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Crompton Greaves: Profitable growth

Jul 27, 2007

Performance summary
  • Standalone topline grows 21% YoY in 1QFY08, led by strong performances from both power and industrial systems businesses.

  • Operating margins expand by 200 basis points (2%) owing to lower raw material costs (as percentage of sales).

  • Net profits grow 89% YoY, helped by margin expansion and higher other income.

Financial performance snapshot
Standalone Consolidated
(Rs m) 1QFY07 1QFY08 Change 1QFY08
Sales 7,406 8,961 21.0% 15,226
Expenditure 6,685 7,916 18.4% 14,002
Operating profit (EBDITA) 722 1,045 44.8% 1,224
Operating profit margin (%) 9.7% 11.7%   8.0%
Other income 49 126 155.4% 402
Interest 53 66 25.3% 177
Depreciation 100 105 4.4% 270
Profit before tax 618 1,000 61.8% 1,179
Tax 254 313 22.9% 287
Profit after tax/(loss) 364 688 89.1% 892
Net profit margin (%) 4.9% 7.7%   5.9%
No. of shares   366.6    
Diluted earnings per share (Rs)*   6.1    
P/E ratio (x)*   44.0    
* On a trailing 12 months basis

Company background
Crompton Greaves (CG) is one of the leading players in the designing, manufacturing and marketing high technology electrical products and services related to power generation, transmission, distribution as well as executing turnkey projects. The company is organised into three business groups - Power Systems (44% of 1QFY08 sales), Industrial Systems (25%) and Consumer Products (31%). In addition to offering broad range of products, the company undertakes turnkey projects. CG exports its products to more than 60 countries. It acquired the Belgian 'Pauwels' in FY06 to emerge amongst the top ten transformer manufacturers in the world. It has also acquired Hungarian based Ganz, which is engaged in the manufacture of high voltage transformers and switchgears. During the period FY02 to FY07, CG grew its consolidated revenues and net profits at compounded annual rates of 30% and 113% respectively.

What has driven performance in 1QFY08?
Power systems lead topline growth: CG's power systems business (PS) recorded a 25% YoY growth in sales during 1QFY08, thus leading the overall growth of the company. This segment, which contributes around 44% to the company's standalone sales, involves manufacturing of transformers, switchgears and other power T&D equipments, and has been a lead growth driver for the company over the past five years (compounded annual growth of 25% during FY02 to FY07). As for the other two segments of consumer products (CP) and industrial systems (IS), sales growth stood at 14% and 32% respectively during 1QFY08.

Segment-wise performance (Standalone)
1QFY07 1QFY08 Change
Power Systems
Revenue 3,469 4,326 24.7%
% share 42.9% 43.8%  
PBIT margin 9.0% 11.5%  
Consumer Products      
Revenue 2,658 3,016 13.5%
% share 32.8% 30.5%  
PBIT margin 9.7% 10.5%  
Industrial Systems      
Revenue 1,895 2,508 32.3%
% share 23.4% 25.4%  
PBIT margin 14.0% 17.8%  
Others      
Revenue 71 31 -57.1%
% share 0.9% 0.3%  
PBIT margin -7.6% -74.8%  
Total      
Revenue* 8,094 9,880 22.1%
PBIT margin 10.3% 12.5%  
* Excluding inter-segment adjustments

Performance summary
Lower input costs aid margin expansion: CG recorded a 200 basis points (2%) improvement in its operating margins during 1QFY08. This was on the back of lower raw material and staff costs. As a matter of fact, raw material costs declined from 77.2% of sales in 1QFY07 to 74.6% in 1QFY08. Based on segments, all the three businesses recorded profitability improvement during the quarter, with the IS business leading the way with a 3.8% expansion in EBIT margins (see above table).

Margin expansion, higher other income powers bottomline: CG recorded an 89% YoY growth in 1QFY08 net profits, which was a result of expansion in operating margins and higher other income. Other income grew by 155% YoY. A lower effective tax rate also helped the bottomline growth during 1QFY08.

What to expect?
At the current price of Rs 270, the stock is trading at a multiple of 44 times its trailing 12 months standalone earnings (35.1 times FY07 consolidated earnings). CG has taken some major steps in the last few quarters in terms of expanding its product range and geographical reach globally. The turnaround of Pauwels and now the acquisition of Ganz are expected to spell good times for the company. We expect CG to be one of the major beneficiaries of the strong investments into the Indian power sectors over the next few years. We shall soon initiate our research coverage on the company.

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