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Crompton Greaves 3QFY2014 performance highlights and results update

February 3, 2014, Monday, 11:56 GMT | 06:56 EST | 16:26 IST | 18:56 SGT
Contributed by Angel Broking

For 3QFY2014, Crompton Greaves (CG)’s top-line performance was in line with our estimates, growing by 12.8% yoy to Rs.3,352cr. On the EBITDA front, the company's margin expanded by 492bp yoy to 5.0%, which is lower than our estimate of 5.8%, due to lower-than-expected recovery in margins of international operations. Consequently, the profit stood at Rs.60cr, lower than our estimate of Rs.79cr.
International operations expected to recover in 1QFY2015: In FY2013, the company’s international operations were a drag on the consolidated margins, partly due to restructuring at the Belgium facility. However, international operations are showing signs of recovery, posting an EBITDA loss of only Rs.7.5cr in 9MFY2014 compared to an EBITDA loss of Rs.132cr in 9MFY2013. Further, international orders accounted for 60% of CG’s total order inflow of Rs.2,624cr (+15.7% yoy) for 3QFY2014. The Management has assured that new international orders have been booked at higher margins. The Management expects international operations to report a positive EBITDA by 1QFY2015.
Domestic operations continue steady growth: CG reported a modest growth of 7.0% yoy in domestic operations to Rs.1,867cr and 147bp yoy improvement in margins to 9.1%, mainly on back of good performance of Power Systems and Consumer Products segments. However, slowdown in investments in India led to a subdued 4.0% yoy growth to Rs.391cr as well as sharp contraction in margin by 468bp to 10.6% in the domestic Industrial segment.
Outlook and Valuation: We are of the opinion that CG’s margins have bottomed out and expect the operating margin to gradually improve over the next year as international business recovers. Given the attractive valuation (stock trading at 0.6x FY2015E EV/Sales compared to its five year trading range of 0.5x to 1.5x and median of 0.9x), we maintain our Buy recommendation on the stock. We have assigned a multiple of 0.8x EV/Sales to arrive at a target price of Rs.140.