STOCK UPDATE

STOCK UPDATE

Crompton Greaves
Cluster: Apple Green
Recommendation: Buy
Price target: Rs367
Current market price: Rs253

Annual report review

Key points

• During FY2008, the overseas power system business of Crompton Greaves Ltd (CGL) reported a 28% year-on-year (y-o-y) growth in its revenues to Rs2,959.7 crore, aided by strong performance of its key subsidiaries Pauwels and Ganz. The profit before interest and tax (PBIT) margin of the division was down 10 basis points to 6.1%, as Ganz reported loss in the last year, however the same is expected to breakeven in FY2009.
• The company has concluded a capital expenditure (capex) of Rs283.4 crore during the financial year. The majority of capex (Rs209 crore) has been incurred in the overseas power system business, as the company concluded acquisition of Microsol. The return on capital employed (ROCE) of the power system division improved from 26.6% to 31.3%. However further analysis shows a significant improvement in the RoCE (62.9% in FY2008 as against 43% in FY2007) of the domestic power business, which led to an improvement in the entire business unit.
• Highlighting the key balance sheet items, the debt of the consolidated entity reduced by Rs62.5 crore mainly on account of repayment of loans of the stand-alone company. CGL continued its efficient working capital management. The working capital (net of cash) was at 27.5 days of sales vis-à-vis 30.2 days in FY2007.
• The management indicated that with higher capital efficiency, inventory turns and cost minimisation, the company will focus on achieving higher growth rate both organically as well as though strategic acquisition. However, the management remained cautious on the global economy outlook and the subsequent slowdown in the demand from the USA, UK and the Euro zone.
• We reiterate CGL as our top preferred pick and continue to remain upbeat about the company’s business prospects. We recommend a Buy on the stock with a price target of Rs367. At the current market price, the stock trades at price to earnings (P/E) of 15.9x and 12.6x our FY2009E and FY2010E earnings respectively.

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SECTOR UPDATE

Insurance

FDI hike on cards
The hike in the FDI limit augurs well for all industry players—both domestic and foreign. As for the domestic players, it will open up a new avenue for capital raising for funding further business growth. Traditionally, the life insurance business is highly capital intensive by nature. Meanwhile, the foreign players will get a chance to increase their stake and participation in the high-growth insurance market, which they have always desired.

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MUTUAL FUND: INDUSTRY UPDATE

Fund flows slow down

The AUM of equity mutual funds (MFs) stood at Rs175,571 crore in July 2008, up by 4.4% from June 2008. On adjusting for the net inflows, the increase stood at 3.7%. This was less than the market rise of approximately 6.6%.

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Click here to read report: Investor's Eye