crg ambhit capital

8/6/2019 CRG Ambhit Capital

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Engineering & Capital Goods August 08, 2011

Crompton GreavesBloomberg: CRG IN EquityReuters: CROM.BO

Accounting: AmberAccounting: AmberAccounting: AmberAccounting: AmberPredictability: REDPredictability: REDPredictability: REDPredictability: REDEarnings Momentum: REDEarnings Momentum: REDEarnings Momentum: REDEarnings Momentum: RED

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit

Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Please refer to the Disclaimers at the end of this Report.

SELLINITIATING COVERAGE

Exhibit 1: Key financials

Year to March (Rsmn) FY09 FY10 FY11 FY12E FY13E

Operating income 87,373 91,409 100,051 107,437 121,118

EBITDA 9,956 12,770 13,438 10,207 12,475

EBITDA (%) 11.4 14.0 13.4 9.5 10.3

EPS (Rs) 8.7 13.4 13.9 10.6 12.7

RoE (%) 35.7 39.7 30.8 18.9 19.3

RoCE (%) 37.2 40.4 34.1 19.2 20.6

P/E (x) 18.1 11.8 11.4 15.0 12.4

Source: Company, Ambit Capital research

Analyst Contacts

Puneet Bambha

Tel: +91 22 3043 [email protected]

Bhargav Buddhadev

Tel: +91 22 3043 [email protected]

Recommendation

CMP: Rs158

Target Price: Rs143

Previous TP: NA

Downside (%) (9)EPS (FY12E): Rs10.6

Change from previous (%) NA

Variance from consensus (%) (10)

Stock Information

Mkt cap: Rs101bn/US$2,272mn

52-wk H/L: Rs349/148

3M ADV: Rs749mn/US$17mn

Beta: 0.8x

BSE Sensex: 17,306

Nifty: 5,211

Stock Performance (%)

1M 3M 12M YTD

Absolute -37.5 -35.2 -43.8 -49.1

Rel. to Sensex -29.3 -28.6 -39.2 -33.5

Performance

10,000

15,000

20,000

25,000

Jun-10 Oct-10 M ar-11175

225

275

325

375

Sensex Crompton Greaves

1-year forward EV/EBITDA

0

100

200

300

400

500

600

Apr-

06

Aug-0

6

Dec-

06

Apr-

07

Aug-0

7

Dec-

07

Apr-

08

Aug-0

8

Dec-

08

May-0

9

Sep-0

9

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

3x

6x9x

12x15x

18x

The Great UnravellingThe Great UnravellingThe Great UnravellingThe Great Unravelling Whilst Cromptons stock price is already down 33% following thedismal 1Q results, we expect further share price weakness in FY12 dueto: (a) Weakness in Cromptons overseas business; (b) The likelihood ofPGCIL throttling back on T&D capex; and (c) Significant corporategovernance concerns regarding Crompton. We initiate with a SELL.

Competitive position - Weak: Crompton Greaves (CRG) has historicallycompeted with MNC peers such as ABB, Areva and Siemens and other foreigncompetitors from Korea and China. With ~44% of PGCILs capex in the XIIFive Year Plan likely to be spent on High Capacity Corridors which alsoincludes HVDC technology (CRG does not have HVDC) and given risingcompetition from Chinese and Korean vendors (primary data says Baoding,Hyosung etc operate at 30% utilization) for PGCILs tenders (CRGs bread andbutter market), CRG is likely to face continued pricing pressure in India.

Several potholes ahead

Difficulties at home: Given the delays faced by generation projects due toissues concerning coal, land and environment clearances, we expect PGCIL todowngrade its capex guidance for the XIIth Five Year Plan as ~80% of its capexdepends on new generation projects. Also, rising losses by State ElectricityBoards (SEBs) have resulted in power outages and delays in capex. This iscorroborated by: (a) SEBs share in CRGs order backlog falling below 10%from 20%+ and (b) BHELs dismal order intake in 1QFY12 (77% YoY decline).

Difficulties abroad: 28% of CRGs international revenues in FY11 came fromEurope and North America. With Portugal, Greece, Spain, Ireland and Italy at

various stages of their sovereign debt crises (which has made investment inT&D by these governments highly unlikely) and global giants such as Siemensand Alstom reporting weakness in order intake from the North Americaregion, visibility on CRGs international business is likely to weaken further.

Corporate governance concerns: Given that CRG is the main cashgenerating asset in the broader Avantha Group and given the waymanagement has dealt with the recent aircraft purchase, investors beliefregarding CRGs corporate governance will take time to recover.

Valuations: Based on our DCF model (assuming COE of 15% and a terminalgrowth rate of 3%), we value CRG at Rs143 implying an FY12 P/E of 13.5x,which is a discount of 25% to its 5-year average P/E of ~18x. We believe sucha low multiple is justified given CRGs poor EPS growth prospects (6% declinefor Crompton v/s 41% growth for peers over FY11-13), deteriorating returnratios and given the corporate governance issues swirling around the firm.


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Crompton Greaves

Ambit Capital Pvt Ltd 2

Company Financial Snapshot

Profit and Loss (consolidated)(Rsmn) FY11 FY12E FY13E

Net sales 100,051 107,437 121,118

Optg. Exp 86,613 97,231 108,643

EBIDTA 13,438 10,207 12,475

Depreciation 1,936 2,330 2,690

Interest Expense 352 403 403

PBT 11,910 8,043 9,863

Tax 3100 1350 1744

PAT 8,887 6,770 8,157Profit and Loss Ratios

EBIDTA Margin % 13.4 9.5 10.3

Net Margin % 8.9 6.3 6.7

P/E (X) 11.4 15.0 12.4

EV/EBITDA (X) 7.7 10.1 8.3

Company Background

Crompton Greaves (CRG), a part of the Avantha Group,is one of the leading players in the Indian transmission

and distribution market. Besides, the company has astrong presence in other business segments includingindustrial systems and consumer products business.Over the past few years, CRG has strengthened itsproduct portfolio and expanded its geographical reachthrough a series of acquisitions (nine acquisitions in thelast six years).

