1QFY11 Results Update

SECTOR: ENGINEERING

Crompton Greaves
STOCK INFO. BLOOMBERG
21 July 2010
BSE Sensex: 17,977 CRG IN Neutral
REUTERS CODE
S&P CNX: 5,399 CROM.BO Previous Recommendation: Neutral Rs283
Equity Shares (m) 641.5
52-Week Range (Rs) 285/149
1,6,12 Rel. Perf. (%) 10/17/48
M.Cap. (Rs b) 181.5
M.Cap. (US$ b) 3.8

* Consolidated nos, pre exceptionals

„ Standalone performance largely in line with expectations: Crompton Greaves (CG) reported standalone revenues
of Rs13b (up 14.4% YoY), marginally lower than our estimate of Rs14b (up 18.3% YoY). Power Systems revenues
were flat on a YoY basis, as exports were down 15% YoY at Rs2.2b. Net of exports, pure domestic growth in Power
Systems was 17%. EBITDA margin expanded 76bp YoY to 15.6%, higher than our estimate of 15.2%. Adjusted net
profit was up 24% YoY at Rs1.4b; higher other income of Rs148m (up 75% YoY) aided PAT growth.
„ CG Global - revenues decline 6% YoY, EBITDA margin expands 198bp: CG Global (consisting of Pauwels,
Ganz, Microsal, etc) reported revenues of Rs9.5b (down 6% YoY), EBITDA of Rs880m (up 20% YoY) and adjusted
net profit of Rs487m (up 6% YoY). Net interest expense was Rs56m (up 11%). Other income of subsidiaries declined
77% YoY. In Euro terms, revenues were up 8% while PAT was up 22% YoY.
„ Power Systems revenues lackluster; Consumer business EBIT at 95% of Power Systems EBIT: In the standalone
entity, Power Systems (38% of revenues and 37% of EBIT) revenues were flat while EBIT margin was up 67bp YoY
at 16.6%. Excluding exports, which declined 15% YoY, Power Systems revenues were up 17%. Industrial Systems
(23% of revenues and 28% of EBIT) revenues jumped 23% YoY; EBIT margin expanded 62bp YoY to 20.6%. Consumer
Products (40% of revenues and 35% of EBIT) revenues jumped 40% YoY while margin went up 104bp YoY to 15%.
The Consumer business EBIT in absolute terms now constitutes almost 95% of Power Systems EBIT, indicating the
significance of this division in the overall scheme of things for CG.
„ Valuation and view: The stock trades at 20x FY11E and 16.3x FY12E earnings. We maintain Neutral with a price
target of Rs264 (15x FY12E EPS).

Dhirendra Tiwari (Dhirendra.Tiwari@MotilalOswal.com); Tel: +91 22 3982 5127

Navneet Iyengar (Navneet.Iyengar@MotilalOswal.com); Tel: +91 22 3029 5126
 Crompton Greaves

REVENUE STANDALONE (RS M, % YOY) STANDALONE AND CG GLOBAL EBITDA MARGIN TREND (%)

Revenue (Rs m) Revenue Grow th (% YoY) Standalone EBITDA Margin (%)

CG Global EBITDA Margin (%)
21 21 20 18 19 15.9 16.5 16.6 16.7 15.6
17 17 17 14.8
14 12.7 13.5 12.7 13.112.8
13 13 11.7 11.8
14.8
10 8 13.8
10.6 11.4

16,182
10.4
13,618

13,429
12,686

12,238
11,595

11,735
8.8 8.8 8.1
10,829

10,862

10,797

7.4 9.2
9,050

9,152
8,961

6.7 7.2
4.1
1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11
Source: Company/MOSL

COST STRUCTURE (% OF REVENUES): RM COSTS INCREASE; OTHER EXPENSES DECLINE

1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11

Raw Materials 70 68 68 65 67 67 64 68 69
Staff Costs 5 5 5 5 5 5 5 4 5
Other Costs 12 14 15 14 13 11 14 11 11
Source: Company/MOSL

Consolidated order backlog at Rs68b; intake growth of 35% YoY

„ Consolidated order backlog stood at Rs68b in 1QFY11. Domestic orders accounted
for 55% of the orders while international subsidiaries accounted for the remaining
45%. Consolidated order book grew 7.7% YoY and 6.3% QoQ.
„ Consolidated order intake was Rs27.3b, up 35% YoY. While the domestic order book
grew 53% to Rs18b, the international order book grew 9% to Rs9.14b. The pick-up in
overseas orders was largely driven by increased demand for wind energy transformers
in Europe and US, though demand for distribution transformers remains weak.

