Analyst Research Report Snapshot

Title:

Crompton Greaves (CRG) - Analyst Meet Update - Dated - May 31, 2013

Price:

$46.00

Provider:

Axis Capital Limited

Date:

03 Jun 2013

Pages:

5

Type:

AcrobatPDF

Companies referenced:

CROM.NS

Available for Immediate Download
Summary:

Key takeaways from our interaction with Crompton Greaves’ CEO & MD Laurent Demortier:  Problems in international business – quality issues, liquidated damages (LDs), pricing pressures, and rising proportion of project revenue. Management indicated quality issues in Canada and Indonesia were triggered by rapid transition to high technology. Transformer prices in key end markets (Middle East and Europe) dropped by 35% and 25% respectively  The solutions? While management is trying to address the quality issues, delays due to rework are resulting in penalties (could be maximum US$ 100 mn). Pricing pressure to continue due to industry overcapacity. Execution of complex offshore wind projects will increase risk profile of business  Little comfort from domestic business as T&D (40% of standalone revenue) margin unlikely to improve due to competition, focus on projects (zero margin) Outlook and valuation CG’s business has become too complex with multiple moving points. Also, risk profile is increasing as CG tries to move to higher voltage without much experience (resulting in LDs). We believe there is downside to our estimates (already lowest on the Street), as we have not factored in risks mentioned above as they are difficult to quantify. Maintain SELL on account of structural issues in India T&D due to product gaps and rising competition from Chinese players and structural issues in international business in transformers (70% of segment revenue) and rising risk profile with execution of wind offshore projects (25% of order book). Our TP stands at Rs 83 (12x FY15E EPS of ~Rs 7). At CMP of Rs 94 (implies 12% downside), the stock trades at PE of 17x FY14E EPS of Rs 5.7 and 14x FY15E EPS of Rs 7.0. Regards, Bhavin Vithlani (Executive Director – Power & Cap Goods) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1144 Charanjit Singh (Vice President – Capital Goods) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1123

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