Balance Sheet (consolidated)

(Rsmn) FY11 FY12E FY13E

Total Assets 71,660 77,837 93,273

Net Fixed Assets 19,417 26,087 27,397

Current Assets 45,496 45,003 59,129

Other Assets 6,747 6,747 6,747

Total Liabilities 71,660 77,837 93,273

Networth 32,747 38,763 45,941

Debt 4,703 5,703 4,703

Current Liabilities 33,892 33,130 42,427

Others 317 241 203

Balance Sheet Ratios

ROE % 30.8 18.9 19.3

ROCE % 34.1 19.2 20.6

Net Debt/Equity 0.1 0.1 0.0

Total Debt /Equity 0.1 0.1 0.1

P/BV (X) 3.1 2.6 2.2

Cash Flow (consolidated)(Rsmn) FY11 FY12E FY13EPAT 12,291 8,043 9,863Depreciation 1,936 2,330 2,690Change in Wkg Cap (5,133) (2,482) (1,025)Others (3,489) (946) (1,341)CF from Operations 5,605 6,944 10,187Capex (6,259) (9,000) (4,000)Investments (1,391) - -CF from Investing (7,382) (9,000) (4,000)Change in Equity - - -Debt (379) 1,000 (1,000)Others (1,548) (1,157) (1,383)CF from Financing

(1,927) (157) (2,383)Change in Cash (3,704) (2,212) 3,804

New project capex announcements in India have come off substantially (figs represent quarterly average capexin Rsbn)

FY96-04 FY05-06 FY07-09 1HFY10 2HFY10+1HFY11 Last 3 quarters

Government projects 339 518 1,750 1,540 2,438 743

Private projects 345 1,124 3,503 1,590 2,795 2,058

Total projects 683 1,642 5,254 3,129 5,234 2,801

Moodys has downgraded ratings for several European countries and this will hit T&D capex

Greece Spain Portugal Italy Ireland

Period Rating Period Rating Period Rating Period Rating Period Rating

Jul-11 Ca Mar-11 Aa2 Jul-11 Ba2 Jun-11 Aa2 Jul-11 Ba1

Jun-11 Caa1 Dec-10 Aa1 Apr-11 Baa1 May-02 Aa2 Apr-11 Baa3

May-11 B1 Sep-10 Aa1 Mar-11 A3 Dec-10 Baa1

Mar-11 B1 Jun-10 Aaa Dec-10 A1 Oct-10 Aa2

Dec-10 Ba1 Jul-10 A1 Jul-10 Aa2

May-10 Aa2 Jul-09 Aa1

Source: Bloomberg, Ambit Capital research, Note: Red colour indicates downgrades


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Crompton Greaves


Company OverviewCrompton Greaves (CRG) is a part of the Avantha Group, which has interestsacross several businesses including pulp and paper (Ballarpur Industries, FY10revenues US$863mn), food processing (Global Green), chemicals (SolarisChemTech Industries), power (Crompton Greaves, FY11 revenues US$2,223mn),energy and infra (Avantha Power & Infrastructure, FY2009 revenues US$73mn)

and IT & ITES (Salient Business Solutions and Avantha Technologies).

Over the past few years, CRG has strengthened its product portfolio and expandedits geographical reach. It now has manufacturing facilities in nine countries across

Asia, Europe and North America thanks to nine acquisitions in the last six years.The companys business portfolio is organized across three primary businesssegments - Power Systems, Consumer Products and Industrial Systems.

Exhibit 2: CRGs revenues have grown at a CAGR of19% over the last 5 years

-

20,000

40,000

60,000

80,000

100,000

120,000

FY06

FY07

FY08

FY09

FY10

FY11

Revenues (Rs mn)

CAGR 19%


Exhibit 3: Revenue growth coupled with PAT marginexpansion has led to net profit CAGR of 32%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,0009,000

10,000

FY06

FY07

FY08

FY09

FY10

FY11

Adjusted PAT (Rs mn)

CAGR 32%


Exhibit 4: A snapshot of CRGs business segments

% ofrevenues

(FY11)

% of EBIT(FY11)

Key products Competitors

Power Systems 65% 59%

Domestic power 26% 34%

International power 39% 25%

Transformers, switchgears, circuitbreakers

ABB, Areva, Siemens, Voltamp,Emco, Indotech

Consumer Products 20% 22%

Fans, lighting equipment, pumps,

appliances

Bajaj Electricals, Havells, Orient,

Philips

Industrial Systems 15% 19%HT and LT motors, drives, stampings,railway signalling and coach applications

BHEL, ABB, Areva, Siemens

Total 100% 100%



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Crompton Greaves


Exhibit 5: SWOT Analysis of CRG

Strengths Weaknesses

Strong franchise with market leadership across transformers,stampings and fans which contribute over 60% of standalonerevenues

Over the last six years, CRG has acquired nine companiesand enhanced its product portfolio to a level where it now

competes with the global leaders in T&D (Areva, ABB,Siemens etc.)

Strong ability to turn around distressed companies

Minimal exposure to the project management business (unlikeglobal peers) due to lack of domain knowledge

Gaps in technology relative to global peers in areas such asHVDC

CRGs financial disclosure levels are lower than those of MNCpeers

Opportunities Threats

Underinvestment in Indian T&D infrastructure is a hugeopportunity for the entire industry

Becoming a distribution franchisee is a potential opportunityfor CRG given the deteriorating financial health of SEBs

Replacement of low tension lines with high tension lines inorder to reduce transmission losses

The continued entry of Korean and Chinese players into theIndian transformer market is a major threat for CRG and otherdomestic players

The cancellation/renegotiation/delayed delivery pickups byclients (such as PGCIL/SEBs) is a potential key threat to CRG

Source: Ambit Capital research

Exhibit 6: Porters analysis of the Indian T&D industry


Bargaining power of suppliers

Low

Steel and copper constitute ~55% of T&Dcompanies raw material costs. Whilstthese prices rose by 31% in CY10,, so farin CY11 they have corrected by 6%. Giventhe slowdown in end demand andconsequent inventory build up, thebargaining power of suppliers hasdeteriorated.

Intensity of competition

High

In the Indian T&D marketcompetition from internationalplayers has increased considerablyespecially given that some of theseChinese and Korean firms areoperating at 30% utilization levels.

Furthermore, with PGCIL relaxingits pre-qualification norms, manyEPC companies have also startedtaking substation orders. This hasfurther increased competition inthis important segment of the T&Dmarket.

Barriers to entry

Medium

Once upon a time, access to technology was the biggest entry barrier. However, with PGCIL now relaxing its pre-qualification norms, this is no longer ameaningful barrier, as relaxation hasallowed construction companies to bid forthe PGCIL tender

Customers tenders have several criteriaamongst which the most demanding onesare technological capability, track record,global presence and a strong balancesheet. Without satisfying these criteria, itis difficult to qualify for the biddingprocess. That being said for largeoverseas firms, like the Korean andChinese firms, none of these areinsurmountable barriers.

Bargaining power of buyers

High

PGCIL which is the biggest customerfor domestic power ancillary firms,issues global tenders for all itstransmission orders. As a monopolybuyer, PGCIL enjoys very high

bargaining power.

This sort of monopoly buying power isenjoyed by Governments across the

world and it puts suppliers of T&Dequipment in an invidious position.

Threat of substitution

Low

T&D equipment does not have asubstitute. However, Governments

across the world can and do postponeinvestment in T&D if they are faced

with difficult fiscal conditions of the sortnow prevalent in the EU and in the US.

Improving

Unchanged

Deteriorating


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Crompton Greaves


Cromptons strengthsCRG scores over peers on financial parameters: In our competitivebenchmarking analysis (based on the financial parameters shown in the tablebelow) of various T&D companies, CRG clearly emerges as one of the strongerplayers on the back of higher net profit margins coupled with high working capital

turnover translating into higher RoEs.

