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Transcript of CRG Ambhit Capital
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8/6/2019 CRG Ambhit Capital
1/25
Engineering & Capital Goods August 08, 2011
Crompton GreavesBloomberg: CRG IN EquityReuters: CROM.BO
Accounting: AmberAccounting: AmberAccounting: AmberAccounting: AmberPredictability: REDPredictability: REDPredictability: REDPredictability: REDEarnings Momentum: REDEarnings Momentum: REDEarnings Momentum: REDEarnings Momentum: RED
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit
Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers at the end of this Report.
SELLINITIATING COVERAGE
Exhibit 1: Key financials
Year to March (Rsmn) FY09 FY10 FY11 FY12E FY13E
Operating income 87,373 91,409 100,051 107,437 121,118
EBITDA 9,956 12,770 13,438 10,207 12,475
EBITDA (%) 11.4 14.0 13.4 9.5 10.3
EPS (Rs) 8.7 13.4 13.9 10.6 12.7
RoE (%) 35.7 39.7 30.8 18.9 19.3
RoCE (%) 37.2 40.4 34.1 19.2 20.6
P/E (x) 18.1 11.8 11.4 15.0 12.4
Source: Company, Ambit Capital research
Analyst Contacts
Puneet Bambha
Tel: +91 22 3043 [email protected]
Bhargav Buddhadev
Tel: +91 22 3043 [email protected]
Recommendation
CMP: Rs158
Target Price: Rs143
Previous TP: NA
Downside (%) (9)EPS (FY12E): Rs10.6
Change from previous (%) NA
Variance from consensus (%) (10)
Stock Information
Mkt cap: Rs101bn/US$2,272mn
52-wk H/L: Rs349/148
3M ADV: Rs749mn/US$17mn
Beta: 0.8x
BSE Sensex: 17,306
Nifty: 5,211
Stock Performance (%)
1M 3M 12M YTD
Absolute -37.5 -35.2 -43.8 -49.1
Rel. to Sensex -29.3 -28.6 -39.2 -33.5
Performance
10,000
15,000
20,000
25,000
Jun-10 Oct-10 M ar-11175
225
275
325
375
Sensex Crompton Greaves
1-year forward EV/EBITDA
0
100
200
300
400
500
600
Apr-
06
Aug-0
6
Dec-
06
Apr-
07
Aug-0
7
Dec-
07
Apr-
08
Aug-0
8
Dec-
08
May-0
9
Sep-0
9
Jan-1
0
May-1
0
Sep-1
0
Jan-1
1
May-1
1
3x
6x9x
12x15x
18x
The Great UnravellingThe Great UnravellingThe Great UnravellingThe Great Unravelling Whilst Cromptons stock price is already down 33% following thedismal 1Q results, we expect further share price weakness in FY12 dueto: (a) Weakness in Cromptons overseas business; (b) The likelihood ofPGCIL throttling back on T&D capex; and (c) Significant corporategovernance concerns regarding Crompton. We initiate with a SELL.
Competitive position - Weak: Crompton Greaves (CRG) has historicallycompeted with MNC peers such as ABB, Areva and Siemens and other foreigncompetitors from Korea and China. With ~44% of PGCILs capex in the XIIFive Year Plan likely to be spent on High Capacity Corridors which alsoincludes HVDC technology (CRG does not have HVDC) and given risingcompetition from Chinese and Korean vendors (primary data says Baoding,Hyosung etc operate at 30% utilization) for PGCILs tenders (CRGs bread andbutter market), CRG is likely to face continued pricing pressure in India.
Several potholes ahead
Difficulties at home: Given the delays faced by generation projects due toissues concerning coal, land and environment clearances, we expect PGCIL todowngrade its capex guidance for the XIIth Five Year Plan as ~80% of its capexdepends on new generation projects. Also, rising losses by State ElectricityBoards (SEBs) have resulted in power outages and delays in capex. This iscorroborated by: (a) SEBs share in CRGs order backlog falling below 10%from 20%+ and (b) BHELs dismal order intake in 1QFY12 (77% YoY decline).
Difficulties abroad: 28% of CRGs international revenues in FY11 came fromEurope and North America. With Portugal, Greece, Spain, Ireland and Italy at
various stages of their sovereign debt crises (which has made investment inT&D by these governments highly unlikely) and global giants such as Siemensand Alstom reporting weakness in order intake from the North Americaregion, visibility on CRGs international business is likely to weaken further.
Corporate governance concerns: Given that CRG is the main cashgenerating asset in the broader Avantha Group and given the waymanagement has dealt with the recent aircraft purchase, investors beliefregarding CRGs corporate governance will take time to recover.
Valuations: Based on our DCF model (assuming COE of 15% and a terminalgrowth rate of 3%), we value CRG at Rs143 implying an FY12 P/E of 13.5x,which is a discount of 25% to its 5-year average P/E of ~18x. We believe sucha low multiple is justified given CRGs poor EPS growth prospects (6% declinefor Crompton v/s 41% growth for peers over FY11-13), deteriorating returnratios and given the corporate governance issues swirling around the firm.
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Crompton Greaves
Ambit Capital Pvt Ltd 2
Company Financial Snapshot
Profit and Loss (consolidated)(Rsmn) FY11 FY12E FY13E
Net sales 100,051 107,437 121,118
Optg. Exp 86,613 97,231 108,643
EBIDTA 13,438 10,207 12,475
Depreciation 1,936 2,330 2,690
Interest Expense 352 403 403
PBT 11,910 8,043 9,863
Tax 3100 1350 1744
PAT 8,887 6,770 8,157Profit and Loss Ratios
EBIDTA Margin % 13.4 9.5 10.3
Net Margin % 8.9 6.3 6.7
P/E (X) 11.4 15.0 12.4
EV/EBITDA (X) 7.7 10.1 8.3
Company Background
Crompton Greaves (CRG), a part of the Avantha Group,is one of the leading players in the Indian transmission
and distribution market. Besides, the company has astrong presence in other business segments includingindustrial systems and consumer products business.Over the past few years, CRG has strengthened itsproduct portfolio and expanded its geographical reachthrough a series of acquisitions (nine acquisitions in thelast six years).
