10 October 2012
Update | Sector: Capital Goods
Crompton Greaves
BSE SENSEX
S&P CNX
18,709
5,676
CMP: INR134
TP: INR163
Upgrade to Buy
One CG: Whole > Sum of Parts
Overseas turnaround a key trigger; risk-reward favorable
Bloomberg
CRG IN
Equity Shares (m)
641.5
52-Week Range (INR) 175/102
1,6,12 Rel. Perf. (%) 16/-11/-25
M.Cap. (INR b)
86.0
M.Cap. (USD b)
1.6
Valuation summary (INR b)
Y/E March
2012 2013E 2014E
Net Sales
112.5 131.3 145.9
EBITDA
8.0 10.9 13.8
NP
3.7
6.0
8.0
EPS(INR)
5.7
9.3 12.6
EPS Gr. (%)
-60.0 62.2 36.0
BV/Sh (INR) 56.3 63.0 71.4
P/E (x)
23.4 14.4 10.6
P/BV (x)
2.4
2.1
1.9
EV/EBITDA (x) 13.3
8.3
6.3
EV/ Sales (x)
0.9
0.7
0.6
RoE (%)
10.7 15.6 18.7
RoCE (%)
9.6 13.0 15.0
* Consolidated
For Crompton Greaves (CG), the attempt now is to ensure that 'the value of the whole
is substantially more than the sum of the parts' and make a full transformation to a
global corporation. We believe this journey provides several levers to boost revenues.
Expect Hungary, Canada and USA (40% of international subsidiary revenues) to turn
profitable by mid-FY13, leading to turnaround in overseas operations.
We model 47% consolidated EPS CAGR over FY12-14 driven by 14% revenue CAGR and
230bp margin expansion. The key risk is that macro environment remains challenging.
We arrive at price target of INR163, based on P/E of 12x FY14E for standalone business
and EV/EBITDA of 8x FY14E for overseas business. Upgrade to Buy.
Synergy-led revenue growth; breaking 'silo structures'
Over the years, CG has evolved from being largely an "India player" to an "Indian
corporation with an international business". The attempt now is to make a full
transformation to a global corporation. This journey provides several levers to
boost revenues:
Organizational restructuring across geographies / product segments to break
'silo' structures for integrated product offerings
Internationalization and integration of industrial business, to possibly double
revenues over the medium-term
New factories / new products in new geographies to contribute meaningfully
Recent acquisitions like Emotron / ZIV have targets to nearly treble revenues
in 3 years given synergy benefits,
Rejuvenation of consumer business portfolio, and
Steady growth and dominant positioning (market share 25-50%) in niche areas
of renewable segments, etc.
Shareholding pattern (%)
As on
Jun-12 Mar-12 Jun-11
Promoter
41.7
41.7
42.8
Dom. Inst 21.7
20.3
18.3
Foreign
21.0
20.3
23.2
Others
15.6
17.7
15.7
Potential turnaround in international operations in FY13
In the overseas markets, performance in key geographies like Belgium (36% of
revenues), USA (24%), Hungary (9%) and Canada (6%) were impacted in FY12
given pricing pressures and region / factory specific issues. We believe USA,
Hungary and Canada could become profitable during FY13. The recovery will also
be aided by benefits of improve d raw material sourcing and decline in commodity
prices. We expect international subsidiaries to report FY13/14 EPS of INR0.5/1.7,
from loss of INR2.1/sh in FY12.
Stock performance (1 year)
Expect Consolidated EPS CAGR of 47% over FY12-14; Upgrade to Buy
We model 47% consolidated EPS CAGR over FY12-14 driven by 14% revenue CAGR
and 230bp margin expansion. The key risk is that macro environment remains
challenging. Also, reported financials over past five quarters have been
disappointing and stock price have reacted sharply, post results. We arrive at
price target of INR163, based on P/E of 12x FY14E for standalone business and EV/
EBIDTA of 8x FY14E for overseas business.
Upgrade to Buy.
1
Investors are advised to refer
through disclosures made at the end
of the Research Report.
Satyam Agarwal
(AgarwalS@MotilalOswal.com); +91 22 3982 5410
Deepak Narnolia
(Deepak.Narnolia@MotilalOswal.com); +91 22 3982 5126

