Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited Crompton Greaves’ (CG) FY13 annual report highlights management’s stress on stability of overseas power transformers plants. The company continues to expand its power transformer portfolio with expansion in Middle East, Hungary and Mandideep (Bhopal). With commencement of production of large rotating machines and AC drives at the new Mandideep plant, CG plans to localise Ganz’s and Emotron’s industrial portfolio. However, management outlook is cautious given industry challenges like over‐capacity and pricing pressure in key markets. It expects recovery only in the medium term (1‐2 years). Maintain ‘HOLD’ with a target price of INR102. Pauwels, Ganz earn PAT of INR3.7bn since acquisition CG had acquired Pauwels and Ganz in FY06 and FY07 for INR2.0bn and INR1.8bn, respectively. Since acquisition, while Pauwels has earned a net profit of INR3.6bn, Ganz earned INR0.1bn till FY13. Working capital declines; operating cash flow maintained The company’s net working capital (consolidated) declined by INR2.5bn in FY13 led by increase in creditors. Its operating cash flow remained healthy at INR2.3bn. On standalone basis, CG’s operating cash flow dipped from INR3.9bn in FY11 to INR1.8bn in FY13, primarily on account of higher working capital requirement led by increase in loans and advances to subsidiaries of INR5bn (FY12: ~INR1bn). We believe loans and advances increased post acquisition of ZIV in FY13. Outlook and valuations: Cautious; maintain ‘HOLD’ Management is confident that its operational improvement strategy will pay rich dividends. Stabilisation of the Hungary plant has given it the necessary boost to replicate the success at Canadian and US plants. However, we retain our view that CG’s ability to turn PAT positive in Belgium, Canada, Hungary and US plants is limited given the sustained industry weakness (demand, pricing pressures). We maintain ‘HOLD/SP’ with a target price of INR102 (valued at 12.0x based on FY15E EPS). The stock (consolidated) trades at P/E of 13.7x and 10.3x FY14E and FY15E EPS, respectively. COMPANY UPDATE CROMPTON GREAVES Back to basics: Mapping the growth path EDELWEISS 4D RATINGS Absolute Rating HOLD Rating Relative to Sector Performer Risk Rating Relative to Sector Medium Sector Relative to Market Underweight MARKET DATA (R: CROM.BO, B: CRG IN) CMP : INR 89 Target Price : INR 102 52‐week range (INR) : 144 / 72 Share in issue (mn) : 641.5 M cap (INR bn/USD mn) : 57/ 939 Avg. Daily Vol.BSE/NSE(‘000) : 2,791.2 SHARE HOLDING PATTERN (%) Current Q4FY13 Q3FY13 Promoters * 41.7 41.7 41.7 MF's, FI's & BK’s 24.2 23.7 21.8 FII's 14.9 15.2 17.9 Others 19.2 19.4 18.6 * Promoters pledged shares (% of share in issue) : 1.4 PRICE PERFORMANCE (%) Stock Nifty EW Capital Goods Index 1 month 0.8 2.5 6.0 3 months (0.7) 6.1 (1.6) 12 months (32.8) 11.9 (3.9) Amit Mahawar +91 22 4040 7451 [email protected]Rahul Gajare +91 22 4063 5561 [email protected]Swarnim Maheshwari +91 22 4040 7418 [email protected]India Equity Research| Engineering and Capital Goods July 15, 2013 Financials (consol) Year to March FY12 FY13 FY14E FY15E Revenues (INR mn) 112,486 120,944 131,671 146,607 Rev. growth (%) 12.4 7.5 8.9 11.3 EBITDA (INR mn) 8,037 3,832 7,640 9,638 Net profit (INR mn) 3,736 846 4,157 5,530 EPS (INR) 5.8 1.3 6.5 8.6 EPS growth (%) (61.5) (77.4) 391.5 33.0 P/E (x) 15.3 67.5 13.7 10.3 ROAE (%) 10.9 2.4 11.4 14.3
22
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Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Crompton Greaves’ (CG) FY13 annual report highlights management’s stress on stability of overseas power transformers plants. The company continues to expand its power transformer portfolio with expansion in Middle East, Hungary and Mandideep (Bhopal). With commencement of production of large rotating machines and AC drives at the new Mandideep plant, CG plans to localise Ganz’s and Emotron’s industrial portfolio. However, management outlook is cautious given industry challenges like over‐capacity and pricing pressure in key markets. It expects recovery only in the medium term (1‐2 years). Maintain ‘HOLD’ with a target price of INR102.