Exhibit 7: CRG scores over peers on financial parameters (quantitative scores in the left table and qualitativerankings in the right table)

RevenueCAGR

(5 years)

Debt/equity

PAT%

CFO/EBITDA

RoCE RoEWorking

capitalturnover

ABB 18% 0.0 1.0 1.2 5.6 2.6 6.3

Areva T&D 36% 0.9 4.4 0.2 20.9 18.6 4.5

CRG 20% 0.1 8.4 0.4 36.4 30.5 11.7

Jyoti

Structures 28% 0.8 3.8 0.2 31.4 18.3 3.1

KECInternational

21% 1.5 4.5 0.3 24.3 23.8 3.9

KalpataruPower 39% 0.5 4.8 0.6 19.1 14.6 3.7

Siemens 21% 0.0 7.7 0.7 37.0 22.8 546.3

RevenueCAGR

(5 years)

Debt/equity

PAT%

CFO/EBITDA

RoCE RoEWorking

capitalturnover

Overall

score

ABB

Areva T&D

CRG

JyotiStructures

KECIntl.

KalpataruPower

Siemens

Source: Capitaline, Ambit Capital research, Note: Based on the latest data available (i.e. FY11 data for CRG, Jyoti, KEC and Kalpataru, CY10 data forABB and Areva T&D, FY10 data for Siemens)

- Strong - Relatively strong - Average - Relatively weak

Strong brand and leadership position in the consumer business: ConsumerProducts is CRGs oldest and most profitable business segment in terms of ROCE.The key to CRGs high ROCE in this segment has been outsourced manufacturing

wherein the outsourced supplier bears the entire working capital burden. WhilstCRG is the market leader in fans and domestic pumps, it ranks second in thelighting business.

Exhibit 8: Crompton is a strong player in the Indian Consumer Durables market

ProductPer annum industry

size (Rsmn)Key players*

Motors 25,000 Crompton, ABB

Fans 20,000 Crompton, Orient, Usha and Bajaj Electricals

CFL 10,000 Philips and Osram

Luminaries 18,000 Philips, Bajaj Electricals and Crompton

Source: Industry, Ambit Capital research Note: *L to R in the order of market share starting from high tolow


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Crompton Greaves


Exhibit 9: CRGs consumer business has been growingsales at a CAGR of 19% over the last 5 years

-

5,000

10,000

15,000

20,000

25,000

FY06 FY07 FY08 FY09 FY10 FY11

(Rsmn)

0%

2%

4%

6%

8%

10%

12%

14%

16%

Sales EBIT EBIT %


Exhibit 10: CRGs consumer business is a cash cow forthe company thanks to its very high RoCE

-

500

1,000

1,500

2,000

2,500

3,000

3,500


(Rsmn)

0%

50%

100%

150%

200%

250%

300%

350%400%

450%

500%

EBIT Capital Employed ROCE%


CRG has strong relationships with State Electricity Boards (SEBs): SEBsconstitute roughly half of the transmission capex planned in the 11th Five YearPlan. Our discussions with various industry participants suggest that CRG hasstrong relationships with SEBs particularly with those in Rajasthan and UttarPradesh. Furthermore, our sources say that CRGs relationships with SEBs tend tobe stronger than those of its overseas (Asian and MNC) competitors, as SEBs areperceived to have lower levels of transparency and higher receivable dayscompared to the PGCIL (Central utility).

Exhibit 11: SEBs comprised 46% of planned Transmission capex in the 11th FYP

Transmission capex (Rsbn) % share

PGCIL & JVs 550 39%

DVC 17 1%

Private bidders 190 14%

Central sector 757 54%

State sector 650 46%

Total 1,407 100%

Source: CEA, Ambit Capital research

Only domestic player to have stood tall against foreign competition: TheChinese (Baoding and TBEA) and Korean (Hyosung) players have been veryaggressive in the PGCIL transformer market and have seen their market share risefrom nothing to 45% over the past five years. However, CRG with its focus on theproducts (rather than on EPC projects), is the only domestic player to havemeaningful market share in the PGCIL transformer market. Thanks to its costcompetitiveness (exhibit 12) CRGs has ~30% market share in PGCILs XI th Five

Year Plan transformer ordering vis--vis 12% for European MNC peers.


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Crompton Greaves


Exhibit 12: Crompton is the most cost competitive amongst peers (based onFY11/CY10 data)

ABB Siemens Areva Crompton*

Fixed cost as % of revenues 17% 12% 21% 16%

Employee expense as % of revenues 8% 7% 9% 5%

Interest as % of sales 0.6% 0.2% 2.9% 0.3%

EBITDA (Rsmn) 1,868 13,791 4,902 10,284

EBITDA margin 3% 15% 12% 17%

Source: Capitaline, Ambit Capital research, *represents standalone for FY11

Acquisitions have plugged CRGs technology gaps and provided thegeographical reach

Over the past six years CRG has acquired nine firms in the Western world for atotal outlay of ~US$305mn. As shown in the table below, these firms haveallowed CRG to plug in technology gaps such as EHV transformers, substationautomation, gas insulated switchgears etc.

Exhibit 14: The acquisitions have plugged CRGs technological gaps

DateAcquisition(country)

Value (Rsmn) Gains for CRG

May-05 Pauwels (Belgium) 2,038Brings three-phase distribution and power transformer technology to CRG andgives it access to European and US markets

Oct-06 Ganz (Hungary) 2,223 EHV transformers, Gas insulated switchgears

May-07 Microsol (Ireland) 667 Sub-station automation for MV and HV sub-stations

Jun-08 Sonomatra (France) 83On-site maintenance and repair of power transformers and on-load tapchangers etc. This enhances CRGs ability in the services segment of the T&Dbusiness.

Sep-08 MSE (USA) 720EPC of high voltage electric power systems, increases CRG's strength as asystems integrator in the international EPC business arena, particularly in therenewable energy (wind) segment

Mar-10Power Technology

Solutions (UK)

2,070Provides consultancy and engineering support to Regional Electricity Companies,

strengthens CRG's positioning in the UK marketApr-10

Nelco (threebusinesses) (India)

920Enables CRG to become a stronger player in its railways business and also buildcapabilities in drives

May-11 Emotron (Sweden) 3,670Fills gap in automation solutions for CRG's industrial systems business and givesit more relationships in West European markets

May-11 QEI Inc (USA) 1,350Strengthens CRGs position in SCADA and substation automation and gives itfurther penetration into the North American automation market


Exhibit 15: CRGs subsidiaries now account for 41% ofits consolidated sales

-

20,000

40,000

60,000

80,000

100,000

120,000


(Rsmn)

0%

10%

20%

30%

40%

50%

Sales - standalone Sales - subsidiary

as % of total


Exhibit 16: CRGs subsidiaries now account for 24% ofits consolidated EBIT

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000


(Rsmn

)

0%

10%

20%

30%

40%

50%

EBIT - standalone EBIT - subsidiary

as % of total


xhibit 13: Market share inansformer orders by PGCIL in

he 11th Plan

hinese/Korean 45.3%

rompton Greaves 29.6%

uropean majors 12.2%

thers 12.9%

ource: PGCIL, Ambit Capital research


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Crompton Greaves


Exhibit 17: Whilst India accounts for 85% of standalonesales for CRG

Standalone Sales breakup FY11

India 84.7%

Asia (ex-India) 6.0%

Africa 4.6%

North America 0.5%

South America 3.3%

Europe 0.8%

Australia 0.1%

Total 100.0%


Exhibit 18: it only accounts for 51% of theconsolidated sales

Consolidated Sales breakup FY11

India 50.5%

Asia (ex-India)

Africa

North America 11.6%

South America 1.1%

Europe 16.9%

Australia

Total 100.0%



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Crompton Greaves


Our worries regarding CRGWhilst the market has analysed CRGs abysmal 1QFY12 results to death and a lothas been written about the steep share price correction which followed the results(see charts below), our worries regarding CRG pre-date the results and go wellbeyond the numbers that this company publishes.

