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Crompton Greaves: Industrial systems' margins suffer - Views on News from Equitymaster
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  • Jan 30, 2014 - Crompton Greaves: Industrial systems' margins suffer

Crompton Greaves: Industrial systems' margins suffer
Jan 30, 2014

Crompton Greaveshas announced third quarter results of financial year 2013-14 (3QFY14). The company has reported 12.8% YoY growth in topline and net profits of Rs 620 m during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated topline grows by about 12.8% YoY during the quarter. The growth has come in on the back of about 17.3% YoY increase in power systems business and 7.3% YoY increase in the consumer products business. Revenues from industrial systems segment increased at a modest pace of 5.9% YoY.
  • Operating profits stood at Rs 1,671 m during the quarter. For the nine month period operating profits grew by 55.7% YoY.
  • Strong performance at the operating level saw the company post a profit of Rs 620 m in the quarter as compared to a loss of Rs 1,894 m in 3QFY13.
  • The company declared second interim dividend of Rs 0.4 per share during the quarter.
  • Crompton Greaves bought back 1.1 m shares as a part of its share buyback program during the quarter.
  • Order backlog stood at Rs 100.7 bn at the end of the quarter.

(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Net sales 29,718 33,520 12.8% 87,071 97,141 11.6%
Expenditure 29,698 31,849 7.2% 84,019 92,389 10.0%
Operating profit (EBDITA) 20 1,671 8212.9% 3,052 4,752 55.7%
EBDITA margin (%) 0.1% 5.0%   3.5% 4.9%  
Other income 304 404 33.0% 703 1,062 51.1%
Interest (net) 213 267 25.6% 501 662 32.1%
Depreciation 566 719 27.0% 1,576 1,908 21.1%
Profit before tax (455) 1,089 NM 1,678 3,244 93.3%
Exceptional items (1,207) - NM (1,207) - NM
Tax 228 493 116.3% 1,087 1,463 34.6%
Share of profit in associates (4) 25 NM (4) 22 NM
Minority interest 0 - -100.0% 6 2 -71.4%
Profit after tax/(loss) (1,894) 620 NM (614) 1,805 NM
Net profit margin (%) -6.4% 1.9%   -0.7% 1.9%  
No. of shares (m)         629.1  
Diluted earnings per share (Rs)#         2.9  
Price to earnings ratio (x)         33.0  
# Based on latest shares outstanding

What has driven performance in 3QFY14?
  • The 12.8% YoY growth in Crompton Greaves' (CG) consolidated sales during 3QFY14 was largely a result of strong performance in its consumer products and power systems business division. Both the divisions grew by 7.3% YoY and 17.3% YoY respectively. Growth from the power systems segment was attributable to low base effect. Lastly, revenues from the industrial systems segment grew 5.9% YoY during the quarter due to modest volumes.

    Segment-wise performance (Consolidated)
      3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
    Power Systems
    Revenue (Rs m) 18,177 21,322 17.3% 52,759 59,767 13.3%
    % share 63.2% 65.4%   62.4% 63.3%  
    PBIT margin -5.8% 2.5%   -1.0% 2.0%  
    Consumer Products
    Revenue (Rs m) 6,070  6,510 7.3% 18,451 20,987 13.7%
    % share 21.1% 20.0%   21.8% 22.2%  
    PBIT margin 10.4% 11.7%   11.1% 11.8%  
    Industrial Systems
    Revenue (Rs m) 4,518  4,783 5.9% 13,384 13,683 2.2%
    % share 15.7% 14.7%   15.8% 14.5%  
    PBIT margin 11.3% 6.2%   11.8% 7.4%  
    Total
    Revenue (Rs m)* 28,764 32,614 13.4% 84,594 94,437 11.6%
    PBIT margin 0.3% 4.9%   3.7% 5.0%  
    * Excluding others & inter-segment adjustments

  • Operating profits stood at Rs 1,671 m as against Rs 20 m in 3QFY13. It may be noted that operating profits were considerably low in 3QFY13 due to a restructuring cost associated with the company's facility in Belgium. Due to downsizing the company recorded a liability of Rs 1.2 bn (shown as exceptional items in the table) as retrenchment compensation in 3QFY13. On a segmental basis margins from the power systems increased to 2.5% in 3QFY14 as against a loss in 3QFY13. Nonetheless, margins from the industrial systems segment fell to 6.2% amidst declining volumes.

  • The company reported a profit of Rs 620 m during the quarter as against a loss of Rs 1,894 in 3QFY13. For 9MFY14, net profits were Rs 1,805 m. Adjusting for exceptional items, net profits grew by 204.4% over the nine month period.
What to expect?
At the current stock price of Rs 109, the stock is trading at a multiple of 33x times its TTM earnings. Culmination of the restructuring exercise in Belgium and cost rationalization efforts have started bearing fruits which is evident in improved financial performance. However, challenges in the overseas markets continue to persist especially in the power systems segment. In light of these factors, we maintain our SELL view on the stock.

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