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Nov 4th, 2010
Stock Data
Sector Capital Goods
Face Value(Rs) Rs.2.00
52 wk. High/Low (Rs.) Rs.341.00/201.85
Volume (2 wk. Avg.) 66000
BSE Code 500093
Market Cap(Rs in Mn) 211053.50
Financials (Rs.in.mn) FY10 FY11E FY12E
Net Sales 91408.70 98721.40 108593.54
EBIDTA 13706.30 15307.61 16255.68
PAT 8240.60 9044.40 9701.21
EPS 13.40 14.12 15.12
P/E 24.54 23.30 21.76
CROMPTON GREAVES LTD BUY F
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SYNOPSIS Crompton Greaves (CG) is part of the US$ 4 bn
Avantha Group, a conglomerate with an
impressive global footprint, operating in over
10 countries. CG's India operations were
established in 1937.
CGL is engaged in designing, manufacturing
and marketing electrical products and services
related to power generation, transmission and
distribution.
The company ventures into three business
groups such as power systems, industrial
systems, and consumer products by investing
Rs.200 crore.
Crompton Greaves exports it wide range of
products to over 60 countries across globe. In
transformer business the company is a market
leader and commands a market share of 18%.
CGL has sanctioned the Scheme of
Amalgamation of Brook Crompton Greaves Ltd
("BCGL" or "the Transferor Company"), a 100%
subsidiary, with Crompton Greaves Ltd.
CGL has set up a new transformer
manufacturing facility in Washington,
Missouri, U.S.A. with an initial investment of $
20 million through its subsidiary CG Power
Systems USA.
Net Sales and PAT of the company are expected
to grow at a CAGR of 8% and 20% over 2009 to
2012E respectively.
1 Year Comparative Graph
Crompton Greaves Ltd BSE SENSEX
V.S.R. Sastry
Equity Research Desk
Dr. V.V.L.N. Sastry Ph.D.
Chief Research Officer
C.M.P: Target Price: Rs.329.00 Rs.378.00
Share Holding Pattern
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Peer Group Comparison
Name of the company CMP(Rs.)
Market Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/BV(x)
Dividend (%)
Crompton Greaves Ltd 329.00 211053.50 13.40 24.54 8.48 110.00
BHEL 2525.70 1236380.70 97.89 25.80 7.77 233.00
Siemens 836.90 282169.40 21.51 38.91 9.68 250.00
ABB 859.10 182050.50 7.84 109.58 7.55 100.00
Investment Highlights
Q2 FY11 Results Update
Crompton Greaves Ltd disclosed results for the quarter ended September 2010.
Net sales for the quarter moved up 10% to Rs.23978.80 million as compared to
Rs.21890.40 million during the corresponding quarter last year. During the
quarter, the company has reported Net Profit increased Rs. 2135.90 million from
Rs.1933.70 million in previous year same quarter. The Basic EPS of the company
stood at Rs.3.33 for the quarter ended September 2010.
Quarterly Results – Consolidate(Rs in mn)
As At Sep-10 Sep-09 %Change
Net sales 23978.80 21890.40 10%
Net Profit 2135.90 1933.70 10%
Basic EPS 3.33 5.28 -
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Basic EPS of the company stood at Rs. 3.33
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Break up of Expenditure
Expenditure for the quarter stood at Rs.20646.60mn, which is around 10%
higher than the corresponding period of the previous year. Raw material cost of
the company for the quarter accounts for 54% of the sales of the company and
stood at Rs.12839.00mn from Rs.11696.70mn of the corresponding period of the
previous year. Employees cost increased 9%YoY to Rs.3093.1mn from
Rs.2828.6mn and accounts for 13% of the revenue of the company for the
quarter.
OPM and NPM for the quarter stood at 15% and 9% respectively from 15% and 9%
respectively of the same period of the last year.
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Board declares Interim Dividend
Crompton Greaves Ltd has declared an interim dividend of 40% i.e. Rs. 0.80 per
share. This dividend will be payable on the increased share capital of Rs. 128.30
crores consequent to the Bonus Issue made on March 10, 2010, in the ratio of 3
shares for every 4 shares held.
Set up new transformer manufacturing facility in US
Crompton Greaves (CG), part of the $4 billion Avantha Group, has set up a new
transformer manufacturing facility in Washington, Missouri, U.S.A. with an initial
investment of $ 20 million through its subsidiary CG Power Systems USA.
