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Crompton Greaves: 'Power Systems' continues to suffer - Views on News from Equitymaster
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  • May 2, 2011 - Crompton Greaves: 'Power Systems' continues to suffer

Crompton Greaves: 'Power Systems' continues to suffer
May 2, 2011

Crompton Greaves has announced the fourth quarter results of financial year 2010-2011 (4QFY11). The company has reported around 16% YoY growth in sales. However, net profits have declined 18.0% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated sales grow by 16% YoY during 4QFY11, led by strong performance from the consumer products' and ‘industrial systems' business. Both these segments record a YoY growth of 19.6% and 25.0%, respectively.
  • Operating profits decline by 7.3% YoY during the quarter. The decline in operating profits was due to increase in raw material cost and other expenditure. Raw material cost increased due to rise in commodity prices. Other expenditure increased due to increase in freight cost resulting from higher exports to overseas markets.
  • Net profits decline by 18.0% YoY due to muted performance at the operating level coupled with negative impact from extraordinary items prevalent in the quarter. Excluding the extraordinary items net profits increased 6.7% YoY during the quarter.
  • During 4QFY11, the consolidated order intake stood at Rs.31.5 bn.

Consolidated performance snapshot
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Sales 25,079 29,080 16.0% 91,409 100,051 9.5%
Expenditure 21,052 25,350 20.4% 78,639 86,613 10.1%
Operating profit (EBDITA) 4,027 3,731 -7.3% 12,770 13,438 5.2%
Operating profit margin (%) 16.1% 12.8%   14.0% 13.4%  
Other income 329 468 42.1% 937 999 6.7%
Interest 119 72 -39.4% 265 209 -21.0%
Depreciation 397 597 50.3% 1,551 1,936 24.9%
Profit before tax 3,840 3,530 -8.1% 11,891 12,291 3.4%
Tax 1,138 683 -40.0% 3,650 3,100 -15.1%
Minority interest (2) (2)   (26) (4)  
Share of profit/(loss) of associate 13 51 297.7% 32 80 154.6%
Extraordinary items 352 (381)   352 (381)  
Profit after tax/(loss) 3,065 2,514 -18.0% 8,599 8,887 3.3%
Net profit margin (%) 12.2% 8.6%   9.4% 8.9%  
No. of shares         641.5  
Basic & Diluted earnings per share (Rs)*         13.9  
P/E ratio (x)*         18.3  
* On a trailing 12-months basis

What has driven performance in 4QFY11?
  • The 16.0% YoY growth in Crompton Greaves' (CG) consolidated sales during 4QFY11 was largely a result of strong performance in its consumer products and industrial systems business. The industrial systems business was the star performer of the quarter, recording a 25.0% YoY growth. This was followed by consumer products division which recorded a 19.6% YoY growth. However, the company's principal business segment power systems division reported a 14.2% YoY growth during the quarter.

    Segment-wise performance (Consolidated)
      4QFY10 4QFY11 Change FY10 FY11 Change
    Power Systems
    Revenue (Rs m) 16,838 19,235 14.2% 62,045 65,029 4.8%
    % share  67.6% 66.1%   68.4% 64.9%  
    PBIT margin 14.8% 13.4%   12.4% 12.4%  
    Consumer Products
    Revenue (Rs m) 4,604 5,508 19.6%  16,120 20,212 25.4%
    % share  18.5% 18.9%   17.8% 20.2%  
    PBIT margin 14.6% 14.3%   14.3% 14.5%  
    Industrial Systems
    Revenue (Rs m) 3,476 4,346 25.0% 12,587 14,971 18.9%
    % share 13.9% 14.9%   13.9% 14.9%  
    PBIT margin 25.6% 14.9%   21.9% 17.6%  
    Total
    Revenue (Rs m)* 24,918 29,088 16.7% 90,751 100,211 10.4%
    PBIT margin 16.3% 13.8%   14.1% 13.6%  
    *Excluding other activities and inter-segment adjustments

  • The power systems business continues to see a muted growth. There is a slowdown in order inflow from the utilities and the situation is not expected to improve in the next 3-6 months. However, order inflows from the other two businesses were steady during the quarter. It may be noted that Management expects the power systems segment to see a muted growth for the next quarter as well.

  • CG's overall operating margins reported a sharp decline during the quarter. This was mainly due to increase in raw material cost.

  • Net profits declined 18.0% YoY during the quarter due to muted performance at the operating level coupled with rise in depreciation expenses. However, tax rate was significantly lower during the quarter as the company incurred a huge sum on R&D expenses which qualifies for a weighted deduction.

What to expect?
At the current price of Rs 253, the stock is trading at a multiple of 15 times our estimated consolidated FY13 earnings. Rising input prices are a cause of worry. However, management indicated that margins are unlikely to fall from current levels as most of the low margin orders in the industrial systems division have been executed. Further, even if the raw material prices continue to rise from these levels management believes that there is headroom to pass on the price increase in the industrial systems and consumer products segment. However, due to overcapacity in the transmission and distribution sector, passing on the raw material price increase in the power systems segment is becoming increasingly difficult.

Over the next 3 to 6 months, management does not anticipate a change in the demand environment as far as the power systems segment is concerned. However, the situation is expected to improve during 2HFY12.

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. (Rpro subscribers click here )

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