Exhibit 19: CRGs 1Q PAT was 62% below consensusestimates

(Rsmn) Reported Consensus Estimates Variation

Sales 24,377 26,240 -7%

EBITDA 1,819 3,278 -45%

EBITDA Margin 7.5% 12.5% -503bps

PAT 795 2,102 -62%

Source: Bloomberg, Ambit Capital research

Exhibit 20: Following the 1Q results CRGs share pricewitnessed a steep correction

5060708090

100110120130140

20

-Ju

l-10

20

-Aug

-10

20

-Sep

-10

20

-Oc

t-10

20

-Nov-1

0

20

-Dec-1

0

20

-Jan

-11

20

-Feb

-11

20

-Mar-

11

20

-Apr-

11

20

-May-1

1

20

-Jun

-11

20

-Ju

l-11

Crompton Greaves Sensex

Source: Capitaline, Ambit Capital research

Surprisingly high EBITDA margins from FY09-11

In its 1Q results, CRG reported a 545bps YoY erosion in EBITDA margin on theback of a sharp spurt in raw material costs (517bps YoY increase). The impact was

visible across all three of CRGs business segments with the consolidated EBIT

margin falling 804bps, 123bps and 523bps (on a YoY basis) for CRGs power,consumer and industrial segments respectively.

Exhibit 21: CRGs domestic power business marginsrose from FY07-FY11

-5%

0%

5%

10%

15%

20%

FY07

FY08

FY09

FY10

FY11

ABB Areva T&D India

Crompton Greaves

Source: Company, Ambit Capital research, Note: We have taken thedomestic power business margins of Crompton and compared with powerbusiness margins of ABB India and overall margins of Areva T&D India

Exhibit 22: CRGS international power businessmargins rose from FY07-FY11

-5%

0%

5%

10%

15%

20%

FY07

FY08

FY09

FY10

FY11

ABB Global Areva Global

Crompton Greaves

Source: Company, Ambit Capital research, Note: We have taken theinternational power business margins of Crompton and compared with

power business margins of ABB Global and overall margins of Areva

This erosion in EBITDA margins came after three years (FY09, FY10 and FY11) in which CRG relentlessly reported margin improvements whilst peers such as ABBand Areva reported consistent margin contraction. In those halcyon days, CRG


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Crompton Greaves


management used to highlight global outsourcing, economies of scale and valueengineering as the drivers of its strong margins.

We note that in 1Q, other capital goods companies did not report such a sharp fallin EBITDA margins (and that is understandable given that steel and copper keyraw materials for firms in the T&D sector prices have softened in the past sixmonths).

Exhibit 23: YoY change in 1QFY12 EBITA margins of peers versus Crompton

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

BHEL BGR Thermax Siemens Crompton

YoY change in EBITDA Margins


Corporate Governance issues

1. The aircraft purchase

In FY2011 CRG bought an aircraft for Rs2.7bn which is equivalent to 61% and34% of FY11 standalone and consolidated capex respectively. When asked torationalise this, management sighted higher travel requirements. Whilst this could

well be a valid justification given the global scale of the business: (a) CRG could

have rented an aircraft at a competitive tariff from Asia Aviation, which is a relatedparty that provides chartered flights for corporates; (b) We estimate that CRG willhave to incur incremental opex of ~Rs400mn to maintain its own aircraft(Rs136mn depreciation assuming 5% depreciation + interest of Rs273mn,assuming that the aircraft was funded through a loan of Rs2.7bn borrowed at 10%interest rate). This incremental expense is equivalent to 5% of its FY11consolidated PAT of Rs8.9bn.

In FY2008, CRG had made an investment of Rs563mn to purchase the co-ownership rights to an aircraft. This figure doubled in the FY2010 Annual Report,to Rs983mn. When we solicited an explanation for this from the management welearnt that whilst in FY2008 CRG owned a 45% stake in the aircraft in partnership

with BILT (45% owner) and Asia Aviation (10% owner), in FY2010, CRG boughtback BILTs stake and thereby raised it stake to 90%.

2. The timing of Mr. Trehans share sale

In a span of three days starting June 29 and ending July 1 i.e. around two weeksbefore the 1Q results, Mr. Trehan, the former MD and CEO of CRG, sold his entire0.03% stake in the firm. Note, Mr. Trehan had stepped down from his MD/CEOrole at CRG on June 1, 2011.

3. Scaling down guidance abruptly

Immediately after the dismal 1QFY12 results (where EBITDA margins fell by545bps YoY), management abruptly scaled down its YoY revenue growth guidancefrom 12%-14% to 10%-12% and pulled back its EBITDA margin guidance from13%-14% to 8%-10%. This was odd given that management had reiterated thisguidance in an analyst meeting hosted a month before the end of the quarter todiscuss its international acquisitions.


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Crompton Greaves


Exhibit 24: Sharp scaling down of guidance by the management

Previous guidance (4QFY11) Revised guidance (1QFY12)

Revenue growth Standalone business: 12-15%

Overseas business: 12-13%Consolidated: 10-12% growth

EBITDA margins Standalone margins: same as FY11 (~15.7%) or slight 20bps-50bps plus minus

Overseas margins: same as FY11 (~10.1%) or slight improvement

Consolidated: 8%-10%


4. Other corporate governance issues

Apart from the issues highlighted above, there are also other issues such as Mr.Thapar being a part of the Audit Committee (despite being a non-independentdirector) and CRG paying audit fees of US$1.4mn in FY11 (175% higher than theaudit fees paid by much larger firms such as NTPC, Adani Enterprises, Infosys, etc.)

which worry us.

Exhibit 25: CRGs high audit fees

(Figures in Rsmn) Crompton Greaves ABB Areva T&D NTPC Adani Enterprises Infosys

Net sales 100,051 62,871 40,200 483,115 263,871 275,010

Audit expenses 63 22 10 26 22

(as % of revenues) 0.06% 0.03% 0.02% 0.01% 0.01% 0.01%

Source: Capitaline, Ambit Capital research, Note: Based on FY11 data for Crompton, Adani and Infosys, FY10 data for NTPC, CY10 data for ABB andAreva T&D

Will CRG invest further in Avantha Power?