ORDER BACKLOG AT RS68B, A GROWTH OF 8% YOY AND 6.3% QOQ

Standalone order book (Rs.m) Subsidiary order book (rs.m)

30,690
30,000
33,000

31,170
27,290

29,250

35,670
30,010

29,920

39,180

37,980
37,647

40,400

37,330
34,000
31,000

29,610
21,400

21,750

27,480
21,740

21,280

26,740

27,700
24,240

27,392
1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

Source: Company/MOSL

21 July 2010 2
 Crompton Greaves

ORDER INTAKE AT RS27B FOR CONSOLIDATED BUSINESS GREW BY 35% YOY

Standalone (Rs.m) Subsidiary (Rs.m)

7,727

9,120
14,705

13,610

7,800
14,542 6,160

13,000 8,000

13,960 6,330
12,039 8,368

3QFY09 10,818 8,808

2QFY08 10,265 8,551

3QFY08 10,009 6,376

20,572

18,200
17,000
14,682

14,869
4QFY08

1QFY09

2QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11
Source: Company/MOSL

Consumer Products business drives 56% of standalone EBIT increase

„ Power Systems (38% of revenues and 37% of EBIT) reported flat revenues of Rs5.1b
(up 0.3% YoY) in 1QFY11, while EBIT margin was up 67bp YoY at 16.6%. Industrial
Systems (23% of revenues and 28% of EBIT) revenues were up 23% YoY while
EBIT margin was up 62bp YoY at 20.6%.
„ Consumer Products (40% of revenues and 35% of EBIT) has been the key driver in
1QFY11. The division reported revenues of Rs5.3b (up 29% YoY) and EBIT margin
was up 104bp YoY at 15.1%. The business accounted for 56% of EBIT increase in
1QFY11. Further, Consumer business EBIT at Rs803m is largely similar to the Power
division at Rs846m in 1QFY11, indicating the meaningful traction witnessed. This
compares with FY09 EBIT of Rs3.5b for Power and Rs1.5b for Consumer division.
SEGMENTAL COMPOSITION (STANDALONE) (RS M)

1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 % YOY

Revenues (Net)
Power Division 5,084 6,043 5,690 8,286 5,101 0.3
Industrial Division 2,539 2,926 2,911 3,368 3,112 22.6
Consumer Division 4,129 3,740 3,647 4,604 5,318 28.8
Total 11,735 12,686 12,238 16,182 13,429 14.4
EBIT Margins (%)
Power Division 15.9 18.6 19.0 19.5 16.6 67.3
Industrial Division 20.0 21.6 23.3 23.2 20.6 62.0
Consumer Division 14.1 14.0 14.4 14.6 15.1 104.0
Source: Company/MOSL

CG Global: revenues decline 6% YoY in INR terms, EBITDA margin expands

198bp YoY
„ CG Global (consisting of Pauwels, Ganz, Microsal, etc) reported revenues of Rs9.6b
(down 6% YoY), EBITDA of Rs880m (up 19% YoY) and net profit of Rs487m (up
7% YoY) in 1QFY11.
„ EBITDA margin improved to 9.2% (up 198bp YoY), as material costs declined to
53% of revenues (down 279bp YoY) and other expenditure declined to 14.2% (down
100bp YoY). Staff cost increased to 23.6% of revenues in 1QFY11, up 180bp YoY.
„ Revenue decline of 6% YoY in 1QFY11 indicates continued weak demand for Power
Systems in the European and US markets. In Euro terms, revenues were up 8% YoY
while PAT was up 22% YoY.

21 July 2010 3
 Crompton Greaves

CG GLOBAL: QUARTERLY FINANCIALS (RS M)

1QFY10 2QFY10 3QFY10 4QFY10 1QFY11

Revenues 10,241 9,205 10,227 8,897 9,593

- Raw Material Exp 5,708 4,876 5,346 4,746 5,079
- Staff Cost 2,235 2,174 2,194 1,971 2,268
- Other Exp 1,562 1,182 1,523 860 1,367
EBITDA 736 973 1,164 1,320 880
EBITDA (%) 7.2 10.6 11.4 14.8 9.2
Depreciation 243 259 263 268 243
Interest 51 51 38 81 56
Other Income 155 54 48 -7 35
PBT 597 717 911 911 616
Tax 140 146 263 168 140
Tax (%) 23.4 20.4 28.9 18.5 22.8
PAT 457 573 642 754 487
Source: Company/MOSL

Takeaways from conference call

„ Stagnant revenue growth in Power Systems during the quarter was attributed to the
deferment of delivery by clients, both private and public. The management expects
pick up in volumes for Power Systems in 2HFY11.
„ The management has guided revenue growth of 14-15% in CG standalone and 5-6%
in the overseas subsidiaries.
„ Growth in the overseas business will mainly come from demand for wind transformers,
as CG has executed its first offshore wind substation project in Belgium and expects
more such orders in FY11.
„ The company expects the current growth rates in Industrial and Consumer businesses
in India to sustain through FY11 and is confident of meeting overall growth rates of
14-15% in FY11. Growth will also be supported by recovery in Power Systems sales
in 2HFY11.
„ Management was concerned about rising material prices, which may impact margins.
„ Margin expansion in international business was also attributed to a 15% gain on currency
translation, which resulted in lower other expenditure.
„ In light of the pick up in demand for industrial systems, the company is putting up a
new facility at Bhopal in Madhya Pradesh to manufacture industrial motors (both HT
and LT including fractional motors) at a cost of Rs550m.

