Dec 12, 2012 07:00 PM IST | Source:

4 reasons why Espirito thinks Crompton Greaves is a sell

Broking firm Espirito Santo has downgraded rating on capital goods player Crompton Greaves from neutral to Sell.

4 reasons why Espirito thinks Crompton Greaves is a sell

Moneycontrol Bureau

Broking firm Espirito Santo has downgraded its rating on capital goods player Crompton Greaves from neutral to sell. Its revised discounted casf flow (DCF) based future value (FV) of Rs 103 per share from Rs 154 earlier implies 13% downside from current levels.

Below are details of why the stock lost its neutral rating:

Losses in international segment to continue in H2FY13

Crompton began restructuring of its European operations in Q1FY13. Under the current restructuring program, Crompton will downsize the Belgium facility to 8,000 MVA. The negotiation is likely to get completed by Q4FY13 and costs associated with the restructuring exercise remains a key unknown risk.

The management expects timely completion of the projects shifted to Hungary. However, in the event of delay, it will have to pay liquidated damages to the customers of 15% of project value.

This restructuring exercise has led to restructuring costs to the tune of Rs 1.3 billion in H1FY13, according to management. These cost pressures will persist in H2FY13 until the projects are completely executed.

Fierce competition; no respite to margin pressure

Competition is intensifying in domestic T&D market. Crompton’s market share in Power Grid (PGCIL) orders has fallen to 8.3% in FY13 from 20% previously. With Chinese and Korean players setting up base in India, pricing will remain under pressure, which means that there will not be any respite on margins. Margins in domestic power business are expected to remain depressed at 10% levels for the next two years.

Weak investment cycle doesn’t augur well for industrial revenues

Its standalone industrial segment revenues declined 1.4% in H1FY13 highlighting India’s weak capex cycle. New project announcement have not shown sign of a recovery in the investment cycle yet. Industrial revenues are expected to grow by 10% YoY in FY14E. However, growth challenges in the base business will persist until there is a broad based revival in India’s corporate capex cycle.

New products additions and integration of small acquisitions

Crompton’s strategy to focus on the integration of all small acquisitions, localize technology of acquired entities is sensible, but it will take a long time to bear fruit.

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