Hindalco
Synergy-led revenue growth
Breaking 'silo structures' for integrated product offerings
Over the years, CG has evolved from being largely an "India player" to an "Indian corporation
with an international business". The attempt now is to make a full transformation to a global
corporation. This journey provides several levers to boost revenues:
Organizational restructuring across geographies / product segments to break 'silo' structures
for integrated product offerings
Internationalization and integration of industrial business to possibly double revenues
over the medium-term
New factories / new products in new geographies to contribute meaningfully
Recent acquisitions like Emotron / ZIV have targets to nearly treble revenues in 3 years
given synergy benefits,
Rejuvenation of consumer business portfolio, and
Steady growth and dominant positioning (market share 25-50%) in niche areas of renewable
segments, etc.
Acquisition-led growth strategy:
Attempt now to integrate and ensure that value of the Whole is substantially higher than the sum of the parts
Company
Pauwels
Ganz
Microsol
Sonomatra
MSE
Acquisition Date Location
May-05
Belgium
Oct-06
May-07
May-08
Sep-08
Revenues Benefit
Eur297m Access to technology for transformers up to 525 kV,
slim transformers, mobile sub-stations
Hungary
Eur35m Eur24m Access to technology for EHV transformers up to 1200
kV, GIS substations, 12 MW class of motors
Ireland
Eur10.5m Eur6m
Automation products and systems for sub- stations
France
Eur1.3m
Servicing of transformers and on-site maintenance
USA
USD16m
EPC for wind and power systems; MSE has
interconnected over 23% of all wind power in USA
UK
GBP30m
Engineering services for HV substations
India
INR920m
Acquired traction electronics, SCADA and Industrial
drives businesses of Nelco
Sweden Eur57.8m Eur35m Variable speed drives and Industrial automation
USA
USD30m Eur12m Automation for Electric utilities and Electrified Transit
(Railways)
Spain
Eur150m Eur75m Grid Automation, Metering, Smart Grids
Turnkey and Services
Industrial Segment
Source: Company, MOSL
Cost (EV)
Eur32m
Power Technology Soln. Mar-10
Nelco
Apr-10
Emotron
QEI
ZIV
Power Products
May-11
May-11
Jul-12
Automation
Driver #1
Organizational restructuring to tap synergy benefits
To realize the full benefits of synergies across businesses, CG has now shifted focus
towards a complete integration involving manufacturing, marketing, sourcing, etc.
Till FY11, the various business operations of CG Global have been operating largely in
'silo' structures, leading to very minimal cross selling opportunities, duplication of
key functions and inefficient cost structures. The initial levels of integration among
the ten acquisitions since 2005 have largely focused on initiatives like:
Unified presence of CG Power (deeper customer interface)
Global platform for design of power transformers (Unipower) and distribution
transformers (DesDT)
'One World Quality' at all manufacturing locations globally and
Integrating global R&D and executive teams.
10 October 2012
2

Hindalco
Initial Phase of integration (2006 onwards) focused on improving efficiencies
The initial phase of
teams, R&D, etc
Unipower
DesDT
One World Quality
CG Power
Other Key Areas
integration revolved around design, quality, customer interface, executive
Global platform for design of power transformers
Global platform for design of distribution transformers
Implemented at all manufacturing locations globally
Unified presence of CRG's power business globally, leading to deeper
customer interface
Integrating global R&D and executive teams, etc
FY12 saw focused organizational attention, on the creation of 'One CG Fast CG Lean CG'
Over the years, CG has transformed from being largely an India oriented player to Indian
corporation with an international business. The attempt now is to make a full transformation
to a global corporation.
One CG
To leverage the right resources and skills to produce the best possible
product or solution for selling anywhere. This will ensure that the DNA of
selling must be one where customers come first, not where the factory is.
Fast CG
Restructuring of the operations into six geographic areas and also business
verticals - resulting in quick reaction to business opportunities.
Lean CG
Global best practices in sourcing, manufacturing, etc.
Example: Initial Success looks promising
Integrated solutions (railways) and new business (Oil & gas): Combining strengths
in 'power', 'industrial' and also 'consumer' segments
Restructuring of business
operations, aimed at breaking
the 'silos'
The existing business
operations have been
restructured into six
geographic areas and also
business verticals -
resulting in quick reaction
to business opportunities.
Business
Geographies
Verticals
SE Asia
Renewables
India
Oil and Gas
Middle
Mining
East and
Africa
Europe
Railways
and Russia
North America
Latin America
1. Railways: Integrated product offerings
Aggregated, CG supplies a gamut of products which can start, control and stop a train.
Power Systems
Supplies trackside and loco transformers and switchgears, which are
critical in regulating the voltage level of motors used in electric
locomotives & railway electrification networks.
Industrial Systems
Supplies traction motors, alternators, control electrics/electronics, point
machines, signaling relays and coach products which are used in
locomotives, driver consoles, signaling and track switching operations.
A recent entrant to the CG Group.
CG Automation US
Experienced supplier of SCADA systems, used by transportation utilities
(formerly QEI)
for maintaining traction power and managing rail traffic.
2. Oil & Gas: Complete Solutions Provider
Full electrical solution, including breakers, transformers, variable speed
drives, motors and automation
Business commenced
In the course of four months till March 2012,
(a tentative order pipeline
in 2HFY12
of EUR150m)
had been developed.
Infrastructure largely
The requisite sales infrastructure is being set up in various locations,
in place
such as Houston (US), the Middle East and Asia. Structures of business
cooperation between CG and other entities in medium- and low-voltage
transformer space are being created to: (i) offer a larger suite of products
to oil & gas majors and international EPC players, and (ii) access major
oil and gas markets in USA, Russia, the Caspian and the Middle East.
Synergy benefits
CG products from India and Indonesia are in the process of being
prequalified for oil & gas end-users and global EPC contractors.
Product offerings
10 October 2012
3