Pauwels, Ganz earn PAT of INR3.7bn since acquisition
CG had acquired Pauwels and Ganz in FY06 and FY07 for INR2.0bn and INR1.8bn,
respectively. Since acquisition, while Pauwels has earned a net profit of INR3.6bn, Ganz
earned INR0.1bn till FY13.
Working capital declines; operating cash flow maintained
The company’s net working capital (consolidated) declined by INR2.5bn in FY13 led by
increase in creditors. Its operating cash flow remained healthy at INR2.3bn. On
standalone basis, CG’s operating cash flow dipped from INR3.9bn in FY11 to INR1.8bn
in FY13, primarily on account of higher working capital requirement led by increase in
loans and advances to subsidiaries of INR5bn (FY12: ~INR1bn). We believe loans and
advances increased post acquisition of ZIV in FY13.
Outlook and valuations: Cautious; maintain ‘HOLD’
Management is confident that its operational improvement strategy will pay rich
dividends. Stabilisation of the Hungary plant has given it the necessary boost to
replicate the success at Canadian and US plants. However, we retain our view that CG’s
ability to turn PAT positive in Belgium, Canada, Hungary and US plants is limited given
the sustained industry weakness (demand, pricing pressures). We maintain ‘HOLD/SP’
with a target price of INR102 (valued at 12.0x based on FY15E EPS). The stock
(consolidated) trades at P/E of 13.7x and 10.3x FY14E and FY15E EPS, respectively.
COMPANY UPDATE
CROMPTON GREAVESBack to basics: Mapping the growth path
leading to liquidated damages (LDs) from customers. Also, the company faced issues
while transferring projects from Belgium to Hungary in H2FY13, which impacted
production.
Globalisation programme
Productivity improvement: Right designing, correct slotting of transformers in product
lines and faster throughput is expected to strengthen overall manufacturing process.
The company is gaining traction in Indonesia, US and Hungary; however, management
believes it will be some time before all plants become fully operational.
Global raw material sourcing and supply chain. The company has already started a
procurement office in China which should help the company rationalize its raw material
cost.
Increase capacity at Hungary to service Europe and Middle East: The company
successfully expanded its Tapioszele power transformers plant from 7,500MVA to
10,000MVA in FY13 and expects to achieve 12,500MVA by FY14E.
Maximise product pull‐through and improve project execution.
Crompton Greaves
3 Edelweiss Securities Limited
Financial Analysis (Standalone)
Increased working capital requirements dent operating cash flow
CG’s operating cash flow dipped from INR3.9bn in FY11 to INR1.8bn in FY13, primarily on
account of higher working capital requirement led by increase in loans and advances to
subsidiaries of INR5bn (FY12: ~INR1bn). Excluding loans and advances, working capital
remained stable.
We believe loans and advances to subsidiaries surged post acquisition of ZIV in FY13.
As a result of declining cash flow, CG’s free cash flow also dipped from INR5.5bn in FY12 to
INR0.01bn in FY13. The cash conversion cycle remained negative due to stable debtor days
at ~90.
Chart 1: OCF and cash conversion cycle trend
Source: Company, Edelweiss research
RoCE continues to decline
CG’s RoCE declined from 25.1% in FY12 to 18.0% in FY13. The dip was due to 280bps margin
plunge in FY13 to 8.3% and increase in working capital.
Margins have declined in all segments, viz., power systems, consumer products and
industrial systems, of which power systems reported a significant margin plunge of 310bps.
Consumer products and industrial systems reported margin fall of 160bps and 60bps,
respectively, in FY13.
While consumer margins were impacted by high input cost and higher SG&A, industrial
margin was hit by pricing pressure and subdued volumes. The company locked material cost
structures at higher prices when the order booking was more, due to which margins
declined, apart from tough macro conditions in the power systems division.
(71)
(57)
(43)
(29)
(15)
(1)
1,449
3,274
5,099
6,924
8,749
10,574
FY08 FY09 FY10 FY11 FY12 FY13
(days)
(INR mn)
OCF (LHS) Cash conversion cycle (RHS)
Standlone cash flow dipped by INR 2.1bn due to increase in loans and advances post ZIV acquisition.
ROCE’s declined by 710bps (at 18%) in FY13 mainly due to margins decline across segments.
Engineering and Capital Goods
4 Edelweiss Securities Limited
Chart 2: RoCE on a declining spree
Source: Company, Edelweiss research
Financial Analysis (Consolidated)
Working capital declines; healthy operating cash flow maintained
Our analysis of CG’s working capital indicates an anomaly in change in working capital given
in the cash flow statement and the analysis of net working capital in the balance sheet.