Balance Sheet (consolidated)
(Rsmn) FY11 FY12E FY13E
Total Assets 71,660 77,837 93,273
Net Fixed Assets 19,417 26,087 27,397
Current Assets 45,496 45,003 59,129
Other Assets 6,747 6,747 6,747
Total Liabilities 71,660 77,837 93,273
Networth 32,747 38,763 45,941
Debt 4,703 5,703 4,703
Current Liabilities 33,892 33,130 42,427
Others 317 241 203
Balance Sheet Ratios
ROE % 30.8 18.9 19.3
ROCE % 34.1 19.2 20.6
Net Debt/Equity 0.1 0.1 0.0
Total Debt /Equity 0.1 0.1 0.1
P/BV (X) 3.1 2.6 2.2
Cash Flow (consolidated)(Rsmn) FY11 FY12E FY13EPAT 12,291 8,043 9,863Depreciation 1,936 2,330 2,690Change in Wkg Cap (5,133) (2,482) (1,025)Others (3,489) (946) (1,341)CF from Operations 5,605 6,944 10,187Capex (6,259) (9,000) (4,000)Investments (1,391) - -CF from Investing (7,382) (9,000) (4,000)Change in Equity - - -Debt (379) 1,000 (1,000)Others (1,548) (1,157) (1,383)CF from Financing
(1,927) (157) (2,383)Change in Cash (3,704) (2,212) 3,804
New project capex announcements in India have come off substantially (figs represent quarterly average capexin Rsbn)
FY96-04 FY05-06 FY07-09 1HFY10 2HFY10+1HFY11 Last 3 quarters
Government projects 339 518 1,750 1,540 2,438 743
Private projects 345 1,124 3,503 1,590 2,795 2,058
Total projects 683 1,642 5,254 3,129 5,234 2,801
Moodys has downgraded ratings for several European countries and this will hit T&D capex
Greece Spain Portugal Italy Ireland
Period Rating Period Rating Period Rating Period Rating Period Rating
Jul-11 Ca Mar-11 Aa2 Jul-11 Ba2 Jun-11 Aa2 Jul-11 Ba1
Jun-11 Caa1 Dec-10 Aa1 Apr-11 Baa1 May-02 Aa2 Apr-11 Baa3
May-11 B1 Sep-10 Aa1 Mar-11 A3 Dec-10 Baa1
Mar-11 B1 Jun-10 Aaa Dec-10 A1 Oct-10 Aa2
Dec-10 Ba1 Jul-10 A1 Jul-10 Aa2
May-10 Aa2 Jul-09 Aa1
Source: Bloomberg, Ambit Capital research, Note: Red colour indicates downgrades
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Crompton Greaves
Ambit Capital Pvt Ltd 3
Company OverviewCrompton Greaves (CRG) is a part of the Avantha Group, which has interestsacross several businesses including pulp and paper (Ballarpur Industries, FY10revenues US$863mn), food processing (Global Green), chemicals (SolarisChemTech Industries), power (Crompton Greaves, FY11 revenues US$2,223mn),energy and infra (Avantha Power & Infrastructure, FY2009 revenues US$73mn)
and IT & ITES (Salient Business Solutions and Avantha Technologies).
Over the past few years, CRG has strengthened its product portfolio and expandedits geographical reach. It now has manufacturing facilities in nine countries across
Asia, Europe and North America thanks to nine acquisitions in the last six years.The companys business portfolio is organized across three primary businesssegments - Power Systems, Consumer Products and Industrial Systems.
Exhibit 2: CRGs revenues have grown at a CAGR of19% over the last 5 years
-
20,000
40,000
60,000
80,000
100,000
120,000
FY06
FY07
FY08
FY09
FY10
FY11
Revenues (Rs mn)
CAGR 19%
Source: Company, Ambit Capital research
Exhibit 3: Revenue growth coupled with PAT marginexpansion has led to net profit CAGR of 32%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,0009,000
10,000
FY06
FY07
FY08
FY09
FY10
FY11
Adjusted PAT (Rs mn)
CAGR 32%
Source: Company, Ambit Capital research
Exhibit 4: A snapshot of CRGs business segments
% ofrevenues
(FY11)
% of EBIT(FY11)
Key products Competitors
Power Systems 65% 59%
Domestic power 26% 34%
International power 39% 25%
Transformers, switchgears, circuitbreakers
ABB, Areva, Siemens, Voltamp,Emco, Indotech
Consumer Products 20% 22%
Fans, lighting equipment, pumps,
appliances
Bajaj Electricals, Havells, Orient,
Philips
Industrial Systems 15% 19%HT and LT motors, drives, stampings,railway signalling and coach applications
BHEL, ABB, Areva, Siemens
Total 100% 100%
Source: Company, Ambit Capital research
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Ambit Capital Pvt Ltd 4
Exhibit 5: SWOT Analysis of CRG
Strengths Weaknesses
Strong franchise with market leadership across transformers,stampings and fans which contribute over 60% of standalonerevenues
Over the last six years, CRG has acquired nine companiesand enhanced its product portfolio to a level where it now
competes with the global leaders in T&D (Areva, ABB,Siemens etc.)
Strong ability to turn around distressed companies
Minimal exposure to the project management business (unlikeglobal peers) due to lack of domain knowledge
Gaps in technology relative to global peers in areas such asHVDC
CRGs financial disclosure levels are lower than those of MNCpeers
Opportunities Threats
Underinvestment in Indian T&D infrastructure is a hugeopportunity for the entire industry
Becoming a distribution franchisee is a potential opportunityfor CRG given the deteriorating financial health of SEBs
Replacement of low tension lines with high tension lines inorder to reduce transmission losses
The continued entry of Korean and Chinese players into theIndian transformer market is a major threat for CRG and otherdomestic players
The cancellation/renegotiation/delayed delivery pickups byclients (such as PGCIL/SEBs) is a potential key threat to CRG
Source: Ambit Capital research
Exhibit 6: Porters analysis of the Indian T&D industry
Source: Ambit Capital research
Bargaining power of suppliers
Low
Steel and copper constitute ~55% of T&Dcompanies raw material costs. Whilstthese prices rose by 31% in CY10,, so farin CY11 they have corrected by 6%. Giventhe slowdown in end demand andconsequent inventory build up, thebargaining power of suppliers hasdeteriorated.
Intensity of competition
High
In the Indian T&D marketcompetition from internationalplayers has increased considerablyespecially given that some of theseChinese and Korean firms areoperating at 30% utilization levels.
Furthermore, with PGCIL relaxingits pre-qualification norms, manyEPC companies have also startedtaking substation orders. This hasfurther increased competition inthis important segment of the T&Dmarket.
Barriers to entry
Medium
Once upon a time, access to technology was the biggest entry barrier. However, with PGCIL now relaxing its pre-qualification norms, this is no longer ameaningful barrier, as relaxation hasallowed construction companies to bid forthe PGCIL tender
Customers tenders have several criteriaamongst which the most demanding onesare technological capability, track record,global presence and a strong balancesheet. Without satisfying these criteria, itis difficult to qualify for the biddingprocess. That being said for largeoverseas firms, like the Korean andChinese firms, none of these areinsurmountable barriers.
Bargaining power of buyers
High
PGCIL which is the biggest customerfor domestic power ancillary firms,issues global tenders for all itstransmission orders. As a monopolybuyer, PGCIL enjoys very high
bargaining power.
This sort of monopoly buying power isenjoyed by Governments across the
world and it puts suppliers of T&Dequipment in an invidious position.
Threat of substitution
Low
T&D equipment does not have asubstitute. However, Governments
across the world can and do postponeinvestment in T&D if they are faced
with difficult fiscal conditions of the sortnow prevalent in the EU and in the US.
Improving
Unchanged
Deteriorating
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Ambit Capital Pvt Ltd 5
Cromptons strengthsCRG scores over peers on financial parameters: In our competitivebenchmarking analysis (based on the financial parameters shown in the tablebelow) of various T&D companies, CRG clearly emerges as one of the strongerplayers on the back of higher net profit margins coupled with high working capital
turnover translating into higher RoEs.
