Motilal Oswal calls a ‘Buy’ on Crompton Greaves
CMP: Rs. 128 Target Rs. 154
FY12 Annual Report suggests several operational initiatives: FY12 performance impacted by various cyclical and structural factors CG Global Overseas: Low cost locations witness revenue decline; Belgium/Canada/Hungary report sharp profitability decline Key Growth Drivers: Renewables /turnkey projects, industry segment – integration motors with drives and increased internationalization, expanding automation footprints. Valuation and view: We arrive at price target of INR 154 (up 19% YoY), based on 12x FY14 PER (standalone) and 8x EV/EBITDA FY14 (overseas). Maintain Neutral.
FY12 saw focused organizational attention on the creation of: One CG to leverage the right resources and skills to produce the best possible product or solution for selling anywhere. This will ensure that the DNA of selling must be one where customers come first, not where the factory is. Fast CG i.e. restructuring of the operations into six geographic areas and also business verticals-resulting in quick reaction to business opportunities. Lean CG i.e. global best practices in sourcing, manufacturing, etc. Over the years, CG has transformed from being largely an India oriented player to Indian corporation with an international business. The attempt now is to make a full transformation to a global corporation.
FY12 performance impacted by various cyclical and structural factors: Management summarized that FY12 performance was impacted by (1) intensified global competition, (2) increased RM costs, (3) customers postponing deliveries, and (4) internal issues. Many of these factors are cyclical, and may start turning around from 2HFY13; continued global uncertainties and liquidity issues, coupled with permanent price erosion in several segments remain overhangs.
Consumer business (19% of consolidated revenues) was impacted by poor market growth in pumps (down 8%) and fans (down 2%), while Appliances are yet to make a significant mark (6% contribution). Industrial business (16%) caters to end-use segments like railway, cement, power, water and irrigation, many of who face headwinds (order book down 11% YoY in FY12). For CG Global, FY12 consolidated revenue was up 12% YoY given strong growth in North America (up 46% YoY, driven by renewables) while Asia (ex India) was most impacted (revenues down 27% YoY) because of slower offtake by customers. CG Global Overseas: Low cost locations see revenue decline; Belgium, Canada, Hungary report sharp profitability decline
Valuation and view: We expect CRG to report consolidated EPS of INR 8.7/sh in FY13 (up 51% YoY) and INR11.9/sh in FY14 (up 36% YoY. Correcting the manufacturing footprint and internationalization of industrial business are important drivers, in our opinion. We arrive at price target of INR 154 (upside of 19% YoY), based on 12x FY14E PER (standalone) and 8x EV/EBITDA FY14 (overseas). Maintain Neutral.
Prabhudas Lilladher calls a ‘Buy’ on Pantaloon Retail
CMP: Rs. 185 Target Rs. 225
We met with the management of Pantaloon Retail (PF) to understand the core retail performance, given the context of weak SSS growth and PF’s de-leveraging plans.
Sluggish demand environment: Overall consumer sentiment continues to remain low impacted by a sluggish macro environment, high inflation as well as moderation in discretionary consumer spending. As a consequence, discount season for Indian Retailers has started a fortnight ahead of its usual schedule.
According to the management, consumer spending should pick up with the onset of festival season in August-September. SSS is expected to remain sluggish.
Space addition of 1.5m sq.ft: PF plans to add ~1.5m sq.ft of retail space annually for the next two years across its retail formats (excluding PF format stores).
We are building in additional ~1m sq.ft space in our model to account for execution risks. As per management, once the current de-leveraging deals are done, focus would be back on expansion, with Food and Fashion being the core drivers. De- leveraging deals, which are already announced, will help reduce core retail debt by Rs22.5-23bn to Rs35bn. However, there are more such deals possible viz. a) Stake sale in Staples which can fetch ~Rs1.4bn (post tax) b) Stake sale in Insurance JV - ~Rs10bn and c) Divestments in Home Town and e‐Zone, if realized, could aid the balance sheet further.
Noise around FDI in retail: We don’t see near-term benefits for PF even if FDI in multi-brand retail goes through. Given the fractious political environment (principal opposition party against the proposed reform) and the underlying conditionalities (back end investments etc.), it will be a while before any deal with overseas retailer is worked out. Rather, GST will be more beneficial as it will lead to efficiencies in supply chain and savings of ~50bps in operating costs. We maintain our ‘Accumulate’ rating on the stock and look for improvement in same-store growth metrics before getting more constructive.