BNP Paribas Securities puts REDUCE on Crompton Greaves

BNP Paribas Securities puts REDUCE on Crompton Greaves

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.

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