Exhibit 7: CRG scores over peers on financial parameters (quantitative scores in the left table and qualitativerankings in the right table)
RevenueCAGR
(5 years)
Debt/equity
PAT%
CFO/EBITDA
RoCE RoEWorking
capitalturnover
ABB 18% 0.0 1.0 1.2 5.6 2.6 6.3
Areva T&D 36% 0.9 4.4 0.2 20.9 18.6 4.5
CRG 20% 0.1 8.4 0.4 36.4 30.5 11.7
Jyoti
Structures 28% 0.8 3.8 0.2 31.4 18.3 3.1
KECInternational
21% 1.5 4.5 0.3 24.3 23.8 3.9
KalpataruPower 39% 0.5 4.8 0.6 19.1 14.6 3.7
Siemens 21% 0.0 7.7 0.7 37.0 22.8 546.3
RevenueCAGR
(5 years)
Debt/equity
PAT%
CFO/EBITDA
RoCE RoEWorking
capitalturnover
Overall
score
ABB
Areva T&D
CRG
JyotiStructures
KECIntl.
KalpataruPower
Siemens
Source: Capitaline, Ambit Capital research, Note: Based on the latest data available (i.e. FY11 data for CRG, Jyoti, KEC and Kalpataru, CY10 data forABB and Areva T&D, FY10 data for Siemens)
- Strong - Relatively strong - Average - Relatively weak
Strong brand and leadership position in the consumer business: ConsumerProducts is CRGs oldest and most profitable business segment in terms of ROCE.The key to CRGs high ROCE in this segment has been outsourced manufacturing
wherein the outsourced supplier bears the entire working capital burden. WhilstCRG is the market leader in fans and domestic pumps, it ranks second in thelighting business.
Exhibit 8: Crompton is a strong player in the Indian Consumer Durables market
ProductPer annum industry
size (Rsmn)Key players*
Motors 25,000 Crompton, ABB
Fans 20,000 Crompton, Orient, Usha and Bajaj Electricals
CFL 10,000 Philips and Osram
Luminaries 18,000 Philips, Bajaj Electricals and Crompton
Source: Industry, Ambit Capital research Note: *L to R in the order of market share starting from high tolow
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Ambit Capital Pvt Ltd 6
Exhibit 9: CRGs consumer business has been growingsales at a CAGR of 19% over the last 5 years
-
5,000
10,000
15,000
20,000
25,000
FY06 FY07 FY08 FY09 FY10 FY11
(Rsmn)
0%
2%
4%
6%
8%
10%
12%
14%
16%
Sales EBIT EBIT %
Source: Company, Ambit Capital research
Exhibit 10: CRGs consumer business is a cash cow forthe company thanks to its very high RoCE
-
500
1,000
1,500
2,000
2,500
3,000
3,500
FY06 FY07 FY08 FY09 FY10 FY11
(Rsmn)
0%
50%
100%
150%
200%
250%
300%
350%400%
450%
500%
EBIT Capital Employed ROCE%
Source: Company, Ambit Capital research
CRG has strong relationships with State Electricity Boards (SEBs): SEBsconstitute roughly half of the transmission capex planned in the 11th Five YearPlan. Our discussions with various industry participants suggest that CRG hasstrong relationships with SEBs particularly with those in Rajasthan and UttarPradesh. Furthermore, our sources say that CRGs relationships with SEBs tend tobe stronger than those of its overseas (Asian and MNC) competitors, as SEBs areperceived to have lower levels of transparency and higher receivable dayscompared to the PGCIL (Central utility).
Exhibit 11: SEBs comprised 46% of planned Transmission capex in the 11th FYP
Transmission capex (Rsbn) % share
PGCIL & JVs 550 39%
DVC 17 1%
Private bidders 190 14%
Central sector 757 54%
State sector 650 46%
Total 1,407 100%
Source: CEA, Ambit Capital research
Only domestic player to have stood tall against foreign competition: TheChinese (Baoding and TBEA) and Korean (Hyosung) players have been veryaggressive in the PGCIL transformer market and have seen their market share risefrom nothing to 45% over the past five years. However, CRG with its focus on theproducts (rather than on EPC projects), is the only domestic player to havemeaningful market share in the PGCIL transformer market. Thanks to its costcompetitiveness (exhibit 12) CRGs has ~30% market share in PGCILs XI th Five
Year Plan transformer ordering vis--vis 12% for European MNC peers.
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Ambit Capital Pvt Ltd 7
Exhibit 12: Crompton is the most cost competitive amongst peers (based onFY11/CY10 data)
ABB Siemens Areva Crompton*
Fixed cost as % of revenues 17% 12% 21% 16%
Employee expense as % of revenues 8% 7% 9% 5%
Interest as % of sales 0.6% 0.2% 2.9% 0.3%
EBITDA (Rsmn) 1,868 13,791 4,902 10,284
EBITDA margin 3% 15% 12% 17%
Source: Capitaline, Ambit Capital research, *represents standalone for FY11
Acquisitions have plugged CRGs technology gaps and provided thegeographical reach
Over the past six years CRG has acquired nine firms in the Western world for atotal outlay of ~US$305mn. As shown in the table below, these firms haveallowed CRG to plug in technology gaps such as EHV transformers, substationautomation, gas insulated switchgears etc.
Exhibit 14: The acquisitions have plugged CRGs technological gaps
DateAcquisition(country)
Value (Rsmn) Gains for CRG
May-05 Pauwels (Belgium) 2,038Brings three-phase distribution and power transformer technology to CRG andgives it access to European and US markets
Oct-06 Ganz (Hungary) 2,223 EHV transformers, Gas insulated switchgears
May-07 Microsol (Ireland) 667 Sub-station automation for MV and HV sub-stations
Jun-08 Sonomatra (France) 83On-site maintenance and repair of power transformers and on-load tapchangers etc. This enhances CRGs ability in the services segment of the T&Dbusiness.
Sep-08 MSE (USA) 720EPC of high voltage electric power systems, increases CRG's strength as asystems integrator in the international EPC business arena, particularly in therenewable energy (wind) segment
Mar-10Power Technology
Solutions (UK)
2,070Provides consultancy and engineering support to Regional Electricity Companies,
strengthens CRG's positioning in the UK marketApr-10
Nelco (threebusinesses) (India)
920Enables CRG to become a stronger player in its railways business and also buildcapabilities in drives
May-11 Emotron (Sweden) 3,670Fills gap in automation solutions for CRG's industrial systems business and givesit more relationships in West European markets
May-11 QEI Inc (USA) 1,350Strengthens CRGs position in SCADA and substation automation and gives itfurther penetration into the North American automation market
Source: Company, Ambit Capital research
Exhibit 15: CRGs subsidiaries now account for 41% ofits consolidated sales
-
20,000
40,000
60,000
80,000
100,000
120,000
FY06 FY07 FY08 FY09 FY10 FY11
(Rsmn)
0%
10%
20%
30%
40%
50%
Sales - standalone Sales - subsidiary
as % of total
Source: Company, Ambit Capital research
Exhibit 16: CRGs subsidiaries now account for 24% ofits consolidated EBIT
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY06 FY07 FY08 FY09 FY10 FY11
(Rsmn
)
0%
10%
20%
30%
40%
50%
EBIT - standalone EBIT - subsidiary
as % of total
Source: Company, Ambit Capital research
xhibit 13: Market share inansformer orders by PGCIL in
he 11th Plan
hinese/Korean 45.3%
rompton Greaves 29.6%
uropean majors 12.2%
thers 12.9%
ource: PGCIL, Ambit Capital research
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Ambit Capital Pvt Ltd 8
Exhibit 17: Whilst India accounts for 85% of standalonesales for CRG
Standalone Sales breakup FY11
India 84.7%
Asia (ex-India) 6.0%
Africa 4.6%
North America 0.5%
South America 3.3%
Europe 0.8%
Australia 0.1%
Total 100.0%
Source: Company, Ambit Capital research
Exhibit 18: it only accounts for 51% of theconsolidated sales
Consolidated Sales breakup FY11
India 50.5%
Asia (ex-India)
Africa
North America 11.6%
South America 1.1%
Europe 16.9%
Australia
Total 100.0%
Source: Company, Ambit Capital research
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Ambit Capital Pvt Ltd 9
Our worries regarding CRGWhilst the market has analysed CRGs abysmal 1QFY12 results to death and a lothas been written about the steep share price correction which followed the results(see charts below), our worries regarding CRG pre-date the results and go wellbeyond the numbers that this company publishes.
