We upgrade Crompton Greaves Ltd to ?buy? from ?sell? as the stock is now our top industrial mid-cap pick. We believe the stock is on the cusp of a major rebound over the next two years. Our belief is bolstered by the stability of the parent business and the slow but steady turnaround of the international business.
Q3 consolidated PAT at R62 crore was in line and hasn?t missed Citi estimates for a long time. A recent 20%-plus correction from R135 levels also makes entry levels attractive. We raise our target price to R138 (earlier R123) to factor in the target P/E hike to 16x (15x) given the expected business turnaround and -9-8% EPS changes to factor in latest trends from nine months to FY14. Our target price is well supported by EPS CAGR of 102% over FY13-16e, with RoEs moving from 2.4% in FY13 to 15.6% in FY16e.
After in-line-to-below-industry growth in FY12 and FY13, Crompton is gaining market share with a 14% y-o-y growth in nine months of FY14. Ebitda margins have stabilised at 11-12% levels. Incrementally, we expect growth to remain steady at 8-12% levels.
The company?s facilities are operating at ~100% utilisation and, hence, it is selective in bidding for orders. The depreciated currency also supports exports from India.
We expect international ebit breakeven in FY15e. Management also corroborated that next year?s Ebit would be positive which could provide a R160 crore swing to numbers. According to management, the US power business should turn profitable in Q4FY14 and the Canada business should turn around by Q1FY15 given the new factory management, shop-floor optimisation, better sourcing and R1.5-crore high-margin orders won in Q3.
