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COMPANY UPDATE 10 FEB 2016

Crompton GreavesBUY

In good handsAmidst high scepticism, the new management of

Crompton Greaves Consumer Electricals (CGCEL)

reported its first quarterly show. There were no

negative surprises either in terms of lower revenues

or major one-off costs. Revenue growth at 12% YoY

(Rs 8.1bn) was healthy. The management said the

ownership transition didnt hamper sales traction,

which is creditable. All sub-segments (fans, lighting,

pumps and appliances) saw double-digit growth.

The focus areas now include (1) Brand investments,(2) Product innovation, (3) Strengthening

distribution, especially via modern trade and

ecommerce and (4) Systems and process overhaul.

We sense that the business is in good hands. While

revenue growth does not look challenging, recurring

PBT margins are currently in the 8-9% range (lower

than our estimate, see our report), with corporate

costs now more delineated for the business. Hence,

our FY18E EPS falls 18%.

As expected, CGCEL has a light balance sheet with

merely ~Rs 800mn of net fixed assets, Rs 500mn of

cash and negative WC. On a tangible asset base of

~Rs 1bn, the business can generate OCF of ~Rs 2bn.

We value CGCEL at Rs 111 per share (25x FY18E EPS),

thereby arriving at a revised TP of Rs 174/share (Rs

200 earlier) for Crompton Greaves (CG). Retain BUY.

Highlights of the quarter

We expect the new leadership to drive

aggressively, enabling revenue growth in LED and

appliances. While confidence on revenue growth

is high, EBIT margins would be a confluence of (1)

Corporate expenses, (2) Increase in A&P spends

and (3) Operating leverage benefits. We expect

PBT margins of 8.5/9.0% for FY17/18E.

The CG management said the record date for the

demerger was likely to be end of Feb-15. CGCELs

new management expects a listing of the

demerged entity by Apr-16.

Near-term outlook: We believe the recent

correction factors in the uncertainty looming over

the sale of the international business. We dontsee any material downsides from current levels,

especially in the wake of an upcoming open offer.

Financial Summary

(Rs mn) 3QFY16 3QFY15 YoY (%) 2QFY16 QoQ (%) FY15 FY16E FY17E FY18E

Net Sales 8,101 7,232 12 8,044 1 32,327 36,206 40,550 46,633

PBT 641 274 NC 641 NA 3,971 3,802 3,447 4,197

PAT 424 769 NC 428 NA 2,694 2,524 2,289 2,787

Diluted EPS (Rs) 0.7 1.2 NC 0.7 NA 4.3 4.0 3.7 4.4

Source: Company, HDFC sec Inst Research, Note: Above numbers represent only consumer business. YoY numbers are not comparables onaccount of adjustment for corporate costs

INDUSTRY CAPITAL GOODS

CMP (as on 9 Feb 2016) Rs 129

Target Price Rs 174

Nifty 7,298

Sensex 24,021

KEY STOCK DATA

Bloomberg CRG IN

No. of Shares (mn) 627

MCap (Rs bn) / ($ mn) 81/1,187

6m avg traded value (Rs mn) 486

STOCK PERFORMANCE (%)

52 Week high / low Rs 204 / 120

3M 6M 12M

Absolute (%) (23.8) (33.3) (20.8)

Relative (%) (15.8) (18.4) (5.9)

SHAREHOLDING PATTERN (%)

Promoters 34.42

FIs & Local MFs 31.00FIIs 18.17

Public & Others 16.41

Source : BSE

Pawan Parakh, CFA

[email protected]

+91-22-6171-7314

HDFC securities Institutional Research is also available on Bloomberg HSLB & Thomson Reuters
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3016181http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3016181http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3016181

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CROMPTON GREAVES: COMPANY UPDATE

Consumer Quarterly Financials: Snapshot

(Rs mn) 3QFY16 3QFY15 YoY (%) 2QFY16 QoQ (%) 9MFY16 9MFY15 YoY (%)

