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Spark Capital: Crompton Greaves 3QFY13 Results Review - Restructuring complete, but recovery to be gradual, Maintain Sell




Spark Capital Advisors(India) Private Limited


31 Jan 2013





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Restructuring complete, but recovery to be gradual, Maintain Sell Crompton Greaves (CRG) reported revenue of Rs. 29.7bn (consolidated), a de-growth of 1.9% yoy. Restructuring related costs of ~Rs. 2.2bn led to a loss of Rs. 1.9bn during the quarter. The management stated that the restructuring process has been complete and expects no further costs to be incurred related to it. Even after adjusting for the restructuring expenses, margin in the international power segment continued to remain weak at -4.3%. Going forward, margins are expected to pick up from the current levels but remain caped at 2-3% for the international segment given the likely LD risks and lack of clarity on high margin order inflow. Growth (4.5% de-growth) and margin (7.9%) in domestic power segment were also muted due to temporary closure of its Nashik factory due to an accident, customer side delays and weak order inflow pace (especially PGCIL orders). Growth in the industrial segment was flat due to muted demand from key sectors – cement and power – and lower than expected HT motor sales. While the management expects cost saving from the restructuring to start accruing from FY14E and thereby improve margins, we expect near term (6-12 months) margin pressure in the international power segment to prevail. Considering this, we reduce our earnings estimate for FY13E and FY14E by 30.8% and 4.5% respectively and maintain our ‘Sell’ rating with a TP of Rs. 96 Highlights of the quarter’s performance and outlook Restructuring complete, but margin uncertainties prevail – The management stated that the restructuring of the Belgium plant has been completed and no further costs would be incurred. While the management expects cost benefits of ~EUR 15mn to accrue in FY14E, we believe that margins in this segment would remain subdued keeping in mind risk of execution delays (as the Hungarian plant stabilizes) and muted margin profile of existing order book. We expect muted margin (consol.) of 0.7% and 4.9% in FY13E and FY14E respectively in the power segment. Growth in industrial segment falters – Growth in industrial segment was affected due to weak demand from key sectors (cement, power). While order inflow has been healthy at Rs. 5.4bn (17% yoy growth), execution in the segment is expected to remain subdued due to client side delays Consumer segment’s performance a silver lining – Consumer segment continued its growth momentum with a growth of 20.6% driven by robust sales in fans and newly launched appliances. We expect pace of growth to continue in this segment and expect revenue growth of 21% and 15% in FY13E and FY14E respectively

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