Hindalco
Driver #2
Internationalization and integration of industrial business
We believe there is exponential growth possibility in CG's industrial business. Post
acquisition of Emotron in May 2011, CG can now leverage the network to -
Drive increased internationalization of revenues of the industrial business:
We
believe this is an important objective. Currently, international business
contributes 16-21% of the revenues of the industrial business v/s 6% in FY11. CG is
in the process of commissioning its drives factory in Manideep in 3QFY13. This
will lead to introduction of drives in the Indian market (an important earnings
trigger), and also increase exports to Europe.
Integrate motors with variable speed drives:
This remains an important priority;
success here could be a game-changer. CG is the largest player in the Indian 'motors'
market. The acquisition of Emotron will thus help CG to penetrate the 'Drives'
segment (estimated market size of INR15b with 75% of the market concentrated
with ABB and Siemens). Also, given the strong base of Emotron in Germany,
Belgium, Netherlands, Luxemburg, etc, the acquisition will also help CG cross-
sell motors to Emotron's international client base.
Order intake and Intake / Revenues (x)
Overseas Revenues in Industrial (% of total indl revenues)
Source: Company, MOSL
Example: Initial success has been encouraging
Motors orders received by CG
Hungary
Hungary
Manideep
Manideep
Manideep
Manideep
8.3 MW, 8 Pole, 6.6 kV motors for a steel mill in the Middle East
4.5 MW, 20 Pole, 6 kV motors as well as 3.3 MW, 22 Pole, 6 kV water-cooled
motors for circulating water pump of Rostov nuclear power plant in Russia
2.85 MW, 16 Pole, 11 kV motors for a thermal power plant in India
7.5 MW, 6 Pole, 11 kV motor for a cement mill in Egypt
4.6 MW, 6 Pole, 3.3 kV cage rotor motor for a cement mill in the UK
Large flame-proof motors for oil and gas applications
Source: Company, MOSL
10 October 2012
4

Hindalco
Drives constitutes an important part of revenues for ABB / Siemens (INR m)
Drives sales are almost
double the sales of
motors and alternators in
case of SIEM and ABB.
While CG is the largest
player in motors it has
just started its journey in
drives through
acquisition of Emotron
CG has
been
absent in
Drives in
India
Source: Company, MOSL
Industrial business is profitable, contributing 16% to revenues but 27% to EBIT
Source: Company, MOSL
Driver #3
New factories, new geographies, new products
CG is in the process of commissioning several manufacturing plants over the next 18
months, targeting new geographies and new segments:
The switchgear plant in Brazil
is expected to add USD100m to revenues,
contributing to ~10% of the overseas business revenues
In India, commissioning of the drives plant in 3QFY13
will also contribute
meaningfully to standalone operations.
Plans to double transformer capacity in India
by setting up a 50,000MVA plant; this
will be an important game-changer in our opinion, as the pertinent issue of
customer acceptance can be possibly addressed through a modern plant.
Plans to set up transformer plants in Brazil and Saudi Arabia
are also important
milestones.
10 October 2012
5

