Crompton Greaves? revenues grew by 14% YoY (year-on-year) to Rs 1,340 crore led by strong growth in consumer products division (+29% YoY to Rs 530 crore). Similarly, industrial division revenue growth was at 23% YoY to Rs 310 crore due to the revival in industrial capex cycle. However, power systems revenues were flat at Rs 510 crore, as there were deferments in deliveries to clients for the quarter.
Ebit (earnings before interest and taxes) margins improved across all the segments, resulting in overall margins improving by 80 bps to 15.6%.
The operating margin improvement is led by the benefit of lower raw material prices during the quarter. Crompton has been able to derive raw material cost savings through design efficiencies (lower quantity of raw materials) and centralised procurement of materials.
The sharp margin expansion led to a strong Ebitda (earnings before interest, taxes, depreciation and amortisation) growth of 20% YoY to Rs 210 crore. Other income jumped sharply by 75% YoY to Rs 14.8 crore led by interest income on surplus cash, dividend, etc in the quarter. As a result, standalone net profit growth was strong during the quarter at 28% YoY to Rs 146 crore.
Order intake strong: Crompton has a consolidated order backlog of Rs 6,800 crore, of which domestic orders are worth Rs 3,700 crore and international Rs 3,100 crore. The order intake in the quarter was extremely strong at Rs 2,730 crore, a sharp 34% jump on a YoY basis, indicating that the order intake for the quarter has been strong in both domestic (Rs 1,800 crore) and international markets (Rs 914 crore). The growth of order intake in international entities in euro terms has been higher at 35% YoY as Crompton received large orders in the wind transformer segment (offsetting the fall in distribution transformers).
Reiterate Outperformer: We have marginally tweaked our consolidated earnings estimates downwards by 1.6% for FY11E and by 1.8% for FY12E on the back of the lower-than-estimated margins in international subsidiaries. We believe Crompton’s core power business in the domestic market is likely to witness sustained growth momentum as also the industrial segment led by capex revival.
Moreover, cost efficiencies and rationalisation are driving sustained improvement in margins, which will likely drive 13% consolidated earnings CAGR (compound annual growth rate) over FY10-12E. Crompton is currently trading at 19.1x FY11E and 16.1x FY12E consolidated earnings, which we believe is attractively valued considering the sustained earnings growth momentum. Moreover, Crompton is trading at a 30-40% discount to peers (ABB, Areva, etc), which we believe is unwarranted considering a superior earnings and the return ratio profile.
Consequently, we believe as the international business starts showing traction and the domestic business continues to grow, the stock is likely to re-rate over the next 12 months. Moreover, Crompton is raising funds in its associate company, Avantha Power (APIL; 31% stake), to bridge the equity funding gap for the power plants. Once the funds are raised, it is likely to unlock value of its investments of Rs 227 crore in APIL. Accordingly, we reiterate our Outperformer, with a target price of Rs 300/share.