FRIDAY CAPITA TELE FOLIO RECOMMENDATION

CAPITA RECOMMENDATION DT:18.8.07



Crompton Greaves

Happy times ahead

The company’s performance will leapfrog as benefits from recent acquisitions in terms of wider product range and better technology kicks in

Buy
Crompton Greaves

BSE Code
500093

NSE Code
CROMPGREAV

Bloomberg
CRG@IN

Reuter
CROM.BO

52-week High/Low
Rs 310 / Rs 144

Current Price
Rs 275 (as on 17th August 2007)


Crompton Greaves a BM Thapar Group Company is mainly engaged in the manufacture, distribution and sale of electrical and electronic equipment/ systems for power, industry and consumer segments.

The company is organized into three business groups viz. Power Systems, Industrial Systems, Consumer Products. Nearly, two-thirds of it's turnover accrues from products lines in which it enjoys a leadership position. Presently, the company is offering wide range of products such as power & industrial transformers, HT circuit breakers, LT & HT motors, DC motors, traction motors, alternators/ generators, railway signaling equipments, lighting products, fans, pumps and public switching, transmission and access products. In addition to offering broad range of products, the company undertakes turnkey projects from concept to commissioning. Apart from this, CG exports it's products to more than 60 countries worldwide, which includes the emerging South-East Asian and Latin American markets.

Thus, the company addresses all the segments of the power industry from complex industrial solutions to basic household requirements.

Crompton Greaves ‘s business operations consist of 22 manufacturing divisions spread across in Gujarat, Maharashtra, Goa, Madhya Pradesh and Karnataka, supported by well knitted marketing and service network through 14 branches in various states under overall management of four regional sales offices located in Delhi, Kolkata, Mumbai and Chennai. The company has a large customer base, which includes State Electricity Boards, Government bodies and large companies in private and public sectors.

Strong standalone growth

For the quarter ended June 2007, the company’s sales grew by 21% to Rs 896.07 crore with most of the upside in absolute terms coming from power systems division. Revenues from Power Systems division were higher by 25% to Rs 432.56 crore (or 44% of the total sales). Revenues from Consumer Products division were higher by 13% to Rs 301.59 crore (or 31% of total sales) and that of Industrial Systems were higher 32% to Rs 250.77 crore (or 25% of total sales).

PBIT margin of Power Systems was higher by 250 basis points to 11.5% as the supplies to SEBs/ Utilities enjoy the cushion of price variation clause offsetting rise in material cost. PBIT margin of Industrial Systems expanded by a sharp 380 basis points to 17.8% with the company scaling up value engineering thereby improving the realization and cutting down the material cost as proportion to sales value. Compared to these two business the segmental margin of consumer products improved by just 80 basis points to 10.5%.

Most of the upside at operating level too has come from Power Systems and Industrial Systems. While PBIT Power systems was higher by 59% to Rs 49.89 crore (or 40% of PBIT) that of Industrial Systems was up by 68% to Rs 44.68 crore (or 36% of PBIT) riding on higher sales and expanded margin. On the other hand the segment profit of Consumer Durable was up by 22% to Rs 31.63 crore (or 26% of total PBIT).

Aided by Rs 5 crore on account of forex gain the other income stood higher by 155% to Rs 12.59 crore. And with interest cost higher by 25% (to Rs 6.59 crore) and depreciation cost higher by 4% (to Rs 10.48 crore), PBT was higher by 62% to Rs 100.01 crore.

PAT grew 89% to Rs 68.76 crore.

Consolidated figures are much higher

Against the standalone revenues and PAT of Rs 896.07 crore and Rs 68.76 crore respectively, on consolidated basis, the company has registered revenues of Rs 1522.59 crore and Rs 89.90 crore respectively for the quarter ended June 2007

The company has four Indian subsidiaries viz CG Motors Private Limited (CGM), CG Capital & Investments Limited (CG Capital), CG-PPI Adhesive Products Limited (CG PPI) and Malanpur Captive Power Limited (MCPL). CGM, CG Capital and MCPL are subsidiaries of the Company, and CG PPI, being a subsidiary of CG Capital, in terms of the provisions of the Companies Act, 1956, is also the company's subsidiary.

The Netherlands- based CG International B.V., a 100% subsidiary of the company, is the ultimate holding company of the Pauwels and Ganz Group, comprising 15 downstream subsidiaries.

In totality, the company has 20 subsidiaries, 4 Indian and 16 foreign.

Encouraging business environment for all its business divisions

Increase in generation capacities has necessitated increase in transformer capacities. The Government of India (GoI) has set a goal of "Power for All" by FY12E. Investments in infrastructure, particularly in the power generation, and transmission & distribution (T&D) segments, are estimated to be at Rs 1400 billion for T&D alone in the XIth Plan (FY07-FY12). Transformers & switchgears are the key constituents for T&D. Every 1 MW of generation capacity added, entails an additional 7 MVA of transformer capacity to be added. India is set to commission 69,000 MW of generation capacity in the next 5-6 years, entailing an estimated 483,000 MVA of capacity requirement. Going forward, this is expected to create a huge demand for transformers.

