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Company Update | Capital Goods

January 4, 2010

Crompton Greaves BUY


CMP Rs426
Powering Ahead Target Price Rs525
We have been maintaining our positive stance on Crompton Greaves (CGL) right Investment Period 15 months
from our initiating coverage report dated June 12, 2009, citing its unjustifiably
Stock Info
huge valuation gap with peers ABB and Areva T&D. Now we introduce our FY2012
estimates, and expect the company to register a Top-line and Bottom-line CAGR of Sector Capital Goods
12.1% and 19.8%, respectively, during FY2009-12E. We upgrade the stock from Market Cap (Rs cr) 15,610
Accumulate to Buy arget P
Buy,, with a 15-month TTarget rice of Rs525.
Price Beta 0.8

Margin expansion driven by operational parameters: CGL surprised the markets 52 Week High / Low 428/100
positively with regards to margin expansion in its 2QFY2010 results, as against Avg Daily Volume 279,285
the margin compression witnessed by its peers. The management attributed this Face Value (Rs) 2
margin expansion to value engineering / better product designing, leading to BSE Sensex 17,465
lower material consumption, coupled with the advantages of global sourcing of
Nifty 5,201
materials. Hence, we expect the margin expansion to be sustainable, rather than
Reuters Code CROM.BO
being one-off in nature.
Bloomberg Code CRG@IN
Higher local manufacturing content; A boon for CGL CGL:: CGL, with a minimum
18-month lead in domestic manufacturing, has a clear competitive advantage Shareholding Pattern (%)
over its peers in the 765kV transformers space. With the PGCIL (Power Grid
Promoters 40.9
Corporation of India) increasing the proportion of domestic manufacturing to
MF / Banks / Indian Fis 33.3
50% from 33%, it augurs well for the company, as it would be able to command
better margins, on account of lower domestic manufacturing costs (as against FII / NRIs / OCBs 16.8
higher costs incurred by its competitors at their overseas facilities). Indian Public / Others 9.0

Management guidance: The management expects FY2010E revenue growth to


Abs. 3m 1yr 3yr
be around 14-16% for the domestic standalone business and 2-5% for the overseas
entities. For FY2011E, the management expects an 18-22% revenue growth for Sensex (%) 2.0 81.0 26.7
the domestic business and 7-8% for its overseas operations. CGL (%) 35.8 215.4 104.0

Key FFinancials
inancials (Consolidated)
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 8,737 9,614 10,816 12,312
% chg 27.9 10.0 12.5 13.8
Net PProfit
rofit 560 729 830 962
% chg 37.7 30.1 13.9 15.9
EBITDA (%) 11.4 12.4 12.5 12.5
EPS (Rs) 15.3 19.9 22.6 26.3
P/E (x) 27.9 21.4 18.8 16.2
P/BV (x) 8.6 6.4 4.9 3.9
RoE (%) 36.1 34.2 29.5 26.7
RoCE (%) 27.5 28.0 26.4 25.4
Puneet Bambha
EV/Sales (x) 1.8 1.6 1.4 1.1
+91 22 4040 3800 Ext: 347
EV/EBITDA (x) 15.8 13.0 11.0 9.2 puneet.bambha@angeltrade.com
Source: Company, Angel Research; Price as on December 31, 2009

Please refer to important disclosures at the end of this report


Crompton Greaves | Company Update

Exhibit 1: Operating Margin Expansion


350 15.0

14.0
300
13.0
250
12.0
200 11.0

(Rs cr)

(%)
150 10.0

9.0
100
8.0
50
7.0

0 6.0
1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10
EBITDA (LHS) EBITDA Margins (RHS)
Source: Company, Angel Research

Acquisitions bridge technology gaps: Over the past few years, the company has
made several strategic overseas acquisitions, which, besides plugging in the technology
gaps, have strengthened its product portfolio and provided the company with access
to the key European and American markets. Notably, the existing gap remains in the
area of MV switch gears, the HVDC segment, industrial drives and automation;
however, the company is actively scouting for acquisitions to bridge this gap as well.

