We maintain our ?sell? rating on Crompton Greaves with a price target of Rs 75, which is derived from a DCF-based methodology and explicitly forecast long-term valuation drivers using our VCAM tool, assuming a WACC of 12.6%.
In our view, FY14 estimates are at risk unless H2 sees a significant improvement. Despite 11% y-o-y increase in revenue in H1, PAT declined 7% on a consolidated basis. This is because of margin decline in industrials systems business without big pick up in other two parts. H1 has contributed a only 47% of our FY14 estimate for revenue and 30% PAT estimates. H2 has to be significantly better otherwise our FY14 PAT estimates could be at risk. We think the company’s acquisitions overseas have not shown consistent performance and this is a reason for concern.
The company reported consolidated operating income of Rs3,200 crore for Q2 FY14, up 10% y-o-y. Ebitda margin increased marginally on y-o-y basis. Reported consolidated PAT increased 39% y-o-y to Rs 58.4 crore. Both ebitda margin and PAT were below our estimates; PAT also fell short of consensus estimates.
Power systems revenue grew 14% y-o-y on a consolidated basis in Q2 FY14, industrial systems revenue declined 9% y-o-y, and consumer products segment revenue grew 13% y-o-y. Ebit margins increased on y-o-y basis in power systems and consumer products however this effect was more or less compensated by big margin decline in industrial systems. Overall, we are yet to see sustained recovery in overseas business.