Exhibit 19: CRGs 1Q PAT was 62% below consensusestimates
(Rsmn) Reported Consensus Estimates Variation
Sales 24,377 26,240 -7%
EBITDA 1,819 3,278 -45%
EBITDA Margin 7.5% 12.5% -503bps
PAT 795 2,102 -62%
Source: Bloomberg, Ambit Capital research
Exhibit 20: Following the 1Q results CRGs share pricewitnessed a steep correction
5060708090
100110120130140
20
-Ju
l-10
20
-Aug
-10
20
-Sep
-10
20
-Oc
t-10
20
-Nov-1
0
20
-Dec-1
0
20
-Jan
-11
20
-Feb
-11
20
-Mar-
11
20
-Apr-
11
20
-May-1
1
20
-Jun
-11
20
-Ju
l-11
Crompton Greaves Sensex
Source: Capitaline, Ambit Capital research
Surprisingly high EBITDA margins from FY09-11
In its 1Q results, CRG reported a 545bps YoY erosion in EBITDA margin on theback of a sharp spurt in raw material costs (517bps YoY increase). The impact was
visible across all three of CRGs business segments with the consolidated EBIT
margin falling 804bps, 123bps and 523bps (on a YoY basis) for CRGs power,consumer and industrial segments respectively.
Exhibit 21: CRGs domestic power business marginsrose from FY07-FY11
-5%
0%
5%
10%
15%
20%
FY07
FY08
FY09
FY10
FY11
ABB Areva T&D India
Crompton Greaves
Source: Company, Ambit Capital research, Note: We have taken thedomestic power business margins of Crompton and compared with powerbusiness margins of ABB India and overall margins of Areva T&D India
Exhibit 22: CRGS international power businessmargins rose from FY07-FY11
-5%
0%
5%
10%
15%
20%
FY07
FY08
FY09
FY10
FY11
ABB Global Areva Global
Crompton Greaves
Source: Company, Ambit Capital research, Note: We have taken theinternational power business margins of Crompton and compared with
power business margins of ABB Global and overall margins of Areva
This erosion in EBITDA margins came after three years (FY09, FY10 and FY11) in which CRG relentlessly reported margin improvements whilst peers such as ABBand Areva reported consistent margin contraction. In those halcyon days, CRG
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Ambit Capital Pvt Ltd 10
management used to highlight global outsourcing, economies of scale and valueengineering as the drivers of its strong margins.
We note that in 1Q, other capital goods companies did not report such a sharp fallin EBITDA margins (and that is understandable given that steel and copper keyraw materials for firms in the T&D sector prices have softened in the past sixmonths).
Exhibit 23: YoY change in 1QFY12 EBITA margins of peers versus Crompton
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
BHEL BGR Thermax Siemens Crompton
YoY change in EBITDA Margins
Source: Company, Ambit Capital research
Corporate Governance issues
1. The aircraft purchase
In FY2011 CRG bought an aircraft for Rs2.7bn which is equivalent to 61% and34% of FY11 standalone and consolidated capex respectively. When asked torationalise this, management sighted higher travel requirements. Whilst this could
well be a valid justification given the global scale of the business: (a) CRG could
have rented an aircraft at a competitive tariff from Asia Aviation, which is a relatedparty that provides chartered flights for corporates; (b) We estimate that CRG willhave to incur incremental opex of ~Rs400mn to maintain its own aircraft(Rs136mn depreciation assuming 5% depreciation + interest of Rs273mn,assuming that the aircraft was funded through a loan of Rs2.7bn borrowed at 10%interest rate). This incremental expense is equivalent to 5% of its FY11consolidated PAT of Rs8.9bn.
In FY2008, CRG had made an investment of Rs563mn to purchase the co-ownership rights to an aircraft. This figure doubled in the FY2010 Annual Report,to Rs983mn. When we solicited an explanation for this from the management welearnt that whilst in FY2008 CRG owned a 45% stake in the aircraft in partnership
with BILT (45% owner) and Asia Aviation (10% owner), in FY2010, CRG boughtback BILTs stake and thereby raised it stake to 90%.
2. The timing of Mr. Trehans share sale
In a span of three days starting June 29 and ending July 1 i.e. around two weeksbefore the 1Q results, Mr. Trehan, the former MD and CEO of CRG, sold his entire0.03% stake in the firm. Note, Mr. Trehan had stepped down from his MD/CEOrole at CRG on June 1, 2011.
3. Scaling down guidance abruptly
Immediately after the dismal 1QFY12 results (where EBITDA margins fell by545bps YoY), management abruptly scaled down its YoY revenue growth guidancefrom 12%-14% to 10%-12% and pulled back its EBITDA margin guidance from13%-14% to 8%-10%. This was odd given that management had reiterated thisguidance in an analyst meeting hosted a month before the end of the quarter todiscuss its international acquisitions.
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Exhibit 24: Sharp scaling down of guidance by the management
Previous guidance (4QFY11) Revised guidance (1QFY12)
Revenue growth Standalone business: 12-15%
Overseas business: 12-13%Consolidated: 10-12% growth
EBITDA margins Standalone margins: same as FY11 (~15.7%) or slight 20bps-50bps plus minus
Overseas margins: same as FY11 (~10.1%) or slight improvement
Consolidated: 8%-10%
Source: Company, Ambit Capital research
4. Other corporate governance issues
Apart from the issues highlighted above, there are also other issues such as Mr.Thapar being a part of the Audit Committee (despite being a non-independentdirector) and CRG paying audit fees of US$1.4mn in FY11 (175% higher than theaudit fees paid by much larger firms such as NTPC, Adani Enterprises, Infosys, etc.)
which worry us.
Exhibit 25: CRGs high audit fees
(Figures in Rsmn) Crompton Greaves ABB Areva T&D NTPC Adani Enterprises Infosys
Net sales 100,051 62,871 40,200 483,115 263,871 275,010
Audit expenses 63 22 10 26 22
(as % of revenues) 0.06% 0.03% 0.02% 0.01% 0.01% 0.01%
Source: Capitaline, Ambit Capital research, Note: Based on FY11 data for Crompton, Adani and Infosys, FY10 data for NTPC, CY10 data for ABB andAreva T&D
Will CRG invest further in Avantha Power?
