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Crompton Greaves: Cost pressures persist - Views on News from Equitymaster

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Crompton Greaves: Cost pressures persist
May 25, 2012

Crompton Greaves has announced its March quarter results. The company has reported a topline growth of 6% YoY while the bottomline has fallen 60% YoY for the quarter ended March 2012. Here is our analysis of the results.

Performance summary
  • Consolidated topline reports 6% YoY growth during the quarter
  • Operating margins contract by 5.9%, leading to 43% fall in operating profits during the quarter
  • Bottomline witnesses a huge fall of 60% YoY on the back of poor operating performance and rise in interest expenses
  • Profit for the full year falls 58% YoY on the back of a 12% growth in topline

Consolidated snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 29,080 30,774 5.8% 100,051 112,486 12.4%
Expenditure 25,350 28,642 13.0% 86,613 104,449 20.6%
Operating profit (EBDITA) 3,731 2,132 -42.9% 13,438 8,036 -40.2%
EBDITA margin (%) 12.8% 6.9%   13.4% 7.1%  
Other income 459 3   990 524  
Interest (net) 64 139 119.5% 201 463 131.0%
Depreciation 597 639 7.1% 1,936 2,600 34.3%
Profit before tax 3,530 1,357 -61.6% 12,291 5,497 -55.3%
Extraordinary income/(expense) (381) -   (381) -  
Tax 683 396 -42.0% 3,100 1,821 -41.2%
Share of profit in associates (51) (40)   (80) (53)  
Minority interest 2 (3)   4 (7) -275.7%
Profit after tax/(loss) 2,514 1,003 -60.1% 8,887 3,736 -58.0%
Net profit margin (%) 8.6% 3.3%   8.9% 3.3%  
No. of shares (m) 641.5 641.5   641.5 641.5  
Diluted earnings per share (Rs)*         5.8  
Price to earnings ratio (x)*         18.4  
(* annualised)

What has driven performance in 4QFY12?
  • The 5.8% YoY growth in Crompton Greavesí (CG) consolidated sales during 4QFY12 was largely a result of strong performance in its consumer products and industrial systems business divisions. The consumer products business recorded a 10.1% YoY growth while the industrial systems too grew at a healthy pace of 15.1% YoY. However, power systems segment grew at a modest pace of 2.3% YoY.

  • The unexecuted order backlog of the company stood at Rs 83.6 bn at the end of the year, up 17% YoY. The company received orders worth Rs 28.9 bn during the quarter. Roughly, Rs 24.5 bn of the orders were from the power segment while Rs 4.4 bn from the industrial segment.

    Segment-wise performance (Consolidated)
      4QFY11 4QFY12 Change FY11 FY12 Change
    Power Systems
    Revenue (Rs m) 19,235 19,683 2.3% 65,029 73,149 12.5%
    % share 66.1% 64.0%   64.9% 64.9%  
    PBIT margin 13.4% 2.7%   12.4% 3.3%  
    Consumer Products
    Revenue (Rs m) 5,508 6,065 10.1% 20,212 21,336 5.6%
    % share 18.9% 19.7%   20.2% 18.9%  
    PBIT margin 14.3% 12.2%   14.5% 12.3%  
    Industrial Systems
    Revenue (Rs m) 4,346 5,001 15.1% 14,971 18,202 21.6%
    % share 14.9% 16.3%   14.9% 16.2%  
    PBIT margin 14.9% 10.8%   17.6% 11.6%  
    Total
    Revenue (Rs m)* 29,088 30,749.3 5.7% 100,211 112,687 12.4%
    PBIT margin 13.8% 5.9%   13.6% 6.3%  
    * Excluding others & inter-segment adjustments

  • The operating margins of the company declined sharply to 6.9% in 4QFY12 from 12.8% in 4QFY11. This was mainly due to a fall in profitability at the subsidiary level. Many overseas subsidiaries operated at less than optimum capacity and made absorption of fixed cost difficult. Also, a couple of acquisitions in US and Europe increased employee and process cost without significant addition to the revenues thereby impacting margins.

  • Net profits declined 60.1% YoY during the quarter and 58.0% YoY during the year due to muted performance at the operating level coupled with rise in interest and depreciation expenses. Interest expenses increased due to rising debt which was taken to meet the working capital requirements.

What to expect?
At the current price of Rs 118, the stock is trading at a multiple of 18.4 times its trailing twelve month earnings. Going forward, management expects sales growth to remain in the region of 12-14% supported by healthy order book. EBITDA margins are expected to be in the range of 8-9%. Management also aims to integrate the power business unit which has grown on the back of a number of acquisitions made in the past. It also aims to expand the industrial business in international markets. However, 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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