While the cash flow statement suggests an improvement of INR2.5bn in working capital,
balance sheet analysis suggests an improvement of INR0.2bn only. Despite considering
working capital improvement of INR0.2bn, the operating cash flow remained healthy at
INR2.2bn.
Free cash flow declined from INR3.68bn in FY12 to INR2.27bn in FY13 on account of increase
in capex which was incurred towards the Mandideep plant.
Chart 3: OCF and cash conversion cycle trend
Source: Company, Edelweiss research
0.0
12.0
24.0
36.0
48.0
60.0
FY08 FY09 FY10 FY11 FY12 FY13
(%)
ROCE's
(60)
(30)
0
30
60
90
1,500
3,350
5,200
7,050
8,900
10,750
FY08 FY09 FY10 FY11 FY12 FY13
(days)
(INR mn)
OCF (LHS) Cash conversion cycle (RHS)
Consolidated cash flow remained healthy despite anomaly in change in working capital.
Crompton Greaves
5 Edelweiss Securities Limited
Turbulence at overseas plants leads to sharp RoCE plunge
CG’s RoCE declined from 13% in FY12 to 3.6% in FY13. The fall was due to 390bps plunge in
EBITDA margin in FY13 to 3.2%.
While the domestic power systems business continued to deteriorate, EBIT margins of the
overseas division also declined substantially — from 7.5% in FY12 to 0.8% in FY13.(EBIT loss
of INR3.4bn in FY13) .
The abysmal overseas performance was due to operational instability at Belgium and
Canada plants, which coupled with restructuring at the Belgium power transfer plant (cost
of INR2.3bn) impacted FY13 profitability and hence the RoCE.
Debt jumps two folds on ZIV acquisition
CG’s debt surged ~100% from INR9.8bn in FY12 to INR19.9bn in FY13 primarily to finance
the ZIV acquisition. The company, during FY13, acquired the Spanish company for
EUR147mn (~INR9.5bn). As a result of the increase in debt, CG’s interest expense also rose
from INR567mn in FY12 to INR955mn in FY13.
Chart 4: Debt catapults two folds
Source: Company, Edelweiss research
0.0
5.0
10.0
15.0
20.0
25.0
FY08 FY09 FY10 FY11 FY12 FY13
(INRbn)
Consolidated Debt
Consolidated RoCE continued its downward trend primarily due to standalone power systems business and operating instability at Belgium and Canada plants which significantly compressed margin
Engineering and Capital Goods
6 Edelweiss Securities Limited
Domestic business Power systems: Revenue flat; profitability under pressure CG reported flat revenue growth in its power systems (India) business given tough business
environment, weak exports and customer‐led delays in picking deliveries.
While the company’s power transformer plant at Kanjurmarg (T1) delivered 181
transformers and 79 reactors in FY13, its Mandideep (T3) plant has delivered 108
transformers since September FY11. Most dispatches from the T3 plant were in the high
technology 765kV category. This plant has been earning an EBIT margin in excess of 10%.
The power systems’ margin continued to slide, which came off ~310bps YoY to 8.5% in FY13.
The fall can be attributed to rising proportion of systems business where margins are less,
intense competition in the transformer market and high raw material costs. The company’s
order book declined 3% YoY to INR33bn. Power system’s RoCE plunged 860bps YoY to 29.5%
due to lower sales and pricing pressure.
Outlook for FY14: Management expects profitability to improve in FY14 on account of
commodity price hedging and supply chain efficiencies.
Domestic power systems’ margin continued to slide due to rising proportion of systems business where margins are less, intense competition in the transformer market and high raw material costs.
Crompton Greaves
7 Edelweiss Securities Limited
Chart 7: Price trend of major input cost
Source: Company, Edelweiss research
Chart 8: Market share of top 5 players in PGCIL ordering in past five years
Source: Company, Edelweiss research
Industrial systems: Thrust on globalising manufacturing capability CG, during FY13, commissioned and started production of large motors and synchronous
generators (Ganz platform) at its new manufacturing facility at Mandideep. This plant has a
capacity to produce 250 large motors and synchronous generators on an annual basis. It is
dedicated to the exports market.
On the financial side, revenue growth remained subdued with margin declining 60bps YoY
due to higher material cost, particularly in H1FY13, and pricing pressure. Order book grew
12.5% YoY to INR6bn. The company has launched several products in alternators, motors
and convertors which are expected to yield positive results in FY14. Industrial system’s RoCE
declined 200bps YoY to 54.4% in FY13.
