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MOSL: THE CORNER OFFICE - Crompton - Murphy's Law = Growth Pangs 2.0 - Focused strategies for growth




Motilal Oswal Securities Ltd.


13 Nov 2013





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THE CORNER OFFICE - Crompton Greaves: Murphy's Law = Growth Pangs 2.0 Focused strategies for growth Growth pangs 2.0 - Key 'monitorables' Phase 1 of restructuring program encompassing the European operations has been largely addressed, with the overseas business reporting positive EBIT of 0.2% in 2QFY14. The key monitorables going forward are: i) Continued losses in Canada and systems business in USA (1H USD10-12m); product profile needs to be reoriented in Canada ii) Risk of delayed deliveries remain a swing factor as transformer factories are full for FY14 and iii) Composition of the order intake in Belgium; as incremental orders need to justify the premium pricing given high cost operations in Western Europe. Currency volatility has impacted the business viability for drives (assembly unit) at Manideep plant (commissioned in July 2013). Focused strategies for growth For the overseas business, we believe that incrementally, the growth trajectory will be positive: i) Automation business reported order intake / manufacturing go-ahead of INR3.2b (2x 2QFY14 revenues) in end Sept 2013 and with operating leverage, this business enjoys double digit EBIT margins ii) possibility of diminishing losses for Canadian operations, as the current order book gets executed iii) post restructuring, US systems business is now at breakeven levels iv) improved operational efficiency and design capabilities in transformers. For Indian operations, CRG is aggressively focusing on exports in Power (transformers from Kanjurmarg, GIS / Ring Main Units from Nashik) and HT Motors / Drives (commissioned in July 2013, and expect meaningful traction in FY15); supporting margin expansion. In Consumer business, attempt is to expand channel reach, largely in fans. Automation business is expected to gain traction post commissioning of the Bangalore factory in 2HFY14. Valuations and View: Several moving aspects The transition phase has led to several moving aspects, which are challenging to monitor and stock's reaction to any slippages has been significant. In our view, CRG's performance would largely be driven by improvement in overseas business, though a more stable standalone performance would protect downsides. Standalone business' performance is expected to be steady, with EPS at INR8.5/sh in FY14 (up 22%) and INR8.9/sh in FY15 (up 8% YoY). Maintain Buy, with a target price of INR131 (12x FY15E standalone business and 0.5x EV/sales for overseas business).

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