Net Sales 8,101 7,232 12 8,044 1 25,853 23,274 11

EBIT 798 866 NC 778 NC 2,964 2,859 NC

PBT 641 860NC

641NC

2,487 2,830NC

Tax 218 274 NC 213 NC 830 904 NC

PAT 424 586 NC 428 NC 1,657 1,925 NC

Source: Company, HDFC sec Inst Research, Note: YoY numbers are not comparables on account of adjustment for corporate costs

Margin Analysis (Consumer)

Margin Analysis - Consolidated 3QFY16 3QFY15 YoY (bps) 2QFY16 QoQ (bps) 9MFY16 9MFY15 YoY (bps)

EBIT (%) 9.9 12.0 NC 9.7 NC 11.5 12.3 NC

PBT (%) 7.9 11.9 NC 8.0 NC 9.6 12.2 NC

Net Profit Margin (%) 5.2 8.1 NC 5.3 NC 6.4 8.3 NC

Tax Rate (%) 33.9 31.9 NC 33.2 NC 33.4 32.0 NCSource: Company, HDFC sec Inst Research, Note: YoY numbers are not comparables on account of adjustment for corporate costs

Revenue growth picking up

Source: Company, HDFC sec Inst Research

EBIT before corporate

expenses and exceptional

items stood at Rs 992mn

(12.3% of sales) broadly in

line with historical trends

0.0

5.0

10.0

15.0

20.0

25.0

0

2,000

4,000

6,000

8,000

10,000

12,000

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

Revenue Growth YoYRs mn

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Key Estimates and Assumptions

(Rs mn) FY14 FY15 FY16E FY17E FY18E

Revenue 28,471 32,327 36,206 40,550 46,633

PBT 3,329 3,971 3,802 3,447 4,197

PBT margin (%) 11.7% 12.3% 10.5% 8.5% 9.0%

PAT 2,367 2,694 2,524 2,289 2,787EPS 3.8 4.3 4.0 3.7 4.4


SOTP valuation

Business Method FY18E PAT Multiple (x) Valuation VPS

SA business (ex-consumer) P/E multiple 2,850 12.0 34,206 55

Consumer business P/E multiple 2,787 25.0 69,670 111

International business P/B multiple 20,000 0.25 5,000 8

SOTP 174

CMP 129Upside 35%

Source: HDFC sec Inst Research

Peer Valuation

CompanyMCap

(Rs bn)

CMP

(Rs)Rating

TP

(Rs)

P/E (x) P/B (x) ROE (%)

FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E

L&T 1036 1,114 BUY 1,222 23.3 18.6 15.4 2.4 2.2 2.0 10.4 12.1 13.4

BHEL 317 131 UR NA 24.8 12.3 16.0 0.9 0.9 0.9 4.4 7.3 6.0

Thermax 95 800 SELL 710 33.5 28.8 28.8 4.2 3.8 3.5 13.0 14.0 12.8

Crompton Greaves 81 129 BUY 174 (91.5) (98.3) 30.8 2.1 2.2 2.1 (2.3) (2.2) 7.0Cummins India 257 928 BUY 1,020 33.7 31.3 27.3 8.1 7.3 6.4 25.1 24.4 25.0

Voltas 93 281 UR NA 30.6 26.4 23.2 4.0 3.7 3.3 13.8 14.5 14.9

Source: HDFC sec Inst Research

PBT margins would be a

confluence of (a) Corporate

expenses, (b) Increase in

A&P spends and (c)

Operating leverage benefits.