Our estimates suggest that Avantha Power & Infrastructure Ltd (APIL) requires~Rs24.6bn in equity. This includes ~Rs10.0bn (assuming debt:equity of 75:25)immediately for completing phase I of the Chhattisgarh and Madhya Pradesh

projects, and Rs14.6bn for phase II (see exhibit 26 for more details).Given that APIL has not had much success in raising money (raised Rs2.2bn fromprivate equity firm KKR compared to requirement of Rs12.5bn as per DRHP) sincethe filing of the DRHP (filed on March 30, 2010) and given that other than CRGthere is no other obvious source of cash in the Avantha Group, there is a risk thatCRGs cash might be used to capitalize APIL (in a repeat of the transaction whichtook place on March 2009 when Rs2.3bn was invested in APIL by CRG).

Exhibit 26: APIL requires ~Rs24.6bn of Equity to achieve financial closure for its projects under implementation

Projects MW Expected CoD* Project cost (Rsmn) Equity required (Rsmn) #

Chhattisgarh Power Project phase I 600 FY2013 28,720 7,180

Madhya Pradesh Power Project phase I 600 FY2013 29,100 7,275

Total equity required 14,455

Less: amount pumped in by CRG 2,270

Less: Pre-IPO placement to KKR 2,170

Equity shortfall for phase I (A) 10,015

Chhattisgarh Power Project phase II 600 FY2014 29,030 7,258

Madhya Pradesh Power Project phase II 600 FY2014 29,240 7,310

Equity shortfall for phase II (B) 14,568

Total equity shortfall (A+B) 24,583

Source: DRHP, Ambit Capital research, * As per DRHP, #assuming debt:equity of 75:25


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Crompton Greaves


Exhibit 27: CRG has been the main cash generator in the Avantha Group

(12,000)(10,000)(8,000)(6,000)

(4,000)(2,000)

-2,0004,0006,0008,000

FY08 FY09 FY10 FY11

FCFF(Rsmn)

Avantha Power Ballarpur Industries Crompton Greaves

Source: Capitaline, Ambit Capital research, Note: for Avantha Power data not available post FY09

Overseas acquisitions seem to be overhypedWhilst consensus has often regarded CRGs subsidiaries performance as a great

success, our analysis suggests otherwise. Whilst CRGs standalone businessgenerated ROCE of 35% in FY11, its subsidiaries in contrast generated ROCE ofonly 15% (which is at the same level as in FY07) compared to a WACC of 15%.See exhibit 28 and 29 below to know more on the shareholder value accretionreported by CRGs standalone and consolidated entities.

Exhibit 28: Consolidated ROCE has been dragged down by the overseasbusinesses

0%

10%

20%

30%

40%

50%

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

(ROC

E)

Standalone Overseas Consolidated


Exhibit 29: Overseas business is not shareholder accreting relative to thestandalone business (figures in Rsmn for FY11)

Capital Employed (consolidated) (A) 37,767

Capital Employed (standalone) (B) 23,910

Capital Employed (subsidiaries) (C=A-B) 13,857

EV of consolidated (D) 91,522

EV of standalone (E) 76,660

EV of subsidiary (F=D-E) 14,862

Shareholders return for standalone (E/B) 3.2

Shareholders return for subsidiary (F/C) 1.1



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Crompton Greaves


Difficulties in CRGs home market

PGCIL likely to miss its Rs120bn guidance for the12th Five Year Plan

CMIE data highlights a slowing down in project completion ...

CMIE data on projects completed and new projects announced indicates aslowdown in projects owing to issues relating to availability of fuel, environmentclearances and land acquisition.

Whilst India continues to remain a power deficit country, coal availability hasbecome the single biggest challenge. Coal India is struggling to ramp up coalproduction. Over the last ten years as coal production has grown at a 5.6% CAGRas against the planned 10%+ CAGR increase in power generation capacity by theend of the 12th Five Year Plan in FY17.

Furthermore, even the captive coal blocks (granted to the IPPs) are struggling to

ramp up. As a result, dependence on imported coal (which is ~65% moreexpensive than domestic coal) is likely to increase from 13% in FY10 to 18%+ byFY14.

Exhibit 30: New project capex announcement has come off substantially (figs represent quarterly averagecapex in Rsbn)


Government projects 339 518 1,750 1,540 2,438 743

Private projects 345 1,124 3,503 1,590 2,795 2,058

Total projects 683 1,642 5,254 3,129 5,234 2,801

Source: CMIE, Ambit Capital research

Exhibit 31: and so has the pace in new project capitalization (figs represent quarterly average capex in Rsbn)


Government projects 75 136 237 189 351 261

Private projects 107 130 366 645 550 528

Total projects 182 267 603 834 901 789

Source: CMIE, Ambit Capital research

and this is likely to delay PGCILs XIIth plan capex as ~80% ofcapex is dependent on commissioning of new projects

Out of PGCILs budgeted capex of ~Rs120bn in the XIIth Five Year Plan, ~80% ofthe capex is dependent on new generation projects being commissioned duringthe XIIth Five Year Plan period. Of this 80%, whilst 44% is towards building ninehigh capacity power corridors, the remaining 36% is to be utilized for connectingthe four UMPPs with the grid.

Given the delays in the number of projects completed and in new projectsannounced (see the CMIE data in the table above), we expect PGCIL to also delayits capex commitment related to these projects.

Whilst bulls can draw comfort from PGCILs capex in the current Five Year Plan(where the target for adding new generation capacity has been revised downwardsto 42gW from 78.5gW but PGCIL is on track to achieve its capex guidance of

Rs550bn), we note that PGCILs Capital WIP/gross block ratio almost doubled inFY10 relative to FY06. Hence we believe it is a matter of time before PGCIL startsevaluating the progress on generation projects before committing its share ofcapex.


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Crompton Greaves


Exhibit 32: 80% of PGCILs capex is linked to new projects

Rsmn %

9 high capacity corridors 53,000 44%

4 UMPPs 43,200 36%

Others 23,800 20%

Total 120,000 100%

Source: Industry, Ambit Capital research

Exhibit 33: PGCILs CWIP/gross block ratio has doubled in the last 5 years

-

100

200

300

400

500

FY2006 FY2007 FY2008 FY2009 FY2010

(Rsbn)

0.0

0.1

0.2

0.3

0.4

0.5

(x)

Gross Block CWIP CWIP / Gross Block

Source: Capitaline, Ambit Capital research

SEBs health continues to deteriorate

The achievement to target ratio for SEBs has dropped from 63% in FY2010 to 40%in FY2011 on the back of rising losses primarily due to: (a) being forced to sellsubsidized power the gap between the average cost of power supply andaverage realizations continue to be 60paise/unit; and (b) high aggregate technical

and commercial (AT&C) losses - average AT&C losses continue to remain high at~28.4%. These losses have now resulted in SEBs cutting power supply as theysimply cannot absorb any further losses given that they have run out of money andregulatory bodies are in no mood to allow tariff hikes.

Whilst cumulative losses for SEBs have increased by 36% CAGR between FY06-FY10 from Rs206bn in FY2006 to Rs705bn in FY2010, the more worrying thing forCRG is that Rajasthan and Uttar Pradesh SEBs (CRGs biggest SEB customers as perour management meeting with the new MD) are amidst the SEBs with the highestEBITDA losses (see exhibit 37). Not surprisingly, given their rising losses, the shareof SEBs in CRGs order book has now declined to 10% in 1QFY12 from 20%+earlier.