Valuation and view

„ The stock trades at 20x FY11E and 16.3x FY12E earnings. We maintain Neutral
with a price target of Rs264 (15x FY12E EPS).
„ We expect a pick-up in order flows in the domestic power business in FY11, which
will help the company maintain strong growth in FY12.
„ Faster-than-expected recovery in developed market sales can provide upsides to FY12
earnings.
„ Crompton Greaves is a strong play on India’s capex cycle and one of the fastest
growing T&D companies worldwide. It has the potential to post earnings CAGR of
20% over next three years and is likely to command higher valuations, with clarity on
growth in overseas markets.

21 July 2010 4
 Crompton Greaves

Crompton Greaves: an investment profile

Company description Recent developments
Crompton is India's leading power equipment (transmission „ CGL though FY10 was able to win orders of close to
and distribution) manufacturer. Besides, it has presence in Rs10bn from PGCIL and hence won major orders
industrial / consumer products like motors, fans, lighting, totaling Rs6.5bn for transformers and reactors in the
etc. Over time, Crompton has acquired companies in Europe 765KV category. CG now holds a 35% share of the
and US and now derives 47% revenues from overseas market in the country and hence remains a formidable
subsidiaries. competition to the MNC's like ABB, Areva and Chinese
players like TBEA.
Key investment arguments
„ CGL also acquired a controlling stake in UK based
„ Crompton holds one of the largest market share of
Power Technology Solutions Ltd (PTS). This acquisition
between for most of the 765KV transformers/reactors
provides CGL with considerable expertise in system
as well as in the 400KV transformers and substation
studies, project management, EPC detailed engineering
awarded by PGCIL.
spanning, electrical (relay/control, SCADA and
„ CGL's market share in the 400KV space is between
substation automation) and civil/structurals (site
18% and 36% for substations and transformers while
foundation, development and structural design) thereby
in the 765KV transformer space it has a 35% share of
giving considerable depth to its existing project business
the market.
which forms.
„ FY10-12E revenue CAGR of 20% and earnings CAGR
of 22%, with potential upside to margin assumptions.
Valuation and view
Key investment risks
„ The stock trades at 20x FY11E and 16.3x FY12E
„ The Power systems business which contributes 68%
earnings. We maintain Neutral with a price target of
of revenues and 60% to EBIT recorded flat revenues
Rs264 (15x FY12E EPS).
for FY10 on a consolidated basis. Weak Macro factors
especially in Europe have lead to inconsistent order
inflows and hence muted revenue growth. Inability on Sector view
part of the utilities to financially close projects will play „ We remain neutral view on the sector.
a major role in incremental order awards for CG Power
going forward in FY11.
EPS: MOST FORECAST V/S CONSENSUS (RS)
COMPARATIVE VALUATIONS
MOST CONSENSUS VARIATION
CROMPTON ABB SIEMENS
FORECAST FORECAST (%)
P/E (x) FY11E 20.0 43.5 27.0
FY11 14.1 13.9 1.2
FY12E 16.3 25.7 21.3
FY12 17.3 16.1 7.8
P/BV(x) FY11E 7.9 6.6 6.3
FY12E 6.2 5.4 5.4 TARGET PRICE AND RECOMMENDATION

EV/Sales (x) FY11E 2.7 c 1.9 CURRENT TARGET UPSIDE RECO.

FY12E 2.2 2.4 1.5 PRICE (RS) PRICE (RS) (%)

EV/EBITDA (x) FY11E 16.7 28.0 15.0 283 264 - Neutral

FY12E 13.2 16.1 11.6
STOCK PERFORMANCE (1 YEAR)
For ABB, FY10 is CY09 and FY11 is CY10; For Siemens FY10 and
FY11 is Sept ending. Crompton Greaves (Rs) - LHS
Rel. to Sensex (%) - RHS
300 60
SHAREHOLDING PATTERN (%)
260 40
JUN-10 MAR-10 JUN-09
220 20
Promoter 42.6 42.3 42.1
180 0
Domestic Inst 22.3 23.1 25.8
140 -20
Foreign 19.8 18.4 16.1
Jul-09 Oct-09 Jan-10 Apr-10 Jul-10
Others 15.3 16.3 16.0

21 July 2010 5
 Crompton Greaves

Financials and Valuation

21 July 2010 6
 Crompton Greaves

N O T E S

21 July 2010 7
 Crompton Greaves

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Disclosure of Interest Statement Crompton Greaves

1. Analyst ownership of the stock No
2. Group/Directors ownership of the stock No
3. Broking relationship with company covered No
4. Investment Banking relationship with company covered No

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21 July 2010 8