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Crompton Greaves: Growth tapering off?
Feb 1, 2008

Performance summary
  • Standalone topline grows by 13% YoY during 3QFY08, 15% YoY during 9mFY08. Growth led by power systems and consumer products businesses.
  • Operating margins expand by 2.3% owing to lower raw material costs (as percentage of sales).

  • Net profits grow by 83% YoY during the quarter, helped by operating margin expansion and higher other income.

  • Order backlog at the end of December 2007 stood at Rs 21.8 bn for the standalone entity, Rs 51.4 bn for the consolidated business.

Financial performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Sales 8,832 9,999 13.2% 25,828 29,717 15.1%
Expenditure 8,014 8,840 10.3% 23,553 26,445 12.3%
Operating profit (EBDITA) 818 1,160 41.8% 2,275 3,272 43.8%
Operating profit margin (%) 9.3% 11.6%   8.8% 11.0%  
Other income 72 144 99.7% 216 456 111.0%
Interest 78 72 -8.0% 203 197 -2.8%
Depreciation 100 115 15.2% 281 333 18.6%
Profit before tax 713 1,117 56.8% 2,008 3,198 59.3%
Tax 258 438 69.7% 783 1,090 39.2%
Profit after tax/(loss) 454 679 49.5% 1,225 2,109 72.2%
Net profit margin (%) 5.1% 6.8%   4.7% 7.1%  
No. of shares         366.6  
Diluted earnings per share (Rs)*         7.7  
P/E ratio (x)*         41.4  
* On a trailing 12 months basis

What has driven performance in 3QFY08?
  • Crompton Greaves (CG) grew its standalone sales by 13% YoY during 3QFY08. This growth was largely aided by the company’s power division, which recorded sales growth of 13% YoY. The segment maintained its share in revenues at 47% during the quarter. The management has indicated that it expects the power division to rake in a growth of 20% YoY during FY08, as a large part of this fiscal’s growth is expected in 4QFY08. As for the consumer products business, sales grew by 15% YoY. The industrial systems business grew by 14% YoY during the quarter. The company had an order backlog of Rs 21.8 bn at the end of December 2007, 85% of which is for the power segment products and the remaining for industrial systems products.

    Segment-wise performance (Standalone)
      3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Power Systems            
    Revenue (Rs m) 4,182 4,731 13.1% 11,909 13,569 13.9%
    % share 47.0% 47.0%   45.7% 45.4%  
    PBIT margin 9.9% 12.4%   9.0% 12.0%  
    Consumer Products            
    Revenue (Rs m) 2,263 2,603 15.0% 7,174 8,146 13.6%
    % share 25.5% 25.9%   27.6% 27.2%  
    PBIT margin 8.7% 9.8%   8.9% 10.3%  
    Industrial Systems            
    Revenue (Rs m) 2,311 2,634 14.0% 6,466 7,724 19.5%
    % share 26.0% 26.2%   24.8% 25.8%  
    PBIT margin 14.3% 18.3%   13.9% 18.1%  
    Others            
    Revenue (Rs m) 137 89 -34.7% 488 479 -1.9%
    % share 1.5% 0.9%   1.9% 1.6%  
    PBIT margin -8.1% -35.6%   -4.2% -11.6%  
    Total            
    Revenue (Rs m)* 8,892 10,057 13.1% 26,037 29,919 14.9%
    PBIT margin 10.5% 12.9%   9.9% 12.7%  
    * Excluding inter-segment adjustments

  • CG’s operating margins expanded by 2.3% during 3QFY08. This was largely on the back of decline in its raw material costs. As a percentage of sales, these costs declined from 57.3% of sales in 3QFY07 to 50.7% in 3QFY08. The management has cited factors like cost control and productivity improvement for this improvement in operating margins during 3QFY08.

  • CG recorded a 50% YoY growth in standalone net profits during 3QFY08. This was duly aided by the expansion in operating margins and a substantial rise in other income. The bottomline growth would have been higher but for a rise in effective tax rate to 39%, from 36% in 3QFY07.

What to expect?
At the current price of Rs 317, the stock is trading at a multiple of 12.5 times our estimated consolidated FY10 earnings for the company. We had recommended a ‘Hold’ on the stock in October 2007 at Rs 340 with a target of Rs 452. Incidentally, post our recommendation, the stock has touched a high of Rs 452 and had retreated back to the current levels, in line with the broader market correction.

While the company has reported a decent performance in its power systems business during 3QFY08, the fact that the management has raised concerns about growth in the North American market (for the consolidated power business) is worrying. We shall soon review our estimates for the company and subsequently update our research report.

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