We maintain our ‘underperform’ rating on Crompton Greaves with a sum-of-the-parts-based target price of Rs 110 on continued losses in European subsidiaries in H2FY13, cut in FY13 guidance and downside to valuations on lower margins and RoEs.
In addition, higher-than-expected losses in Belgium (30% of overseas revenues) have clouded performance of other subsidiaries. This dents our visibility on a sharp recovery in margins for FY14e.
We assign a 12 times P/E to FY14e earnings for core operations. We also use DCF (WACC 13.5%) to validate intrinsic value for core ops. In addition, we value Crompton Greaves' 17% stake in Avantha Power on a DCF basis, at R5 per share (R250 crore). We also assign a DCF value of R5 per share for Crompton Greaves' Jalgaon distribution franchise.
We visited Crompton Greaves plants in Hungary and Spain. Our key takeaways from the visit are risk of execution slippages and penalties as deliveries of transferred projects at Hungary peak in Q4FY13, continued losses at Canada in FY14 on higher overheads in a lower pricing scenario, and possibility of revenue decline in ZIV for CY13 in absence of large orders.
We cut our FY13 earnings by 4% on lower margins in ZIV. We have come back with the view that it will take until H2FY14 for any visibility to emerge on turnaround of international subsidiaries. Though we do not contest Crompton Greaves' rationale of making its Hungarian plant the hub for power transformers in EU (earlier Belgium), we highlight our concerns, viz, benefits of full 15,000 megavolt ampere (MVA) only in FY15. We see risk to FY13e 10,000 MVA delivery volume target.
As capacity expansion happens in Q3/Q4FY13 and delivery schedules peak in Q4FY13, it may lead to liquidated penalties. The Hungarian plant will now manage exports to West Asia — this would entail greater logistics challenges, risks for which are not adequately built in.
Further, in our view, ZIV makes a good strategic fit for Crompton Greaves on expanding its power automation portfolio. However, we would like to see near0term order inflows to supplement execution of 50 million euros-Iberdrola order.