We expect PBT margins of

8.5/ 9.0% for FY17/18E

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Income Statement


Net Revenues 134,806 140,131 118,282 95,189 105,055

Growth (%) 11.5 4.0 (15.6) (19.5) 10.4

Material Expenses 91,353 95,305 79,166 61,405 67,505

Employee Expenses 19,521 19,936 18,461 16,784 16,713

SG&A Expenses 17,113 18,941 16,859 13,727 13,783

Total Expenses 127,986 134,181 114,486 91,916 98,001

EBIDTA 6,820 5,950 3,795 3,273 7,053

EBIDTA % 5.1 4.2 3.2 3.4 6.7

EBIDTA Growth % 78.0 (12.7) (36.2) (13.8) 115.5

Depreciation 2,621 2,620 2,703 2,798 2,966

EBIT 4,198 3,330 1,092 475 4,087

Other Income (Including EO

Items)2,115 2,397 3,612 1,938 2,043

Interest 1,366 1,443 1,765 1,838 1,920

PBT 4,947 4,283 2,939 576 4,210

Tax 2,361 2,220 2,223 1,417 1,709

RPAT 2,587 2,064 715 (841) 2,501

Minority Interest (143) 30 55 50 20

EO (Loss) / Profit (Net Of

Tax)- 727 1,620 - -

APAT 2,443 1,367 (850) (791) 2,521

APAT growth % 188.9 (44.1) (162.2) (6.9) (418.8)

Adjusted EPS (Rs) 3.9 2.2 (1.4) (1.3) 4.0

EPS growth % 195.7 (44.1) (162.2) (6.9) (418.8)


Balance Sheet


SOURCES OF FUNDS

Share Capital 1,254 1,254 1,254 1,254 1,254

Reserves 35,192 36,906 35,323 33,799 35,586

Total Shareholders Funds 36,446 38,159 36,576 35,052 36,840

Minority Interest 117 203 173 153 163

Long Term Debt 16,323 19,039 22,000 22,000 22,000

Short Term Debt 7,614 8,399 6,000 6,000 8,500

Total Debt 23,936 27,438 28,000 28,000 30,500

Deferred Taxes (1,532) (1,110) (320) (320) (320)

Long Term Provisions &

Others731 655 528 461 487

TOTAL SOURCES OF FUNDS 59,698 65,345 64,957 63,346 67,670

APPLICATION OF FUNDS

Net Block 32,408 28,634 27,198 28,000 28,784

CWIP 2,184 1,267 3,600 3,750 4,000

Investments 2,780 2,806 4,806 6,806 8,806

LT Loans & Advances 499 237 434 232 258

Inventories 16,714 14,552 12,572 10,838 11,479

Debtors 35,913 37,318 31,919 24,489 27,037

Other Current Assets 7,893 13,485 12,616 6,738 7,484

Cash & equivalents 8,358 8,501 5,705 10,476 9,560

Total Current Assets 68,878 73,856 62,812 52,542 55,561

Creditors 43,717 37,985 31,096 25,542 27,160Other Current Liabilities &

Provns3,333 3,470 2,797 2,442 2,579

Total Current Liabilities 47,050 41,455 33,893 27,984 29,739

Net Current Assets 21,828 32,401 28,919 24,558 25,822

TOTAL APPLICATION OF

FUNDS59,699 65,345 64,957 63,346 67,670


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Cash Flow


Reported PBT 4,947 4,283 2,939 576 4,210

Non-operating & EO items (2,115) (2,397) (3,612) (1,938) (2,043)

Interest 1,366 1,443 1,765 1,838 1,920Depreciation 2,621 2,620 2,703 2,798 2,966

Working capital change (2,513) (9,983) 488 9,335 (2,206)

Tax Paid (2,411) (2,468) (2,223) (1,417) (1,709)

Other operating items 4,692 (3,560) 221 (464) (424)

OPERATING CASH FLOW (a) 6,588 (10,060) 2,281 10,726 2,715

Capex (2,620) 1,310 (3,600) (3,750) (4,000)

Free Cash Flow 3,968 (8,750) (1,319) 6,976 (1,285)

Investments 1,242 2,578 (1,525) (1,530) (1,530)

