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Cromp. Greaves: Margins boost profits - Views on News from Equitymaster

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Cromp. Greaves: Margins boost profits

May 13, 2010

Crompton Greaves has announced its FY10 results. The company has reported 5% YoY and 54% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Consolidated sales grow by 2% YoY during 4QFY10, led by strong performance from the ‘consumer products' business, which records a growth of 24% YoY.
  • Operating margins expand substantially by 2.7% YoY - improvement aided by a big drop in cost of traded goods as also other expenditure (as a percentage of sales).
  • On the back of improvement in operating margins, lower interest expenses and a lower effective tax rate, profits surge by 40% YoY during the quarter (excluding extraordinary items).
  • Performance during FY10 almost similar as profit rises by 47% YoY despite a tepid sales growth of about 5% YoY.


Consolidated performance snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Sales     24,600      25,079 1.9%      87,373       91,409 4.6%
Expenditure       21,313      21,052 -1.2%      77,417      78,639 1.6%
Operating profit (EBDITA)        3,287        4,027 22.5%         9,956      12,770 28.3%
Operating profit margin (%) 13.4% 16.1%   11.4% 14.0%  
Other income             215             329 53.3%             587             937 59.6%
Interest             128              119 -7.2%             655             265 -59.6%
Depreciation             299             397 32.9%          1,216          1,551 27.5%
Profit before tax        3,075         3,840 24.9%         8,672        11,891 37.1%
Tax         1,135          1,138 0.3%         3,047         3,650 19.8%
Minority interest               (7)                  2 -123.5%                17                26 49.1%
Share of profit/(loss) of associate               (7)                13 -285.5%                (9)                32 -453.9%
Extraordinary income -               352   -               352  
Profit after tax/(loss)         1,940         3,065 58.0%         5,599         8,599 53.6%
Net profit margin (%) 7.9% 12.2%   6.4% 9.4%  
No. of shares               366.6          641.4  
Diluted earnings per share (Rs)*         13.4  
P/E ratio (x)*                    18.6  
* On a trailing 12-months basis

What has driven performance in 4QFY10?
  • The lackluster 2% YoY growth in Crompton Greaves' (CG) consolidated sales during 4QFY10 was largely a result of a weak performance of its largest business of ‘power systems' (67% of total sales). This segment clocked a sales fall of around 5% YoY during 4QFY10. However, the second largest segment of ‘consumer products' was the star performer during the quarter once again. This segment recorded a sales growth of 24% YoY (3QFY10 also, it did brilliantly with a 27% YoY growth in sales). Sales of the ‘industrial systems' business also saw a good growth of 17% YoY.
    Segment-wise performance (Consolidated)
      4QFY09 4QFY10 Change FY09 FY10 Change
    Power Systems            
    Revenue (Rs m)      17,713       16,838 -4.9%       61,745      62,045 0.5%
    % share   72% 67%   70% 68%  
    PBIT margin 12.7% 14.8%   10.1% 12.4%  
    Consumer Products            
    Revenue (Rs m)        3,703         4,604 24.3%       13,219       16,120 21.9%
    % share   15% 18%   15% 18%  
    PBIT margin 12.1% 14.6%   11.1% 14.3%  
    Industrial Systems            
    Revenue (Rs m)        2,976         3,476 16.8%       11,498       12,587 9.5%
    % share   12% 14%   13% 14%  
    PBIT margin 20.8% 25.6%   18.5% 21.9%  
    Others            
    Revenue (Rs m)             286             291 1.6%          1,223         1,034 -15.5%
    % share   1% 1%   1% 1%  
    PBIT margin 15.7% 6.7%   15.9% 14.6%
    Total            
    Revenue (Rs m)*      24,679      25,209 2.1%      87,685       91,785 4.7%
    PBIT margin 13.6% 16.2%   11.4% 14.1%  
    * Excluding inter-segment adjustments

  • CG's operating margins expanded by 2.7% YoY during 4QFY10. This was largely on account of lower costs of traded goods, lower staff costs as also lower other expenditure, all of which saw a big decline, thereby aiding the improvement in profitability. Based on segments, this time the ‘industrial systems' business stole the show as its PBIT margins expanded from 20.8% in 4QFY09 to 25.6% in 4QFY10, an expansion of 4.8%.

  • On the back of a sharp improvement in operating margins, lower interest costs and much lower effective tax rate, CG recorded a strong 40% YoY growth in consolidated net profits during 4QFY10. This is excluding an extraordinary gain of Rs 352 m on the sale of investment in Malanpur Captive Power Ltd. during the quarter.

What to expect?
At the current price of Rs 248, the stock is trading at a multiple of 15.6 times our estimated consolidated FY12 earnings. Though the company has slightly underperformed our topline estimates, its bottomline performance has been in line with our estimates due to a higher than expected margin expansion. However, at the current price, most of the upside seems to be already factored into the stock.

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