Hindalco
New factories for new geographies and new products
Switchgear factory, Brazil [June 2012]
Transformer factory, Brazil
Power Transformer plant,
Saudi Arabia [FY13]
Drives factory in Manideep [3QFY13]
CG commenced operations of Extra High Voltage Switchgear manufacturing facility in
Sapucaia do Sul in the state of Rio Grande do Sul, Brazil in June 2012. This is the first
factory of CG in Latin America, and will enable it to tap emerging opportunities in
this geography. The total market represents more than
USD1b and CG intends to capture
10% of the market.
Revenue in the first year of operation is expected at USD50m+, and
the company has already received orders from utilities such as CEMIG, CPFL, CEEE,
RGE and Toshiba.
In November 2011, CG had laid the foundation stone for new factory in Guaiba's
Industrial District in Brazil to manufacture transformers and circuit breakers. The
factory will employ 250 people, with investment of USD47m. We understand that this
will possibly be commissioned in FY14.
CG has created a joint venture in Saudi Arabia to manufacture medium-voltage power
transformers to meet growing demand in the Middle East. The plant will have the
capacity to produce transformers in the 100MVA and 132kV class. In addition, it will
be able to undertake repairs for units up to 120MVA, 220kV. It is targeted for completion
in FY13.
CG is in the process of commissioning its drives factory in Manideep in 3QFY13. This
will lead to introduction of drives in the Indian market (an important earnings trigger),
and also increase exports to Europe.
Plans to nearly double transformer capacity in India - game changer in our opinion
CG plans to nearly double its transformer capacity in India by adding ~50,000MVA at a new location. We understand
that the facility is being proposed to be set up in Vadodara, and will also cater to requirements of the overseas
business. We understand that construction is expected to commence in FY13, and this facility will be commissioned
in ~24 months.
Being a modern plant, the pertinent issue of customer acceptance from Western Europe can also possibly be
addressed, given the 'One World Quality' initiative. We believe that this 50,000MVA facility can be a game changer,
as it will materially alter CG's manufacturing footprint (consolidated CG Global transformer capacity currently
stands at 85,000MVA).
CG's standalone exports (from India) has remained stagnant, and largely concentrated towards developing
countries which indicates product exchanges / outsourcing for Western Europe have been limited, and the synergy
benefits have not been captured. This is largely given issues of customer acceptance, which could possibly be
addressed with a modern plant.
CG's standalone exports (from India) has remained stagnant, and largely concentrated towards developing countries
(INR m)
Source: Company, MOSL
10 October 2012
6

Hindalco
3 year capex plans of USD300m is nearly equivalent to
existing gross fixed assets (INR m)
Emotron and ZIV have targets to triple revenues in 3 years
Emotron Management in past stated that it expects revenues
to grow to EUR80m by 2013 from EUR37m in 2010.
ZIV
Expects topline at EUR200m in next 3 years, from
EUR75m expected in CY12; driven by synergy benefits.
Source: Company, MOSL
Expanding footprint in automation
CG has made ~3 acquisitions so far which give it access to various parts of the
automation business, in specific segments. The key missing gap was the HV automation
products, which has been bridged via the recent acquisition of ZIV. CG's management
believes that the growth will be driven largely in Western Europe and USA. CG already
has a sales force of 647 employees, who will now also market the grid automation
offerings of ZIV. Based on this synergy getting captured over time, the 3-year revenue
target from ZIV is EUR200m (v/s EUR75m TTM ending June 2012).
Acquisitions in Automation segment
Company
Microsol
QEI
ZIV
Acquisition Date
May-07
May-11
Jul-12
Location
Ireland
USA
Spain
Cost (EV)
EUR10.5m
USD30m
EUR150m
Revenues
EUR6m
EUR12m
EUR75m
Segments
Automation products and systems for sub-stations
Automation for Electric utilities and Electrified Transit (Railways)
Grid Automation, Metering, Smart Grids
Driver #4
Rejuvenation of the consumer business
In the consumer segment, CG is the market leader in Fans (24% market share) and
Pumps (~20% market share), and is the Number 2 player in Lighting segment (~13-14%
market share). FY12 revenue growth at just 5.6% was impacted by poor market growth
in Pumps (down 8%) and Fans (down 2%), while Appliances are yet to make a significant
mark (6% contribution).
As a strategy, CG's attempt is towards complete rejuvenation to drive strong
performance. This is showing signs of paying off - in FY12, nearly 32% of Consumer
segment's revenue was contributed by new products. The rejuvenation measures
include the following -
Chinese sourcing footprint is being established
'Intelligence' is increasingly being built into products
Capacity is being expanded in India (like investing in new capacity in Vadodara for
lighting products, including LED) and
Channel management program is being carried out
Product portfolio is also being expanded to cover kitchen appliances, coolers,
personal care products, etc.
10 October 2012
7