This apart, replacement will drive the second round of demand for transformers. Old and outdated transformers are being used by utilities leading to huge T&D losses. Immediate replacement is the need of the hour and the government has been emphasizing on this through programmes like APDRP. Average life of a power transformer is about 25 years and that of a distribution transformer is 15-20 years. This should generate a replacement demand to the tune of 25,000 to 30,000 MVA p.a. in the next 4-5 years

Going forward past acquisitions will lead growth

Crompton Greaves enjoys superior brand equity in the domestic markets. However, its products were not as widely accepted internationally. The company is now spreading its footprint across the globe with certain key acquisitions that have strong brand equity. Thereby the company has diversified its customer base and reduced its heavy dependence on the domestic market that had proved to be nemesis during FY 1999 to FY 2001.

Crompton Greaves’ acquisitions (Pauwel, Ganz and Microsol), have given it the much-required brand name in the overseas market, access to superior technology and automation products, thus providing unique synergies to become a global T&D player.

In May 2005, Crompton Greaves acquired the Belgium-based loss-making Pauwel group that has five manufacturing facilities in three continents at an EV of Rs 191.4 crore. Since then Pauwel has turned around, partly due to superior European replacement demand and partly due to CGL's better management.

Pauwel group has manufacturing facilities in Belgium, Ireland, Canada, USA and Indonesia and well spread distribution network across the globe. The acquisition catapulted Crompton Greaves amongst top ten transformer manufacturers in the world.

Apart from strengthening it's foothold in the Indian market, Crompton Greaves acquisition of the Pauwels Group and it's transformer manufacturing facilities in five countries is expected to provide a significant impetus to the company's international presence.

The additional turnover of approximately Rs 1380 crore of Pauwels Group for it's last financial year is expected to increase Crompton Greaves’ International business to around 50% of it's turnover, making the company a force to reckon with, in the international market.

Apart from improving its geographical reach, the acquisition has given Crompton Greaves a new clientele to whom it can cross-sell its other products, and use its superior project management skills to position itself as a total solutions provider.

Crompton Greaves also successfully acquired Hungarian based Ganz (GTV) on 17th October, 2006. Ganz has added Gas Insulated Switchgears (GIS), Rotating Machines, and the supporting areas of design, erection, and commissioning to CGL's portfolio of products. This step makes high-end technology in switchgears required in EHV systems available to Crompton Greaves. Ganz Translator Villamossagi Zrt (GTV) and Transverticum kft (TV) located in Hungary, have been acquired at an EV of Rs 203 crore. TV is a subsidiary of GTV.

Capacity utilization at Ganz is low to the tune of 30-40%. Crompton Greaves expects to ramp it up by executing incremental orders of Pauwels, using Ganz's facilities.

Crompton Greaves has 18 Foreign Subsidiaries resulting from Pauwels and Ganz Acquisition.

International replacement demand for transformers will largely benefit Pauwels and Ganz

International replacement demand for transformers has also helped in the transformation of Pauwels: The North American grid failure of 2005 caused a virtual blackout in USA & Canada, due to power transformer failure. A majority of transformers had been installed 20 - 40 years ago (transformers usually have a life span of 25 years). This has caused a sudden spurt in replacement demand for transformers apart from increased stress on integration of networks.

This market is expected to grow by 15-17% CAGR over the next three years, as against 3-5% CAGR growth for the last decade. Crompton Greaves, along with its recent acquisitions (Pauwels and Ganz), caters to the European, North American and Australian markets.

Microsol acquisition would place CGL to a superior trajectory

Microsol acquisition would increase Crompton Greaves’ strengths in the area of high-end engineering and sub-station automation capabilities. Crompton Greaves will now move towards being a solutions provider from a product based company and market the same all over the world. The acquisition was done at an EV of Rs 57.8 crore.

More acquisitions are likely going forward

Crompton Greaves may opt for more acquisitions, especially in the industrial drives and relay automation segment, to expand its geographical reach as well as acquire further high-end technology. The move is well supported by its strong balance sheet and positive cash flows.

Acquisitions to further improve operating margin going forward

In FY 2006, Crompton Greaves’ operating margin was adversely affected because of its acquisition of Pauwel, a loss making entity. However, Crompton Greaves has managed to turnaround the financial health of Pauwel.

With increasing synergies among Crompton Greaves, Pauwel and Ganz expected to fully factor in by FY09E, the operating margin are bound to improve from the current levels. Also, its acquisition of Microsol would enable the company to foray into high-end solution projects, which yield superior margins.

Rise in raw material prices should not impact margins to a large extent as 52% of its orders have in-built PEC (majorly domestic) and it would now be resorting to back to back hedging. Also, staff cost, as a percentage of sales, is expected to decrease due to economies of scale.