Exhibit 2: Acquisitions bridge technology gaps & provide access to global markets
Acquisition Country Details
Pauwels Belgium Three-phase distribution and power transformers,
production and retrofitting of sub-stations
Ganz Hungary High voltage transformers, gas insulated switchgear,
rotating machines, contracting service
Microsol Ireland Sub-station automation in HV/MV segments
Sonomatra France Services segment of the T&D business
MSE Power Systems USA EPC of high voltage systems
Source: Company, Angel Research

Outlook & Valuation:

During FY2009-12E, we expect the company to register a Top-line and Bottom-line


CAGR of 12.1% and 19.8%, respectively. At the CMP of Rs426, the stock is quoting at
18.8x and 16.2x FY2011E and FY2012E EPS, respectively, which we believe is attractive
compared to its peers ABB and Areva T&D (which are quoting at 24.9x and 21.5x
CY2011E EPS, respectively). We believe that such a high valuation gap is unwarranted
and going ahead it would narrow down as CGL has been bridging the technological
gaps through various acquisitions. The gap would also narrow down on the back of
superior earnings growth and higher average RoEs for CGL as against its peers. We
assign CGL a Target P/E multiple of 20x and upgrade the stock from Accumulate to
Buy
Buy,, with a 15-month TTarget
arget PPrice
rice of Rs525.

January 4, 2010 2
January 4, 2010
Share Price (Rs) Share Price (Rs)

10
20
30
40
50
60
70
80

0
Apr-04

0
100
200
300
400
500
600
0
100
200
300
400
500
600

Apr 01 Jul-04 Apr 01


Oct-04
Oct 01 Oct 01
Jan-05
Apr 02 Apr 02
Apr-05
Oct 02 Oct 02
Jul-05
Apr 03 Apr 03

Source: C-line, Angel Research


Source: C-line, Angel Research
Source: C-line, Angel Research

Oct-05

Oct 03 Jan-06 Oct 03


Apr-06
Apr 04 Apr 04
Jul-06
Oct 04 Oct 04

Crompton P/E
Oct-06
Apr 05 Apr 05
Jan-07

Oct 05 Apr-07 Oct 05

Exhibit 5: 12-month Forward Rolling P/BV


Apr 06 Jul-07 Apr 06

Areva P/E
Oct-07
Exhibit 3: 12-month Forward Rolling P/E Band

Oct 06 Oct 06
Jan-08
Exhibit 4: Crompton Forward Rolling P/E v/s Peers

Apr 07 Apr 07
Apr-08
Oct 07 Oct 07
ABB P/E
Jul-08

Apr 08 Oct-08 Apr 08

Jan-09 Oct 08
Oct 08
Apr-09
Apr 09
Apr 09
Jul-09
Oct 09
Oct 09
Oct-09

2x
3x
4x
5x
6x
11x
14x
17x
20x
23x
Crompton Greaves | Company Update

3
Crompton Greaves | Company Update

Profit & Loss Statement (Consolidated) Rs crore Balance Sheet (Consolidated) Rs crore
Y/E Mar FY2009 FY2010E FY2011E FY2012E Y/E Mar FY2009 FY2010E FY2011E FY2012E

Net Sales 8,737.3 9,614.5 10,815.8 12,311.5 SOURCES OF FUNDS


% chg 27.9 10.0 12.5 13.8 Equity Share Capital 73.3 73.3 73.3 73.3
Total Expenditure 7,741.7 8,421.7 9,468.5 10,775.0 Adj Reserves & Surplus 1,743.2 2,377.3 3,104.2 3,963.5
EBITDA
EBITDA 995.6 1,192.8 1,347.3 1,536.5 Shareholders FFunds
unds 1,816.5 2,450.6 3,177.5 4,036.8

