We initiate coverage on electrical equipment manufacturer, Crompton Greaves Ltd (CRG).
We believe CRG’s international business (40% of total sales) will decline 14.3% y-o-y and 17.1% y-y for FY09 and FY10 in order intake, driven by the slowdown in the distribution business from a weak housing market and capex cuts by utilities during the current recession in Europe and the US.
Analysis of the previous down cycle reveals European T&D capex declined by 12.2% CAGR in CY01-03.
The industrial segment’s (15% of sales) growth will moderate to 15.7% CAGR in FY08-11E (vs 3-year historic CAGR of 24.6% in FY05-08) driven by weakening private sector capex, and demand slowdown in commodities.
Also, given the slump in new house construction, and rising competition in the consumer fans and lightings business (16% of sales), we expect decelerating growth of 12.7% CAGR (FY08-11E) for the consumer segment.
The company’s domestic power business is the only bright spot and will benefit from Government of India’s sustained investments in T&D infrastructure.
However, significant order activity from PGCIL and domestic utilities will resume in 2HFY10 as half of the associated generation projects are seeing delays. Therefore upside to our domestic T&D order growth assumptions of 40.0% y-y in FY09, and 26% y-y in FY10, appear limited and will not counter demand slowdown of its international subsidiaries.
The stock trades at P/E of 10.2x our FY10 EPS estimate of Rs14.3, vs Indian peers trading at 12.9x.
Our target price of Rs110 is based on a P/E of 7.7x our FY10 EPS. Discount to peers is due to higher exposure to weakening T&D capex cycle in Europe and the US; weakening demand in its industrial and consumer segments and below-peer sales and EPS growth and revenue visibility in FY10.