Hindalco
Consumer business: Negligible working capital funds
supporting growth in other businesses
EBIT margins have been largely in a range (%)
Source: Company, MOSL
Driver #5
Niche positioning in renewables
CG is the global market leader in offshore wind transformer applications. Its market
share has increased from 42% in FY10/11 to 51% in FY12. CG has also successfully
forayed into turnkey solutions for the renewable segment in Western Europe - it
completed its maiden project of designing and building the transmission grid
connection offshore windpark ('Belwind', 165MW) on the coastal waters of Belgium
in September 2010. Over the last 10 months, it has received 4 new projects (1,000MW+),
leading to strong traction in order intake for CG Global. From a zero base 3 years ago,
CG now accounts for 4.2% of the global offshore wind market in systems, and the
management expects this share to increase in future.
In USA, CG is already a market leader having inter-connected 23% of the wind capacity
to the grid. During FY12, CG Power also entered the solar renewables market. Two key
orders received are from First Solar USA worth EUR19.5m and SMA worth EUR5m.
These orders have provided CG 5.9% share of the overall US solar market, and 23.5%
of the US solar utility market.
The renewable segment contributed EUR270m of revenues in FY12 (~37% of CG Global
overseas revenues); at end FY12, a renewable project pipeline of EUR214m was in
place which includes wind (EUR148m) and solar (EUR66m). For CG, renewables
contribute ~37% of revenues in Europe and ~50%+ of revenues in USA.
Wind Power: Turnkey projects drive order intake, strong traction witnessed
In July 2012, CG received
a 216MW offshore wind
installation contract; and
is the fifth such contract
Award
Project
MW
9-Jul-12
Northwind offshore wind farm
216
11-Jan-12 Humber Gateway offshore wind farm 219
19-Dec-11 Amrumbank West GmbH
288
14-Sep-11 Butendiek project
288
2009
Belwind Phase 1
165
All contracts are turnkey contracts
Country
Belgium
UK
Germany
Germany
Belgium
IPP
Execution
Sep-13
EON
Early 2014
EON
2014
WPD WINDFARM
2013
2010
10 October 2012
8

Hindalco
Leveraging the MSE acquisition to build turnkey applications in wind segment in Western Europe
Acquisition
CG acquired MSE Power Systems in September 2008 at an EV of USD16m.
MSE was engaged in engineering, procurement and construction of high
voltage electric power applications. It was a systems integrator in
international EPC business, especially in the renewable energy (wind)
segment. MSE had interconnected over 23% of all wind power in the USA
to the grid and was a market leader in the segment.
MSE's expertise has been leveraged with the product offering in the
wind business (especially of Pauwels) to build turnkey applications in
Europe.
Going forward, MSE will be the key organization for smart grids in the
USA. MSE has also developed balance-of-plant solutions for photovoltaic
solar plants; this is also becoming an interesting growth opportunity.
Integration, leading
to increased offering
What next?
Revenues in Renewable Business
For CG, renewables
contribute ~37% of
revenues in Europe and
~50%+ of revenues in
USA.
Euro M
Products
Europe, ME and Africa
The Americas
Systems
Europe, ME and Africa
The Americas
Total
FY12
105
55
50
165
80
85
270
10 October 2012
9

Hindalco
Turnaround in international operations?
Hungary, Canada and USA could become profitable by mid FY13
In the overseas markets, performance in key geographies like Belgium (36% of revenues),
USA (24%), Hungary (9%) and Canada (6%) was impacted in FY12 given pricing pressure and
region/factory specific issues (lower capacity utilization in Hungary, inventory build-up at
Canada, high product development costs in USA, etc).
We believe USA, Hungary and Canada could become profitable during the course of FY13,
driving a turnaround in overall international operations. The process will also be aided by
other measures like rationalizing sourcing, decline in commodity prices, etc.
We expect international subsidiaries to report FY13/14 EPS of INR0.5/1.7 against loss of
INR2.1/sh in FY12.
Reasons for muted performance of overseas business (as stated by the management)
1QFY12
2QFY12
4QFY12
1QFY13
Slower off take by customers in MENA reason resulting into significant inventory
pile up and under absorption of fixed costs.
Speedy execution/closure of a near-zero margin EUR50m project, losses on
inventory
Sales postponement in Europe, etc given macro headwinds
Deferment of offtake in HT motors by cement customers (loss of profit: INR100m),
loss of profit in Belgium plant (INR500m)
Overseas subsidiaries: EBIDTA margins (ttm, %) and EPS (INR/sh) Key subsidiaries reported large losses in FY12 (INR M)
% Share
Belgium
36
USA
24
Ireland
9
Indonesia
9
Hungary
9
Canada
6
Others
8
100
Revenues
FY12
FY11
20,202 20,259
13,512
8,216
5,070
4,577
4,807
3,818
4,794
6,007
3,228
4,384
4,670
2,294
56,284 49,555
%YoY
(0.3)
64.5
10.8
25.9
(20.2)
(26.4)
103.6
13.6
PBT
FY12
FY11
(420)
1,493
110
432
233
411
657
902
(632)
840
(387)
662
1,064
493
626
5,234
Source: Company, MOSL
What can drive the turnaround in international operations
We expect CRG's international subsidiaries to report FY13/14 EPS of INR0.5/1.7 against
loss of INR2.1/sh in FY12. We believe the following hold the key to this turnaround:
Normalization of operations in Hungary and Canada/USA
Belgium losses (INR360m in FY12) to be addressed post the restructuring (expect
more clarity by end 3QFY13)
Increasing share of Low cost country in manufacturing
Efficient sourcing of raw materials and
Decline in commodity prices.
10 October 2012
10

