPS higher) than the existing orders. The
better margin numbers are expected to reflect in the
companys performance from mid 2015.
Domestic consumer remains king now but power and
industrials could revive in India soon: The stand-alone
consumer durable division continues to perform well,
as per the expectation of the management, supported
by an improvement in fans, pumps and lightings.
Currently, the industrial and power system divisions
remain sluggish but the management sees green shoots,
after the coming of a development-focused
government at the centre.
Consumer durable demerger; potential value
unlocking: The management of CGL has plans to
demerge the consumer durables division into a
separate entity and list it on the bourses. It is
evaluating various options for the same and would
finalise the detailed structure in the next two to three
months. We believe there could be value unlocking
from this exercise, subject to the deal structure.
Moreover, it is important to note that the management
has categorically stated that the company has no plans
to bring in new partners in the demerger structure
and that the deal would be for the benefit of the
existing shareholders.
Valuations
Particulars FY12 FY13 FY14 FY15E FY16E
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 YoY (%) (59.0) (77.8) 195.7 120.9 31.1
PER (x) 32.9 147.9 50.0 22.6 17.3
P/B (x) 3.5 3.5 3.4 3.0 2.7
EV/EBIDTA (x) 14.7 33.6 19.5 13.0 10.2
RoCE (%) 14.7 5.5 10.4 14.5 17.1
RoNW (%) 10.5 (1.0) 6.7 13.4 15.6
Div yield (%) 0.7 0.6 0.5 1.1 1.4
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
sharekhan stock update
Stock Update August 05, 2014
4
sharekhan stock update
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