Maintain ‘buy’ on Crompton Greaves (CG) and value the stock at a target price of R210 per share.
Crompton has used the slowdown to realign its business for enhanced profitable growth 1) widened its geographical reach, 2) launched/improved products in higher kV range, which will help decrease contribution from lower-margins areas, and 3) gained new pre-qualifications. That said, given the business dynamics, it needs to increase its outlay in capacity (running at high utilisation) and R&D to grow the business/generate value.
The company has taken several steps to turn around the overseas power business: 1) plants restructuring with net cost savings of 200 bps, 2) increasing sales contribution from higher-margin automation and EMEA systems businesses, and 3) better margins in recently booked orders. We expect a return to positive ebit (1.8% in FY16e and 3.2% in FY17e), which will magnify the consolidated financial improvement and can help further re-rate the stock.
The company has used the downturn to improve internal processes and invest in the business. We expect a pick-up in sales from FY16 onwards, led by demand uptick in capex-led sectors (oil & gas, cement, metals), pick-up in railways and higher exports.
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