Buy Crompton Greaves, target of Rs 325: CLSA

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CLSA is bullish on Crompton Greves and has maintained buy rating on the stock and expects a target price of Rs 325.

 

CLSA research reporton Crompton Greaves

 

Growth after consolidation

 

After a lacklustre FY07 (8% growth in pre-exceptional profit), Crompton is set for 40% earnings cagr over next three years driven equally by its domestic and international operations. Three acquisitions made by Crompton have provided it a global footprint and expanded the product range. Potential synergies include improved product designs, savings in material costs and cross selling of products. These coupled with operating leverage should provide a boost to Ebitda margins. Crompton is our top pick in power T&D segment. Target price raised to Rs325. Maintain BUY.

 

Domestic revenue growth slows a bit, earnings growth still good

 

Our recent meeting with PowerGrid indicated that there could be a slowdown in the domestic T&D revenues given the delays in order placement by PowerGrid and uncertainty over the private participation in transmission projects. Thus we have cut our revenue growth estimate for Crompton's power division. Despite that we have raised our margin assumption for the company. Introduction of improved designs and better bargaining power will help save material costs - to some extent already evident in 1Q FY08 results. Industry and Consumer division growth should remain strong over next few years. We expect 39% earnings cagr for domestic business over FY07-10.

 

International business - substantial scope for margin expansion

 

In FY08, domestic business will be the primary driver for Crompton's earnings growth. However, from FY09 onwards international business is likely to take the lead in growth given higher margin improvement potential. Demand for T&D equipment in Europe, US is strong and Pawuels-Ganz combine should be able to grow faster than the market given their low base and potential for better asset utilisation. We have raised our revenue growth estimates for international business from around 15% to 20-25% over next three years, in line with management guidance. Ebitda margins for international businesses are substantially lower than domestic margins. However, international businesses have higher operating leverage. With 20-25% revenue growth, there is potential for substantial improvement in Ebitda margins. We expect to see the full impact of this from FY09. We expect +55% earnings cagr for international business over FY08-10.

 

Synergy benefits to have tangible impact on financial performance

 

With acquisition of Pauwels, Ganz and Microsol, Crompton's power business has grown to 2.5x in revenues and now has a much larger vendor base. This should lead to savings in material cost. We are raising our FY08 earnings estimates by 3% and FY09 earnings by 10%. Maintain BUY. Our 12 month target price, based on 18x one year forward earnings, goes up to Rs 325.