Investor's Eye: Update - Crompton Greaves, Construction

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Summary of Contents   STOCK UPDATE Crompton Greaves Recommendation: Buy Price target: Rs170 Current market price: Rs140 Upgrade to Buy; price target revised to Rs170 Key points In our recent interaction, the management of CGL reaffirmed their confidence of erasing losses in the overseas subsidiaries, which would result in an exponential growth in the consolidated earnings. We estimate CGL's consolidated earnings per share to jump to Rs10.7 in FY2016 from Rs1.3 in FY2013. In the domestic business, a double-digit growth in the consumer products and the power systems businesses would make up for the subdued performance of the industrial products division. Consequently, the stand-alone earnings are estimated to grow at a decent compounded rate of 16% annually for the three year period FY2013-2016. Given the prospect of a turnaround in CGL's consolidated performance on the back of its restructuring efforts, we expect the valuations to revert back towards its historic average multiples (ie 18x one-year forward earnings). In line with our market outlook strategy, we also expect some churn towards cyclical's (especially in the quality mid-cap stocks in the capital good and engineering sector), which would aid in the re-rating of the stock. Consequently, we are upgrading the stock from Hold to Buy rating with a revised price target of Rs170 (16x FY2016 earnings; a 10% discount to its mean average multiples).     SECTOR UPDATE Construction Premium rescheduling-a step towards improving the cash flow The finance ministry's approval for the premium rescheduling norms are likely to benefit 64 projects (worth Rs75,821 crore at a premium of Rs8,474 crore per annum that has an average escalation of 5% annually) awarded during FY2011-FY2013. Almost all the players have bidded through the FY2011-FY2013 period at an aggressive premium. The deferment will help in the four-laning projects more as compared with the six-laning projects bidded by large developers. The cash flow position of Ashoka Buildcon, GIPL, GMR, GVK, IRB, ITNL, IVRCL, L&T, Ramky, Sadbhav, Simplex etc are expected to improve on account of a deferment of premium.  Within the construction sector, we retain our preference for L&T (despite the recent run-up) and ITNL in the mid-cap segment due to its pedigree and the recent steps taken to ease the stress on the balance sheet through a mix of preference and rights issues (a total of Rs1,278 crore). We have a Reduce rating on Punj Lloyd and Pratibha Industries due to balance sheet stress and pressure on the margins. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards, The Sharekhan Research Team

 

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