‘Underperform’ on Crompton Greaves as near-term pain visible
In addition, higher-than-expected losses in Belgium (30% of overseas revenues) have clouded performance of other subsidiaries. This dents our visibility on a sharp recovery in margins for FY14e.
We assign a 12 times P/E to FY14e earnings for core operations. We also use DCF (WACC 13.5%) to validate intrinsic value for core ops. In addition, we value Crompton Greaves' 17% stake in Avantha Power on a DCF basis, at R5 per share (R250 crore). We also assign a DCF value of R5 per share for Crompton Greaves' Jalgaon distribution franchise.
We visited Crompton Greaves plants in Hungary and Spain. Our key takeaways from the visit are risk of execution slippages and penalties as deliveries of transferred projects at Hungary peak in Q4FY13, continued losses at Canada in FY14 on higher overheads in a lower pricing scenario, and possibility of revenue decline in ZIV for CY13 in absence of large orders.
We cut our FY13 earnings by 4% on lower margins in ZIV. We have come back with the view that it will take until H2FY14 for any visibility to emerge on turnaround of international subsidiaries. Though we do not contest Crompton Greaves' rationale of making its Hungarian plant the hub for power transformers in EU (earlier Belgium), we highlight our concerns, viz, benefits of full 15,000
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