Our estimates suggest that Avantha Power & Infrastructure Ltd (APIL) requires~Rs24.6bn in equity. This includes ~Rs10.0bn (assuming debt:equity of 75:25)immediately for completing phase I of the Chhattisgarh and Madhya Pradesh
projects, and Rs14.6bn for phase II (see exhibit 26 for more details).Given that APIL has not had much success in raising money (raised Rs2.2bn fromprivate equity firm KKR compared to requirement of Rs12.5bn as per DRHP) sincethe filing of the DRHP (filed on March 30, 2010) and given that other than CRGthere is no other obvious source of cash in the Avantha Group, there is a risk thatCRGs cash might be used to capitalize APIL (in a repeat of the transaction whichtook place on March 2009 when Rs2.3bn was invested in APIL by CRG).
Exhibit 26: APIL requires ~Rs24.6bn of Equity to achieve financial closure for its projects under implementation
Projects MW Expected CoD* Project cost (Rsmn) Equity required (Rsmn) #
Chhattisgarh Power Project phase I 600 FY2013 28,720 7,180
Madhya Pradesh Power Project phase I 600 FY2013 29,100 7,275
Total equity required 14,455
Less: amount pumped in by CRG 2,270
Less: Pre-IPO placement to KKR 2,170
Equity shortfall for phase I (A) 10,015
Chhattisgarh Power Project phase II 600 FY2014 29,030 7,258
Madhya Pradesh Power Project phase II 600 FY2014 29,240 7,310
Equity shortfall for phase II (B) 14,568
Total equity shortfall (A+B) 24,583
Source: DRHP, Ambit Capital research, * As per DRHP, #assuming debt:equity of 75:25
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Exhibit 27: CRG has been the main cash generator in the Avantha Group
(12,000)(10,000)(8,000)(6,000)
(4,000)(2,000)
-2,0004,0006,0008,000
FY08 FY09 FY10 FY11
FCFF(Rsmn)
Avantha Power Ballarpur Industries Crompton Greaves
Source: Capitaline, Ambit Capital research, Note: for Avantha Power data not available post FY09
Overseas acquisitions seem to be overhypedWhilst consensus has often regarded CRGs subsidiaries performance as a great
success, our analysis suggests otherwise. Whilst CRGs standalone businessgenerated ROCE of 35% in FY11, its subsidiaries in contrast generated ROCE ofonly 15% (which is at the same level as in FY07) compared to a WACC of 15%.See exhibit 28 and 29 below to know more on the shareholder value accretionreported by CRGs standalone and consolidated entities.
Exhibit 28: Consolidated ROCE has been dragged down by the overseasbusinesses
0%
10%
20%
30%
40%
50%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
(ROC
E)
Standalone Overseas Consolidated
Source: Company, Ambit Capital research
Exhibit 29: Overseas business is not shareholder accreting relative to thestandalone business (figures in Rsmn for FY11)
Capital Employed (consolidated) (A) 37,767
Capital Employed (standalone) (B) 23,910
Capital Employed (subsidiaries) (C=A-B) 13,857
EV of consolidated (D) 91,522
EV of standalone (E) 76,660
EV of subsidiary (F=D-E) 14,862
Shareholders return for standalone (E/B) 3.2
Shareholders return for subsidiary (F/C) 1.1
Source: Ambit Capital research
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Difficulties in CRGs home market
PGCIL likely to miss its Rs120bn guidance for the12th Five Year Plan
CMIE data highlights a slowing down in project completion ...
CMIE data on projects completed and new projects announced indicates aslowdown in projects owing to issues relating to availability of fuel, environmentclearances and land acquisition.
Whilst India continues to remain a power deficit country, coal availability hasbecome the single biggest challenge. Coal India is struggling to ramp up coalproduction. Over the last ten years as coal production has grown at a 5.6% CAGRas against the planned 10%+ CAGR increase in power generation capacity by theend of the 12th Five Year Plan in FY17.
Furthermore, even the captive coal blocks (granted to the IPPs) are struggling to
ramp up. As a result, dependence on imported coal (which is ~65% moreexpensive than domestic coal) is likely to increase from 13% in FY10 to 18%+ byFY14.
Exhibit 30: New project capex announcement has come off substantially (figs represent quarterly averagecapex in Rsbn)
FY96-04 FY05-06 FY07-09 1HFY10 2HFY10+1HFY11 Last 3 quarters
Government projects 339 518 1,750 1,540 2,438 743
Private projects 345 1,124 3,503 1,590 2,795 2,058
Total projects 683 1,642 5,254 3,129 5,234 2,801
Source: CMIE, Ambit Capital research
Exhibit 31: and so has the pace in new project capitalization (figs represent quarterly average capex in Rsbn)
FY96-04 FY05-06 FY07-09 1HFY10 2HFY10+1HFY11 Last 3 quarters
Government projects 75 136 237 189 351 261
Private projects 107 130 366 645 550 528
Total projects 182 267 603 834 901 789
Source: CMIE, Ambit Capital research
and this is likely to delay PGCILs XIIth plan capex as ~80% ofcapex is dependent on commissioning of new projects
Out of PGCILs budgeted capex of ~Rs120bn in the XIIth Five Year Plan, ~80% ofthe capex is dependent on new generation projects being commissioned duringthe XIIth Five Year Plan period. Of this 80%, whilst 44% is towards building ninehigh capacity power corridors, the remaining 36% is to be utilized for connectingthe four UMPPs with the grid.
Given the delays in the number of projects completed and in new projectsannounced (see the CMIE data in the table above), we expect PGCIL to also delayits capex commitment related to these projects.
Whilst bulls can draw comfort from PGCILs capex in the current Five Year Plan(where the target for adding new generation capacity has been revised downwardsto 42gW from 78.5gW but PGCIL is on track to achieve its capex guidance of
Rs550bn), we note that PGCILs Capital WIP/gross block ratio almost doubled inFY10 relative to FY06. Hence we believe it is a matter of time before PGCIL startsevaluating the progress on generation projects before committing its share ofcapex.
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Exhibit 32: 80% of PGCILs capex is linked to new projects
Rsmn %
9 high capacity corridors 53,000 44%
4 UMPPs 43,200 36%
Others 23,800 20%
Total 120,000 100%
Source: Industry, Ambit Capital research
Exhibit 33: PGCILs CWIP/gross block ratio has doubled in the last 5 years
-
100
200
300
400
500
FY2006 FY2007 FY2008 FY2009 FY2010
(Rsbn)
0.0
0.1
0.2
0.3
0.4
0.5
(x)
Gross Block CWIP CWIP / Gross Block
Source: Capitaline, Ambit Capital research
SEBs health continues to deteriorate
The achievement to target ratio for SEBs has dropped from 63% in FY2010 to 40%in FY2011 on the back of rising losses primarily due to: (a) being forced to sellsubsidized power the gap between the average cost of power supply andaverage realizations continue to be 60paise/unit; and (b) high aggregate technical
and commercial (AT&C) losses - average AT&C losses continue to remain high at~28.4%. These losses have now resulted in SEBs cutting power supply as theysimply cannot absorb any further losses given that they have run out of money andregulatory bodies are in no mood to allow tariff hikes.
Whilst cumulative losses for SEBs have increased by 36% CAGR between FY06-FY10 from Rs206bn in FY2006 to Rs705bn in FY2010, the more worrying thing forCRG is that Rajasthan and Uttar Pradesh SEBs (CRGs biggest SEB customers as perour management meeting with the new MD) are amidst the SEBs with the highestEBITDA losses (see exhibit 37). Not surprisingly, given their rising losses, the shareof SEBs in CRGs order book has now declined to 10% in 1QFY12 from 20%+earlier.