Hindalco
Normalization of operations in Hungary and Canada/USA
We understand that Hungary from net loss of INR630m in FY12 is now profitable as
capacity utilization has increased to 70% currently (v/s 40% in FY12). We believe
this could further improve to 85-90% by end 2QFY13 on the back of increased
customer acceptance, largely from Western Europe.
Canada / USA factories had been impacted given stabilization issues / inventory
build-up / product development costs and these factors have possibly stabilized.
Profitability here could improve going forward.
Restructuring of Belgium operations
CG is currently restructuring operations in its Belgium factory. It has announced plans
to reduce workforce by 38% (260 employees) to shift production to Hungary (low cost
country) where transformer capacity is being expanded from 5,000MVA to 17,000MVA
(whereas Belgium capacity is being lowered from 15,000MVA to 5,000MVA).
Management stated that Phase 1 consultations with employees are expected to be
completed by Oct-Nov 2012 (however, this is not a time-bound program, and given
the tough environment in Europe, the process can take longer). The management is
hopeful that restructuring of the Belgium operations should be completed by end-
3QFY13. Staff costs account for ~23% of revenues in overseas markets; as the cost
differential between Belgium and Hungary is ~350%, the potential savings from
restructuring Belgium operations could be meaningful.
Staff cost differential meaningful between standalone
and subsidiaries (% of revenues)
Staff cost differential between Belgium / Hungary
stands at ~350%
Source: Company, MOSL
Source: Eurostat
Increasing share of LCC in manufacturing
On a consolidated basis, 57% of CG's manufacturing is in high cost countries (HCC).
Based on the same, we estimate that for the overseas business (ex India), a high 75%
of the manufacturing footprint is in HCC. Increasing the shift towards LCC (low cost
countries) is important, as the staff cost differential stands at a meaningful 18% of
revenues. Factories in HCCs like Belgium (~40% of CG Global overseas) have order
book extending up to 2 years, while LCCs like Hungary (~12% contribution) have
factories operating at barely 50% of capacity. Hence, the challenge is about customer
acceptability (to be addressed through One World Quality), and thus targeting a large
part of the incremental orders to be manufactured from factories in LCCs.
10 October 2012
11

Hindalco
Efficient sourcing of raw materials
In June 2012, CG established an International Procurement Office in China, and
commodity managers have been appointed for sourcing of key raw materials. The
benefits of centralized raw material sourcing are expected to start kicking in shortly.
Efficient raw material sourcing is a key determinant of cost structure and profit, given
that raw material costs constitute 65-68% of revenues. The management highlighted
a two-pronged strategy on sourcing:
(1) Increase share of purchases from LCCs like Eastern Europe, China, India and rest
of Asia (FY11 at 46%) and
(2) Lower the inefficiencies in the chain (like fragmented raw material sourcing from
3,000+ suppliers in power business, etc).
We expect the benefits of this strategy to start flowing in from end-FY13.
Decline in commodity prices
CG's raw material costs have a strong correlation with commodity prices: this is largely
in the power segment (65% of consolidated revenues); industrial / consumer business
have a short cycle, and thus it is possible to pass on cost variations. We believe CG is
a major beneficiary of any decline in commodity prices, particularly in its overseas
business (47% of consolidated revenues), where most of the contracts are fixed price.
Strong correlation of raw material cost with industrial commodities
For details please refer to
our report "Commodity
price volatility: Identifying
winners", dated 7 Sep 2012
Source: Company, MOSL
10 October 2012
12

