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Crompton Greaves Ltd
BUY Target Price: Rs.478.00
CMP: Rs.415.65 Market Cap.: Rs.152356.5mn.
Date: February 08, 2010
Key Ratios:
Particulars FY09 FY10E FY11E
OPM (%) 12 15 15
NPM (%) 6 9 9
ROE (%) 31 30 25
ROCE (%) 63 56 47
P/BV(x) 8.39 5.84 4.36
P/E(x) 27.21 19.23 17.19
EV/EBDITA(x) 14.45 11.42 10.19
Debt Equity Ratio 0.03 0.02 0.02
Key Data:
Sector Capital Goods
Face Value Rs.2.00
52 wk. High/Low (Rs.) 449.00/99.70
Volume (2 wk. Avg.) 199000
BSE Code 500093
SYNOPSIS
• 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 and distribution, besides executing
turnkey projects.
• Crompton Greaves Ltd has approved a scheme of
amalgamation of Brook Crompton Greaves (a
wholly owned subsidiary) with the company.
• CGL have granted their approval to the divestment
of the Company's 59% shareholding in Malanpur
Captive Power Ltd, comprising 1,10,22,000 equity
shares of Rs. 10/- each to APIL, at an aggregate
price of Rs 514 mn.
• Net sales and PAT of the company are expected to
grow at a CAGR of 14% and 26% over 2008 to
2011E respectively.
Share Holding Pattern:
V.S.R. Sastry
Vice President
Equity Research Desk
91-22-25276077
Dr. V.V.L.N. Sastry Ph.D.
Chief Research Officer
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Table of Content
Investment Highlights ............................................................................................................ 3
Company Profile…………………………………………………………………………………………………………………….4
Peer Group comparison………………………………………………………………………………………………….….….6
Keyconcern………………………………………………………………………………………………………………….…………6
Financials……………………………………………………………………………………………………………………………….7
Charts………………………………………………………………………………………………………………………….………...9
Outlook and conclusions……………………………………………………………………………………………………....11
Industry Overview…….…………………….……………………………………………………………….………….…….. ..12
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Investment Highlights
Q3 FY10 Results Update
Crompton Greaves disclosed a phenomenal rise in consolidated net profit for the quarter
ended December 2009. During the quarter, the profit of the company rose 62.02% to
Rs.1996.4 million from Rs.1232.2 million in the same quarter previous year. Net sales for
the quarter for the quarter rose 4.47% to Rs.22464.2 million, while total income for the
quarter rose 5.07% to Rs.22679.5 million, when compared with the prior year period. It
reported earnings of Rs.5.45 a share during the quarter, registering 62.02% growth over
previous year period.
Quarterly Results - Consolidated (Rs in mn)
As At Dec-09 Dec-08 %change
Net sales 22464.20 21503.70 4.47
Net profit 1996.4 1232.2 62.02
Basic EPS 5.45 3.36 62.02
Recommends bonus shares
The Board of Directors have recommended issue of Bonus Shares in the proportion of 3
(Three) new Equity Shares for every 4 (Four) Equity Shares, of Rs. 2/- each, subject to
approval of Members as necessary.
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Declaration of Dividend
Crompton Greaves Ltd has declared an interim dividend of 70% i.e. Rs 1.40 per share of
the Company.
Divestment
Crompton Greaves Ltd have granted their approval to the divestment of the Company's
59% shareholding in Malanpur Captive Power Ltd, comprising 1,10,22,000 equity shares of
Rs. 10/- each to Avantha Power & Infrastructure Ltd (APIL), at an aggregate price of Rs 514
Million, which works out to Rs 46.63 per share.
Crompton Greaves to merge subsidiary with itself
Crompton Greaves Ltd has approved a scheme of amalgamation of Brook Crompton
Greaves (a wholly owned subsidiary) with the company. The amalgamation will be
effective from Apr. 01, 2009 (appointed date), subject to receipt of all regulatory
approvals.
Company Profile
Crompton Greaves (CG) is part of the US$ 3 bn Avantha Group, a conglomerate with an
impressive global footprint. 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.
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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 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.
The fans and lighting businesses acquired "Superbrand" status in January 2004. It is a unique
recognition amongst the country's 134 selected brands by "Superbrands", UK.
Products & services
The company is organized into three business groups viz. Power Systems, Industrial Systems,
Consumer Products. Nearly, two-thirds of it's turnover accrues from products lines in which it
enjoys a leadership position. Presently, the company is offering wide range of products such as
power & industrial transformers, HT circuit breakers, LT & HT motors, DC motors, traction
motors, alternators/ generators, railway signaling equipments, lighting products, fans, pumps
and public switching, transmission and access products. In addition to offering broad range of
products, the company undertakes turnkey projects from concept to commissioning. Apart
from this, CG exports it's products to more than 60 countries worldwide, which includes the
emerging South-East Asian and Latin American markets.