Exhibit 36: SEBs generation capacity addition track record witnessed a sharpdowntrend in FY11
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
FY08 FY09 FY10 FY11
Central State Private
Source: CEA, Ambit Capital research
Exhibit 34: Rising losses of SEBs
SEB losses (Rsbn)
FY06 -206
FY07 -267
FY08 -321
FY09 -526
FY10 -705
Source: PFC, Ambit Capital research
Exhibit 35: AT&C lossescontinues to be high
AT&C losses (%)
FY03 32.5
FY04 34.8
FY05 34.3
FY06 33.0
FY07 30.6
FY08 29.2
FY09 28.4
Source: PFC, Ambit Capital research
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Exhibit 37: Rajasthan and Uttar Pradesh are amongst the worst SEBs
EBITDA (Rsmn)
State (Discom) FY07 FY08 FY09
Tamil Nadu 4,560 (14,370) 930
Rajasthan 5,290 (11,390) (46,340)
Uttar Pradesh (27,940) (28,700) (30,830)
Madhya Pradesh (5,270) (13,070) (22,320)
Maharashtra 9,440 12,350 840
Andhra Pradesh 11,390 8,000 (17
Karnataka 7,600 7,280 (9,530)
Jammu & Kashmir (11,910) (13,050) (12,340)
Haryana (1,080) (3,360) (7,830)
Bihar 140 2,970 (370)
Punjab (1,340) 1,420 40,370
Total (9,120) (51,920) (104,860)
All India Total (2,760) (15,560) (45,880
Source: PFC, Ambit Capital research
Competition intensifies in the Indian market
Whilst competition in the transformers market was already intense, the recent(4QFY11) relaxation of pre qualification norms by PGCIL in the 765kV sub-stationsegment has made the situation worsen. PGCIL has now excluded circuit breakers(a key component forming ~10%-15% of a sub-stations cost) from the 765kV sub-station contract, thereby making way for several new EPC players (including L&T,Jyoti Structures, Techno Electric, Kalpataru etc.) in its sub-station tender. Earlier,only MNCs used to be able to qualify for the substation package as only they hadthe requisite technology. Now, the field has been opened up by PGCIL.
Moreover, the Chinese are competing more aggressively for PGCIL orders asutilization in their home market has fallen to 30%. Our primary data sourcessuggest that Chinese bids are at least 15%-20% lower compared to bids fromIndian companies.
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Challenges in overseas marketsInternational sales constituted 50% of CRGs FY11 consolidated revenues withEurope, Asia and North America being the major contributors (see exhibit 18). If
we look at CRGs international revenues, 28% of these revenues in FY11 camefrom Europe and North America.
Now, T&D spend in both Europe and North America has fallen. Whilst Portugal,Greece, Spain, Ireland and Italy are at various stages of their sovereign debt crises(which has made investment in T&D by these governments highly unlikely), globalgiants like Siemens and Alstom have reported a slowdown in order intake fromNorth America region.
Exhibit 38: Moodys has downgraded ratings for several European countries
Greece Spain Portugal Italy Ireland
Period Rating Period Rating Period Rating Period Rating Period Rating
Jul-11 Ca Mar-11 Aa2 Jul-11 Ba2 Jun-11 Aa2 Jul-11 Ba1
Jun-11 Caa1 Dec-10 Aa1 Apr-11 Baa1 May-02 Aa2 Apr-11 Baa3
May-11 B1 Sep-10 Aa1 Mar-11 A3 Dec-10 Baa1
Mar-11 B1 Jun-10 Aaa Dec-10 A1 Oct-10 Aa2
Dec-10 Ba1 Jul-10 A1 Jul-10 Aa2
May-10 Aa2 Jul-09 Aa1
Source: Bloomberg, Ambit Capital research, Note: Red colour indicates downgrades
Exhibit 39: Whilst Siemens reported only 1% growth inorder inflows from America
34%
1%
39%
0% 10% 20% 30% 40% 50%
Europe /
C.I.S. / Africa
/ ME
America
Asia /
Australia
3QFY11 order growth YoY
Source: Company, Ambit Capital research
Exhibit 40: Alstom reported 25% drop in new ordershare from developed countries in FY11
(Order inflow share) FY2010 FY2011
Developed countries 65% 40%
BRICS 10% 25%
Other Emerging countries 25% 35%
Source: Company, Ambit Capital research
The difficult situation in North America and Europe has resulted in profit warnings
from global players such as ABB and Siemens. Whilst ABB global in its July results,has highlighted weakness in transmission related investments citing growingmacroeconomic concerns, Siemens AG in its 2QFY11 results announced in March2011 has told the market to expect weak order intake in 3QFY11.
MNC peers are better placed than domestic peers: MNC peers (ABB, ArevaT&D, Siemens) have an obvious advantage over CRG with respect to their productportfolios and technological prowess. One of the main reasons for this is high R&Dspend. Whilst Indian firms spent 1% of revenues on R&D in FY11/CY10, MNCpeers spent 4-5x this amount (which is not surprising given that the MNC firmsbalance sheets are 20x larger than that of the Indian firms).
In the years ahead, the technological advantage that the MNCs have will become
a greater disadvantage for CRG given that PGCIL is encouraging commissioning ofHigh Capacity Power Transmission Corridors (HCPTC), which also involves highend technology like High Voltage Direct Current (HVDC), which CRG does notpossess. Note that HCPTC constitutes ~44% of PGCILs 12th Plan capex.
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Exhibit 41: CRGs R&D spend is amongst the lowest (figs in $mn)
ABB Global Areva Global Siemens Global Crompton Greaves
Balance Sheet size 36,295 46,163 140,050 1,631
Sales 31,589 12,078 103,072 2,223
R&D Expense 1,082 470 5,217 22
(as % of sales) 3.4% 3.9% 5.1% 1.0%
Source: Company, Bloomberg, Ambit Capital research
Exhibit 42: MNC have broader product portfolios
Companies 765KV 1200KV HVDC GIS
ABB Yes Yes Yes
Areva T&D Yes Yes Yes
BHEL Yes Yes Yes Yes
Crompton Yes Yes No Yes
Emco No No No Yes
Siemens Yes Yes Yes Yes
Source: Industry, Ambit Capital research
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Key assumptions and estimates Whilst we expect Crompton to report revenue CAGR of 10% over FY11-FY13,given the lower margins (9.5% in FY12 v/s 13.4% in FY11), we expect a decline innet profits on the back of the assumptions made in the table below.
Exhibit 43: Key assumptions and estimates for Crompton (all figures in Rsmn unless otherwise mentioned)
FY10 FY11 FY12E FY13E CommentsKey assumptions
Power Systems 62,045 65,029 66,667 72,176
Domestic Power25,103 25,542 28,097 30,906
Given the steady spend in the Indian T&D sector, we assumerevenue CAGR of 10% over FY11-13 (as against 12% over FY08-11).
International Power37,330 40,600 38,570 41,270
Given the Euro zone crisis and consequent slowdown in housingdemand and wind installations, we expect a major slowdown inthis business and assume revenue de-growth of 5% in FY12.