% of Net Sales 11.4 12.4 12.5 12.5 Minority Interest 13.9 13.9 13.9 13.9
Total Loans 718.2 618.2 468.2 318.2
Others 74.0 76.6 80.1 87.6
Total Liabilities 2,548.5 3,082.7 3,659.6 4,368.8
Depreciation & Amortisation 121.6 134.6 144.0 152.6
TION OF FUNDS
APPLICATION
APPLICA
Interest 80.8 43.4 40.7 31.5
Adj Gross Block 3,014.3 3,248.0 3,448.0 3,648.0
PBT 867.2 1,091.4 1,242.7 1,440.2 Less: Acc. Depreciation 1,704.0 1,838.7 1,982.6 2,135.2
% of Net Sales 9.9 11.4 11.5 11.7 Net Block 1,310.3 1,409.3 1,465.3 1,512.8
Tax 304.7 360.1 410.1 475.3 Capital Work-in-progress 53.7 20.0 20.0 20.0

Effective Tax Rate (%) 35.1 33.0 33.0 33.0 Investments 167.2 394.2 394.2 394.2
Deferred Tax (Net) 48.2 48.2 48.2 48.2
Profit Before Minority Int. 562.5 731.2 832.6 964.9
Current Assets 4,169.9 4,526.3 5,741.6 6,776.4
Minority Int. 2.6 2.6 2.6 2.6
Current Liabilities 3,200.8 3,315.4 4,009.8 4,382.8
PAT 559.9 728.6 830.0 962.3
Net Current Assets 969.2 1,210.9 1,731.8 2,393.6
% chg 37.7 30.1 13.9 15.9 Total Assets 2,548.5 3,082.7 3,659.6 4,368.8

Cash Flow Statement (Consolidated) Rs crore Key Ratios


Y/E Mar FY2009 FY2010E FY2011E FY2012E Y/E Mar FY2009 FY2010E FY2011E FY2012E

Profit before tax 867.2 1,091.4 1,242.7 1,440.2 Per Share Data (Rs)
Depreciation 121.6 134.6 144.0 152.6 EPS 15.3 19.9 22.6 26.3

(Inc)/Dec in Working Capital 111.3 (86.6) 10.7 (71.0) Cash EPS 18.6 23.5 26.6 30.4

Income taxes paid (266.6) (360.1) (410.1) (475.3) DPS 2.0 2.2 2.4 2.4

Others 4.2 (35.8) (42.0) (58.8) Book value per share 49.6 66.9 86.7 110.1
Operating Ratios
Cash from operations 837.7 743.5 945.2 987.7
Asset Turnover (x) 3.7 3.4 3.2 3.1
(Inc) / Dec in Fixed Assets (349.7) (200.0) (200.0) (200.0)
EBITDA (%) 11.4 12.4 12.5 12.5
Free cash flows 488.0 543.5 745.2 787.7
NPM (%) 6.4 7.6 7.7 7.8
(Inc) / Dec in Investments (73.8) (227.0) 0.0 0.0
Debt / Equity (x) 0.4 0.3 0.1 0.1
Others 74.0 76.6 80.1 87.6
Return Ratios (%)
Inc / (Dec) in Share Capital 0.0 0.0 0.0 0.0
RoE 36.1 34.2 29.5 26.7
Inc / (Dec) in Debt (123.8) (100.0) (150.0) (150.0)
RoCE 27.5 28.0 26.4 25.4
Dividend and dividend tax (85.9) (94.5) (103.1) (103.1)
Dividend payout 13.1 11.1 10.6 9.1
Others (80.8) (43.4) (40.7) (31.5)
Valuation Ratios (x)
Cash from fin. activities (290.4) (237.9) (293.8) (284.5) P/E 27.9 21.4 18.8 16.2
Other adjustments 123.4 0.0 0.0 0.0 P/E (Cash EPS) 22.9 18.1 16.0 14.0
Net Inc / (Dec) in Cash 321.2 155.2 531.6 590.8 P/BV 8.6 6.4 4.9 3.9
Opening cash balance 244.5 565.6 720.8 1,252.4 EV/Sales 1.8 1.6 1.4 1.1
Closing cash balance 565.6 720.8 1,252.4 1,843.2 EV/EBITDA 15.8 13.0 11.0 9.2