Exhibit 36: SEBs generation capacity addition track record witnessed a sharpdowntrend in FY11

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

FY08 FY09 FY10 FY11

Central State Private

Source: CEA, Ambit Capital research

Exhibit 34: Rising losses of SEBs

SEB losses (Rsbn)

FY06 -206

FY07 -267

FY08 -321

FY09 -526

FY10 -705

Source: PFC, Ambit Capital research

Exhibit 35: AT&C lossescontinues to be high

AT&C losses (%)

FY03 32.5

FY04 34.8

FY05 34.3

FY06 33.0

FY07 30.6

FY08 29.2

FY09 28.4



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Crompton Greaves


Exhibit 37: Rajasthan and Uttar Pradesh are amongst the worst SEBs

EBITDA (Rsmn)

State (Discom) FY07 FY08 FY09

Tamil Nadu 4,560 (14,370) 930

Rajasthan 5,290 (11,390) (46,340)

Uttar Pradesh (27,940) (28,700) (30,830)

Madhya Pradesh (5,270) (13,070) (22,320)

Maharashtra 9,440 12,350 840

Andhra Pradesh 11,390 8,000 (17

Karnataka 7,600 7,280 (9,530)

Jammu & Kashmir (11,910) (13,050) (12,340)

Haryana (1,080) (3,360) (7,830)

Bihar 140 2,970 (370)

Punjab (1,340) 1,420 40,370

Total (9,120) (51,920) (104,860)

All India Total (2,760) (15,560) (45,880


Competition intensifies in the Indian market

Whilst competition in the transformers market was already intense, the recent(4QFY11) relaxation of pre qualification norms by PGCIL in the 765kV sub-stationsegment has made the situation worsen. PGCIL has now excluded circuit breakers(a key component forming ~10%-15% of a sub-stations cost) from the 765kV sub-station contract, thereby making way for several new EPC players (including L&T,Jyoti Structures, Techno Electric, Kalpataru etc.) in its sub-station tender. Earlier,only MNCs used to be able to qualify for the substation package as only they hadthe requisite technology. Now, the field has been opened up by PGCIL.

Moreover, the Chinese are competing more aggressively for PGCIL orders asutilization in their home market has fallen to 30%. Our primary data sourcessuggest that Chinese bids are at least 15%-20% lower compared to bids fromIndian companies.


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Crompton Greaves


Challenges in overseas marketsInternational sales constituted 50% of CRGs FY11 consolidated revenues withEurope, Asia and North America being the major contributors (see exhibit 18). If

we look at CRGs international revenues, 28% of these revenues in FY11 camefrom Europe and North America.

Now, T&D spend in both Europe and North America has fallen. Whilst Portugal,Greece, Spain, Ireland and Italy are at various stages of their sovereign debt crises(which has made investment in T&D by these governments highly unlikely), globalgiants like Siemens and Alstom have reported a slowdown in order intake fromNorth America region.

Exhibit 38: Moodys has downgraded ratings for several European countries

Greece Spain Portugal Italy Ireland

Period Rating Period Rating Period Rating Period Rating Period Rating

Jul-11 Ca Mar-11 Aa2 Jul-11 Ba2 Jun-11 Aa2 Jul-11 Ba1

Jun-11 Caa1 Dec-10 Aa1 Apr-11 Baa1 May-02 Aa2 Apr-11 Baa3

May-11 B1 Sep-10 Aa1 Mar-11 A3 Dec-10 Baa1

Mar-11 B1 Jun-10 Aaa Dec-10 A1 Oct-10 Aa2

Dec-10 Ba1 Jul-10 A1 Jul-10 Aa2

May-10 Aa2 Jul-09 Aa1

Source: Bloomberg, Ambit Capital research, Note: Red colour indicates downgrades

Exhibit 39: Whilst Siemens reported only 1% growth inorder inflows from America

34%

1%

39%

0% 10% 20% 30% 40% 50%

Europe /

C.I.S. / Africa

/ ME

America

Asia /

Australia

3QFY11 order growth YoY


Exhibit 40: Alstom reported 25% drop in new ordershare from developed countries in FY11

(Order inflow share) FY2010 FY2011

Developed countries 65% 40%

BRICS 10% 25%

Other Emerging countries 25% 35%


The difficult situation in North America and Europe has resulted in profit warnings

from global players such as ABB and Siemens. Whilst ABB global in its July results,has highlighted weakness in transmission related investments citing growingmacroeconomic concerns, Siemens AG in its 2QFY11 results announced in March2011 has told the market to expect weak order intake in 3QFY11.

MNC peers are better placed than domestic peers: MNC peers (ABB, ArevaT&D, Siemens) have an obvious advantage over CRG with respect to their productportfolios and technological prowess. One of the main reasons for this is high R&Dspend. Whilst Indian firms spent 1% of revenues on R&D in FY11/CY10, MNCpeers spent 4-5x this amount (which is not surprising given that the MNC firmsbalance sheets are 20x larger than that of the Indian firms).

In the years ahead, the technological advantage that the MNCs have will become

a greater disadvantage for CRG given that PGCIL is encouraging commissioning ofHigh Capacity Power Transmission Corridors (HCPTC), which also involves highend technology like High Voltage Direct Current (HVDC), which CRG does notpossess. Note that HCPTC constitutes ~44% of PGCILs 12th Plan capex.


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Crompton Greaves


Exhibit 41: CRGs R&D spend is amongst the lowest (figs in $mn)

ABB Global Areva Global Siemens Global Crompton Greaves

Balance Sheet size 36,295 46,163 140,050 1,631

Sales 31,589 12,078 103,072 2,223

R&D Expense 1,082 470 5,217 22

(as % of sales) 3.4% 3.9% 5.1% 1.0%

Source: Company, Bloomberg, Ambit Capital research

Exhibit 42: MNC have broader product portfolios

Companies 765KV 1200KV HVDC GIS

ABB Yes Yes Yes

Areva T&D Yes Yes Yes

BHEL Yes Yes Yes Yes

Crompton Yes Yes No Yes

Emco No No No Yes

Siemens Yes Yes Yes Yes

Source: Industry, Ambit Capital research


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Crompton Greaves


Key assumptions and estimates Whilst we expect Crompton to report revenue CAGR of 10% over FY11-FY13,given the lower margins (9.5% in FY12 v/s 13.4% in FY11), we expect a decline innet profits on the back of the assumptions made in the table below.

Exhibit 43: Key assumptions and estimates for Crompton (all figures in Rsmn unless otherwise mentioned)

FY10 FY11 FY12E FY13E CommentsKey assumptions

Power Systems 62,045 65,029 66,667 72,176

Domestic Power25,103 25,542 28,097 30,906

Given the steady spend in the Indian T&D sector, we assumerevenue CAGR of 10% over FY11-13 (as against 12% over FY08-11).