Hindalco
Expect Consolidated EPS CAGR of 47% over FY12-14;
Upgrade to Buy
Target price of INR163 offers 22% upside
We expect CRG to report standalone EPS of INR8.9 in FY13 (up 13%) and INR10.9 in FY14
(up 22%). As stated earlier, international subsidiaries should EPS of INR0.5 in FY13 and
INR1.7 in FY14.
We model 47% consolidated EPS CAGR over FY12-14 driven by 14% revenue CAGR and
230bp margin expansion. But the key risk is that macro environment remains challenging.
We arrive at price target of INR163, based on P/E of 12x FY14E for standalone business and
EV/EBIDTA of 8x FY14E for overseas business. Upgrade to Buy.
Turnaround of overseas subsidiaries to drive
stock performance (EPS INR)
Stock price has reacted sharply post disappointing quarterly
performance
27% fall post
1QFY12 results
16% fall post
2QFY12 results
27% fall post
4QFY12 results
Source: Company, MOSL
Long-term guidance: 450bp profitability improvement in 3 years
The management stated that a three-year strategy to improve profitability is in place.
This includes 4 focus areas, which should result in EBITDA margin expanding 450bp
over the next three years (from 7.1% in FY12 to ~11.5% by FY15).
1.
Improved offerings,
largely towards high technology/high voltage products
including EHV segment and building up service business portfolio, penetration
into new geographies like Middle East and Brazil
(+150bp EBITDA margin).
2.
Rationalization of raw material sourcing
and focus on low cost countries including
China
(+150bp EBITDA margin).
3.
Change in manufacturing footprint,
with rationalization of capacity utilization in
European factories, and capacity expansion from 85,000MVA to 140,000MVA
(+50,000MVA incremental capacity in India) over the next 3 years
(+100bp EBITDA
margin).
4.
Improvement in manufacturing processes
by implementing Six Sigma and
sustainability program across factories
(+50bp EBITDA margin).
10 October 2012
13

Hindalco
We model in EBIDTA margin improvement of 240bp till FY14
Standalone and Subsidiaries EBIDTA margins
Consolidated EBIDTA (INR M) and EBIDTA margins (%)
Source: Company, MOSL
Current valuations do not factor in meaningful value for overseas business
In our view current valuations seems to be largely ignoring the value of overseas
business given the headwins in terms of business environment. We arrive at price
target of INR163, based on P/E of 12x FY14E for standalone business and EV/EBIDTA of
8x FY14E for overseas business.
CG: SOTP valuation
Standalone Business
Overseas Business
Avantha
Target Price
PE FY14 (x)
EV/EBIDTA (x)
PBV (x)
Multiple
12
8
1
INR/sh
131
29
4
163
Our valuation of the overseas business is based on the global valuation metrics of
industrial majors. We note that historically MSCI European industrial index has traded
at a long term average EV/EBITDA of 8-9 (x) over the last 15 years while the EBITDA
margin have varied between 10-15% over the same period.
MSCI Industrial Index EV/EBITDA (x)
Source: Bloomberg, MOSL
10 October 2012
14

Hindalco
Global Industrial and Electrical valuation metrics
EV/Sales
EV/EBITDA
PER (x)
ABB
1.1
7.7
15.1
Mitsubishi
0.5
5.1
11.1
Alstom
0.6
5.7
10.9
Siemens
0.9
6.6
14.7
GE
3.2
18.9
16.3
Hitachi
0.5
5.5
5.5
RWE/ SMIT
0.8
5.0
12.0
Hyundai
0.8
6.1
7.7
Average
1.0
7.6
11.7
Based on prices as 9 October 2012 and latest reported financials
Year End
Dec-11
Mar-12
Mar-12
Sep-11
Dec-11
Mar-12
Dec-11
Dec-11
EBITDA Margin (%)
15.0
9.7
10.2
14.1
17.5
9.2
16.9
12.5
13.1
Source: Bloomberg
10 October 2012
15

