Acquisitions enhance value : BUY : Target Price : Rs 289

We initiate coverage on Crompton Greaves Ltd. (CGL) with a BUY and a target price of Rs.289, an upside of 17%. CGL is utilizing its expertise in turning around companies to become one of the largest transformer manufacturers in the world. The € 61 mn acquisitions are expected to double the CGLs consolidated revenue and EBITDA by FY2008e to Rs. 82.89 bn. and Rs. 7.00 bn. respectively. These acquisitions have enhanced its geographical reach, its product and solutions portfolio, along with providing CGL with a ready clientele base. From the current levels, CGLs EBITDA margins are expected to expand by 50 bps by FY2008e. At the current market price of Rs. 246 CGL trades at a PER of 14.2x FY2008e earnings.

Global footprint

In two successive years, CGL has taken into its fold the Pauwels group and the Ganz group. The FY2006 Pauwels acquisition doubled CGLs topline and increased its consolidated net profits by a phenomenal 162%. Together these acquisitions give CGL a global footprint with manufacturing operations in 7 countries and a sales and service network in over 135 countries. We expect the consolidated revenues to further double by FY2008e, to Rs. 82.89 bn and a 36% CAGR increase in net profits to Rs. 4.54 bn.

Acquisitions enhances the product range

CGL now offers a complete range of transformer products to suit diverse requirements. CGL as a stand-alone entity specialized in transformers of up to 400 kV. Its Belgium based acquisition added medium rating (up to 500 kV) transformers to its product range, while the Ganz group brings with it  the skill sets to manufacture up to 750 kV or high rating transformers. These acquisitions have enabled CGL to bridge the technological gap and offer an enhanced product range to its customers. It now also has the expertise to offer complete turnkey solutions, including erection and maintenance of mobile substations and larger power equipment projects. We anticipate that the CGL would now be able to bid for big ticket orders and be in a position to achieve greater size and scale.

Power Sector to bring growth

Power sector reforms in India are at an inflection point, with clear focus on the each segment of the power sector value chain. Over Rs. 105.44 bn is expected to be invested in the transmission and distribution sector to increase the transmission capacity by 20.7 GW by 2012, carry out distribution reforms including reducing AT&C losses, improving the power quality and reliability, and for the rural electrification programme.

The EU is expected to spend $544 bn. between now and 2030 in the transmission and distribution sector to upgrade obsolete systems, and to increase the transmission capacity in the erstwhile eastern economy countries.

Attractive Valuations

There would be no equity dilution as these acquisitions have been made in all-cash deals. We estimate that CGLs EPS would increase at a CAGR of 36% to Rs, 17.3 in FY2008e. At the current market price the FY2008e earnings are discounted 14.2x.

Source: Emkay