Crompton Greaves : BUY

Correction in Stock, An Oppurtunity to Add

Crompton Greaves’ (CG) Q4 operational results were below estimates due to lower-than-expected margins in int’l subs & lower growth in dom. T&D biz. The mgmt expects standalone sales growth of ~12-15% in FY12 (vs. 16-18% earlier). For int’l subs., the mgmt expects 12-13% constant currency growth in FY12. While standalone margins could dip ~50 bps, expansion in int’l subs margins would compensate for the same.

FY11 highlights and key conference call takeaways

• Int’l subs orders make-up for muted domestic orders: Int’l biz order intake grew at ~38% (constant currency) compensating for flat intake in dom biz. Driven by execution of large EPC projects, FY11 sales growth surprised positively at ~16%. The mgmt foresees significant headroom for margin expansion in the international division, which can off-set margin dip in India T&D biz.
• Domestic T&D biz to be muted in FY12E; likely pick-up in FY13E: Given 20% decline in order inflow, the mgmt expects 6-8% growth in FY12. However, they expect significant pickup in domestic T&D orders from H2FY12 driving 20%+ growth for FY13E, which is corroborated with our checks with PGCIL. Post a 40 bps dip in FY11 margins, the mgmt expects further pressure of 50bps+ in FY12.
• Industrial & Consumer Biz grew by 19% and 25% respectively, which the management expects to sustain in FY12 .
• Acquisitions: CG expects to close a couple of acquisitions in the Industrial (drives & automation) & Power (substation automation) segments in Q1FY12. This would narrow CG’s technology & product gap vis-à-vis global majors such as ABB, Alstom, Siemens, etc.

Maintain Buy with a TP of 298 (18% upside)

To factor in the results & mgmt guidance, we have cut our FY12-13 EPS by 3-4%. While, FY12 would be a year of consolidation, the mgmt expects growth to accelerate from FY13 onwards.

Through organic as well as inorganic routes, the mgmt is targeting sales of USD 8 bn in 5 yrs which implies CAGR of ~30%. Post a 10% correction, we believe that the risk-reward is favorable at CMP (Rs 253) – P/E of 16x FY12E and 13x FY13E, for a co. that can grow its earnings by 15-20% with RoE of 25-30%.