Hindalco
Financials and Valuation
Income Statement (Consolidated)
Y/E March
Net Sales
Change (%)
Raw Materials
Staff Cost
Other Mfg. Expenses
EBITDA
% of Net Sales
Depreciation
Interest
Other Income
EO Items (as rep.)
PBT
Tax
Rate (%)
Reported PAT
Extra-ordinary Inc.(net)
Adjusted PAT
Minority Int
Consolidated PAT
Change (%)
FY10
91,409
4.6
57,966
11,131
9,542
12,770
14.0
1,551
428
1,100
352
12,243
3,650
29.8
8,593
352
8,241
6.0
8,247
47.3
FY11
100,051
9.5
64,980
11,811
9,822
13,438
13.4
1,936
352
1,142
-381
11,910
3,100
26.0
8,810
-381
9,191
76.5
9,268
12.4
FY12
112,486
12.4
76,850
14,662
12,937
8,036
7.1
2,603
463
524
0
5,494
1,821
33.1
3,673
0
3,673
60.0
3,733
-59.7
FY13E
131,290
16.7
85,343
16,303
18,714
10,930
8.3
2,540
830
480
0
8,040
2,080
25.9
5,960
0
5,960
69.0
6,029
61.5
(INR Million)
FY14E
145,945
11.2
95,328
17,169
19,618
13,828
9.5
2,730
967
486
0
10,618
2,580
24.3
8,037
0
8,037
67.0
8,104
34.4
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Loans
Deffered Tax Liability
Minority Interest
Capital Employed
FY10
1,283
23,760
25,043
5,010
49
43
30,145
FY11
1,283
31,464
32,747
3,955
160
157
37,019
37,805
19,490
18,315
1,102
6,747
45,646
11,893
25,427
2,984
5,342
34,786
18,585
12,148
4,054
10,860
37,024
FY12
1,283
34,826
36,109
9,849
-122
157
45,992
44,477
23,005
21,473
1,097
7,864
55,343
12,233
31,432
4,976
6,703
40,181
21,076
15,318
3,787
15,162
45,992
(INR Million)
FY13E
1,283
39,106
40,389
15,831
-557
157
55,819
58,273
25,999
32,274
418
5,902
60,639
13,551
34,359
5,411
7,318
43,414
22,004
17,268
4,141
17,225
55,819
FY14E
1,283
44,496
45,779
15,708
-529
157
61,114
61,047
28,216
32,831
409
7,962
66,541
14,471
37,071
7,039
7,961
46,628
24,019
18,265
4,344
19,913
61,114
Gross Fixed Assets
29,858
Less: Depreciation
17,234
Net Fixed Assets
12,623
Capital WIP
1,137
Investments
5,536
Curr. Assets
41,018
Inventory
10,412
Debtors
21,463
Cash & Bank Balance
6,688
Loans & Advances
2,455
Current Liab. & Prov.
30,170
Creditors
16,098
Other Liabilities
10,469
Provisions
3,603
Net Current Assets
10,849
Application of Funds
30,145
E: MOSL Estimates; Consolidated Financials
10 October 2012
16

Hindalco
Financials and Valuation (Consolidated)
Ratios
Y/E March
Basic (INR)
Consolidated EPS
Growth (%)
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation (x)
P/E (standalone)
P/E (consolidated)
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios
Debtors (Days)
Inventory (Days)
Creditors. (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
FY10
12.8
46.5
15.3
39.0
1.3
15.3
FY11
14.3
11.5
17.3
51.0
2.2
23.7
FY12
5.7
-60.0
9.8
56.3
1.4
20.7
FY13E
9.3
62.2
13.2
63.0
1.9
25.0
FY14E
12.6
36.0
16.8
71.4
2.3
25.0
21.7
23.4
13.7
13.3
0.9
2.4
1.0
15.0
14.4
10.1
8.3
0.7
2.1
1.4
12.3
10.6
8.0
6.3
0.6
1.9
1.7
39.6
30.9
30.5
28.1
10.7
9.6
15.6
13.0
18.7
15.0
42
42
64
3.0
43
43
68
2.7
40
40
68
2.4
38
38
61
2.4
36
36
60
2.4
0
-0.1
0.0
0.2
0.1
Cash Flow Statement
Y/E March
PBT before EO Items
Add : Depreciation
Interest
Less : Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
(Inc)/Dec in FA
(Pur)/Sale of Investments
CF from Investments
(Inc)/Dec in Net Worth
(Inc)/Dec in Debt
Less : Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
FY10
11,891
1,551
428
3,650
-125
10,094
-1,526
-3,864
-5,389
-917
-2,173
428
944
-4,461
1,032
5,656
6,688
FY11
12,291
1,936
352
3,100
-3,715
7,765
-7,593
-1,211
-8,805
538
-1,055
352
1,644
-2,513
-3,709
6,688
2,984
FY12
5,494
2,603
463
2,494
-2,311
3,756
-5,756
-1,117
-6,873
390
5,894
463
1,044
4,777
1,851
2,984
4,976
FY13E
8,040
2,540
830
2,125
-1,628
7,657
-12,662
1,962
-10,700
-249
5,982
830
1,431
3,472
429
4,976
5,410
(INR Million)
FY14E
10,618
2,730
967
2,552
-1,060
10,703
-3,278
-2,060
-5,338
-897
-123
967
1,750
-3,737
1,628
5,411
7,039
10 October 2012
17

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