International Power37,330 40,600 38,570 41,270

Given the Euro zone crisis and consequent slowdown in housingdemand and wind installations, we expect a major slowdown inthis business and assume revenue de-growth of 5% in FY12.

Consumer Products16,120 20,212 22,233 26,679

Given the high inflation and challenging macro environment, weassume revenue CAGR of 15% over FY11-13 (as against 22% overFY08-11).

Industrial Systems12,587 14,971 18,714 22,456

Industrial systems is expected to register a strong revenue growthof 22% over FY11-13 given the enhanced product profileparticularly post the Emotron acquisition.

Key estimates

Sales 91,409 100,051 107,437 121,118Based on the assumptions highlighted above, we expect revenuesto grow at CAGR of 10% over FY11-13 (FY08-11 CAGR has been14%).

Sales (YoY growth) (%) 4.6 9.5 7.4 12.7

EBITDA 12,770 13,438 10,207 12,475

EBITDA margin (%) 14.0 13.4 9.5 10.3

We expect EBITDA margins to hover at 9.5-10% going forward v/s~14% in the last couple of years. Consequently, we expect EBITDACAGR of -4% over FY11-13 (FY08-11 CAGR has been 22%).

EBITDA (YoY growth) (%) 28.3 5.2 -24.0 22.2

Interest expense 428 352 403 403Crompton is virtually a debt free company with a consolidated net

debt to equity of 0.05x.PBT 12,243 11,910 8,043 9,863

Tax rate (%) 29.8 26.0 16.8 17.7Given the managements guidance of higher R&D expense andconsequent reduction in the tax l iability, we have assumed a lowertax rate of 17-18%.

Adj. PAT 8,247 9,268 6,770 8,157Consequently, we expect net profit de-growth of 6% over FY11-13(FY08-11 CAGR has been 32%).

PAT (YoY growth) (%) 47.3 12.4 -27.0 20.5

Cash flow fromoperations (CFO)

10,561 5,605 6,944 10,187

Whilst we expect Crompton to continue to be CFO positive, goingahead we factor in higher working intensity for the company (~38days as against 31 days in FY11) on back of higher inventory buildup coupled with higher debtor days as customers delay/deferpickups.

Cash flow from

investments(5,751) (7,382) (9,000) (4,000)

We model investments made by Crompton for the recent

acquisitions of Emotron and QEI Inc in FY12.Free cash flow 4,810 (1,777) (2,056) 6,187

Cash flow fromfinancing

(3,778) (1,927) (157) (2,383)We assume a dividend of 50% and 65% during FY12 and FY13respectively

Overall change in cash 1,032 (3,704) (2,212) 3,804



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Crompton Greaves


For FY12 and FY13 our estimates are below consensus for topline and bottomline.Our more conservative growth assumptions for the international power businesscould be the main reason for this lower topline (we have modeled a 5% declineand 7% growth in revenues in the international power business for FY12 and FY13respectively).

On the EBITDA margin front, we have modeled a margin of 9.5% for FY12 and

10.3% for FY13, which is 110bps-125bps lower than consensus for both theseyears. Hence our EPS estimates are 10%-13% lower than consensus.

Exhibit 44: Ambit v/s consensus estimates for Crompton

Consensus Ambit % change

Sales (Rsmn)

FY12E 111,495 107,437 -3.6

FY13E 126,893 121,118 -4.6

EPS (Rs)

FY12E 11.7 10.6 -10.1

FY13E 14.7 12.7 -13.5


Absolute valuation

We have valued CRG using a free cash flow (FCFF) model. Our FCFF metric iscash profit increase in working capital capex . Our FCFF model has two distinctphases:

FY12-FY22: We model each year in detail and assume that: (i) revenues willgrow at CAGR of 11%; and (ii) operating margins would gradually stabilize at~9.3% by FY22 (from 13.4% in FY11).

From FY23: FCFF would grow at a CAGR of 3%.

Given the deteriorating margin profile coupled with rising working capitalrequirement, we expect CRGs ROCE to gradually reduce from 25% in FY11 to13% in FY22. Based on these assumptions and assuming a weighted average costof capital (WACC) of 15.0% (assuming equivalent to the cost of equity of 15%,CRG being a negligible debt company), our FCFF model values CRG at Rs143 pershare (implying FY12 P/E of 13.5x and FY13 P/E of 11.2x) and 10% downside.

Exhibit 45: Our free cashflow (FCF) valuation for Crompton is Rs143/share

Period Rsmn

Net PV of free cash flows for CRG 55,000

Terminal value 41,453

Total 96,453

Less net debt 4,932

Value of CRG

Total no. of shares (in mn) 641.5

Value per share (Rs/share)



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Crompton Greaves


Exhibit 46: FCFF profile on Crompton

-

1,0002,000

3,000

4,000

5,000

6,000

7,000

FY13E

FY14E

FY15E

FY16E

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

0%

5%

10%

15%

20%

PV of FCF (Rs. mn) WACC (RHS) ROCE (RHS)


Crompton is currently trading 15% below its 5-year mean P/E band havingwitnessed a sharp de-rating on the back of dismal 1QFY12 results. However, giventhe deteriorating business environment (in both its domestic and internationalbusiness), governance issues and change in management, we believe that such adiscount to the historical average is justified.

Exhibit 47: One year forward P/E band

0

50100

150

200

250

300

350

400

450

500

Apr-

06

Aug-0

6

Dec-

06

Apr-

07

Aug-0

7

Dec-

07

Apr-

08

Aug-0

8

Dec-

08

May-0

9

Sep-0

9

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

5x10x

15x

20x

25x

30x


Exhibit 48: One year forward EV/EBITDA band

0

100

200

300

400

500

600

Apr-

06

Aug-0

6

Dec-

06

Apr-

07

Aug-0

7

Dec-

07

Apr-

08

Aug-0

8

Dec-

08

May-0

9

Sep-0

9

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

3x6x9x

12x

15x

18x


Relative valuation

Crompton is currently trading at a discount to most Capital Goods peers (around

30% discount to peers on FY13 P/E and a 25% discount on EV/EBITDArespectively), which we believe is justified given its poor growth prospects (6%decline for Crompton v/s 41% growth for peers over FY11-FY13) and given thecorporate governance issues swirling around the firm.


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Crompton Greaves


Exhibit 49: Peer valuations

Company Share Price Mcap P/E (x) P/B (x) EV/EBITDA (x) RoE (%) EPS CAGR (%)

(Rs) (US $mn) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E (FY11-13E)

ABB 824 3,904 46.0 33.6 6.4 5.4 29.3 21.5 14.8 17.1 186.2

Areva T&D 229 1,226 22.8 16.8 4.6 3.8 11.8 9.6 21.2 23.7 32.3

BGR Energy 360 581 7.8 7.5 2.1 1.7 4.8 4.4 30.4 25.7 3.6

Thermax 521 1,386 14.4 12.6 3.8 3.1 8.7 7.5 28.3 26.5 13.5BHEL 1,711 18,723 12.3 10.8 3.4 2.8 7.6 6.8 30.2 28.6 13.2

Siemens 895 6,806 32.4 26.8 7.5 6.1 19.3 16.3 26.3 25.5 22.0

Crompton Greaves 158 2,262 15.0 12.4 2.6 2.2 10.1 8.3 18.9 19.3 -6.2

Larsen & Toubro 1,639 22,360 19.2 16.3 3.5 3.0 13.3 11.4 19.9 20.0 17.0

Average (excl.Crompton)

22.1 17.8 4.5 3.7 13.6 11.1 24.4 23.9 41.1

Divergence -32% -30% -41% -40% -25% -25% -22% -19% -110%


Exhibit 50: Sensitivity analysisHigh Case Base Case Low Case

Revenue growth

We have modelled consolidatedrevenue CAGR of 13% over FY11-FY22E and subsequently aterminal growth rate of 4%.

