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Crompton Greaves: Power systems business drags numbers down - Views on News from Equitymaster
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  • Jul 31, 2015 - Crompton Greaves: Power systems business drags numbers down

Crompton Greaves: Power systems business drags numbers down
Jul 31, 2015

Crompton Greaves has announced first quarter results of financial year 2015-16 (1QFY16). The company has reported 8% YoY fall in topline. Net profits fell by 75% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated topline falls by about 8% YoY during the quarter.
  • Operating profits fall by 54% YoY during the quarter. Operating margins contract 2.5% YoY during the quarter to 2.5% in 1QFY16.
  • Along with the poor performance at the operating level, higher taxes led to net profits falling 75% YoY during the quarter.
  • The unexecuted order book stood at about Rs 79 bn, a fall of 18% over the backlog as at the end of 1QFY15. The company registered an order inflow of approximately Rs 25 bn during the quarter.

Consolidated snapshot
(Rs m) 1QFY15 1QFY16 Change
Net sales 34,415 31,658 -8.0%
Expenditure 32,688 30,867 -5.6%
Operating profit (EBDITA)  1,728 791 -54.2%
EBDITA margin (%) 5.0% 2.5%  
Other income 386 984 155.1%
Interest (net) 245 280 14.4%
Depreciation 671 680 1.4%
Exceptional items  -  (11)  
Profit before tax  1,198 804 -32.9%
Tax 550 653 18.8%
Share of profit in associates (8) 9  
Minority interest (1) 0  
Profit after tax/(loss) 640 160 -75.0%
Net profit margin (%) 1.9% 0.5%  
No. of shares (m)    626.8  
Diluted earnings per share (Rs)*   2.57  
Price to earnings ratio (x)*   70.7  
* On a trailing 12 months basis

What has driven performance in 1QFY16?
  • The fall in revenues during the quarter has come in on the back of about 19% YoY fall in the power systems business. Revenues from consumer products segment on the other hand increased 13% YoY. Revenues from industrial systems business came in almost flat relative to the same quarter last fiscal.

    Segment-wise performance (Consolidated)
      1QFY15 1QFY16 Change
    Power Systems
    Revenue (Rs m) 20,193 16,353 -19.0%
    % share  60.6% 53.4%  
    PBIT margin 1.8% -4.4%  
    Consumer Products
    Revenue (Rs m) 8,611 9,708 12.7%
    % share  25.8% 31.7%  
    PBIT margin 12.6% 14.3%  
    Industrial Systems
    Revenue (Rs m) 4,526 4,587 1.3%
    % share  13.6% 15.0%  
    PBIT margin 6.8% 7.4%  
    Total
    Revenue (Rs m)* 33,329 30,648 -8.0%
    PBIT margin 5.3% 3.3%  
    * Excluding others & inter-segment adjustments

  • The operating margins of the company contracted in 1QFY16 driven mainly by significantly higher costs relating to purchases of stock in trade along with other expenses. These two cost heads put together rose by 4.1% of sales from 30% in the previous year's quarter to 34.1% during the quarter gone by. In terms of segments, the Power Systems business was the worst performer on the margins front with margins coming in negative even at the PBIT level.

  • With the fall in operating profits along with a big increase in the effective tax rate, net profits tanked 75% YoY.
What to expect?

The stock of Crompton Greaves is currently trading at 70.7x its trailing twelve months earnings. The company is undergoing reorganization process of its business across the segments. The company had already announced in the past the demerger of its consumer products business. The Bombay court has approved the scheme, which will be effective in October 2015.

The power segment of the company has been a poor performer since many years now. Crompton Greaves has been witnessing pressure in some of its business segments while international acquisitions have not proved to be very lucrative either. The company is going through a restructuring process to streamline its operations and stabilize profitability. We are in process of updating our FY18 estimates, till then we recommend investors not to Buy the stock at these levels.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 4-5% of your portfolio.

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