0.0
90.0
180.0
270.0
360.0
450.0
25,000
30,000
35,000
40,000
45,000
50,000
FY08
FY09
FY10
FY11
FY12
FY13
(INR '000/tonnne)
(INR /tonne)
IndIan HRC prices (Landed) ‐ LHS Copper prices (in INR) ‐RHS
44.3 32.4
19.8 11.7 9.0
10.9
12.5
3.4 3.1
23.6
45.5
19.2 46.1 55.7
12.1
17.8
18.2 8.5
9.1 22.2
30.7 20.6 23.7
0.0
22.0
44.0
66.0
88.0
110.0
FY09 FY10 FY11 FY12 FY13
(%)
Crompton Siemens Chinese Areva T&D Others
Chinese/Koreans have dominated the Indian transformers market in the past 4‐5 years. More than 40% of total PGCIL orders (FY09‐13) were won by Chinese/Koreans.
The company has launched several products in alternators, motors and convertors which are expected to yield positive results in FY14.
Engineering and Capital Goods
8 Edelweiss Securities Limited
Chart 9: RoCE stabilising at lower level Chart 10: Motors and drives’ revenue growth declines
Source: Company, Company, Edelweiss research
Consumer products: Regaining focus; leadership maintained Though revenue grew at a healthy 21.5%, margin fell 160bps in FY13 primarily due to high
commodity prices and INR depreciation. The company, during the year, has significantly
improved its service capabilities by establishing more than 400 exclusive authorised service
centers. All the regions in India have registered more than 20% growth, with North being
the highest at 24%.
Chart 11: RoCE trend—on a decline Chart 12: Revenue growth in electric fans spurts
Source: Company, Edelweiss research
Fans: Revenue grew 22% YoY against industry growth of 15%, translating into revenue of
more than INR10bn. The company has been able to maintain its leadership position in the
fans market. It posted double digit EBITDA margin in the division. CG also maintained
negative capital employed through controls on debtors and inventory. In‐house production
increased 26% YoY during FY13. The company launched 50 new products in the fans division
which accounted for over a third of the division’s sales.
23.0
48.0
73.0
98.0
123.0
148.0
FY09 FY10 FY11 FY12 FY13
(%)
Industrial Systems (India)
0.0
100.0
200.0
300.0
400.0
500.0
FY09 FY10 FY11 FY12 FY13
(%)
Consumer Products
10.0
13.0
16.0
19.0
22.0
25.0
(5.0)
2.0
9.0
16.0
23.0
30.0
FY09 FY10 FY11 FY12 FY13
(%)
(%)
Rev . Growth (YoY)
Motors & drives rev growth (%)
EBIT margins (RHS)
0.0
5.0
10.0
15.0
20.0
25.0
0.0
12.0
24.0
36.0
48.0
60.0
FY09 FY10 FY11 FY12 FY13
(%)
(%)
Rev . Growth (YoY)
Electric fans rev growth (%)
EBIT margins (RHS)
Crompton Greaves
9 Edelweiss Securities Limited
Lighting: This division grew 13% against industry growth rate of 11%. CG enjoys third
position in the Indian market with leadership in public lighting, industrial lighting and flood
lighting. CFL, indoor commercial lighting and high mast grew 26%, 30% and 42%,
respectively, against industry growth of 18%, 22% and 15%, respectively, in FY13. The
company acquired CFL business of Karma Industries at Baddi for INR145mn, which will
double the company’s CFL capacity. CG has also entered into technology licensing
agreement with Bridgelux (USA) for rapidly growing LED‐based lighting.
Pumps: Pumps division surged 17% against industry’s 6% growth. CG retained the No.2
position in this business with leadership position (27% market share) in the domestic pump
business.
Appliances: The appliances division surged 75% on a small base with significant presence in
the geysers market. CG is planning to grow this business via introduction and marketing of
large number of new and more innovative products.
Engineering and Capital Goods
10 Edelweiss Securities Limited
International business
Overseas power systems performance Pauwels Led by growth in US, Ireland and Indonesia, Pauwels’ revenue grew 6% YoY despite a
capacity shift to Hungary during FY13. This was despite 16% YoY drop in Canada (led by
plant level issues).
Belgium, Canada and US from the Pauwels portfolio were the major loss making plants
during the year. Management expects these plants to break even at the EBIT level by FY14.
Chart 13: Pauwels—Revenue and profitability trend
Source: Company, Edelweiss research
Led by strong pick up in execution of power transformers at Hungary (especially in H2FY13),
Ganz posted an impressive 27% YoY sales growth during FY13.
While the Hungary power transformers plant for Ganz remained loss making in FY13, there
was a strong pick up in execution and profitability during Q4FY13 with 7% EBIT margin.
Management expects to sustain this performance during FY14.