Subsidiaries
CG Energy Management Pvt. Ltd.
CG Hungary Kft.
CG PPI Adhesive Products Ltd.
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Microsol Holdings Ltd
Pauwels International NV.
Pauwels Middle East Ltd.
Sonomatra
Transverticum Kft.
Tricon Controls Ltd
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 415.65 152356.5 14.11 29.41 12.40 100.00
ABB Ltd 783.45 165924.3 20.68 37.86 7.88 110.00
Blue Star Ltd 355.00 31927.3 22.20 15.99 8.69 350.00
Techno Electric &
Engineering Company 217.50 12417.3 16.52 13.17 5.45 50.00
Key Concerns
Slow down in the capital goods sector
More number of players and tough competition
In most of the business areas in which the CG operates, the growth prospects are also
dependent on policy decisions at the national level and prevailing business trends
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Financials Results
12 Months Ended Profit & Loss Account (Consolidated)
Value (Rs.in.mn) FY08 FY09 FY10E FY11E
Description 12m 12m 12m 12m
Net sales 68323.40 87372.60 91040.42 100144.46
Other Income 677.00 587.00 844.23 928.65
Total Income 69000.40 87959.60 91884.65 101073.12
Expenditure -60884.50 -77416.80 -78541.51 -86124.24
Operating Profit 8115.90 10542.80 13343.14 14948.88
Interest -700.90 -655.10 -197.46 -209.31
Gross profit 7415.00 9887.70 13145.68 14739.57
Depreciation -1262.60 -1216.00 -1580.28 -1706.71
Profit Before Tax 6152.40 8671.70 11565.40 13032.86
Tax -2054.20 -3046.70 -3636.54 -4170.52
Profit After Tax 4098.20 5625.00 7928.86 8862.35
Minority Interest -31.00 -26.00 -5.20 0.00
Net Profit 4067.20 5599.00 7923.66 8862.35
Equity capital 733.10 733.10 733.10 733.10
Reserves 12137.10 17431.00 25359.86 34222.21
Face value (Rs.) 2.00 2.00 2.00 2.00
EPS 11.10 15.27 21.62 24.18
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Quarterly Ended Profit & Loss Account (Consolidated)
Value (Rs.in.mn) 30-Jun-09 30-Sep-09 31-Dec-09 31-Mar-10E
Description 3m 3m 3m 3m
Net sales 21975.20 21890.40 22464.20 24710.62
Other Income 239.00 153.10 215.30 236.83
Total Income 22214.20 22043.50 22679.50 24947.45
Expenditure -19498.80 -18823.40 -19264.70 -20954.61
Operating profit 2715.40 3220.10 3414.80 3992.84
Interest -45.10 -51.50 -49.20 -51.66
Gross profit 2670.30 3168.60 3365.60 3941.18
Depreciation -371.30 -387.80 -394.80 -426.38
Profit Before Tax 2299.00 2780.80 2970.80 3514.80
Tax -694.50 -849.00 -968.30 -1124.74
Profit After Tax 1604.50 1931.80 2002.50 2390.06
Minority Interest -1.00 1.90 -6.10 0.00
Net Profit 1603.50 1933.70 1996.40 2390.06
Equity capital 733.10 733.10 733.10 733.10
Face value (Rs.) 2.00 2.00 2.00 2.00
EPS 4.37 5.28 5.45 6.52
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Charts:
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1 Year Comparative Graph
Outlook and Conclusion
At the current market price of Rs.415.65, the stock is trading at 19.23 x FY10E and
17.19 x FY11E respectively.
Price to Book Value of the stock is expected to be at 5.84 x and 4.36 x respectively
for FY10E and FY11E.
Earning per share (EPS) of the company for the earnings for FY10E and FY11E is seen
at Rs.21.62 and Rs.24.18 respectively.
Net Sales and PAT of the company are expected to grow at a CAGR of 14% and 26%
over 2008 to 2011E respectively.
On the basis of EV/EBITDA, the stock trades at 11.42 x for FY10E and 10.19 x for
FY11E.
Crompton Greaves Ltd has approved a scheme of amalgamation of Brook Crompton
Greaves (a wholly owned subsidiary) with the company.
Crompton Greaves BSE SENSEX
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CGL have granted their approval to the divestment of the Company's 59%
shareholding in Malanpur Captive Power Ltd, comprising 1,10,22,000 equity shares
of Rs. 10/- each to APIL, at an aggregate price of Rs 514 mn.
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.478.00 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
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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
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.
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The framework below captures some of the key factors that are contributing to domestic and
international demand for engineering goods from 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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