January 4, 2010 4
Crompton Greaves

Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059.
Tel : (022) 3941 3940 / 4000 3600

Research Team
Fundamental: (+ 9122- 3952 4568)
Hitesh Agrawal Head - Research hitesh.agrawal@angeltrade.com
Sarabjit Kour Nangra VP-Research, Pharmaceutical sarabjit@angeltrade.com
Vaibhav Agrawal VP-Research, Banking vaibhav.agrawal@angeltrade.com
Vaishali Jajoo Automobile vaishali.jajoo@angeltrade.com
Shailesh Kanani Infrastructure, Real Estate shailesh.kanani@angeltrade.com
Anand Shah FMCG , Media anand.shah@angeltrade.com
Deepak Pareek Oil & Gas deepak.pareek@angeltrade.com
Puneet Bambha Capital Goods, Engineering puneet.bambha@angeltrade.com
Sushant Dalmia Pharmaceutical sushant.dalmia@angeltrade.com
Rupesh Sankhe Cement, Power rupeshd.sankhe@angeltrade.com
Param Desai Real Estate, Logistics, Shipping paramv.desai@angeltrade.com
Sageraj Bariya Fertiliser, Mid-cap sageraj.bariya@angeltrade.com
Viraj Nadkarni Retail, Hotels, Mid-cap virajm.nadkarni@angeltrade.com
Paresh Jain Metals & Mining pareshn.jain@angeltrade.com
Amit Rane Banking amitn.rane@angeltrade.com
Jai Sharda Mid-cap jai.sharda@angeltrade.com

Amit Vora Research Associate (Oil & Gas) amit.vora@angeltrade.com


V Srinivasan Research Associate (Cement, Power) v.srinivasan@angeltrade.com
Aniruddha Mate Research Associate (Infra, Real Estate) aniruddha.mate@angeltrade.com
Shreya Gaunekar Research Associate (Automobile) shreyap.gaunekar@angeltrade.com
Mihir Salot Research Associate (Logistics, Shipping) mihirr.salot@angeltrade.com
Chitrangda Kapur Research Associate (FMCG, Media) chitrangdar.kapur@angeltrade.com
Vibha Salvi Research Associate (IT, Telecom) vibhas.salvi@angeltrade.com

Tehcnicals:
Shardul Kulkarni Sr. Technical Analyst shardul.kulkarni@angeltrade.com
Mileen Vasudeo Technical Analyst vasudeo.kamalakant@angeltrade.com
Krunal Dayma Technical Analyst krunal.dayma@angeltrade.com

Derivatives:
Siddarth Bhamre Head - Derivatives siddarth.bhamre@angeltrade.com
Jaya Agrawal Jr. Derivative Analyst Jaya.agarwal@angeltrade.com

Institutional Sales Team:


Mayuresh Joshi VP - Institutional Sales mayuresh.joshi@angeltrade.com
Abhimanyu Sofat AVP - Institutional Sales abhimanyu.sofat@angeltrade.com
Nitesh Jalan Sr. Manager niteshk.jalan@angeltrade.com
Pranav Modi Sr. Manager pranavs.modi@angeltrade.com
Sandeep Jangir Sr. Manager sandeepp.jangir@angeltrade.com
Jay Harsora Sr. Dealer jayr.harsora@angeltrade.com
Meenakshi Chavan Dealer meenakshis.chavan@angeltrade.com

Production Team:
Bharathi Shetty Research Editor bharathi.shetty@angeltrade.com
Dharmil Adhyaru Assistant Research Editor dharmil.adhyaru@angeltrade.com
Bharat Patil Production bharat.patil@angeltrade.com
Dilip Patel Production dilipm.patel@angeltrade.com

Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946
Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302
Crompton Greaves

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Disclosure of Interest Statement Crompton Greaves


1. Analyst owership of the stock No
2. Angel Group owership of the stock No
3. Broking relationship with company covered No

Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)