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Crompton Greaves: Profit surge continues - Views on News from Equitymaster
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Crompton Greaves: Profit surge continues
Jan 28, 2010

Performance summary
  • Consolidated sales grow by 4.5% YoY during 3QFY10, led by strong performance from the ‘consumer products’ business, which records a growth of 27% YoY.
  • Operating margins expand substantially by 3.7% YoY – improvement aided by a big drop in raw material costs (as a percentage of sales).
  • On the back of improvement in operating margins, substantially lower interest expenses and higher other income, profits surge by 62% YoY during the quarter.
  • Performance during 9mFY10 almost similar as profit rises by 51% YoY despite a tepid sales growth of about 6% YoY.
  • Declares an interim dividend of Rs 1.4 per share (dividend yield of 0.3%).
  • Recommends issue of bonus shares in the proportion of 3:4.


(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Sales 21,498 22,464 4.5% 62,772 66,330 5.7%
Expenditure 19,242 19,265 0.1% 56,104 57,587 2.6%
Operating profit (EBDITA) 2,256 3,200 41.8% 6,669 8,743 31.1%
Operating profit margin (%) 10.5% 14.2%   10.6% 13.2%  
Other income 88 215 144.7% 373 607 62.7%
Interest 224 49 -78.1% 528 146 -72.4%
Depreciation 252 395 57.0% 917 1,154 25.8%
Profit before tax 1,869 2,971 59.0% 5,597 8,051 43.8%
Tax 620 968 56.3% 1,912 2,512 31.4%
Minority interest 16 11 -30.9% 24 24  
Share of profit/(loss) of associate (1) 5   (2) 19  
Profit after tax/(loss) 1,232 1,996 62.0% 3,660 5,534 51.2%
Net profit margin (%) 5.7% 8.9%   5.8% 8.3%  
No. of shares       366.6 366.5  
Diluted earnings per share (Rs)*         20.4  
P/E ratio (x)*         21.1  

What has driven performance in 3QFY10?
  • The lackluster 5% YoY growth in Crompton Greaves’ (CG) consolidated sales during 3QFY10 was largely a result of a weak performance of its largest business of ‘power systems’ (69% of total sales). This segment clocked sales fall of around 1% YoY during 3QFY10. However, the second largest segment of ‘consumer products’ was the star performer during the quarter. This segment recorded a sales growth of 27% YoY. Sales of the ‘industrial systems’ business also saw a good growth of 19% YoY.

    Segment-wise performance (Consolidated)
      3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Power Systems            
    Revenue (Rs m) 15,736 15,596 -0.9% 44,031 45,206 2.7%
    % share 73.0% 69.2%   69.9% 67.9%  
    PBIT margin 9.6% 12.9%   9.1% 11.5%  
    Consumer Products            
    Revenue (Rs m) 2,868 3,647 27.2% 9,515 11,516 21.0%
    % share 13.3% 16.2%   15.1% 17.3%  
    PBIT margin 9.4% 14.4%   10.7% 14.1%  
    Industrial Systems            
    Revenue (Rs m) 2,614 3,100 18.6% 8,522 9,111 6.9%
    % share 12.1% 13.8%   13.5% 13.7%  
    PBIT margin 16.0% 20.7%   17.8% 20.5%  
    Others            
    Revenue (Rs m) 348 188 -45.9% 937 743 -20.7%
    % share 1.6% 0.8%   1.5% 1.1%  
    PBIT margin 21.4% 26.5%   16.1% 17.7%  
    Total            
    Revenue (Rs m)* 21,566 22,532 4.5% 63,006 66,576 5.7%
    PBIT margin 10.5% 14.3%   10.6% 13.3%  
    * Excluding inter-segment adjustments

  • CG’s operating margins expanded by 3.7% YoY during 3QFY10. This was largely on account of raw material costs which saw a big decline, thereby aiding the improvement in profitability. Based on segments, ‘consumer products’ again stole the show as its PBIT margins expanded from 9.4% in 3QFY09 to 14.4% in 3QFY10.

  • On the back of a sharp improvement in operating margins and lower interest costs (down 78% YoY), CG recorded a strong 62% YoY growth in consolidated net profits during 3QFY10.

What to expect?
At the current price of Rs 430, the stock is trading at a multiple of 17.4 times our estimated consolidated FY12 earnings.

The management has indicated that the level of domestic demand and orders in the ‘power systems’ business is still strong. Plus, the company’s order inflows are also doing well. However, it is facing some delays in the domestic market on account of customers delaying the picking up of products even after the company has finished production. This has led to some amount of delays in booking revenues, leading to a sluggish performance of its power systems business.

CG’s 9mFY10 performance has been higher than our estimates, especially because of it higher than expected margin expansion. However, we have a cautious view on the stock due to its valuations, which we believe are currently on the higher side.

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