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FY2011 performance sluggish led by stand-alone power business: Crompton Greaves (CG)' consolidated business has posted a sluggish revenue growth of 9.5% year on year (YoY) for FY2011 on account of a mere 1.8% growth in the stand-alone power business. This blip was mainly on account of (1) a fall in the realisation in spite of a 17% growth in the physical output and (2) a delay by some key customers in India in taking delivery of or installing power transformers, switchgears and sub-stations. The overseas power business' revenue grew by 21% in euro terms on account of a good growth registered in the sales of distribution transformers both in the USA and in Europe coupled with a major growth in the demand for wind energy solutions.
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Capex of Rs795 crore incurred during FY2011: Out of capital expenditure (capex) of Rs795 crore, about Rs272.6 crore was spent on aircraft for which no further detail has been given. Besides there were several capacity expansion, debottlenecking and modernization programmes undertaken particularly in the transformer, electric motor, alternator and drives panel facilities. CG Power's global capacities were increased by 10,000MVA in three steps during the year. First, a new medium power transformer plant was set up in the USA and two new low power transformer plants were set up in Belgium and India. Two, the manufacturing capability of all plants was raised to higher kV and higher MVA classes. Three, the productivity of power transformers was improved by almost 15% through modernisation and automation.
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Return ratio suffered but remained attractive: The subdued profitability of its industrial system business dragged its overall profit for the year. This coupled with the implementation of an aggressive capital expenditure (capex) plan dragged the overall return on capital employed (RoCE) to 37.4% in FY2011 from 44.2% in FY2010. The return on equity (RoE) also fell to 28.1% in FY2011 from 32.9% in FY2010. However, Crompton Greaves Ltd (CGL) continues to enjoy high return ratios among its peers.
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Working capital cycle increased to 31 days: During FY2011, CGL's working capital cycle increased to 31 days from 17 days in FY2010. The primary reason for this was the increase in debtor and inventory levels resulting from the delay by some key customers in taking delivery of power system orders. As a result, the cash from operations decreased by 47% YoY to Rs560 crore in FY2011.
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Leverage level remained comfortable: CGL's debt on the consolidated level remained stable at Rs470 crore vs Rs501 crore in FY2010. The debt-to-equity ratio was quite comfortable at 0.14x. On a stand-alone basis the company remained net debt-free with merely Rs13.4 crore of loans at the end of FY2011. As the company has been generating sufficient cash, we feel that its debt levels will remain low in the near future.
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Share of domestic revenue increased: In the consolidated sales, the domestic sales contribution increased further to 51% in FY2011, up from 47% in FY2010, led by a robust growth in the industrial system and consumer durable segments. Geographically, South America and Australia were the regions that reported the highest Y-o-Y fall in sales (by 54% and 40% respectively) while North America reported a sharp recovery with an 18% Y-o-Y growth. In the stand-alone revenue, exports reported a fall of 12.5% YoY, dragging down the overall revenue growth to 12.5% in spite of an 18.8% growth in the domestic revenue. Consequently, the share of exports declined to 15.3% from 19.8% in FY2010.
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Management remains optimistic about T&D demand: The management remains optimistic about the opportunities in the global power transmission and distribution (T&D) business (particularly for India and China) for both replacement and new projects.
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Maintain bullish stance due to its diversified presence: We feel CGL is the best play in the power T&D space with a wide portfolio of offerings for products and services. Its new product (NP) development initiatives have also started bearing fruits as NPs accounted for 23% of its total domestic sales in FY2011. While its stand-alone power business' revenue is expected to grow at a sluggish pace in FY2012, a robust double-digit growth is expected in this segment from FY2013 onward on the back of the order inflows expected from the domestic T&D sector. The industrial division should benefit from the recent two acquisitions and see a good growth in the next two years. The consumer products business is also expected to benefit from the rising consumer spending and the company's strong position in the fan, pump and lighting segments.
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Maintain Buy: We have realigned our numbers to incorporate the changes from the balance sheet. However, there has been no material change in our earnings per share (EPS) estimates. At the current market price the stock is discounting its FY2012 and FY2013 earnings estimates by 15.5x and 13.5x respectively which looks attractive. Hence, we maintain our Buy recommendation on the stock with a price target of Rs303 per share. The near-term triggers for the stock are synergies from the recent acquisitions, a pick-up in its domestic T&D orders, an uptick in global demand for power systems and a positive translation impact from the appreciating euro. However, the near-term challenges for the company will be to maintain robust margin levels amid the rising input cost and pressurised realisations in the highly competitive domestic transformer business.
