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Crompton Greaves

Crompton Greaves stock update:

Crompton Greaves (CRG) is taking steps to align its manufacturing base and

(1) increase associated sourcing from low cost countries, such as India, to supply material for a new transformer facility in Brazil;
(2) its Hungarian facility will cater to a greater share of European demand;
(3) its Belgian facility (high cost base) will have a reduced role;
(4) potential shut down of units in high cost areas.

Presently, each entity in the group (Pauwels, Ganz etc.) operates as an independent silo. CRG plans to integrate key business functions (such as finance, payroll and HR) across the entities, which would help to cut headcount and overhead costs. Besides, CRG’s overseas business may have potential to operate leverage-led margin expansion on a high proportion of fixed costs.

CRG plans to incrementally increase cross selling between recently acquired companies, leveraging group synergies across geographies, technologies and customers. CRG will (1) use Indian manufactured products in PTS and MSE, (2) align industrial products with EU standards,(3) manufacture for Emotron from the Indian facility and (4) bring QEI’s numeric technology to Nelco.

Going by the above developments and the EPS estimates for FY12 AND FY13( Rs6.4 and Rs10.3 respectively), long-term investors can buy on declines with a target of Rs170 (16X FY2013E EPS) based on visible potential for revenue growth and improvement in profitability.