>CROMPTON GREAVES (JAYPEE CAPITAL)

We initiate coverage on Crompton Greaves with a ‘BUY’ recommendation and a target price of
INR 320 per share implying an upside of 22% from current levels. We expect Crompton Greaves
to maintain its leadership position in transformers space with robust spending planned in power
generation over 11th and 12th five year plans resulting in robust demand for power equipments.
We believe the increasing synergies arising from the international acquisitions and technological
prowess in high end power T&D products would create significant value going forward.

■ Power infrastructure to witness heavy investments
The peak power deficit, at 16.6%, is at a multi year high. With demand for power expected to grow at 8 to 10% annually, power supply will face even greater strain. In order to meet the shortfall, heavy investments are planned in increasing the installed capacity of power generation. Huge investments will also be made in increasing inter regional transmission capacity to facilitate transfer of power across the regions. With an investment of INR 1,400 bn ministry of power plans to increase the capacity of integrated national power grid from 17,000 MW to 37,000 MW by 2012.

■ Strongly placed to tap power growth
Every 1 MW of power generation capacity requires 7 MVA of new transformer capacity addition. Ministry of power plans to increase installed power generation capacity from 147.7 GW to 200 GW which would result in huge demand for transformers. With the installed capacity of 27,000 MVA Crompton Greaves is the largest manufacturer of transformers in India. With the product synergies and technological advancement arising through international acquisitions it is now one of the very few companies having experience in execution of high end power equipment products in which incremental investment will come going forward.

■ Avantha acquisition a downer
Crompton Greaves recently purchased 41% stake in group company Avantha Power and
Infrastructure Ltd (APIL) for INR 2.27 bn. The entire investment will be towards the equity infusion in APIL’s 600 MW Korba power project. We believe that such non – core investment was made in order to enable the Korba project to reach financial closure as banks disburse funds in proportion to equity contribution. Although the cash outflow is sentimentally negative and could have been utilized for more strategic business purposes it is not likely to have a negative impact on the financials of Crompton Greaves in the long term.

■ Steep discount to peers unwarranted, BUY with a price target of INR 320
Crompton Greaves has historically traded at a discount to its peers which we believe should narrow down considerably going forward. It did not get the same valuations as its peers due to the fact that it was not as techhmmmnologically superior, had gaps in its product portfolio, lack of presence in high end range of power equipments products and lack of proven track record world wide. But it has addressed these issues considerably through successfully integrating its international acquisitions. Although we still believe that the relative premium of companies like ABB and Siemens will continue going forward primarily due to its strong parentage, the extent of discount shall reduce considerably. We assign a p/e multiple of 16 times FY11E estimated EPS of INR 20 to arrive at a target price of INR 320 per share implying an upside of 22% from current levels.

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