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Crompton Greaves: Cost inflation mars profits

Feb 8, 2012

Crompton Greaves has announced its financial results for the quarter ended December 2011. During 3QFY12, the company has reported 26.3% YoY rise in sales and 66.9% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated sales rise by 26.3% YoY during quarter ended December 2011. The rise has come in on the back of about 33.9% YoY increase in power systems segment and about 24.7% YoY increase in industrial systems segment. However, growth in the consumer products segment was flattish at about 5.9% YoY.
  • Operating profits decline by 46.3% YoY during 3QFY12. Execution of a project in international business at near zero margin and increase in operating expenses dented profitability.
  • Net profits decline 66.7% YoY due to muted performance at the operating level and increase in interest expenses.
  • The order back log stood at Rs 81.8 bn during 3QFY12, witnessing a 17% YoY growth. The company received orders worth Rs 34 bn in the quarter.


Consolidated performance snapshot
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Sales 23,970 30,280 26.3% 70,971 81,712 15.1%
Expenditure 20,568 28,453 38.3% 61,264 75,808 23.7%
Operating profit (EBDITA) 3,402 1,826 -46.3% 9,707 5,905 -39.2%
Operating profit margin (%) 14.2% 6.0%   13.7% 7.2%  
Other income 120 155 28.5% 531 521 -1.9%
Interest 39 112 191.7% 137 324 136.3%
Depreciation 467 627 34.3% 1,340 1,961 46.4%
Profit before tax 3,017 1,242 -58.8% 8,761 4,141 -52.7%
Tax 703 487 -30.8% 2,417 1,425 -41.0%
Minority interest (1) 3   (2) 4  
Share of profit/(loss) of associate 15 13 -14.9% 29 13 -54.6%
Extraordinary items - -   - -  
Profit after tax/(loss) 2,328 771 -66.9% 6,372 2,733 -57.1%
Net profit margin (%) 9.7% 2.5%   9.0% 3.3%  
No. of shares         641.5  
Basic & Diluted earnings per share (Rs)*         4.3  
P/E ratio (x)*         17.8  
* On a trailing 12-months basis

What has driven performance in 3QFY12?
  • The 26.3% YoY growth in Crompton Greavesí (CG) consolidated sales during 3QFY12 was largely a result of strong performance in its power systems and industrial systems business divisions. The power systems business was the star performer of the quarter recording a 33.9% YoY growth. Even the industrial systems segment recorded a 24.7% YoY growth. However, revenue growth from the consumer products segment was modest at 5.9% YoY.

    Segment-wise performance (Consolidated)
      3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
    Power Systems            
    Revenue (Rs m) 15,452 20,689 33.9% 45,794 53,465 16.8%
    % share 64.3% 67.9%   64.4% 65.3%  
    PBIT margin 13.0% 2.5%   12.0% 3.5%  
    Consumer Products            
    Revenue (Rs m) 4,751 5,033 5.9% 14,704 15,271 3.9%
    % share 19.8% 16.5%   20.7% 18.6%  
    PBIT margin 14.0% 11.8%   14.6% 12.4%  
    Industrial Systems            
    Revenue (Rs m) 3,809 4,749 24.7% 10,625 13,202 24.2%
    % share 15.9% 15.6%   14.9% 16.1%  
    PBIT margin 18.2% 10.4%   18.8% 11.8%  
    Total            
    Revenue (Rs m)* 24,012 30,470 26.9% 71,123 81,938 15.2%
    PBIT margin 14.0% 5.3%   13.5% 6.5%  
    *Excluding other activities and inter-segment adjustments

  • The operating margins of the company declined sharply to 6% in 3QFY12 from 14.2% in 3QFY11. Execution of a near zero margin order in the international business and increase in raw material prices (copper, steel and aluminum) impacted margins. However, the company is planning to source raw materials from low cost countries in order to control costs and restore its margins. In fact, the company already saved Rs 500 m in the current quarter due to sourcing from low cost destinations.

  • The company received orders worth Rs 34 bn in the quarter, up 66% YoY. Orders from the power sector were up 82% YoY to Rs 29.3 bn while those from the industrial and consumer segment were up by 6% each to 4.6 bn and 5 bn respectively.

  • The company finally disposed off the aircraft (purchased earlier) to the promoters at about Rs 2.5 bn.

  • Net profits declined 66.9% YoY during the quarter due to muted performance at the operating level coupled with rise in interest and depreciation expenses.

What to expect?
At the current price of Rs 145, the stock is trading at a multiple of 17.8 times its TTM earnings. Despite a challenging quarter, management has maintained its full year revenue and EBITDA margin guidance. While the margin guidance (8-10%) could be at risk the company is well poised to achieve the targeted growth in revenues taking into consideration the overall 9MFY12 performance. Considering the weak demand environment in the international business, stiff competition and prevailing pricing pressures in the domestic markets we maintain our hold view on the stock.

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