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Crompton Greaves: Subsidiaries remain a drag

Jul 23, 2012

Crompton Greaves has announced its June quarter results. The company has reported a 15.3% YoY and 8.1% YoY growth in topline and bottomline respectively. Here is our analysis of the results.

Performance summary
  • Consolidated topline grows by about 15.3% YoY during the quarter. The rise has come in on the back of about 16.2% YoY increase in power systems segment and about 19.9% YoY increase in consumer products segment. However, growth in the industrial systems segment was modest at about 6.7% YoY.
  • Operating margins contract to 5.9%, led by an 8.3% YoY fall in operating profits. Increase in staff cost and purchase of stock in trade impacted the operating profitability.
  • Bottomline increased by 8.1% YoY on the back of 23.3% YoY and 6.3% YoY fall in depreciation and tax expenses respectively.
  • The company has declared an interim dividend of Rs 0.4 per share for the quarter ended June 30th.

Consolidated snapshot
(Rs m) 1QFY12 1QFY13 Change
Net sales 24,377 28,111 15.3%
Expenditure 22,559 26,444 17.2%
Operating profit (EBDITA) 1,819 1,668 -8.3%
EBDITA margin (%) 7.5% 5.9%  
Other income 151 192 26.8%
Interest (net) 110 99 -9.7%
Depreciation 608 466 -23.3%
Profit before tax 1,253 1,294 3.3%
Tax 475 445 -6.3%
Share of profit in associates 18 9 -47.2%
Minority interest (1) 0  
Profit after tax/(loss) 795 859 8.1%
Net profit margin (%) 3.3% 3.1%  
No. of shares (m)   641.5  
Diluted earnings per share (Rs)   1.3  
Price to earnings ratio (x)*   19.9  
(* annualised)

What has driven performance in 1QFY13?
  • The 15.3% YoY growth in Crompton Greaves’ (CG) consolidated sales during 1QFY13 was largely a result of strong performance in its power systems and consumer products business divisions. The consumer products business recorded a 19.9% YoY growth while the power systems too grew at a healthy pace of 16.2% YoY. However, industrial systems segment grew at a modest pace of 6.7% YoY.

    Segment-wise performance (Consolidated)
      1QFY12 1QFY13 Change
    Power Systems
    Revenue (Rs m)  15,166  17,620 16.2%
    % share  62.2% 62.5%  
    PBIT margin 2.6% 2.6%  
    Consumer Products
    Revenue (Rs m)  5,437  6,521 19.9%
    % share  22.3% 23.1%  
    PBIT margin 13.9% 12.8%  
    Industrial Systems
    Revenue (Rs m) 3,797 4,051 6.7%
    % share  15.6% 14.4%  
    PBIT margin 13.4% 9.0%  
    Revenue (Rs m)* 24,400 28,191 15.5%
    PBIT margin 6.8% 5.9%  
    * Excluding others & inter-segment adjustments

  • The operating margins of the company declined sharply to 5.9% in 1QFY13 from 7.5% in 1QFY12. This was mainly due to a fall in profitability at the subsidiary level. In order to rationalize cost, the company has decided to shift its manufacturing base from high cost destinations to low cost countries. Further, with market in Western Europe facing overcapacity and margin pressures, the company is also planning to downsize its operations in Belgium so as to stay competitive.

  • Net profits increased 8.1% YoY during the quarter, despite muted performance at the operating level due to fall in depreciation, interest and tax expenses.

What to expect?
At the current price of Rs 118, the stock is trading at a multiple of 19.9 times its trailing twelve month earnings. Despite muted performance in the current quarter, management reiterated its earlier growth guidance. In line with this, sales growth is expected to remain in the region of 12-14% supported by healthy order book, while EBITDA margins are expected to be in the range of 8-9%. Nonetheless, considering the 1QFY13 performance and weak global environment, we believe that guidance is at the risk of being missed. Further, after taking into consideration rising competitive pressures and prevailing pricing environment in the domestic markets, we maintain our hold view on the stock.

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