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Crompton: Eye improvement with caution

Feb 25, 2002

Crompton Greaves Limited, India's largest private sector electrical equipment manufacturer continues its battle for survival. Its performance in 3QFY02 is encouraging. During the December quarter, the company has declared a 12% topline growth and Rs 22 m net profit (loss of Rs 371 m in 3QFY01). Cosequently, the stock has surged by over 40% in the last couple of months.

(Rs m) 3QFY01 3QFY02 Change 9m FY01 9m FY02 Change
Net Sales 2,972 3,331 12.1% 7,851 10,069 28.3%
Other Income (incl. Extraordinary) 19 36 85.9% 44 109 150.6%
Expenditure 3,253 3,036 -6.7% 8,940 9,379 4.9%
Operating Profit (EBDIT) -281 295 -205.1% -1,089 690 -163.3%
Operating Profit Margin (%) -9.5% 8.9%   -13.9% 6.8%  
Interest 235 190 -19.2% 694 554 -20.2%
Depreciation 102 119 17.0% 339 336 -1.1%
Profit before Tax -599 22   -2,078 -91  
Extraordinary items 227 0   1,212 141  
Tax 0 0   3 11 324.0%
Profit after Tax/(Loss) -371 22   -869 40  
Net profit margin (%) -12.5% 0.7%   -11.1% 0.4%  
No. of Shares 52.4 52.4   52.4 52.4  
Diluted Earnings per share* -28.4 1.7   -22.1 1.0  
P/E Ratio   18.1     29.9  
*(annualised)            

During the nine month period (April - December 2001), Crompton posted a 28% growth in turnover and reported Rs 40 m as net profit. However, extraordinary income continues to help Crompton report a positive bottomline. During the nine month period last year, Crompton earned Rs 1,212 m as extraordinary income (sale of Skycell - Rs 985 m and Rs 227 m as net surplus of transfer of low tension control gear unit and Faxemail). In the current year too, Crompton earned Rs 314 m from sale of land, but had to incur Rs 173 m as advances written off. The net extraordinary income of Rs 141 m is reflected as extraordinary income this year.

During the December quarter, the company has completed the transaction for the sale of its investments in CG Glass to Koninklijke Philips Electronics NV for a consideration of Rs 171 m. The resultant loss of Rs 7.8 m has been accounted for in this quarter. Also, the board of directors of the company has decided to divest the company's shareholding in CG Newage Electrical Ltd.

Cost break-up
(Rs m) 3QFY01 3QFY02 Change 9m FY01 9m FY02 Change
Material costs 2,222 2,194 -1.3% 5,835 6,766 15.9%
Staff costs 505 438 -13.4% 1,612 1,280 -20.6%
Other expenditure 526 405 -23.1% 1,493 1,334 -10.7%
Total expenditure 3,253 3,036 -6.7% 8,940 9,379 4.9%

During the December quarter, the company has completed the transaction for the sale of its investments in CG Glass to Koninklijke Philips Electronics NV for a consideration of Rs 171 m. The resultant loss of Rs 7.8 m has been accounted for in this quarter. Also, the board of directors of the company has decided to divest the company's shareholding in CG Newage Electrical Ltd.

If we exclude the extraordinary income figure from both FY01 and FY02 numbers, the company will be significantly in the red. The only consolation is the company's continous improvement in operational performance. The turnover is up by 28% in 9m FY02, but the operating expenditure has grown by less than 5% YoY. Therefore, the company is earning positive operating margins during FY02. Added to this, the Skycell stake last year helped Crompton prune its debt burden, resulting in reduced interest expenses this year (down 20% YoY).

Crompton's efforts at restructuring by selling of non-core businesses as well as change in management control (29.1% of the company's shares, previously held by various Thapar Group companies have been transferred in favour of Mr Brij Mohan Thapar. The Company now forms part of the BM Thapar Group), seem to have brought it back in the reckoning. It is no wonder then the stock price has improved significantly in the recent past.

However, Crompton still has to cover a long distance before it can be considered as a safe investment. The company's inconsistent past makes investors wary. For Crompton, any improvement in bottomline without the aid of extraordinary income is likely to provide stability to valuations.

At Rs 30 the stock trades at 30x annualised 9mFY02 earnings.


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