We have modelled consolidatedrevenue CAGR of 11% overFY11-FY22E and subsequently aterminal growth rate of 3%.

We have modelledconsolidated revenue CAGRof 8% over FY11-FY22E andsubsequently a terminalgrowth rate of 2%.

Operating margins

We model EBITDA margin todecline from 13.4% in FY11 to9.5% in FY12. However, over alonger term, we expect EBITDAmargin to stabilize at ~11.0%.

We model EBITDA margin todecline from 13.4% in FY11 to9.5% in FY12 and stabilize at~9.3% over the long term.

We model EBITDA margin todecline from 13.4% in FY11to 9.5% in FY12 andsubsequently stabilize at~8.5% over the long term.

Working capital cycle

We model the working capitalcycle to increase from 31 days in

FY11 to ~38 days in FY12 andFY13. However, subsequently weexpect working capital to stabilize~30 days over the long term.

We model the working capitalcycle to increase from 31 days inFY11 to 38 days in FY12 andsubsequently stabilize at around40 days over the long term.

We model the working capitalcycle to increase from 31

days in FY11 to ~38 days inFY12 and FY13 andsubsequently stabilize at ~45days over the long term.

Fair value (Rs per share) 216 143 107

Upside / (Downside) 35% -11% -33%


Exhibit 51: Explanation for our flags on the cover page

Accounting AMBERWhilst CRG scores in line with our forensic accounting scores for tier-1 T&D companies, it scores poorly onaudit fees. Furthermore, the CRG promoter sits on the audit committee.

Predictability REDCRG seems to be an unpredictable company capable of generating negative surprises on multiple frontse.g. aircraft purchases, unexpected misses on EPS, sudden investment in Avantha Power, etc.

EarningsMomentum

REDBloomberg earnings momentum suggests a 20%-25% downgrade in FY12 earnings post the 1QFY12results. In addition to this we expect consensus to further downgrade FY12 earnings by ~10% and FY13earnings by ~13%.



22/25


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Crompton Greaves


Exhibit 54: Cashflow Statement (Consolidated)

Year to March (Rsmn) FY09 FY10 FY11 FY12E FY13E

PBT 8,672 11,891 12,291 8,043 9,863

Depreciation 1,216 1,551 1,936 2,330 2,690

Interest 808 428 352 403 403

Tax (2,165) (2,920) (3,343) (1,350) (1,744)

(Incr) / decr in net working capital 59 543 (5,133) (2,482) (1,025)

Others 855 (931) (499) - -

Cash flow from operating activities 9,444 10,561 5,605 6,944 10,187

(Incr) / decr in capital expenditure (1,977) (2,070) (6,259) (9,000) (4,000)

(Incr) / decr in investments (1,549) (3,770) (1,391) - -

Others 310 90 268 - -

Cash flow from investing activities (3,216) (5,751) (7,382) (9,000) (4,000)

Issuance of equity - - - - -

Incr / (decr) in borrowings (1,374) (2,169) (379) 1,000 (1,000)

Others (1,643) (1,610) (1,548) (1,157) (1,383)

Cash flow from financing activities (3,017) (3,778) (1,927) (157) (2,383)Net change in cash 3,212 1,032 (3,704) (2,212) 3,804


Exhibit 55: Ratio Analysis

Year to March (%) FY09 FY10 FY11 FY12E FY13E

EBITDA margin 11.4 14.0 13.4 9.5 10.3

EBIT margin 10.0 12.3 11.5 7.3 8.1

Net profit margin 6.4 9.4 8.9 6.3 6.7

Return on capital employed 37.2 40.4 34.1 19.2 20.6

Return on equity 35.7 39.7 30.8 18.9 19.3

Current ratio (x) 1.3 1.4 1.3 1.4 1.4


Exhibit 56: Valuation Parameters

Year to March FY09 FY10 FY11 FY12E FY13E

EPS (Rs) 8.7 13.4 13.9 10.6 12.7

Book value per share (Rs) 28.5 39.0 51.0 60.4 71.6

P/E (x) 18.1 11.8 11.4 15.0 12.4

P/BV (x) 5.5 4.0 3.1 2.6 2.2

EV/EBITDA (x) 10.4 8.1 7.7 10.1 8.3

EV/Sales (x) 1.2 1.1 1.0 1.0 0.9



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Crompton Greaves


Institutional Equities Team

Saurabh Mukherjea,CFA

Managing Director - Institutional Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Aadesh Mehta Banking / NBFCs (022) 30433239 [email protected]

Ankur Rudra, CFA Technology / Education Services (022) 30433211 [email protected]

Ashvin Shetty Consumer/Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power/Capital Goods (022) 30433252 [email protected]

Chandrani De, CFA Metals & Mining (022) 30433210 [email protected]

Chhavi Agarwal Construction, Infrastructure (022) 30433203 [email protected]

Gaurav Mehta Derivatives Research (022) 30433255 [email protected]

Hardik Shah Technology / Education Services (022) 30433291 [email protected]

Krishnan ASV Banking (022) 30433205 [email protected]

Nitin Bhasin Construction, Infrastructure, Cement (022) 30433241 [email protected]

Pankaj Agarwal, CFA NBFCs (022) 30433206 [email protected]

Parita Ashar Metals & Mining / Media / Telecom (022) 30433223 [email protected]

Puneet Bambha Power/Capital Goods (022) 30433259 [email protected]

Rakshit Ranjan, CFA Mid-Cap (022) 30433201 [email protected]

Ritika Mankar Economy (022) 30433175 [email protected]

Ritu Modi Cement (022) 30433292 [email protected]

Shariq Merchant Consumer (022) 30433246 [email protected]

Subhashini Gurumurthy Technology / Education Services (022) 30433264 [email protected]

Vijay ChughConsumer (incl FMCG, Retail,

Automobiles)(022) 30433054 [email protected]

Sales

Name Regions Desk-Phone E-mail

Deepak Sawhney India / Asia (022) 30433295 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / Europe (022) 30433053 [email protected]

Pramod Gubbi, CFA India / Asia (022) 30433228 [email protected]

Sarojini Ramachandran UK / US +44 (0) 20 7614 8374 [email protected]


25/25

Crompton Greaves

Explanation of Investment Rating

Investment Rating Expected return(over 12-month period from date of initial rating)

Buy >5%

Sell

crg ambhit capital

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