This next-generation power transformer plant, located on the newly named
'Avantha Drive' would produce medium capacity transformers of 100 MVA (mega
volt amperes) and is expected to generate close to 150 new jobs over the next three
years. It will also allow CG Power Systems USA to offer, to their Utility and
Industrial customers in the Americas region, medium power transformers through
60 MVA, 138 kV and 750 BIL. Meanwhile, this plant will help build CG's product
portfolio globally and aggressively in the engineering, procurement and
maintenance segment. Further, it will also help the company to become a total
solutions provider in the industry.
Company Profile
Crompton Greaves (CG) is part of the US$ 4 bn Avantha Group, a conglomerate with
an impressive global footprint, operating in over 10 countries. Since its inception, CG
has been synonymous with electricity. In 1875, a Crompton 'dynamo' powered the
world's very first electricity-lit house in Colchester, Essex, U.K. CG's India operations
were established in 1937, and since then the company has retained its leadership
position in the management and application of electrical energy.
Crompton Greaves is India's largest private sector enterprise. It has diversified
extensively and is engaged in designing, manufacturing and marketing technologically
advanced electrical products and services related to power generation, transmission
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and distribution, besides executing turnkey projects. The company is customer-centric
in its focus and is the single largest source for a wide variety of electrical equipments
and products. With several international acquisitions; Crompton Greaves is fast
emerging as a first choice global supplier for high quality electrical equipment.
Products
Power Systems
Under this it manufactures transformers, switchgears and power quality products
like harmonic filters, power quality monitors, transient suppressors, current limiting
reactors and reactive power compensation systems. It offers power quality services
such as audits, system design, consulting etc. It also undertakes engineering projects
providing total solution for power transmission and distribution.
Industrial systems
Under this segment it manufactures and markets wide range of electric motors such
as Fractional Horse Power Motors, LT Motors, HT Motors, DC Machines, Stampings,
Traction Motors and Alternators, Electrical Control Panels for diesel electric
locomotives and Railway Signaling Products.
Consumer Products
It manufactures consumer products such as fans, lamps, pumps and a range of
electrical appliances such irons, mixers, etc.
It also manufactures telecom solutions such as switching, transmission and access
products for telecommunications network and information technology services.
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Financials Results
12 Months Ended Profit & Loss Account (Consolidate)
Value(Rs.in million) FY09A FY10A FY11E FY12E
12m 12m 12m 12m
Description
Net Sales 87372.6 91408.7 98721.4 108593.54
Other Income 587 936.8 993.01 1052.59
Total Income 87959.6 92345.5 99714.4 109646.12
Expenditure -77416.8 -78639.2 -84406.79 -93390.44
Operating Profit 10542.8 13706.3 15307.61 16255.68
Interest -655.1 -264.9 -270.01 -285.26
Gross Profit 9887.7 13441.4 15037.6 15970.43
Depreciation -1216 -1550.9 -1737.01 -1910.71
Exceptional Items 0 0 0 0
Profit before Tax 8671.7 11890.5 13300.59 14059.72
Tax -3046.7 -3649.9 -4256.19 -4358.51
Profit after Tax 5625 8240.6 9044.4 9701.21
Extraordinary Items 0 352.1 0 0
Minority Interest -17.1 -25.5 -1 0
Share of Porfit & Loss Asso
-8.9 31.5 13.9 0
Net Profit 5599 8598.7 9057.3 9701.21
Equity Capital 733.1 1283 1283 1283
Reserves 17431.5 23615.6 32660 42361.21
Face Value(Rs.) 2 2 2 2
EPS 15.27 13.4 14.12 15.12
*A=Actual, *E=Estimated
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Quarterly Ended Profit & Loss Account (Consolidate)
Value(Rs.in million) 30-Mar-09 30-Jun-10 30-Sep-10 30-Dec-10
3m(A) 3m(A) 3m(A) 3m(E)
Description
Net Sales 25078.9 23022.1 23978.8 25177.74
Other Income 329.4 183 227.8 250.58
Total Income 25408.3 23205.1 24206.6 25428.32
Expenditure -21052.3 -20048.8 -20646.6 -21652.86
Operating Profit 4356 3156.3 3560 3775.46
Interest -119.1 -50.1 -48.5 -50.93
Gross Profit 4236.9 3106.2 3511.5 3724.54