Consumer Products16,120 20,212 22,233 26,679
Given the high inflation and challenging macro environment, weassume revenue CAGR of 15% over FY11-13 (as against 22% overFY08-11).
Industrial Systems12,587 14,971 18,714 22,456
Industrial systems is expected to register a strong revenue growthof 22% over FY11-13 given the enhanced product profileparticularly post the Emotron acquisition.
Key estimates
Sales 91,409 100,051 107,437 121,118Based on the assumptions highlighted above, we expect revenuesto grow at CAGR of 10% over FY11-13 (FY08-11 CAGR has been14%).
Sales (YoY growth) (%) 4.6 9.5 7.4 12.7
EBITDA 12,770 13,438 10,207 12,475
EBITDA margin (%) 14.0 13.4 9.5 10.3
We expect EBITDA margins to hover at 9.5-10% going forward v/s~14% in the last couple of years. Consequently, we expect EBITDACAGR of -4% over FY11-13 (FY08-11 CAGR has been 22%).
EBITDA (YoY growth) (%) 28.3 5.2 -24.0 22.2
Interest expense 428 352 403 403Crompton is virtually a debt free company with a consolidated net
debt to equity of 0.05x.PBT 12,243 11,910 8,043 9,863
Tax rate (%) 29.8 26.0 16.8 17.7Given the managements guidance of higher R&D expense andconsequent reduction in the tax l iability, we have assumed a lowertax rate of 17-18%.
Adj. PAT 8,247 9,268 6,770 8,157Consequently, we expect net profit de-growth of 6% over FY11-13(FY08-11 CAGR has been 32%).
PAT (YoY growth) (%) 47.3 12.4 -27.0 20.5
Cash flow fromoperations (CFO)
10,561 5,605 6,944 10,187
Whilst we expect Crompton to continue to be CFO positive, goingahead we factor in higher working intensity for the company (~38days as against 31 days in FY11) on back of higher inventory buildup coupled with higher debtor days as customers delay/deferpickups.
Cash flow from
investments(5,751) (7,382) (9,000) (4,000)
We model investments made by Crompton for the recent
acquisitions of Emotron and QEI Inc in FY12.Free cash flow 4,810 (1,777) (2,056) 6,187
Cash flow fromfinancing
(3,778) (1,927) (157) (2,383)We assume a dividend of 50% and 65% during FY12 and FY13respectively
Overall change in cash 1,032 (3,704) (2,212) 3,804
Source: Company, Ambit Capital research
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For FY12 and FY13 our estimates are below consensus for topline and bottomline.Our more conservative growth assumptions for the international power businesscould be the main reason for this lower topline (we have modeled a 5% declineand 7% growth in revenues in the international power business for FY12 and FY13respectively).
On the EBITDA margin front, we have modeled a margin of 9.5% for FY12 and
10.3% for FY13, which is 110bps-125bps lower than consensus for both theseyears. Hence our EPS estimates are 10%-13% lower than consensus.
Exhibit 44: Ambit v/s consensus estimates for Crompton
Consensus Ambit % change
Sales (Rsmn)
FY12E 111,495 107,437 -3.6
FY13E 126,893 121,118 -4.6
EPS (Rs)
FY12E 11.7 10.6 -10.1
FY13E 14.7 12.7 -13.5
Source: Bloomberg, Ambit Capital research
Absolute valuation
We have valued CRG using a free cash flow (FCFF) model. Our FCFF metric iscash profit increase in working capital capex . Our FCFF model has two distinctphases:
FY12-FY22: We model each year in detail and assume that: (i) revenues willgrow at CAGR of 11%; and (ii) operating margins would gradually stabilize at~9.3% by FY22 (from 13.4% in FY11).
From FY23: FCFF would grow at a CAGR of 3%.
Given the deteriorating margin profile coupled with rising working capitalrequirement, we expect CRGs ROCE to gradually reduce from 25% in FY11 to13% in FY22. Based on these assumptions and assuming a weighted average costof capital (WACC) of 15.0% (assuming equivalent to the cost of equity of 15%,CRG being a negligible debt company), our FCFF model values CRG at Rs143 pershare (implying FY12 P/E of 13.5x and FY13 P/E of 11.2x) and 10% downside.
Exhibit 45: Our free cashflow (FCF) valuation for Crompton is Rs143/share
Period Rsmn
Net PV of free cash flows for CRG 55,000
Terminal value 41,453
Total 96,453
Less net debt 4,932
Value of CRG
Total no. of shares (in mn) 641.5
Value per share (Rs/share)
Source: Ambit Capital research
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Exhibit 46: FCFF profile on Crompton
-
1,0002,000
3,000
4,000
5,000
6,000
7,000
FY13E
FY14E
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
0%
5%
10%
15%
20%
PV of FCF (Rs. mn) WACC (RHS) ROCE (RHS)
Source: Company, Ambit Capital research
Crompton is currently trading 15% below its 5-year mean P/E band havingwitnessed a sharp de-rating on the back of dismal 1QFY12 results. However, giventhe deteriorating business environment (in both its domestic and internationalbusiness), governance issues and change in management, we believe that such adiscount to the historical average is justified.
Exhibit 47: One year forward P/E band
0
50100
150
200
250
300
350
400
450
500
Apr-
06
Aug-0
6
Dec-
06
Apr-
07
Aug-0
7
Dec-
07
Apr-
08
Aug-0
8
Dec-
08
May-0
9
Sep-0
9
Jan-1
0
May-1
0
Sep-1
0
Jan-1
1
May-1
1
5x10x
15x
20x
25x
30x
Source: Bloomberg, Ambit Capital research
Exhibit 48: One year forward EV/EBITDA band
0
100
200
300
400
500
600
Apr-
06
Aug-0
6
Dec-
06
Apr-
07
Aug-0
7
Dec-
07
Apr-
08
Aug-0
8
Dec-
08
May-0
9
Sep-0
9
Jan-1
0
May-1
0
Sep-1
0
Jan-1
1
May-1
1
3x6x9x
12x
15x
18x
Source: Bloomberg, Ambit Capital research
Relative valuation
Crompton is currently trading at a discount to most Capital Goods peers (around
30% discount to peers on FY13 P/E and a 25% discount on EV/EBITDArespectively), which we believe is justified given its poor growth prospects (6%decline for Crompton v/s 41% growth for peers over FY11-FY13) and given thecorporate governance issues swirling around the firm.
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Exhibit 49: Peer valuations
Company Share Price Mcap P/E (x) P/B (x) EV/EBITDA (x) RoE (%) EPS CAGR (%)
(Rs) (US $mn) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E (FY11-13E)
ABB 824 3,904 46.0 33.6 6.4 5.4 29.3 21.5 14.8 17.1 186.2
Areva T&D 229 1,226 22.8 16.8 4.6 3.8 11.8 9.6 21.2 23.7 32.3
BGR Energy 360 581 7.8 7.5 2.1 1.7 4.8 4.4 30.4 25.7 3.6
Thermax 521 1,386 14.4 12.6 3.8 3.1 8.7 7.5 28.3 26.5 13.5BHEL 1,711 18,723 12.3 10.8 3.4 2.8 7.6 6.8 30.2 28.6 13.2
Siemens 895 6,806 32.4 26.8 7.5 6.1 19.3 16.3 26.3 25.5 22.0
Crompton Greaves 158 2,262 15.0 12.4 2.6 2.2 10.1 8.3 18.9 19.3 -6.2
Larsen & Toubro 1,639 22,360 19.2 16.3 3.5 3.0 13.3 11.4 19.9 20.0 17.0
Average (excl.Crompton)
22.1 17.8 4.5 3.7 13.6 11.1 24.4 23.9 41.1
Divergence -32% -30% -41% -40% -25% -25% -22% -19% -110%
Source: Bloomberg, Ambit Capital research
Exhibit 50: Sensitivity analysisHigh Case Base Case Low Case
Revenue growth
We have modelled consolidatedrevenue CAGR of 13% over FY11-FY22E and subsequently aterminal growth rate of 4%.
