Crompton Greaves – Kotak Securities Research Report

Kotak Securities are not bullish on Cromton Greaves and have recommended REDUCE:

We recently met with the management of Cromton Greaves to get a perspective on the overall business in domestic and overseas markets. Below are the key highlights of our interaction.

Management of Cromton Greaves reiterates its guidance for 15% YoY growth in FY11E in the domestic business mainly driven by 1) expected up tick in order flow from Powergrid for setting up of seven transmission corridors at an investment of about INR 500 bn over the next five years; 2) industrial division picking up due to resurrection of domestic demand across sectors giving thrust to the corporate capex for funding future growth plans.

Despite improvement in overseas order intake in Q1FY11, Cromton Greaves does not foresee sharp recovery in its overseas revenue and expects to grow by 5% for full year FY11E on constant currency basis. CompanyCromton Greaves expects benefits from the surge in demand for wind energy business in medium term. It has a reasonable presence in the space and enjoys a firm market for its SLIM transformers in wind farm installations.

Driven by falling demand for distribution transformers due to muted activity in the housing sector in abroad, the revenues from the overseas subsidiaries of Cromton Greaves have been on the declining mode in since past few quarters. We would be closely monitoring the overseas revenue trend to conclude revival in these geographies.

Cromton Greaves‘s current order book stands at Rs 39 bn in power systems division and offers one year revenue visibility.

Cromton Greaves has experienced slippages and delivery deferments from customers in the Q1FY11 on account of muted order inflows from PGCIL. However there are no instances of order cancellations. Management claims that the situation is in on the improving trend and is further expected to pick up in 2HYFY11E with increase in PGCIL spending.

We believe that Cromton Greaves would maintain margins in FY11E on back of design optimization, standardization of processes, global sourcing and having selective order mix. At consolidated level, Cromton Greaves has reported 14%EBITDA in FY10 primarily led by resource optimization and efficient cost control measures taken at SBU level.

Competition is expected to intensify in the power transformer business from local as well as international players. Lately Chinese and Korean players have also imparted stiff competition in the industry.

We believe that Cromton Greaves would take leverage on its early mover position; especially in the 765 KV segment and with the proposed localization reference stated by PGCIL, should benefit and maintain significant market share going ahead.

Management of Cromton Greaves has reiterated to continue focus on its core three business verticals; viz. power systems, industrial and consumer business. However it would consciously expand presence in Drives and Automation business. Wind business would continue to grow in the revenue mix from international operations. n While we are positive on the overall business prospects of the company, we change our recommendation to ‘Reduce’ in view of rich valuations due to the recent run up in the stock price.

We value Cromton Greaves‘s core business at 21x FY11E earnings and assign Rs 10 for its 32% stake in Avantha Power arriving at a one year price target of Rs 308.