Depreciation -397 -415.1 -457.8 -480.69
Exceptional Items 0 0 0 0
Profit before Tax 3839.9 2691.1 3053.7 3243.85
Tax -1138.1 -793.8 -919.5 -1005.59
Profit after Tax 2701.8 1897.3 2134.2 2238.26
Extraordinary Items 352.1 0 0 0
Minority Interest -1.6 -1 0 0
Share of Porfit & Loss Asso
12.8 12.2 1.7 0
Net Profit 3,065.10 1,908.50 2,135.90 2,238.26
Equity Capital 1283 1283 1283 1283
Face Value(Rs.) 2 2 2 2
EPS 4.78 2.98 3.33 3.49
*A=Actual, *E=Estimated
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Key Ratios Particulars FY09 FY10 FY11E FY12E
EPS (Rs.) 15.27 13.4 14.12 15.12
EBITDA Margin (%) 12.07% 14.99% 15.51% 14.97%
PAT Margin (%) 6.44% 9.02% 9.16% 8.93%
P/E Ratio (x) 23.83 24.54 23.3 21.76
ROE (%) 30.97% 33.10% 26.65% 22.23%
ROCE (%) 36.80% 40.64% 34.40% 28.92%
EV/EBITDA (x) 12.65 15.4 13.79 12.98
Debt-Equity Ratio 0.4 0.2 0.16 0.14
Book Value (Rs.) 49.56 38.81 52.91 68.03
P/BV 7.34 8.48 6.22 4.84
Charts:
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Outlook and Conclusion
At the current market price of Rs.329.00, the stock is trading at 23.30 x FY11E
and 21.76 x FY12E respectively.
Price to Book Value of the stock is expected to be at 6.22 x and 4.84 x respectively for FY11E and FY12E.
Earning per share (EPS) of the company for the earnings for FY11E and FY12E is seen at Rs.14.12 and Rs.15.12 respectively.
Net Sales and PAT of the company are expected to grow at a CAGR of 8% and 20% over 2009 to 2012E respectively.
The company ventures into three business groups such as power systems, industrial systems, and consumer products by investing Rs.200 crore.
Crompton Greaves exports it wide range of products to over 60 countries across globe. In transformer business the company is a market leader and commands a market share of 18%.
CGL has sanctioned the Scheme of Amalgamation of Brook Crompton Greaves Ltd ("BCGL" or "the Transferor Company"), a 100% subsidiary, with Crompton Greaves Ltd.
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CGL has set up a new transformer manufacturing facility in Washington, Missouri, U.S.A. with an initial investment of $ 20 million through its subsidiary CG Power Systems USA.
On the basis of EV/EBITDA, the stock trades at 13.79 x for FY11E and 12.98 x for FY12E.
We expect that the company will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs.378.00 for Medium to Long term investment.
Industry Overview
Engineering Sector: Market & Opportunities
Engineering sector
Heavy Engineering Light engineering
Transport
Capital goods
Other machinery/
Equipment
Low-tech items like
castings, forgings and
Fasteners
Highly sophisticated
Microprocessor-based
Process control
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India's engineering industry is highly competitive with a number of players in each
segment. The engineering sector has been growing, driven by growth in end user
industries and the new projects being taken up in the power, railways, infrastructure
development, and private sector investments fields amongst others. The industry
attracted FDI inflows of US$ 1,196.7 million from August 1991-July 2006
India's exports of engineering goods are valued at US$ 27 billion during 2006-07
which represents a 6 per cent growth over the exports for 2005-06 (US$ 20 billion).
The engineering sector accounted for 14 per cent of the country's total exports. It is
also noteworthy that 40 per cent of India's engineering export is from the small and
medium enterprises (SME) sector. According to Engineering Exports Promotion
Council (EEPC), engineering exports could touch US$ 30 billion by 2008-09. In such a
scenario, India, driven by the engineering sector, will emerge as a key global
manufacturing hub
Industry demand is driven by investments in core sectors
The demand from this sector depends largely on GDP growth, which in turn is a
function of expenditure in core segments like power, railways, and infrastructure
development, private sector investments, and the speed at which projects are
implemented. The power sector is the largest contributor to the revenues of
engineering companies. Engineering majors like Bharat Heavy Electricals Limited
(BHEL) and ABB Limited derive a significant chunk of their revenues (69 per cent and
60 per cent, respectively) through the supply of equipment to the power sector.
