We upgrade Crompton Greaves to ‘hold’ (from ‘underperform’) with a revised target price of R200 (from R130), valuing the company's consumer business 25x P/E FY16e. This compares to a consolidated P/E of 20x FY16e versus 12x earlier and R10 per share for Avantha.
Listed consumer durable businesses in India, given high RoCEs, trade at FY16e P/E band of 21-25x. We believe a floor has emerged. Hence, while we are still not positive on the business, we upgrade the stock.
Crompton reported disappointing Q1FY15 Ebitda — 20% below estimates. We remain sceptical on a positive surprise in power systems. However, we believe the consumer business de-merger and a potential power systems sale have created a floor on the stock.
Losses at the subsidiary level led to the company reporting 5% Ebitda margins, below expectations of 6.2%. Power systems at subsidiary level turned Ebit negative (-0.8%) versus positive 1.9% seen in Q4FY14.
While the management is hopeful of turning around the business, we believe the segment will continue to disappoint. Given some Ebit margin surprise at the consumer business level (12.5% versus expected 11.5%), we have maintained our full-year estimates for now.