Powering Ahead - Crompton Greaves
11/22/2010 12:19 PM Monday
It is said that during uncertain times it is better to stick to the consistent performers. Based on the same theory this time we are recommending Crompton Greaves (CGL) as our choice scrip. While the consistent financial performance of the company is the primary factor behind recommending CGL, there are other compelling factors too. The other convincing factors include the company’s strong order book of Rs 6,802 crore, recent acquisitions resulting in a widening base of services and products, its plans to become an integrated player and pursue new attractive segments, and the plans for Avantha Power & Infrastructure (APIL) where CGL holds a stake of 32 per cent. On the valuation front the scrip seems to be placed very well where the trailing four-quarter earnings are discounted 28x.
The EV/EBITDA of 18x seems to be on the higher side but historically the scrip has enjoyed such a premium and hence our recommendation is that investors should buy the scrip at its current levels with a target price of Rs 400. As regards the business of the company, it has three segments viz. power systems, industrial systems, and consumer durables. The highest contribution to its topline comes from power systems (41 per cent), followed by consumer goods (35 per cent) and then industrial systems (24 per cent). Similar is the scenario with its bottomline. Going ahead all the three segments are expected to witness good growth. While the power systems segment is expected to derive growth from the improving scenario in the manufacturing sector, the industrial segment is expected to gain momentum from the higher number of orders for electrical motors. The expected growth is visible from the strong pending-for-execution order book of Rs 6,802 crore which has increased by more than 7 per cent as compared to the pervious year. Even the order intake has been strong with Q1 witnessing an intake of Rs 2,732 crore.In the past few years CGL has displayed intent to become an integrated as well as a global player and made some acquisitions.
This has widened the portfolio of services and products being offered by the company. Now, as a part of its strategy to pursue other attractive segments, CGL also plans to build competencies in renewable energy, ultra high voltage, and energy automation. That apart, the key trigger for the upside is the value unlocking expected from the listing of APIL. Here CGL’s stake translates to 20.64 crore equity shares of APIL at just Rs 11 per share. APIL is into power generation with 192 mega watt of thermal power capacity and plans to raise Rs 1,250 crore.A huge value unlocking is expected from this investment. On the financial front the performance of the company has been very good. The company has carried this momentum into H1FY11 where it posted topline of Rs 2,788 crore and bottomline of Rs 300.66 crore as compared to Rs 2,442.02 crore and Rs 250.82 crore in H1FY10. With good order inflow and improving margins our recommendation to investors is to buy the scrip at its current levels with a target price of Rs 400.
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