We have modelled consolidatedrevenue CAGR of 11% overFY11-FY22E and subsequently aterminal growth rate of 3%.
We have modelledconsolidated revenue CAGRof 8% over FY11-FY22E andsubsequently a terminalgrowth rate of 2%.
Operating margins
We model EBITDA margin todecline from 13.4% in FY11 to9.5% in FY12. However, over alonger term, we expect EBITDAmargin to stabilize at ~11.0%.
We model EBITDA margin todecline from 13.4% in FY11 to9.5% in FY12 and stabilize at~9.3% over the long term.
We model EBITDA margin todecline from 13.4% in FY11to 9.5% in FY12 andsubsequently stabilize at~8.5% over the long term.
Working capital cycle
We model the working capitalcycle to increase from 31 days in
FY11 to ~38 days in FY12 andFY13. However, subsequently weexpect working capital to stabilize~30 days over the long term.
We model the working capitalcycle to increase from 31 days inFY11 to 38 days in FY12 andsubsequently stabilize at around40 days over the long term.
We model the working capitalcycle to increase from 31
days in FY11 to ~38 days inFY12 and FY13 andsubsequently stabilize at ~45days over the long term.
Fair value (Rs per share) 216 143 107
Upside / (Downside) 35% -11% -33%
Source: Ambit Capital research
Exhibit 51: Explanation for our flags on the cover page
Accounting AMBERWhilst CRG scores in line with our forensic accounting scores for tier-1 T&D companies, it scores poorly onaudit fees. Furthermore, the CRG promoter sits on the audit committee.
Predictability REDCRG seems to be an unpredictable company capable of generating negative surprises on multiple frontse.g. aircraft purchases, unexpected misses on EPS, sudden investment in Avantha Power, etc.
EarningsMomentum
REDBloomberg earnings momentum suggests a 20%-25% downgrade in FY12 earnings post the 1QFY12results. In addition to this we expect consensus to further downgrade FY12 earnings by ~10% and FY13earnings by ~13%.
Source: Ambit Capital research
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Exhibit 54: Cashflow Statement (Consolidated)
Year to March (Rsmn) FY09 FY10 FY11 FY12E FY13E
PBT 8,672 11,891 12,291 8,043 9,863
Depreciation 1,216 1,551 1,936 2,330 2,690
Interest 808 428 352 403 403
Tax (2,165) (2,920) (3,343) (1,350) (1,744)
(Incr) / decr in net working capital 59 543 (5,133) (2,482) (1,025)
Others 855 (931) (499) - -
Cash flow from operating activities 9,444 10,561 5,605 6,944 10,187
(Incr) / decr in capital expenditure (1,977) (2,070) (6,259) (9,000) (4,000)
(Incr) / decr in investments (1,549) (3,770) (1,391) - -
Others 310 90 268 - -
Cash flow from investing activities (3,216) (5,751) (7,382) (9,000) (4,000)
Issuance of equity - - - - -
Incr / (decr) in borrowings (1,374) (2,169) (379) 1,000 (1,000)
Others (1,643) (1,610) (1,548) (1,157) (1,383)
Cash flow from financing activities (3,017) (3,778) (1,927) (157) (2,383)Net change in cash 3,212 1,032 (3,704) (2,212) 3,804
Source: Company, Ambit Capital research
Exhibit 55: Ratio Analysis
Year to March (%) FY09 FY10 FY11 FY12E FY13E
EBITDA margin 11.4 14.0 13.4 9.5 10.3
EBIT margin 10.0 12.3 11.5 7.3 8.1
Net profit margin 6.4 9.4 8.9 6.3 6.7
Return on capital employed 37.2 40.4 34.1 19.2 20.6
Return on equity 35.7 39.7 30.8 18.9 19.3
Current ratio (x) 1.3 1.4 1.3 1.4 1.4
Source: Company, Ambit Capital research
Exhibit 56: Valuation Parameters
Year to March FY09 FY10 FY11 FY12E FY13E
EPS (Rs) 8.7 13.4 13.9 10.6 12.7
Book value per share (Rs) 28.5 39.0 51.0 60.4 71.6
P/E (x) 18.1 11.8 11.4 15.0 12.4
P/BV (x) 5.5 4.0 3.1 2.6 2.2
EV/EBITDA (x) 10.4 8.1 7.7 10.1 8.3
EV/Sales (x) 1.2 1.1 1.0 1.0 0.9
Source: Company, Ambit Capital research
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Institutional Equities Team
Saurabh Mukherjea,CFA
Managing Director - Institutional Equities (022) 30433174 [email protected]
Research
Analysts Industry Sectors Desk-Phone E-mail
Aadesh Mehta Banking / NBFCs (022) 30433239 [email protected]
Ankur Rudra, CFA Technology / Education Services (022) 30433211 [email protected]
Ashvin Shetty Consumer/Automobile (022) 30433285 [email protected]
Bhargav Buddhadev Power/Capital Goods (022) 30433252 [email protected]
Chandrani De, CFA Metals & Mining (022) 30433210 [email protected]
Chhavi Agarwal Construction, Infrastructure (022) 30433203 [email protected]
Gaurav Mehta Derivatives Research (022) 30433255 [email protected]
Hardik Shah Technology / Education Services (022) 30433291 [email protected]
Krishnan ASV Banking (022) 30433205 [email protected]
Nitin Bhasin Construction, Infrastructure, Cement (022) 30433241 [email protected]
Pankaj Agarwal, CFA NBFCs (022) 30433206 [email protected]
Parita Ashar Metals & Mining / Media / Telecom (022) 30433223 [email protected]
Puneet Bambha Power/Capital Goods (022) 30433259 [email protected]
Rakshit Ranjan, CFA Mid-Cap (022) 30433201 [email protected]
Ritika Mankar Economy (022) 30433175 [email protected]
Ritu Modi Cement (022) 30433292 [email protected]
Shariq Merchant Consumer (022) 30433246 [email protected]
Subhashini Gurumurthy Technology / Education Services (022) 30433264 [email protected]
Vijay ChughConsumer (incl FMCG, Retail,
Automobiles)(022) 30433054 [email protected]
Sales
Name Regions Desk-Phone E-mail
Deepak Sawhney India / Asia (022) 30433295 [email protected]
Dharmen Shah India / Asia (022) 30433289 [email protected]
Dipti Mehta India / Europe (022) 30433053 [email protected]
Pramod Gubbi, CFA India / Asia (022) 30433228 [email protected]
Sarojini Ramachandran UK / US +44 (0) 20 7614 8374 [email protected]
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Explanation of Investment Rating
Investment Rating Expected return(over 12-month period from date of initial rating)
Buy >5%
Sell