CROMPTON GREAVES-OUTPERFORMER-FIRST GLOBAL

First Global Research has recommended an outperformer rating on Crompton Greaves.
First Global Research report on Crompton Greaves:
On a standalone basis Crompton Greaves sales increased by over 27 per cent during FY06. With all three business divisions; power, industrial and consumer displaying growth rates above 20 per cent the near term prospects are bright. On a standalone basis we expect top line to grow at around 28% and 24% respectively for FY07 and FY08. However as the company has started paying marginal tax from FY07 vis a vis Minimum Alternate Tax (MAT) in FY06 we expect Profit after taxes to show a marginal rise in FY07 on a standalone basis. In a way the consumer and industrial businesses provide the cash flow to fund power segment growth.
Crompton Greaves’ acquisition appetite is, however, is far from over. In the second half of 2006, CG acquired two Hungary-based companies - Ganz Transelektro Villamossagi Zrt (Ganz) and Transverticum Kft (TVK). The acquisition cost for both the companies stood at 35 mn euro (approximately Rs.2 bn). Management expects the Ganz acquisition to pay off in less than two years. Ganz is a loss-making company with a turnover of Rs.2 bn. CG plans to leverage Ganz’s idle capacities to make up for the shortage at Pauwels’ manufacturing facilities. The Hungarian facility will be used to service CG's European customers.
New additions to the company’s portfolio by Ganz include high-range transmission and distribution equipment of up to 800 kV; gas-insulated switchgears; rotating and traction machines of up to 8 MW (used in railway applications); and turnkey product execution capability in the T&D segment. Considering CG’s success in turning around Pauwels' operations, there is reason to believe that its recent buyout of Ganz may also pay off. Further, given its high-end product portfolio, the company’s overall margins may also improve once the integration is over.
On the domestic front, the overall scenario for CG’s three businesses - Power Systems, Industrial Systems and Consumer Products - looks good. In India, one can expect an investment of around Rs3000 bn in power generation addition from here up to 2012. For each rupee spent on power generation, approximately 40 paise must be spent on transmission and distribution networks. With Pauwel and Ganz under its belt, Crompton Greaves has the required suite of products to ride the boom in the power equipment business in the domestic market. With Power Systems contributing to 64% of revenues on a consol. basis in FY2006 on a strong wicket, the overall prospects for CG appear to be bright in the near term.
With industry capex continuing to be on an upswing, the demand for motors & alternators from user industries ranging from manufacturers of DG sets, pumps and compressors to construction equipments, is expected to be firm. As a result, Industrial Systems should continue to record healthy growth. Finally the strong pace of GDP growth and firmness in the construction sector indicate a reasonably sound business environment for the Consumer product business of CG.
CG trades at 23.4x and 19x our FY07E and FY08E EPS and at the current price, it is one of the more attractive stocks in the capital goods space. We have assumed that for FY07 and FY08, EBITDA Margins of Pauwel would show marginal improvement over FY06 levels. In the absence of sufficient financial information on Ganz, the same has not being included in any of our projections. CG is quoting at lower valuation multiples despite high growth expectations for the company over the next few years. Considering the benefits from the company’s strategic acquisitions (Pauwel and Ganz) that are likely to flow in over the next couple of years, it is our firm belief that the stock has plenty of upside left. We, therefore, reinitiate our coverage on CG with a rating of ‘Outperform.’