Stock Idea - Crompton Greaves

Recommendation: Buy

CMP = Rs 400

Price target: Rs 646

Key points:

• Crompton Greaves Ltd (CGL) is one of the major players in transmission and distribution (T&D) equipment space in India. With vast product portfolio and a roll out of massive expenditure in the T&D space, we reassert our confidence in the company to show strong growth in years to come.
• Industrial and consumer segments of the company also look well placed to grow robustly. HT motors will drive the growth of industrial segment while the booming real estate industry will drive the growth of consumer segment. 
• With acquisition of Pauwels, Ganz, and Microsol, CGL is well placed to garner a pie not only in domestic market but also in international markets. We expect CGL's consolidated revenues to grow at a compounded annual growth rate (CAGR) of 22.7% over FY2007-09E.
• CGL has signed a distribution franchise agreement with Maharashtra State Electricity Distribution Company Ltd (MSEDCL) for power distribution in three divisions of Nagpur for 15 years. The net present value (NPV) of the agreement is put at Rs 2,600 crore. However we have not factored in any value from this agreement and would wait for CGL to acquire assets from the utility by the end of the year.
• At the end of H1FY2008, CGL had a consolidated order book of Rs 5,211 crore. The order flow remains strong for both domestic and international businesses, and we believe this to continue going forward on the back of increased spending on T&D world over.
• Continued growth stint of CGL and management's endeavors to integrate all its acquisitions (Pauwel, Ganz, and Microsol) have been impressive. Historically, CGL has traded at a discount to the likes of ABB, Siemens, and Areva due to its limited product range. By integrating its international acquisitions, CGL has emerged as a complete solution provider in T&D sub-station business, and we expect the discount vis-à-vis its peers to get reduced. A wider product range would differentiate it in the domestic market and would enable it to compete effectively with other MNCs. 
• At the current market price the stock trades at 34.9x its FY2008E earnings per share (EPS) of Rs 11.5 and 26.7x its FY2009E EPS of Rs 15.
• I believe these valuations are attractive because of (a) Robust operating performance of stand-alone company; (b) Higher geographical width and product depth of the company due to subsidiaries and (c) Management's expertise in turning around operations of subsidiaries.
• I remain bullish on this stock and reiterate Buy recommendation with the price target of Rs 464.