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Crompton Greaves: Profit surge continues

Feb 1, 2011

Crompton Greaves has declared its 3QFY11 results. The company has reported around 7% YoY growth in sales while its net profits have grown by almost 17% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated sales grow by 7% YoY during 3QFY11, led by strong performance from the ‘consumer products’ and ‘industrial systems’ business, which records a YoY growth of 30% and 23% respectively.
  • Operating profits grow by 6% during the quarter. Raw material costs and employee costs as a percent of sales stood at 50% and 12.5% respectively, almost similar to their proportion of sales during 3QFY10.
  • Net profits grow by 17% aided by a 22% decline in interest costs and a 27% decline in tax expense.
  • At the end of 3QFY11, the consolidated unexecuted order book stood at 70.2 bn, up around 15% YoY. This order backlog is nearly 73% of the trailing twelve month sales.

Consolidated performance snapshot
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Sales 22,464 23,970 6.7% 66,330 70,971 7.0%
Expenditure 19,265 20,568 6.8%   57,587 61,264 6.4%
Operating profit (EBDITA) 3,200 3,402 6.3%  8,743  9,707 11.0%
Operating profit margin (%) 14.2% 14.2%   13.2% 13.7%  
Other income 215 120 -44.1% 607  531 -12.6%
Interest  49 39 -21.7%  146  137 -6.0%
Depreciation 395 467 18.2% 1,154 1,340 16.1%
Profit before tax 2,971 3,017 1.5% 8,051 8,761 8.8%
Tax 968  703 -27.4% 2,512 2,417 -3.8%
Minority interest 11  1 -94.6%  24 2 -93.3%
Share of profit/(loss) of associate 5 15 202.0% 19 29 56.7%
Profit after tax/(loss) 1,996 2,328 16.6% 5,534 6,372 15.2%
Net profit margin (%) 8.9% 9.7%   8.3% 9.0%  
No. of shares       641.2 641.7  
Diluted earnings per share (Rs)*         14.2  
P/E ratio (x)*         19.2  
* On a trailing 12-months basis

What has driven performance in 3QFY10?
  • The 6.7% YoY growth in Crompton Greaves’ (CG) consolidated sales during 3QFY11 was largely a result of strong performance in its consumer products and industrial systems business. The consumer products business was the star performer of the quarter recording a 30% YoY growth. This segment now contributes to nearly 20% share in revenues as compared to 16% share during 3QFY10. Sales of the ‘industrial systems’ business also saw a good growth of 23% YoY during the quarter.

    Segment-wise performance (Consolidated)
      3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Power Systems            
    Revenue (Rs m)      15,596       15,452 -0.9% 45,206 45,794 1.3%
    % share  69.8% 64.3%   68.7% 64.4%  
    PBIT margin 12.9% 13.0%   11.5% 12.0%  
    Consumer Products            
    Revenue (Rs m) 3,647  4,751 30.3%  11,516 14,704 27.7%
    % share  16.3% 19.8%   17.5% 20.7%  
    PBIT margin 14.4% 14.0%   14.1% 14.6%  
    Industrial Systems            
    Revenue (Rs m) 3,100  3,809 22.9%     9,111 10,625 16.6%
    % share  13.9% 15.9%   13.8% 14.9%  
    PBIT margin 20.7% 18.2%   20.5% 18.8%  
    Revenue (Rs m)*      22,343      24,012 7.5% 65,833  71,123 8.0%
    PBIT margin 14.4% 13.4%   13.4% 18.1%  
    * Excluding inter-segment adjustments

  • The power systems business continues to see a muted growth. There is a slowdown in order inflow from the utilities and Power Grid. Price realizations are under pressure. The transformers business has grown in volume terms (MVA) with an increase of nearly 31%, but in value terms the increase has been just 2-3%. The management expects the power systems segment to see a muted growth for the next quarter as well.

  • CG’s overall operating margins during 3QFY11 were at 14.2%. This was almost similar to the operating profit margins during 3QFY10.

  • Lower interest costs and decrease in tax expense have driven the net profit margins upwards. Net profit margins rose by 0.8% during the quarter to stand at 9.7%.

What to expect?
At the current price of Rs 272, the stock is trading at a multiple of 16 times our estimated consolidated FY13 earnings. Rising input prices and falling realizations are a cause of worry. The company continued to maintain healthy margins because of better operational efficiencies and cost cutting in other overheads. However the management has indicated that if the pressure on input prices persists further, the margins may subsequently get impacted. Additionally, there is an overcapacity in the transmission and distribution sector. The price realizations are squeezing. The management expects the power systems segment to see a muted growth during the next quarter as well. On account of expected orders from Power Grid, the management expects the power systems segment to pick during the second half of the year.

The management expects a 16-18% sales growth for FY12. It has however ruled out an upside in margins, but has said that the company will maintain margins at the current levels. In terms of valuations, the stock seems to be trading at reasonable levels. However considering the slowdown in order inflow in the power segment and the uncertainty over input prices in the near term we advice a cautious view on the stock.

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