Motilal Oswal neutral on Crompton Greaves

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Motilal Oswal neutral on Crompton Greaves

Motilal Oswal has maintained neutral rating on Crompton Greaves with a target of Rs 138, in its October 21, 2011 research report.

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Motilal Oswal has maintained neutral rating on Crompton Greaves with a target of Rs 138, in its October 21, 2011 research report.

"Crompton Greaves (CRG) reported disappointing 2QFY12 results. Consolidated profit declined by 45% YoY, led by a 29% drop in standalone profit and 92% decline in subsidiaries' profit. Pressure on margins is expected to continue through the rest of FY12. We are downgrading earnings estimates by 20% and 17% for FY12 and FY13, respectively."

"Crompton Greaves (CRG) reported 45% YoY decline in consolidated net profit to INR1,167m (v/s our estimate of INR1451m, down 32% YoY) despite 13% YoY growth in revenue to INR27b (v/s our estimate of INR26.5b, up 11% YoY). Revenue growth was boosted by the impact of recent acquisitions and gains due to currency-rate fluctuations. Adjusting for these, consolidated revenue grew ~2% YoY. The management maintained its FY12 guidance of consolidated revenue growth of 10-12% and EBITDA margin of 8-10%. The domestic power business, which is facing intense pricing pressure, posted 7% YoY decline in revenue and EBIT margin fell by 630bp YoY and 140bp QoQ. The industrial business posted revenue growth of 9% YoY and EBIT margins contracted by 478bp YoY to 15.7%. The consumer business revenue grew 4% YoY, driven by a partial rollback of price increases taken in FY12 and EBIT margins contracted by 317bp YoY to 11.3%."

"Overseas revenue was INR12.5b, up 32% YoY (~20% in Euro terms). Overseas sales recovered sharply in 2QFY12, rising ~20% YoY in Euro terms from a decline of 9% YoY in 1QFY12, impacted by deferment of shipments in the MENA region. Like-for-like sales were flat YoY in 1HFY12. 2QFY12 EBITDA margins was 5.2% recovering sharply from 1QFY12. The subsidiaries business posted a net profit of INR42m, down 92% YoY (against our estimate of INR50m, down 91% YoY)."  We have cut our consolidated FY12 and FY13 EPS estimates by 20% and 17% respectively. Our target price is revised to INR138 (earlier INR165), based on 12x FY13E earnings and INR4/share for investment in Avantha. Although the stock trades at a significant discount to its long-range PE, we believe concern about profitability in the international business will be a key overhang on the stock in the near future. Maintain Neutral," says Motilal Oswal research report.

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