Ganz Management confident of EBIT breakeven in FY14: CG remains confident of attaining
operational stability in all plants by FY14 end led by encouraging results at Hungary during
Q4FY13 and in Belgium during Q1FY14. Management is currently focusing on execution
stability at three power transformer plants which includes Canada and US.
0.6
1.7 1.8 1.3
2.0
(0.4)
(3.4)
(5.4)
(3.6)
(1.8)
0.0
1.8
3.6
(50.0)
0.0
50.0
100.0
150.0
200.0
FY07 FY08 FY09 FY10 FY11 FY12 FY13
(INR bn)
(%)
PAT (RHS) Rev. growt (LHS)
Crompton Greaves
11 Edelweiss Securities Limited
Chart 14: Ganz— Revenue and profitability trend
Source: Company, Edelweiss research
ZIV Deterioration in ZIV’s performance post acquisition; CG confident of recovery
CG acquired ZIV in FY13 for an EV of EUR147mn, funded via 50:50 debt‐eqiuty ratio to
complete its power system automation (control and relay panels, metering) portfolio.
However, there was a sharp drop in ZIV’s profitability immediately post acquisition with
FY13 (8 months’ period) revenue and PAT at INR3.4bn and INR(0.2)bn led by significant
slowdown in key markets like Spain.
While most business segments like application technology and grid automation posted
losses, metering business (37% of ZIV sales) remained profitable with PAT of INR60mn (9.3%
PBT and 4.5% PAT margin).
Management expects ZIV’s performance to improve in FY14 led by integration with various
CG products (power + industrial).
Table 1: ZIV—Performance for 8 months (August‐March FY13)
Source: Company, Edelweiss research
Emotron and QEI On a strong footing
While Emotron’s revenue surged a robust 52%, PAT jumped 60% YoY in FY13 led by strong
traction in AC drives and variable frequency drives (VFDs). PAT margin improved by 40bps
YoY to 8.2% in FY13.
219.0
(466.0)
303.8
525.7
829.1
(657.2) (642.1) (800)
(400)
0
400
800
1,200
(27.0)
0.0
27.0
54.0
81.0
108.0
FY07 FY08 FY09 FY10 FY11 FY12 FY13
(INR mn)
(%)
PAT (RHS) Rev. growt (LHS)
Particulars (INR mn) FY13
Revenue 3,470.0
PAT 57.3
Engineering and Capital Goods
12 Edelweiss Securities Limited
Table 2: Emotron—Robust growth
Source: Company, Edelweiss research
QEI reported 29% sales growth led by healthy traction in SCADA, RTU (remote terminal
units). However, PAT was lower at 20% YoY led by margin pressure.
Particulars (INR mn) FY12 FY13 % change
Revenue 1,930 2,930 51.8
PAT 150 240 60.0
Crompton Greaves
13 Edelweiss Securities Limited
Annexure I Table 1: Major orders received by CG entities
Table 2: Notable launches in FY13
Source: Company, Edelweiss research
FY13 FY12
PT transformers PT transformers
1) 13x42MVaA tranformers for Hydro One ( Canada) 1) Solar order from First solar, USA
2) 2x300MVA auto transformer for Saskatchewan Power
(Canada)
2) HVDC Transformer from Manitoba Hydro (Canada)
3) 3x85MVa GSU transformers for Coast Mountain Hydro
(Canada)
3) Generator step up transformer (GSU) from Ontario Power
(Canada)
4) 75MVA transformer from Global foundries (USA) 4) Power transfromer fromSNC Lavalin (Canada)
Coverage group(s) of stocks by primary analyst(s): Engineering and Capital Goods
ABB India, BGR Energy, Bharat Electronics, Bharat Heavy Electricals, Bajaj Electricals, Crompton Greaves, Havells India, Jyoti Structures, KEC International, Cummins India, Kalpataru Power, Larsen & Toubro, Siemens, Sterlite Technologies, Techno Electric & Engineering, Thermax, Voltamp Transformers, Voltas
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 120 49 17 186* ‐ stocks under review
Market Cap (INR) 118 56 12
Date Company Title Price (INR) Recos
Recent Research
01‐Jul‐13 Voltas Subdued on weak sentiments; Visit Note
81 Hold
01‐Jul‐13 ABB India Back to basics: Tough times call for tough measures; Visit Note
612 Reduce
05‐Jun‐13 Cummins India
Positioned for a long haul; Visit Note
459 Buy
> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
Rating Interpretation
Buy appreciate more than 15% over a 12‐month period
Hold appreciate up to 15% over a 12‐month period
Reduce depreciate more than 5% over a 12‐month period
Rating Expected to
21 Edelweiss Securities Limited
Crompton Greaves
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Engineering and Capital Goods
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