Infrastructure is another key area of operation. Larsen & Toubro Limited, for example,
garners around 35 per cent of its sales from infrastructure activities like engineering,
design and construction of industrial projects, social and physical projects like
housing, hospitals, information technology (IT) parks, expressways, bridges, ports, and
water/effluent treatment projects. The industrial segment contributes to around 30
per cent of the total revenues of the engineering sector. While India’s engineering
industry has capabilities in manufacturing the range of machinery required by the
different user sectors, the rapid rise in demand has led to a large part of the
machinery requirements being met through imports. This indicates the size of
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opportunity for investment in the engineering and capital goods sector in India. The
engineering industry has attracted FDI inflows of US$ 1,196.73 million from August
1991-July 2006.
Indian Engineering goods are gaining acceptance in overseas markets
India’s exports of engineering goods are valued at US$ 27 billion during 2006-07
which represents a 36 per cent growth over the exports for 2005-06 US$ 20 billion).
The engineering sector accounted for 14 per cent of the country’s total exports. It is
also noteworthy that 40 per cent of India’s engineering export is from the small and
medium enterprises (SME) sector. A key driver for increased engineering exports is the
trend towards shifting of global manufacturing bases to countries like India that offer
lower costs and good engineering talent. This trend is expected to continue and boost
exports of engineering goods from India over the next 5 years. According to
Engineering Exports Promotion Council (EEPC), engineering exports could touch US$
30 billion by 2008-09. In such a scenario, India, driven by the engineering sector, will
emerge as a key global manufacturing hub.
The nature of Indian engineering exports is also changing with time. India is fast
moving from exporting low value goods to developing countries to more sophisticated
goods targeted at developed countries. Capital goods account for 27 per cent of total
engineering exports. Exports to European Union countries and North America
accounted for 19 per cent and 17 per cent respectively, of total engineering exports in
2005-06. Engineering goods worth US$ 3.34 billion were exported to USA alone in
April – Feb 2006-07
Growing Demand
Capacity creation and transformation in sectors such as infrastructure, power,
mining, oil & gas, refinery, steel, automotive, consumer durables are driving growth in
the engineering industry. The framework below captures some of the key factors that
are contributing to domestic and international demand for engineering goods from
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India. Restructuring of the state electricity boards in different states, growth of private
sector players and focus on capacity creation have driven growth in the power sector.
Conclusion
The Engineering sector’s future outlook is promising. Drivers like power projects, other
infrastructure development activities, industrial growth and favorable policy
regulations will drive growth in manufacturing. The Indian engineering industry has
been witnessing significant level of capability enhancement over the years. As export
markets open up, this will help India develop a strong presence in global engineering
exports. Power sector contributes the largest to the engineering companies’ revenues.
Major players in this sector like ABB and BHEL derive 60 per cent and 69 per cent of
their revenues from supplying equipments to the power sector. Going forward, with
the Government clearing the blueprint for adding 100,000 MW in the tenth (2002-07)
and eleventh 2007-12) five-year plans, the potential are high for the engineering
majors. Emerging trends such as outsourcing of engineering services can provide new
opportunities for quantum growth. Engineering and design services such as new
product designing, product improvement, maintenance and designing manufacturing
systems are increasingly getting outsourced to countries like India and China. India’s
engineering sector has significant potential for future growth, in manufacturing as well
as services.
With development in associated sectors like automotive, one of the largest evolving
markets for engineering and industrial goods, and a well developed technical human
resources pool, India is poised to make significant strides in all segments of
engineering.
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________ ____ _________________________ Disclaimer:
This document prepared by our research analysts does not constitute an offer or solicitation
for the purchase or sale of any financial instrument or as an official confirmation of any
transaction. The information contained herein is from publicly available data or other
sources believed to be reliable but do not represent that it is accurate or complete and it
should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s
affiliates shall not be in any way responsible for any loss or damage that may arise to any
person from any inadvertent error in the information contained in this report. This document
is provide for assistance only and is not intended to be and must not alone be taken as the
basis for an investment decision.
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