India's industrial growth will see sustained growth momentum in demand for industrial drives

India Inc's capex is in full swing. An industrial capital expenditure is incomplete without industrial drives such as motors (Low-Tension and High-Tension types). With the acquisition of Ganz, CGL can now manufacture drives with a capability of up to 20 MW from earlier 5-6 MW. This segment is expected to grow at the rate of ~20% over the next two years.

Buoyant outlook

Strong investment splurge in the power sector along with strategic investment made by the company in technology and capacity to power strong growth momentum for Crompton Greaves going forward. Crompton Greaves continues to expand its product offering and moving up the value chain with both organic and inorganic route. The acquisition of Pauwels and Ganz while filled the product gap for the company apart from providing ready marketing and production footprints for access to European market, the recent acquisition of Microsol have resulted in the company turning fully integrated in the T&D value chain. Having filled the product gap and mustering presence across the value chain the company now turned its focus on improving profitability with right strategies to improve the utilization of resources at hand. On the competitive consumer products market of Fans, Luminaries etc the company is building strong brand recallability and reputation to sustain growth momentum along with right strategies of outsourcing and manufacturing. The new plant for Fans at Himachal Pradesh would bring in better volumes along with tax concessions for the division.

As demand preferences shift from a products to a solutions domain, the company has built capabilities to fulfill customer expectations with integrated solutions that combine information systems, people and processes, in contrast to its earlier emphasis, which was more product oriented.

The integration of the acquired companies has now entered more intricate arenas of information systems, organizational structure and governance. The company has already restructured its transformer, switchgear and engineering projects businesses of Crompton Greaves in India, and the power product and solution portfolios of Pauwels and Ganz into a new SBU-`CG Power', which will be the unified face for its ‘Transmission and Distribution’ business worldwide; this new SBU is expected to further realise benefits of co-ordinated sourcing, marketing and greater value extraction from larger scale synchronized operations in the long run. Though not as large as Power Systems, the company is steadfastly supported in its spirited journey of growth by a stable and profitable Industrial Systems business, and a low cost, high cash flow oriented Consumer Products business. With a unique combination of these three businesses, the company is well poised to capitalize on future global growth opportunities.

Valuation

In FY 2008, we expect the company to register standalone sales and net profit of Rs 4074.73 crore and Rs 295.80 crore respectively. On equity of Rs 73.31 crore and face value of Rs 2 per share, EPS works out to Rs 8.1. Consolidated EPS works out to Rs 11.5. The share price trades at Rs 275, giving a reasonable P/E of 23.9.

Crompton Greaves: Financials





0403(12)
0503 (12)
0603 (12)
0703 (12)
0803 (12P)

Sales
1861.05
1972.51
2520.59
3367.61
4074.73

OPM (%)
7.5
8.3
9.8
10.2
11.9

OP
139.37
163.51
247.88
341.83
485.93

Other inc.
27.02
21.44
32.74
34.88
42.59

PBIDT
166.39
184.95
280.62
376.71
528.52

Interest
38.48
23.08
26.37
30.35
37.95

PBDT
127.91
161.87
254.25
346.36
490.57

Dep.
44.22
42.09
44.18
39.36
41.27

PBT before EO
83.69
119.78
210.07
307.00
449.30

EO
5.83
5.03
-15.27
0.00
0.00

PBT after EO
89.52
124.81
194.80
307.00
449.30

Tax
18.69
10.03
31.75
114.63
153.50

PAT
70.83
114.78
163.05
192.37
295.80

EPS (Rs)*
2.5
4.2
4.8
5.2
8.1

Cons. EPS (Rs)*
N.A
N.A
6.4
7.7
11.5

* EPS is on current equity of Rs 73.31 crore,
Cons. EPS: Consolidated EPS
Face value of Rs 2
(P): Projections
# EPS is not annualised due to seasonality of business
Figures in Rs crore
Source: Capitaline Corporate Databases




Crompton Greaves: Standalone results





0706 (03)
0606 (03)
Var. (%)
0703 (12)
0603 (12)
Var. (%)

Sales
896.07
740.62
21
3367.61
2520.59
34

OPM (%)
11.7
9.7

10.2
9.8


OP
104.49
72.17
45
341.83
247.88
38

Other inc.
12.59
4.93
155
34.88
32.74
7

PBIDT
117.08
77.10
52
376.71
280.62
34

Interest
6.59
5.26
25
30.35
26.37
15

PBDT
110.49
71.84
54
346.36
254.25
36

Dep.
10.48
10.04
4
39.36
44.18
-11

PBT before EO
100.01
61.80
62
307.00
210.07
46

EO
0.00
0.00

0.00
-15.27
-100

PBT after EO
100.01
61.80
62
307.00
194.80
58

Current Tax
27.85
17.93
55
88.15
20.65
327

Deferred Tax
3.40
7.50
-55
26.48
11.10
139

PAT
68.76
36.37
89
192.37
163.05
18

EPS (Rs)*
#
#

5.2
4.8


* EPS is on current equity of Rs 73.31 crore,
Face value of Rs 2
# EPS is not annualised due to seasonality of business
Figures in Rs crore
Source: Capitaline Corporate Databases