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Crompton Greaves 3QFY2013 performance highlights and results update

Contributed by Angel Broking

Crompton Greaves (CG) reported a disappointing performance for 3QFY2013, which was below our estimates and street expectations. The company posted a loss of Rs.69cr mainly on account of Rs.108cr restructuring loss at its Belgium unit (since most of the transformers had to be reworked at Hungary unit due to product defects). The company also incurred an additional loss of Rs.121cr towards VRS package of 199 redundant workers.

Standalone margin disappoints: The company’s international business has been a drag on its consolidated margins over the last few quarters. However, standalone margins were propping up the consolidated margins during these quarters. But in 3QFY2013, CG’s standalone margins also disappointed, contracting by 320bp yoy to 7.6%. The contraction in margins was on account of revenue deferral and shutdown of Nasik plant (due to an accident).

The consolidated order intake for 3QFY2013 has come in at Rs.2,267cr, a yoy decline of 33%. This is on account of a 41% yoy decline in order intake in the Power Systems segment to Rs.1,728cr, although a 17% yoy growth in Industrial segment’s order intake at Rs.539cr did offset the impact partially. The order backlog stood at Rs.9,200cr, increasing 15% yoy.

Outlook and Valuation: Although the company is expected to register a moderate sales growth, supported by healthy order backlog, its operating margins are expected to remain under pressure for the next few quarters. On a positive note, the Management has indicated that all exceptional losses due to Belgium unit’s restructuring have been accounted for and the company is expected to save up to 14mn euros/year on account of the same. We are of the opinion that CG’s margins will bottom out in FY2013 and we expect the operating margin to gradually improve over the next 14 to 18 months. Given the attractive valuation (stock trading at 0.5x FY2014E EV/Sales compared to its five year trading range of 0.6x to 1.6x and median of 1.1x), we maintain our Buy recommendation on the stock. We have assigned a multiple of 0.7x to arrive at a target price of Rs.129.