Stock Market Update on Crompton Greaves for 1QFY2012 with a Neutral recommendation.
Crompton Greaves (CG) reported a dismal performance for 1QFY2012; well below our expectations, with a disappointing performance on the profitability front. On a consolidated basis, the company posted modest growth of 5.9% yoy to `2,438cr (`2,302cr), which was broadly in-line with our estimate of `2,486cr. However, a sharp increase in raw-material costs affected the company’s margins considerably, denting CG’s overall profitability during the quarter. We recommend Neutral on the stock
Negative surprise on margins; Unimpressive show by the power segment: Led by high raw-material costs, EBITDA margin for the quarter witnessed a steep decline of 545bp yoy to 7.5%, which was well below our estimate of 12.5%. The margin erosion can mainly be attributed to the power systems segment, which contracted sharply by around 800bp yoy to 2.6%. Weak performance delivered through overseas subsidiaries (flat growth and negative OPM) largely contributed to the dull operating performance on a consolidated front. Consequently, EBITDA declined by 38.8% yoy to `182cr (`297cr). Consequently, PAT also fell sharply by 58.4% yoy to `79cr (`191cr).
Outlook and valuation: The T&D equipment segment is witnessing challenging times, characterised by heightened competition, pricing pressures and delayed tendering from PGCIL. Industry commentary suggests that ordering is likely to pick up post 1HFY2012 on the back of increased activity at PGCIL’s, which should stabilise CG’s power segment. However, a tough macro environment and competitive pressures in the overseas T&D markets (which contribute substantially to CG’s revenue) would weigh heavily in the near-to-medium term. Though we believe CG to be an underperformer, the stock has corrected significantly and further downside seems limited. Hence, we recommend Neutral.