Non-operating Income 400 396 1,992 1,938 2,043

INVESTING CASH FLOW (b) (978) 4,284 (3,133) (3,342) (3,487)

Debt Issuance/(Repaid) 274 6,744 562 - 2,500

Interest (1,337) (1,430) (1,765) (1,838) (1,920)

FCFE 2,905 (3,436) (2,523) 5,139 (705)

Share Capital Issuance (1,335) - - - -

Minority Interest (8) 100 (30) (20) 10

Dividend (888) (895) (733) (733) (733)

FINANCING CASH FLOW (c) (3,294) 4,520 (1,967) (2,591) (144)

NET CASH FLOW (a+b+c) 2,316 (1,257) (2,819) 4,794 (916)

Closing cash 8,358 8,501 5,705 10,476 9,560


Key Ratios

FY14 FY15 FY16E FY17E FY18E

PROFITABILITY %

GPM 32.2 32.0 33.1 35.5 35.7

EBITDA margin 5.1 4.2 3.2 3.4 6.7APAT margin 1.8 1.0 (0.7) (0.8) 2.4

RoE 6.8 3.7 (2.3) (2.2) 7.0

Core RoCE 4.6 3.0 0.5 (1.2) 4.4

RoCE 5.8 3.4 (0.7) (5.4) 5.6

EFFICIENCY

Tax rate % 47.7 51.8 75.7 246.0 40.6

Fixed Asset Turnover (x) 0.3 0.3 0.2 0.2 0.2

Inventory (days) 45.3 37.9 38.8 41.6 39.9

Debtors (days) 97.2 97.2 98.5 93.9 93.9

Payables (days) 118.4 98.9 96.0 97.9 94.4

Cash Conversion Cycle (days) 24.1 36.2 41.3 37.5 39.5

Debt/EBITDA (x) 3.5 4.6 7.4 8.6 4.3

Net D/E (x) 0.4 0.5 0.6 0.5 0.6

Interest Coverage (x) 3.1 2.3 0.6 0.3 2.1

PER SHARE DATA (Rs)

EPS 3.9 2.2 (1.4) (1.3) 4.0

CEPS 8.1 6.4 3.0 3.2 8.8

Dividend 21.1 24.1 19.3 24.3 29.2

Book Value 58.2 60.9 58.4 55.9 58.8

VALUATION

P/E 31.8 56.9 (91.5) (98.3) 30.8

P/BV 2.1 2.0 2.1 2.2 2.1

EV/EBITDA 13.7 16.2 26.4 29.1 14.0

EV/Revenues 0.7 0.7 0.8 1.0 0.9

OCF/EV (%) 7.1 (10.4) 2.3 11.3 2.8

FCF/EV (%) 4.3 (9.1) (1.3) 7.3 (1.3)

FCFE/MCAP (%) 3.7 (4.4) (3.2) 6.6 (0.9)


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RECOMMENDATION HISTORY

Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period

SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

120

140

160

180

200

220

Fe

b-1

5

Mar-

15

Apr-

15

May

-15

Jun

-15

Jul-15

Aug

-15

Sep

-15

Oct-

15

Nov

-15

Dec

-15

Jan

-16

Fe

b-1

6

Crompton TP

Date CMP Reco Target

4-Feb-15 179 BUY 209

29-May-15 168 BUY 206

3-Feb-16 131 BUY 200

10-Feb-16 129 BUY 174

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Disclosure:I, Pawan Parakh, CA, CFA, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subjectissuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or itsAssociate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. FurtherResearch Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.Any holding in stock No

Disclaimer:This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled orarrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation ofwarranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for informationpurposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as anoffer or solicitation of an offer, to buy or sell any securities or other financial instruments.This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in anylocality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HDFC SecuritiesLtd or its affiliates to any registration or licensing requirement within such jurisdiction.If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may notbe reproduced, distributed or published for any purposes without prior written approval of HDFC Securities Ltd .Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derivedfrom them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

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